'Cash Will Be King'

Ohio State ag economist predicts drastic farm income changes, as supply and demand adjust to lower commodity prices. Put money in the bank now, he advises.

Published on: Jan 13, 2014

Ohio State University ag economist Matt Roberts told a packed crowd, held at rapt attention, during the 2014 American Farm Bureau Federation convention, that agricultural incomes and lifestyles will change dramatically in next three to five years.

"The last six years have been extraordinary if you've been a row crop producer. It's been the best in history," Roberts said. "It's been six years in which any idiot could've made money – and a lot of them did."

Roberts credited an extra 50 million acres' worth of demand for corn and soybeans over the past 10 years for the high commodity prices in recent agricultural history. In terms of acreage, that demand has equaled the production of "two Illinoises."

SIZEABLE CROWD: Farmers and ranchers are gathering this week in San Antonio, Texas, for the 95th Annual American Farm Bureau Federation convention.
SIZEABLE CROWD: Farmers and ranchers are gathering this week in San Antonio, Texas, for the 95th Annual American Farm Bureau Federation convention.

In response, idled land – including hundreds of thousands of acres in the Ukraine – have come into production. "We had a big demand response and now we've got a supply response," Roberts said.

Ethanol and China are two primary demand sources. "Which is still growing?" Roberts asked. "It's not ethanol. Best case scenario is flat going forward. Demand growth is gone. Ethanol plants aren't going away but we won't see annual growth that we've seen in the past. But I'm a bull on China." He points to a rebound in feed usage, as feeders go back to using corn in their rations. Corn exports are available and have doubled from last year to this year.

Roberts does, however, believe it's going to take a few years to figure this out all out, and he predicts and era of significantly lower prices than production agriculture has seen the last six years.

"I've been saying we're one good year's yield away from $4 corn. I'm not sure I'd call 2013 a good year but here we are," Roberts said. "Ask yourself: what would our yield have been if April and May had been normal?

"Normal years do happen, with reasonable frequency. Normal years happen, that's why we call them normal."

He also compared the fight over acres to a custody dispute. "What we have seen in the last five years is the crop market fighting over who gets the kids, trying to pull acres into their given crop. This year it's the ugliest divorce ever: no, you take the kids! You take the acres!"

Liquidity crisis
Echoing common sentiments heard around the convention and in other workshops, Roberts painted a picture for the next three to five years.

"If you're large, progressive or young? We're going into three to five years of low prices, low profitability. Low $4 corn, high $3. In the commodity business, the low-cost producers survives, Always. Basic economics. And the prevailing difference in cost of production is land charge," he said.

He's seen a lot of farmers with "very high land charges," and predicts people will be losing money. "Current prices are unprofitable for many producers."

"I don't believe we're in a farmland bubble. I don't believe we'll see the '80s farm crisis. We will see bankruptcies: 90% cash rented, very large operations, will go bankrupt because they will run out of cash."

Roberts recommended building cash on hand, keeping one year's land charges above your normal working capital, in cash or near cash.

"If that means you have a farm to pass on to your kids, then losing a couple percent in the bank is not a bad thing," Roberts concluded.

Editor's note: An earlier version of this story inadvertently included information about IRS Section 179.