The Conundrum We Face in Agriculture Today
By Ben Palen
One of the memories that will forever be etched in my mind from a 40-year career in agriculture was selling wheat for $1.85 per bushel in the midst of the 1980s farm crisis.
Although it was apparent at the time there was no way for even the most efficient farmer in our area to avoid losing money with the abysmal grain prices, no thought was given to anything other than production.
It is in the DNA of a farmer to produce, produce, produce. And therein lies a conundrum, which Merriam-Webster’s dictionary defines as “an intricate and difficult problem that has only a conjectural answer.”
There are some constants in this business, and one which continues to this day is what I just noted – produce, produce, produce. This is a timely topic in light of my article from March 2023, in which the topic of discussion was whether a resetting was occurring in agriculture.
Providing some context
Let me give some current context to this conundrum.
In recent weeks, I have been doing budgets for broad acre crops grown in three primary regions of the U.S. – the Delta, the Corn Belt and the Great Plains. These crops include – depending on the region – corn, soybeans, rice, cotton, milo and oil sunflowers.
Both irrigated and non-irrigated production have been evaluated.
Primary references for the budgeting work were the very detailed line item budgets for various crops in 2024, as prepared by the University of Arkansas, the University of Illinois and Kansas State University, respectively.
Further, I evaluated six different crops for a client whose farm in Western Kansas we manage. Input costs were verified with local suppliers in this instance.
The numbers are sobering, and this goes beyond the four corners of the spreadsheets.
One point of reference was Moultrie County, Illinois, which is in the heart of the high-quality “black dirt” area of central Illinois. The average corn and bean yields from 2020-22 were 212 and 67 bushels per acre, respectively – 2023 figures are not yet available from published sources.
Using these figures and the University of Illinois’ current – as of last month – budgets for 2024, the results, at the noted yields, are losses of $221 and $109 per acre for corn and soybeans, respectively.
The budget costs include a charge for direct expenses – what we will refer to as hard cash costs – as well as land rent, a small amount for depreciation and modest amounts for overhead and repairs.
In Poinsett County, Arkansas, which is a strong crop production area of the state, average corn and bean yields from 2020-22 were 177 and 52 bushels per acre, respectively.
Using the University of Arkansas’ 2024 budget figures and including a land rent charge of 25 percent of gross revenue, the results show losses of more than $300 and $190 per acre for corn and soybeans, respectively.
In a highly productive area of northwest Kansas, budget figures from Kansas State University and area average crop yields indicate losses per acre of about $200 and $142 per acre for irrigated corn and beans.
Similarly, my own analysis of costs and expenses on a client-owned, non-irrigated farm in northwest Kansas indicates losses ranging from $60 to $80 per acre depending on the crop.
This is in a custom farming arrangement. If the land were leased, the flip side for the tenant would likely be losses of at least double these figures.
As an illustration of the volatility of the agricultural markets, the per bushel prices assumed in the various university prepared budgets I have noted above are anywhere from 50 cents to $2.20 higher than published new crop bids for fall 2024 delivery.
I made the appropriate adjustments for the declines in prices. Hence, the projected losses are at least tens of dollars per acre higher than the referenced budgets indicate.
There are other examples from different geographic regions and with different annual crops, and the results are typically as poor as those noted above.
I am well aware some readers will question these figures, especially items such as depreciation. My rejoinder is kicking the can down the road by not considering basic accounting and financial principles is nothing more than sidestepping the heart of the issue.
Further, finding small adjustments in a few expense items will not have a material impact on reducing these losses. The issue goes deeper.
Making sense of it all
How does one make sense of all of this? What impact will this have on land values?
With reference to my initial comments about the production-based DNA of farmers, the hard financial reality is it seems to make sense in some instances not to plant a crop.
This will be viewed by some as heresy. Others will say it is completely impractical. But, the facts of the matter suggest even with normal or somewhat above-normal crop yields, it is highly unlikely significant losses for most annual crops can be avoided in 2024 and perhaps beyond – at least until such a point as some sort of resetting takes place.
At the very least, not planting would likely ensure the magnitude of the loss is nowhere near what any realistic projection indicates. To be sure, there are some costs associated with leaving land idle, but they pale in comparison to the amount of losses which loom from raising certain crops this year.
I say this with the full recognition this scenario will lead to painful conversations between farmers and their lenders and farmers and their landlords and with complete awareness leaving land idle – in the absence of a government subsidy program – is practically unheard of.
Suggesting a reset
In the quest to produce, produce, produce, we seem to have lost sight of some of the things I noted in my prior article about a resetting. Two this merit, special note are waning demand because of slowing global population growth and increased competition for U.S. farmers from South America and other locations.
We have, to some extent, forgotten the fact we must find new uses for some of our crops, otherwise these negative trends will feed on themselves.
For those readers who think the idea of not planting is anathema, think about what John Deere does when demand wanes. It cuts back production.
For well-managed factories, this is not an unusual occurrence, as the economy goes through various cycles. I understand there might be only a handful of factories producing tractors, whereas the U.S. Department of Agriculture (USDA) reports there are over two million farms in the U.S.
No one farmer can control his or her demand for what is being grown. But, they can control their costs by not planting x amount of acres.
To those who scoff at this notion, what is the alternative? Plant more acres and lose more money than would be the case by not planting? It is akin to the lesser of two evils.
These are hard questions. They are things none of us in agriculture enjoy talking about. But, they are necessary topics which must be discussed.
I saw firsthand what happened in the 80s when it was produce, produce, produce. And I am aware there are important differences between now and then.
The stakes are higher now. We have a land market – and let’s be honest with ourselves – this may not reflect the reality of overproduction and questions about demand.
To use a word which is perhaps used too often these days in agriculture – the path of produce, produce, produce is not sustainable given the current supply/demand situation. There is no question equity erosion will occur as cash losses mount.
At some point, even the most financially solid growers will adjust expectations. This will impact land values. There will be a resetting.
Because of the production mentality most farmers have, some will be tempted to plant in the hopes of a weather-related disaster in some major producing area of the world impacting grain prices. This is a bet that more times than not, fails to pay off.
Further, and notwithstanding the general aversion to government help from most farmers, I have yet to see one mark of “return to sender” on any payments from the USDA. However, in the current political and economic environment, I am not sure I would bet the farm on some sort of ad hoc disaster or subsidy payments being in the offing.
The problem is real.
What are the solutions to keeping the agricultural economy healthy for all of its participants?
All of the technology is wonderful, but what we are talking about here goes way beyond savings of a few dollars an acre with some new product or service. At the top of my list is finding further uses for our primary crops.
There is promise in this regard for various oil seeds and for corn, especially when the latter can generate some extra money for farmers and processors via the carbon intensity score mechanism which is part of recent climate related legislation.
Requiring a paradigm shift
In the mid-1980s, the Conservation Reserve Program (CRP) was introduced, and it resulted in the enrollment of millions of acres of cropland in a long-term program of reestablishing grass on such acres.
Interest has waned in recent years during the commodity super cycle, and a fairly large percentage of expired CRP acres went back into crop production.
Perhaps this is a program which merits further government funding.
There are environmental benefits, such as carbon sequestration, which are now front-and-center in many discussions about farmland. This was not the case when the CRP was rolled out some 40 years ago.
Although there has been a certain degree of hype about carbon, regenerative agriculture and the like, there is an underpinning of legitimacy to those topics and more ways will emerge for farmers to monetize their environmentally-friendly practices.
It would seem more politically palatable for the government to pay farmers for “good” practices rather than simply issuing subsidy payments. There is a role private industry can and must play in supporting good practices on the farms from which they buy their raw materials.
Large amounts of capital are committed to regenerative agriculture, and I fully expect benchmarks will be established by which farmers can monetize such practices at scale.
The long view, and perhaps one which will create heartburn for some readers, is we have, to some extent, outdone ourselves.
There are all kinds of new technologies designed to make farmers more efficient. There are biological products aimed at lowering costs for certain inputs. There are higher yielding crop varieties.
These products and services are all well and good, but they are tied to production. We are not paying enough attention to the other side of the equation, and this is can we sell what we grow at a globally competitive price?
Readers may ask, what am I to do on the aforementioned Western Kansas farm we manage?
As distasteful as it feels, I am most likely going to advise the client not to plant a crop this year. I do not feel good about telling them this, but I would feel worse in a scenario where we plant and lose even more money than we would by not planting.
In this instance, the decision is also influenced by very dry soil moisture levels. Unless we receive above normal moisture between now and the time for spring planting, the odds of a normal crop are not good.
A farmer lives on optimism. It is always going to rain tomorrow.
The reality at this time is the status quo is not sustainable for many of us who are involved in the ag sector, notably in broad acre annual crops.
Expectations must be adjusted. All participants in the ag sector, along with government and private industry, must focus on new product uses and ways to generate new sources of revenue from eco-friendly practices. A paradigm shift is needed.
In the short run, I believe there will be adjustments in income and in asset values. It is incumbent on all participants in the sector to be proactive so these adjustments are not as harsh as some may believe they will be.
Ben Palen is a fifth-generation farmer with experience in many aspects of agriculture, including projects in the U.S., Africa and the Middle East. This opinion column was originally published in GAI News.
