The Problem

 

The Problem

North American farmers are receiving inadequate returns on the land, labor, capital and management they invest in their operations. If we compare net farm income to total farm equity we quickly see that farmers could do better investing in almost anything else and receive higher returns.

Three lessons from history are clear and must influence the way we challenge the marketplace

  • farm land value increases in lockstep with farm commodity prices
  • farm input costs always consume a disproportionately larger share of increased commodity prices than net returns to farmers
  • farm commodity prices will come down in unpredictable cycles and when they do come down, farm input costs will not decrease equally or at all

As the value of the land increases the farmer is confronted with an important investment decision. If the farmer sells the land and invest the proceeds, will his returns be significantly greater? In most cases, the answer is yes. While increased commodity prices do contribute to increased current income, by factoring in the increasing land prices they also erode the value of capital return.

Then, we see that as farm commodity prices rise, farm input costs rise to consume a larger share of the value created by the farmer. We may “feel” great that we are receiving prices of $2.00 where we were previously receiving $1.00. We may continue to be happy that, of the new $1.00, 60 cents goes to increased input costs, because we are left with 40 cents more than we had before. However, the financial reality is that if we used the same resources in different economic activities we would retain more, in some cases almost all, of the revenue growth for our own families.

Despite the predictions of the past 30 years that farm product prices will always rise, the truth has been that prices also decrease. As demand increases production is ramped up through new technologies and from regions of the world that were previously not a significant factor in world supply. For example, China is building massive farms in Africa and new land is coming under production in Brazil and Eurasia. Better technology is increasing yields in all producing countries as farmers chase the more-bushels  strategy to increase revenue.

Farm commodity prices will always retreat from highs. It is only a question of when and by how much. A big part of the economic problem is that farm input costs never retreat as much as farm commodity prices – or at all. This has been the driving force of consolidation and bursts of farm bankruptcies for half a century.

 

The solution

FNA’s strategies, on behalf of our members, are created to form permanent structural changes to the business environment. From reducing input costs to providing the means to capture more value from the supply chain — only by building a farm business alliance will there be any lasting solution.

No individual farmer or small group of farmers can command the market power required to sustain the systemic forces required – regardless how large their individual operations. It is necessary to make systemic changes to properly reward the land, labor, capital and management invested by farmers.

The solution will not come from our governments. The amount of governmental power that would need to be exercised would challenge our independence and wreck the industry in the process. This is our industry and our responsibility, as allies, to shape the way we do business.

The only viable solution is building the farm business alliance with the clear purpose of maximizing farm profitability on all fronts.

 

1. http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/agri01a-eng.htm
2. http://www5.statcan.gc.ca/cansim/a05?lang=eng&id=0020020&pattern=0020020&searchTypeByValue=1&p2=35
3. http://www.ers.usda.gov/dataFiles/Farm_Income/US_Farm_Income_and_Wealth_Statistics_includes_the_US_Farm_Income_Forecast/FarmSectorIndicators.xls