Surplus of commodities could mean dismal path ahead for many farmers

April 12, 2016

As farmers gear up for spring planting, those who sell crops on the commodities markets are preparing to lose money from low prices that are beyond their control. According to statistics from the U.S. Department of Agriculture, the U.S. net farm income is expected to drop to $54.8 billion this year, the lowest since 2002 and less than half the record of $123.3 billion in 2012.

Simply put, what many farmers are currently paid for milk, grain or livestock is not enough to cover their expenses, a recent article explains, and is causing some to take out loans or tap into their savings to remain in business.

While the outlook for grain farmers has improved some in recent months, the global marketplace is still awash in corn and soybeans — much of it left over from a bountiful harvest last fall.

Meanwhile, the article states that U.S. farmers plan to sow 93.6 million acres of corn this year, exceeding all analyst estimates and boosting prospects for higher supplies that could further depress prices. Growers hope that better-than-normal yields will help them at least break even.

"We are swimming in corn, soybeans… all of these commodities, and the U.S. dollar is so strong that nobody (overseas) can afford them," Ross Bishop, a beef cattle and crops farmer in Washington County, Wisconsin, said in the article.

Wisconsin livestock farmers benefit from lower corn and soybean prices because much of the crop that's raised here goes for feeding dairy and beef cattle. Still, livestock farmers have felt the downturn. Last year, Bishop said, he lost $411 for every beef cow that he sold.

"You would have to go back to the 1980s to see anything like this," he said, although it was worse then because of high-interest loans.

The beating that farmers take from low market prices, which often stems from an oversupply of milk, grain and livestock, begs the question: Why don't they respond by slashing production?

It's not that easy, said Harwood Schaffer, an agricultural economist at the University of Tennessee in Knoxville. Every spring, crop farmers face a dilemma as crop yields and profits are unknowns at planting time, yet decisions have to be made while the weather, hopefully, cooperates.

The article explains that some of the choices, such as what seed to buy and how much land to rent, are locked-in the previous year. But crops can't be planted early, to take advantage of better prices, or later to see if prices improve.

"While farmers only have one time to make the decision that has the most impact on production — to plant or not to plant — other industries have many more opportunities during the year to adjust the production and inventory they have for sale," Schaffer said.

Dairy farmers face tough decisions when milk prices are low because producing more milk lowers their cost of production, on a per-unit basis, but it adds to the oversupply problem. As an industry, they can seek operating efficiencies to squeeze out a profit, or lose less money, rather than reducing the number of cows they milk.

"The number one rule in the dairy industry is you never cut back, especially in a down period," Gordon Speirs, a dairy farmer from Brillion, Wisconsin, said.

Speirs's farm milks 2,100 cows and in a year like this, when the farm milk price has fallen below a profitable level, he's reduced spending for anything that's not essential. "It's going to be a skinny year,” he said. “We aren't going to be buying new tractors or upgrading equipment.”

In 2015, the number of Wisconsin dairy farms fell below 10,000 for the first time in more than a century, down about 33% from 2005. Yet milk production increased, largely from bigger farms with hundreds or thousands of cows, the article explains.

According to the latest DTN/The Progressive Farmer Agriculture Confidence Index released last week, farmers are feeling more pessimistic than ever before. Some commodity prices are about half of what they were a few years ago, yet farmers are paying the same, or more, for many things they need to run their businesses.

"It's just a tough year in trying to make everything work and not lose money," Katie Micik, director of the DTN agriculture confidence index, said. "How long will this last? I wish my crystal ball would tell me. It could take a widespread natural disaster, or multiple smaller disasters, to put much of a dent in global grain supplies,” she added.

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Category: Agriculture