Tuesday, February 08, 2011
What Are The Drivers Of The Dynamics You Will Face This Year And Next?
As you prepare to begin a new year with a new lease, new marketing plan, new budget and cropping pattern, what are the dynamics that will push and pull on your operation in 2011? Sure, you can count on markets, fuel prices, and your spouse. But look at the big picture. 75% of the value of crop production is produced by 40% of farms. In the past 50 years corn yields have increased 300%, wheat yields by 215%, and bean yields by 169%; all while variable costs per bushel have declined by one third. And operators are effectively managing more acres in one operation. Those are significant dynamics that dictate what is happening on your farm. Are you keeping up with the forces around you?
In 1970, 40 acres could be planted in a day and 4000 bushels could be harvested in a day. In 2012 the planting rate will be over 900 acres in a day, and the harvest rate will be 50,000 bushels in a day. The difference can be attributed to several forces outlined by Purdue economists Allan Gray and Brent Gloy, and consulting economist Elizabeth Bechdol, in the recent issue of Choices Magazine.
1) Growing and diversified demand: the global population will reach 9.5 billion by 2050, with the 2.6 billion additional people being born and living in developing countries where the need for affordable food will be the greatest.
2) Technology: yield monitors, GPS, satellite imagery, plant and soil sensing systems are fundamentally changing the way crops are produced. That does not include biotechnology which is producing stronger plants.
3) Resource availability: The availability and cost of natural resources will have a significant impact on the capacity of farms to meet the demand. That includes land, fertilizer, and water, and the owners of the latter will benefit.
4) Societal influences: social concerns over biotechnology and how agriculture uses it will be a force that will affect the ability of farms to utilize those technologies. Government regulation and public opinion will keep agriculture more accountable, as they have for non-farm business.
The economists say those factors will shape the farming sector, but there will be other factors that will affect profitability. 1) Input suppliers will be dominated by large agribusiness firms that will compete for farmer business. Recent large price increases have resulted from consolidation in the fertilizer industry, but there are alternatives that may benefit some producers who can recycle livestock waste. 2) Buyers of grain and oilseeds are usually private companies or farmer cooperatives, but beyond them there is a substantial concentration among the grain handling and merchandising companies. They will funnel grain into the livestock, ethanol, and export industries.
The economists also paint a picture of rivalry within agriculture. While you are not competing with your neighbor for the best price at the elevator, you are competing with your neighbor for control of those land and water resources. And your potential profits will be bid into additional land acquisition, either by purchase or rent. Subsequently, rivalry has had a detrimental impact on agricultural profitability on Rural Route 4.
A significant dynamic that is restricting agriculture is the financial barrier to entry for young farmers. Capital is not prohibitive for a large scale entry by an agribusiness, but it is prohibitive for an individual beginning a career. But the economists say there are more farm management companies pursuing large scale land investments, funded by the equity markets. And they add, “The relative ease with which parties with access to capital can enter crop production will limit the upside profitability potential for current producers.”
So what are the implications of these dynamics on farm operators? The economists say the drivers of change suggest it will be critical for crop producers to be diligent in their pursuit of ever increasing productivity. To meet the demand, yields will have to increase at increasing rates, and because that will not work in marginal areas, technology will have to be adopted to achieve those needs. They say economy of scale will continue to be a critical driver of one’s competitive position. That will require bargaining power to control a product in the marketplace, either being bought or sold, all the while technology adoption must continue to help drive down the cost of production.
Summary:
“An increasing and diverse demand, rapid adoption of new technologies, limitations on global agricultural resources, and a society with increasing expectations of agriculture to produce a safe, abundant, affordable—and now “sustainable”—supply of food, fiber, feed, and energy will all shape the future environment for crop producers. In addition, crop producers’ ability to generate profits will change with the profitability prospects of input suppliers, customers, competitors, substitutes, and new entrants.”
Posted by Stu Ellis on 02/08 at 09:19 PM | Permalink
Comments
Posted by: Jib at February 15, 2011 2:02PM
Mr. Ellis;
I hope your resources will be able to provide some answer to the following questions. (My resources have not provided a consistent answer.) The questions have to do with the tearing up of a perfectly good winter wheat crop this spring and planting another spring crop on those acres. The economics later this spring may make this an interesting proposition.
The consistent answers I have found indicated a grower has the option of doing with a crop what he/she wishes. So tearing up a “perfectly good” winter wheat crop is an option. They also say a premium is due the insurance company for they took the risk of prevented planting and winter kill but no rebate would be forth coming for the balance of the growing season. The question then become:
• What is reported as yield for APH purposes; is it a Z (indicating no crop was planted and keeping next years APH as it is currently) or is it a 0 (which lower the APH value for the following years)?
• What are the insurance options for the “replacement” spring crop?
• Is insurance coverage mandated on the new spring crop for SURE qualification or did the winter wheat premium cover that?
• Does the new spring crop even qualify for coverage without the crop insurance company’s release?
• Can the insurance on the spring crop be a different type and coverage?
(We believe the answer to the last two questions are; yes anything but you need a release and anything but while we are asking we thought we would ask.)
A bright green carpet on a warm day, early in the spring, will more than likely make this an unneeded mental exercise. We will be thankful for the crop planted last fall. After all wheat prices are very good. May folks have told me be a bird in the hand is worth two in the bush. I agree but I think I might see three.
Thanks in advance for any help you may be able to provide.
Jib aka Gibberish
Jib:
You are asking some legitimate questions, and ones that quite a few other farmers are wondering. I have only marginal knowledge of the crop insurance requirements, so I do not want to express my opinion and guide anyone down the wrong path. They are questions that any crop insurance agent will have accessible answers, and that is where I would suggest your next stop be.
I am not begging off, I just an not trusting of my knowledge on details that could mean tens of thousands of dollars for someone.
~Stu