Governors' Biofuels Coalition

 A price drop would have effects throughout the state’s economy

Iowa’s farmers and state economy watchers face the reality that a “historically rare period” of prosperity for Iowa agriculture may be ending.

The U.S. Department of Agriculture last week forecast a return to more normal corn surpluses of almost 2 billion bushels. The more ample supplies could drive down corn prices to as low as $4.20 per bushel by year’s end, compared with an average price of $6.20 in 2011, the USDA predicted.

If the forecast holds, the impact will ripple across Iowa’s economy. During the ag boom, farmers with cash to spend have bid up land prices and bought new tractors and combines. Deere & Co., seed companies and other manufacturers have added thousands of workers to meet demand.

“A reduction in corn prices will take away cash from the economy,” said state banking superintendent Jim Schipper, also a farm banker in Osceola.

Iowa Secretary of Agriculture Bill Northey noted that a $2 per bushel reduction in the price of corn from the $6.20 average of 2011 would be about a $5 billion haircut. Farmers hauled in almost $15 billion from Iowa corn sales alone in 2011.

That $15 billion was larger than any private company in Iowa generated last year, save the $33 billion in sales from Deere, which needed production and sales in 90 countries to achieve that figure. Principal Financial Group oversees revenues of about $9 billion from its campus in downtown Des Moines.

Good times on the farm prompted hiring by agribusiness and manufacturers and helped Iowa weather the recession in better shape than the rest of the nation.

“Iowans have certainly learned again how important agriculture is to the state’s economy,” Northey said. “If farmers’ revenue is reduced, Iowa’s economy will feel it because farmers spend their money in the state on land and equipment and seeds.”

What has changed: Big crops elsewhere

Iowa farmers haven’t done anything different this year from last, except to plant about 500,000 acres more in corn.

But while Iowa agriculture proudly boasts of its ability to “feed the world,” figures show that the world is getting better at feeding itself.

The USDA said Thursday that grain supplies for 2012-13 are projected at a record 1,389.2 million tons, up 6 percent from 2011-12. Global corn production for 2012-13 is projected at a record 945.8 million tons, up 8.7 percent from 2011-12, with the largest increases for Argentina, Mexico, Canada, South Africa, China and Ukraine.

India is struggling with a surplus of wheat, thanks to the “green revolution” launched by the much-honored Iowa native Norman Borlaug, and now can export some of its surplus to neighbors such as Bangladesh.

Russia and Ukraine, whose agricultural woes hobbled the old Soviet Union during the Cold War, now are corn and wheat export powerhouses. A worldwide abundance of wheat spells trouble for corn. The notion of feeding wheat to livestock is an apostasy in Iowa, but it is common practice in most of the world.

Two years ago, a $4.20 per bushel corn price would have looked good to Iowa farmers, who then were mired in corn prices of $3.45 and wondering when the benefits of the ethanol boom would ever reach them.

Then came a drought in central Asia and a 10 percent reduction in the U.S. corn crop. That reduced domestic corn surpluses to a 15-year low.

Throw in strong demand from cattle feeders, expanded ethanol production and a boost in exports, and agriculture suddenly was on a joy ride to corn prices that topped $7 per bushel by early 2011.

Equipment makers enjoy good times

Farmers saw the benefits in record land prices, which increased by 25 percent in 2010 and 34 percent last year. They had enough money to buy enough tractors boasting 500 horsepower and costing a half million dollars that the machines became backlogged by several months.

“The biggest equipment has been selling the strongest,” said Matt Van Houweling of Van Wall implements of Perry, a major Deere dealer.

Iowa’s economy went along for the ride. Deere added 2,000 workers to what is the state’s largest manufacturing workforce, and other implement makers and dealers followed suit.

Iowa’s unemployment rate in March was 5.2 percent, well below the national average of 8.2 percent. Iowa ranked an improbable second in personal income growth for 2011, behind only oil-soaked North Dakota, according to federal statistics.

This spring, Gov. Terry Branstad merrily crisscrossed Iowa with his scissors, snipping ribbons at grand openings at Pioneer Hi-Bred in Johnston, Deere & Co. in Ankeny, Lely milk machines in Pella and Mitas Tires in Charles City, all generated by the heat of Iowa’s agricultural boom.

Those happy ceremonies reflected corn prices of $6 or more beginning in mid-2011. The nearly $15 billion in cash that Iowa’s corn crop generated last year compares with just $8.9 billion in 2008 and $6.2 billion in 2006.

A drop to a price of $4.20 — still a big if for a corn crop that has barely emerged from planting — would slow or end a wave of gains. Iowa State University economist Neil Harl describes 2011 as a historic year, when all of Iowa’s agricultural engines — corn, soybeans, cattle and hogs — were running on full cylinders.

“These spikes tend to be short-lived,” Harl said. “We think of the 1970s as a period of a boom in farm prices. Actually, it was just a couple of years, beginning in 1972, that we saw record prices.”

But in the 1970s, Harl said, land prices and farmer debt continued to climb after prices had cooled. That set the stage for Iowa’s second-worst economic calamity of the 20th century, the 1980s farm crisis, which cost the state one-third of its farms and farmers two-thirds of their land values.

Experts don’t expect repeat of farm crisis

Memories of the 1980s are fresh in the minds of Iowans close to agriculture.

“I lived through the 1970s and then the ’80s,” said Roger Fray, marketing vice president with West-Central Co-op in Ralston. “People say things are different this time. But you always want to keep your hand on your wallet.”

Schipper, Northey and others say that unlike the 1980s, Iowa farmers aren’t laden heavily with debt. Interest rates are low, and farmers haven’t depended on inflation to float them along as they did in the last half of the 1970s.

“We’re in a situation of strong revenues for agriculture, very low interest rates and good returns,” Schipper said. “A lot is said about high land prices. But the revenues corn and soybeans have generated have justified those prices.”

The soft underbelly for Iowa agriculture is the 55 percent of the state’s farmland that is worked by cash renters. Rents have followed land prices upward, rising $38 per acre to $252 per acre in 2012, according to Iowa State University surveys.

The added costs of rent payments historically have rendered rent farming less profitable than farming on owned land. Rent farming will be even less profitable this year if corn prices fall the way the USDA forecasts.

The $252 per acre rent figure in the ISU survey is a state average. Farmers say that rents of $400 or $500 per acre are becoming more common.

“When you are paying $300 per acre or more for rent, along with the cost of fertilizer, seeds and diesel that we’re paying this year, you have a cost of production that is well above $5 per bushel,” said Kevin Ross, who farms near Minden in western Iowa and is president of the Iowa Corn Growers Association.

Other parts of Iowa’s economy would benefit from a big price drop, including ethanol manufacturers as well as livestock producers, because of lower feed costs. Consumers, in turn, could see lower meat prices.

Failure to hedge may hurt farmers

Ross said that some farmers have protected themselves by selling their corn ahead of the crop in futures contracts, or hedging by using option contracts to protect their prices.

“The folks who haven’t hedged might have a tough time this year,” Ross said.

Harl, Schipper and Northey all worry that not enough farmers have protected themselves by hedging this year because of the psychological nature of the boom. Farmers have less incentive to protect themselves when prices are rising.

Because agricultural sales are private transactions, no good data are available on how much of the crop is sold forward or hedged, but the worry now is that the answer may be “not enough.

“Hedging is still an underutilized tool in agricultural marketing,” Harl said.

Farmers historically have been reluctant to sell a crop before they plant it. Hedging also costs money for the call and put options, which must be purchased through brokers.

Schipper said, “It’s psychologically hard to spend money to lock in a price when the prices are going up.”

Fray puts it another way: “For the last two years, farmers profited by doing nothing and waiting for prices to continue to rise. That’s a hard habit to break.”

Additional Facts

WHAT CAN HAPPEN?

CORN PRICES COULD RECOVER IF:

• A big-time drought hits Iowa, Illinois or the heart of the Corn Belt and reduces yields well below the national projection of 166 bushels per acre. Iowa is overdue for a serious drought, which hasn’t happened since 1988. But a dry spell last autumn and winter now apparently has passed with adequate moisture. (Note: Hail, the bane of Iowa farmers, is usually too localized to affect prices).

• China comes into the corn market with the same zeal it has for soybeans. It buys 60 percent or more of U.S. exports. The Chinese have bought more corn this year than before, but they’re picky. They spread their business around many countries and don’t like to pay top dollar.

• Shortages suddenly develop with wheat

supplies. This appears unlikely in the U.S., where the wheat crop is expected to be 12 percent above the drought-damaged 2011 crop. But places like central Asia and Australia have proved to be vulnerable to drought or floods in recent years. In many countries, wheat is used interchangeably with corn as a livestock feed.

BUT CORN PRICES COULD DROP INTO

THE LOW $4 PER BUSHEL RANGE IF:

• Growing conditions are good in the U.S. (and so far they have been), especially if farmers can deliver good yields on new corn acres in western Kansas, Nebraska and the Dakotas, which aren’t in the sweet spot of the Corn Belt. Keep your eye on early-planted corn in the southern U.S. If it comes in abundance in late summer, corn prices will weaken even before the normally price-depressing Midwest harvest begins.

• The world is flooded with cheap feed grains. India, long a symbol of starvation, is now a net wheat exporter, and its presence will grow stronger with better infrastructure. Ukraine is expecting a record corn crop, which suggests that Russia will follow suit.

• Demand from livestock feeders is slack, which is likely because U.S. cattle herds aren’t increasing. While more pigs were born this spring, the herd numbers so far are up only 1 percent to 2 percent over 2011.

• U.S. ethanol producers cut back on production, which already has occurred with some plants because of tighter margins after the ethanol tax credit ended Jan. 1. Also, the U.S. Energy Department says gasoline demand this year will be the lowest in a decade because of more fuel-efficient vehicles on roads.

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