January 22, 2013
It’s the time of year in agriculture when we start asking “what if?” This is a time-tested business practice where managers and others begin creating various scenarios and ask themselves and their teams what “could” happen and how “could” the company or industry cope if this or that situation crops up.
Sometimes, usually very rarely, it’s what if something really positive happens. But more often than not, the exercise is aimed at the worst possible scenario. And it’s the latter that’s taking place in agriculture at the moment, before the planting season sets in.
Last week, JP Morgan hosted an event for investors that it calls “Farming Comes to New York.” It featured a couple of midwestern farmers and an energy/ag consultant.
In her follow-up report, Ann Duignan, machinery analyst for JP Morgan, said, “Overall, we came away with the impression that farmers are a little more cautious/anxious this year, with dry conditions, reduced crop-insurance guarantees, lack of a Farm Bill and somewhat higher input costs contributing to the anxiety.”
But, she added, “Extended tax benefits, elevated prices and five years of cumulative wealth creation remain tailwinds into 2013.”
One of the more interesting “what ifs” that came out of the program was a scenario in which the new Farm Bill applies a means test to calculate a farmer’s contribution to crop insurance premiums. According to the analyst, today farmers pay 49% of the premium and the government covers the rest.
A means test “may drive the cost up from the current $80-$100 per acre. If the subsidy from crop insurance were eliminated or significantly reduced, farmers will likely not plant corn on riskier ‘fringe’ land.” This means that the USDA estimates of 99 million acres of corn planted this year could be substantially reduced. Peter Meyer, the consultant from the PIRA Energy Group, who spoke at the event, suggests that corn acreage will come in at 97 million acres and 145-150 bushels per acre vs. USDA’s estimated forecast of 162 bushels per acre.
According to her report, “If corn prices fell from $7 a bushel to less than $5 per bushel, the first cut would be to machinery spending, which has increased from ~$70 an acre to $95 an acre over the past five years. Fungicide spending would also be cut, as the effects are viewed as ‘hit or miss.’”The other “what if” scenario that could be interesting is a potential drop in crop prices.
Based on the farmers’ comments, Duignan adds, “At depressed commodity prices, the focus shifts from revenues to inputs, and the end-goal becomes outlasting the competition. In this environment, the larger farms are disadvantaged because of their significant operating leverage. Smaller family farms would likely survive because they are well capitalized. The farmers noted that they would be unwilling to shift back to cheap seed, even at low crop prices; yield is key.”
My question for you is, what if you talk to your own customers and find out for yourself what they’re thinking?
The 30,000 foot view presented at the New York conference is helpful in gauging the big trends, but it’s your customers who will help you assess the developments that are most important to your bottom line.