December 22, 2017
For agriculture, another year is in the books. There is a surplus for most commodities worldwide, which is in part due to the strong investments made during the recent supercycle in technology and innovation.
In 2017, the performance and profitability of farm businesses widened. As measured by the average and median farm incomes, farm record databases show a distinct polarity between the most- and least-profitable groups. Regardless of farm size or enterprise, the gap between the top third of economic performers and the bottom third is widening. Among the most profitable, common practices include strong production, a drive toward efficiency and an executed marketing and risk management plan.
While agribusinesses and agricultural lenders report fewer producers at their educational meetings, they also note more revenue, acreage and cattle numbers are represented among the participants. The mass consolidation of commodity agriculture is underway, resulting in larger, more complex entities. In some businesses, this looks like cousins managing with cousins with a mix of non-family members sprinkled in. Whatever the arrangement, this transition is happening throughout agriculture.
Another interesting trend is more new entrants into the industry such as boomerangers, or the individuals returning to rural America with a different skill set and management style. These agricultural entrepreneurs are often women, minorities or veterans, and bring a hybrid of vigor and smarts to a globalizing industry.
The economic reset is now ending its fourth year, and could be termed as a “grinder.” Compared to the sharp and abrupt downturn of the 1980s, this economic cycle appears to be trolling along the bottom with occasional spurts and dips. Of course, this still provides plenty of market opportunities for the astute managers who plan, strategize and execute along with monitoring.
Farm real estate, the largest item on the balance sheet, is surprisingly maintaining its resilience, and in some cases is actually increasing. The dichotomy in values stems from marginal resources whether it is fertility, water, logistics or layout challenges. And with the use of technology these weaknesses are more easily recognizable, which explains why these properties are beginning to dip.
Eric Snodgrass, a meteorologist from the University of Illinois, recently reported that American agriculture was 500 miles away from a major drought. This year’s dry weather set up over Montana and the Dakotas, keeping disaster just west of the U.S. production belts. This highlights the continuing need for excellent farm management including working capital, risk management tools and making sure debt levels not grow too high.
The domestic economies are experiencing growth and exuberance in the Coastal and Southern regions of the country. In contrast, the rural areas of the U.S. are impacted by agriculture’s elongated economics, which has become quite emotionally taxing for all involved. Of course, red-hot stock markets across the globe only heighten the economic difference in comparison.
The year 2018 will be one of transition, not only in farm and ranch ownership, but in agricultural lending, agribusinesses and even academics. Much of the institutional memory of the decades gone by is exiting the industry, which is challenging management teams and Boards of Directors across many industries. Some of my friends and contemporaries are exiting agriculture, academics and agricultural lending in pursuit of the next chapter of their lives, and they will be missed. However, the positive side is that these exits open entrance avenues for the new generation and young thinking.
As we move closer to the end of another decade, and despite current economic challenges, the industry can take solace in the fact that farms will always be needed. In fact, the world increasingly depends on those who provide our food, feed, fiber and fuel, so thank you to all producers as well as every business that makes their job possible. From our team in Blacksburg, Virginia, home of the Hokies, to your team wherever it may be, we wish for you health, happiness and good economics for the holiday season and all year long.