Farm Profits Seen Down in 2009

LANSING - Oct 23/08 - MFB -- American agriculture may be in the best financial shape it's ever been, but there are potential storm clouds building on the horizon, caution many economists and commodity specialists.

In the year ahead, farmers will probably continue to realize fairly strong cash receipts, but by the same token they will see significant increases in input costs. So overall, the farm sector may very well see a down-turn in profits in 2009 compared to 2008, according to the American Farm Bureau Federation (AFBF).

Here in Michigan, the state's diverse agriculture industry creates opportunities for producers and continues to provide the bright spot in the state's economy, said Bob Boehm, manager of the Michigan Farm Bureau Commodity and Marketing Department. "But Michigan farmers are not immune to the cost-price squeeze impacting the rest of the country, and they will need to be cautious in managing their input costs," he says.

The changing financial landscape will force many farmers to look at the commodities futures market in a new light. In the past, it was not uncommon for farmers to hedge against the futures prices, but the ability to use that market as a risk management tool has been reduced, according to Boehm.

"Extreme price volatility has resulted in dramatically higher cash needs to meet margin requirements, putting many traditional investors on the sidelines," he explained.

The bottom line is that farmers need to exercise caution as they plan for the year ahead, said Terry Francl, AFBF senior economist.

Most farmers should not have trouble getting credit, says Francl, but they will have to work closely with their lenders and carefully prepare crop budgets in anticipation of rising input costs and a weaker economy that could well push commodity prices lower.

"We are very fortunate in production agriculture in that our debt-to-asset ratio looks pretty good," Francl said. "Agriculture still has the capacity to take on a lot more debt, but just because we can doesn't mean we should run out and bump up borrowing."

Still, farmers will have to keep a particularly close watch on their costs in 2009.

"Fertilizer costs are expected to be higher in 2009 than they were in 2008. Pesticide prices may also rise, but due to the increased role of biotechnology it is not clear how much actual spending on pesticide will rise," Francl said.

The saving grace for American agriculture is the rise in land values.

"The agriculture balance sheet in Michigan is strong, but much of the strength is tied to appreciation on land values, up 42 percent since 2004 to $4,150 per acre," said Boehm.

Francl calls land values the "shock absorber" for farmers but warns, "Land values are very high right now, but just because they went up this year, doesn't mean they will continue to go up."

U.S. land values reached a peak in 1981 in inflation-adjusted (real dollar) terms, but it took until 2006 to reach that peak again.

"It took 25 years for land values to get back to that level, so rising land values is not always a given for American agriculture," Francl said.

For 2008, farmers are expected to realize a record net cash income of more than $100 billion with strong corn, soybean and wheat prices pumping in more cash receipts to agriculture. For 2009, farm income will likely back down from these levels due to lower cash receipts as well as higher input costs, said Bob Young, AFBF's chief economist.

"The agricultural sector as a whole is in the best shape it's ever been since we started keeping these financial measures in 1960," Young said. "However, farmers will still need to find new ways to market their crops, and they will still need risk management tools beyond hedging."

The major worry facing crop producers will be continuing rising fertilizer costs.

"While you may see some moderation in fertilizer prices, there are no indicators of a serious collapse," Young said.

Also, indicators point to falling corn prices in 2009. Young cautioned that cash prices for corn below $4 per bushel threaten farmers with a cost-price squeeze.

Copyright (c) 2008 Michigan Farm Bureau