After presenting an agricultural economic outlook, Abner Womack, University of Missouri economist, had words of caution for farmers at a dinner meeting at the Saline County Fairgrounds Tuesday night.
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"You will have to manage your farms more carefully than ever before," said the co-director of the MU Food and Agricultural Policy Research Institute (FAPRI) in Columbia.
"Be extremely careful with debt, if you want to stay in business," Womack said.
Accelerating land prices, higher fuel and fertilizer costs, and potential hikes in interest rates are some concerns behind his caution.
In 2005, land prices rose 11 percent; in 2004, land prices went up seven percent. "An 18 percent increase puts land to where it is very difficult to pencil out a profit from farming. If you have deep pockets and a good off-farm job, you might make it," Womack said. "You may be tempted to pursue land when it becomes available, but do your calculations before buying."
Womack noted that rising land prices, followed by higher interest rates, put many farmers into a crisis in the 1980s. "Those with grey hair like I have know what I’m talking about."
Womack cautioned farmers also about paying higher rent for crop land.
"You are dealing with millions in assets and not very much return per acre," Womack said. Results from balance sheets on representative farms across Missouri show good crop farms are making a return of only $48 per acre, and many in drought areas had negative returns last year.
"It will take those farms three or four years of good crops to get back even with the board." Womack said the numbers made him more worried about the farm economy than he had ever been before.
Two years of record-breaking crops put a lot of grain into bins, Womack said. "I’ve never seen so many soybeans."
The current carryover of soybean stocks is 400 million bushels. That will go higher if we have another good crop year, he added.
Corn stocks are at 2.4 billion bushels, about 1 billion bushels above normal.
The current outlook calls for yearly averages of $1.90 per bushel for corn and $5.35 for soybeans. "That is the structural price, based on supply and demand," Womack said. "
However, current prices on the futures market are running ahead of those levels.
"When you can get a price 50 cents above the projected season-average, you ought to look at selling part of your crop," Womack told farmers.
"Our models give an average price," Womack said. "But, they also show that is not a straight line, as there is always volatility in the market. There will be 50-cent swings above and below that average corn price.
"Set some target prices on what you can sell for, then when the price hits that level, be prepared to pull the trigger," Womack said. "You will have to act quickly, because with huge supplies hanging over the market, high prices can’t be maintained for long."
High futures prices may be caused by buyers looking at the drought monitor for the Corn Belt. "Prolonged drought that persisted over western states seems to be moving eastward," Womack said. "We saw drought over a big portion of Missouri last year. Now there are large areas of Iowa and Illinois that are abnormally dry.
"Once a drought sets up, it seems to persist," Womack noted. "With current supplies in the bin, it will take a huge drought to get stocks back down to normal."
The FAPRI model gives a more favorable outlook for livestock producers.
Beef, pork and chicken prices are expected to remain good.
"Cheap grain always helps the livestock side of the equation." Womack spoke at a farmers’ appreciation night sponsored by radio station KMZU, Carrollton.
FAPRI economists will speak at about two dozen outlook meetings across the state in the next month. The meeting at Marshall was the first of the season.
FAPRI, a part of the MU College of Agriculture, Food and Natural Resources, is funded in part by the U.S. Congress to provide impartial policy analysis in forming agricultural legislation. A FAPRI 10-year baseline will be finished and presented to congressional committees in March.