As incomes fall, Illinois farmers prepare for sparse decade

cornprices

By Nicholas Heinzmann

A plummet in grain prices is turning the Illinois farm economy on its head and slashing incomes for farmers, who will need to adjust their strategies to adapt to leaner times.

Corn prices have fallen by nearly half and soybeans are down by one-third from the highs reached in 2012. That means average incomes on grain farms would return to levels not seen since 1998, according to Gary Schnitkey, an economist at the University of Illinois at Urbana-Champaign.

It’s a sharp reversal for farmers in Illinois, whose earnings were at record highs just two years ago. Net incomes for grain farms exceeded averages of $250,000 per farm in 2011 and 2012, up from $185,000 per farm from 2006 to 2008 and $51,000 per farm for the previous decade, according to data compiled by University of Illinois.

High crop prices underpinned farm revenue, with corn in 2012 selling at an average of $6.93 per bushel and soybeans at an average $14.66 per bushel. A drought that year also boosted incomes, with one-third of gross revenue for Illinois grain farmers coming from crop insurance payments.

But now that well of good fortune has dried up, with income for crop producers expected to drop significantly in 2014, 2015 and perhaps beyond.

“Crop farm incomes are going to be under a lot of downward pressure” in the coming decade, Purdue University economist Chris Hurt said at a conference at the Federal Reserve Bank of Chicago.

Corn futures at the Chicago Board of Trade have dropped 36 percent, to $3.95 per bushel from the December 2012 high. Soybeans have faced a similar fate, falling 20 percent to $10.49 per bushel. Hurt expects corn prices “will average between $4 to $4.50 over the next three to five years.”

Low crop prices are improving profit margins for animal operations, such as cattle and hog farms that use corn for feed, but Illinois is far more leveraged toward crops.

“Corn prices near $4.20 per bushel combined with above average yields could result in average incomes on grain farms in Illinois around $45,000 per farm,” said Schnitkey in a report published in June. If corn were $4.80, Schnitkey said, average incomes would be near $134,000 per farm, the 2013 level of average income. “This is a large range ($45,000 to $134,000), and it represents the likely range of average grain farm incomes over the next several years.”

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To protect against such a volatile range of incomes, states are looking for ways to cushion the impact of low grain prices. A steadily growing population and rising consumption of animal products is helping Illinois’ neighbors do just that.

Because low grain prices have also significantly lowered feed prices, animal farm incomes are expected to reach a record high in 2014 and hit similar levels in 2015, Hart said. This reversal could provide a considerable cushion for net farm income in states such as Wisconsin and Iowa, where portions of farm value from animals in 2012 were 65 percent and 44 percent.

“Illinois does not have hardly any cushioning from these much better incomes we’re going to seen in the animal industries,” Hurt said during his presentation.  The portion of farm value from animals for Illinois in 2012 was only 16 percent. “You’ve got no moats for where it’s primarily specialized crops,” Hurt said of states like Illinois, which focuses on production of corn and soybeans.

While that specialization was a boon during the aughts, it now means hard times for Illinois farmers, who will have to take a hard look at their finances to protect themselves against potentially volatile incomes.

“Capital purchases will need to decrease now that it appears that an extended period of lower incomes may be occurring,” Schnitkey said in a report published Dec. 3. “When incomes fell in the 1980s, there was a lag before capital purchases decreased. This lag contributed to financial stress during the 1980s. Lowering capital purchases now could lessen the potential for financial stress in the next several years.”

Farmers have gotten the message, it seems. With the farm crisis of the 1980s imprinted on the minds of farmers across the country, farms big and small are adapting their strategies to more successfully navigate the current downturn.

“At the beginning of last year we were preparing ourselves for the possibility of multiple years of tougher times,” soybean farmer Lynn Rohrscheib said via email. “Prices have bottomed out slightly lower than we thought they’d go but we have tried to plan for everything from the worst case scenario to the best.”

For large, commercial farms, that planning has meant tightening finances. Knowing that the good times would eventually come to an end, farmers have prepared for the reversal by refinancing long-term debt and reducing their spending, said Todd Kuethe, an economist at the University of Illinois at Urbana-Champaign.

“The farmers that I communicate with seem to have been anticipating this kind of downturn environment for quite a while,” Kuethe said in a phone interview. “They’ve anticipated that commodity prices would come down in the future. I don’t think farmers spent all of the money they’ve made in the last decade.”

To be sure, Rohrscheib has taken many steps to maximize profits and lower costs on her farm.

By using several different types of commodity contract options with elevators and livestock producers, she said, her farm can “utilize premiums offered for specialty crops such as non-GMO soybeans and corn,” which helps make up the difference with lower commodity prices.

“We have been trying to lower equipment repairs by doing as much of the repairs in house as possible instead of taking it to a shop,” Rohrscheib said. “I am very diligent at paying attention to rebate programs and or sales to help cut costs.”

Part of this financial vigilance has been the specter of history. The farm crisis of the 1980s stemmed from a massive investment in agricultural assets. American agricultural producers, looking for a hedge against the rampant inflation of the 1970s, invested heavily in land and equipment. When interest rates surged in the late 70s and commodity prices fell amid huge increases in crop production, farmers found their cash flows strapped as they tried to handle their uptake in borrowing.

Many of the farmers operating vast commercial grain farms have been in the field for 50 or 60 years, Kuethe said, and they remember what caused the most recent collapse.

“I don’t see as much debt today as we did then,” Kuethe said. As of late, farmers are taking out mostly one-year loans, he said, and have built cash reserves over the past decade to weather the current drop in farm income.

For small farms, those with incomes between $1,000 and $10,000, the adjustment is less a financial one and more a change in strategy.

Ventures such as corn mazes, pumpkin patches and winery tours provide small farms a way to boost income independent from crop production. “In terms of a way to spend your weekend, it’s really a booming sector,” Kuethe said of agritourism.

The combined efforts of large and small farms should help cushion the Illinois farm economy in the coming decade, Kuethe added. “A lot of the farmers are going to have a downturn, but not going to have an extreme risk.”