It is important to recognize that FNA was created to address a specific “problem bundle” and that problem has not gone away.
Even while many farmers feel very comfortable with the earnings from their farm over the past few years, the fact remains that North American farmers are not receiving an appropriate return on the land, labor, capital and management they invest in their operations.
Using simply a return on equity calculation – in other words giving away the farmer’s labor and management for free – the number is unacceptably low.
In 2012 Statistics Canada reported total net farm income (excluding government payments) to be $7.1 Billion1, with total farm equity of $367.6 Billion2. That works out to a 1.9% return on equity. They literally could do better investing in almost anything else.
In 2012 the USDA’s Economic Research Unit reported total U.S. net farm income of $95.8 Billion and equity of $2.7 Trillion3 for a return on equity of 3.6%.
Compare those numbers to the growth in the Dow index. Farmers would have been financially much better off if they had sold their farms and invested the money in stock index funds. So on a purely use of capital basis, it is clear that the return is not competitive.
Importantly, when we write “give away the farmer’s labour and management for free,” it is not a figure of speech unless the farmer in question directly pays competitive salaries and management fees to himself, and includes those expenses in his expense reports to the respective governments. In many, perhaps still most, cases farmers do not do this. Instead their family income is the net income of the farm. For those farmers, the labor and management is “free” from the perspective of available data.
More importantly, it is imperative that we learn from history, two lessons from which are clear:
• farm land value increases in lock step 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
The first point is important because as the value of the land increases the farmer is confronted with an increasingly important investment decision. Simply, if the farmer were to sell the land and invest the proceeds, would his returns be significantly greater? In most cases, the most consistent answer is a clear “yes.” So while increased commodity prices contribute to increased current income, by increasing land prices they also erode the value of the capital return.
That negative return must be added into the calculation of return on labor. If the farmer foregoes taking an alternate job with comparable high skills, the value of that potential salary must be added to the cost side of the equation, recognizing that because farming involves such a wide range of high skills finding “comparables” is a forced exercise. Consider the extent of the demands, from heavy equipment operator to lab technician; mechanic to marketer; truck driver to trade analyst… If the farmer could be earning $500 a day as a heavy equipment operator, then that is a $500/day cost of the decision to farm.
Similarly, today’s active farmer must be a skilled business manager. He must organize resources including money, men and machines; develop operational plans and oversee execution under tight deadlines; measure risk and determine strategies to manage those risks. The return to management is a real economic value that is very rarely considered in assessing the real returns farmers receive against the real costs and investments they make. Yet no other business would operate without demanding a return on that investment in management. There are also unpaid investments in intellectual capital that would be compensated in any other industry.
So the economic problem starts with capital opportunity costs and uncompensated investments in labor and management.
It is magnified by the historically demonstrable fact that as farm commodity prices rise, farm input costs rise to consume a larger share of the value of the farmers’ output. So, you may “feel” great that you are receiving prices of $2.00 where you previously receiving $1.00. And you may continue to be happy that, of the new $1.00, 60 cents goes to increased input costs, because, after all, you are left with 40 cents more than you had before. But the financial reality is that if you used all the same resources in different economic activities, you would retain much more, in some cases almost all, of the revenue growth for yourself.
Moreover, regardless the continuous predictions of the past 30 years that farm product prices will always rise because of Asian demand or some other set of variables, the truth has been that farm product prices do go down. Perhaps more than any other commodity, farm price increases trigger increased production from increasing numbers of countries. As more demand comes on line, more production is ramped up, not just through new technologies that put farmers into the straight jacket of more bushels at any cost, but also from regions of the world that were previously not a significant factor in world supply. China is building massive farms in Africa. 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 grow revenues.
All this new production will be more than enough to keep ahead of the demand curve.
So we know that 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.
FNA attacks this bundle of problem directly and indirectly. You can read “What we do” and “Building the Farm Business Alliance” for details of how we attack the problems. The key message here is that our activities on behalf of Members are intended to make permanent structural changes to their business environment, from reducing input costs to providing the means to capture more value from the supply chain. Only by building the farm business alliance will there be any lasting solution to “the problem.”
The reason that FNA is the only viable solution is that 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. This is not about farm “survival” but about making systemic changes to properly reward the land, labor, capital and management invested by farmers. In fact, the larger the farm the more costly the misallocation of resources may be.
The solution will not come from governments, simply because the amount of governmental power that would need to be exercised would challenge our independence and wreck the industry in the process.
The solution cannot come from input suppliers or the supply chain acting without the structural impact of the farm business alliance, because that is not their role. Their job is to maximize profits for their shareholders, not to ensure an economically appropriate allocation of returns to farmers. And it is a job we want them to do, because their drive for profitability is essential to maintaining a healthy and lasting supply chain which we need to be successful in our own farm businesses.
The only solution is in fact building the farm business alliance with the clear purpose of maximizing farm profitability on all fronts.