I am often asked an obvious question. If farmers are projected to lose money raising crops, why do it? And if they grow them on owned land, why do they continue to rent that is projected to lose money?
The answer has to do with fixed costs and long-term optimism.
Fixed costs such as land payments and farm machinery must be covered, and that involves generating cash. Farmers can’t generate any cash by not raising a crop at all, and they have to do something with the land to keep it from going to weeds. So they raise a crop and hope for the best, or some weather disaster somewhere (else) in the world that changes prices.
Farmers have acquired equipment to cover a particular amount of land. If they drop some of their rented land because it isn’t making money over a year or three, the neighbor will rent it instead. Suddenly, your future prospects as a farmer are gone.
But it’s grim. Dwight Aakre, a North Dakota State University farm management specialist, recently went through the numbers with me, based on price projections from the end of December. Most of those haven’t changed much since then, he said. Yields are based on seven-year averages.
Wheat budgets show farmers losing $24.78 per acre in 2016 in the southern Red River Valley. Returns are expected slightly in the black in the southeast, northeast, east central part of the state, and negative everywhere else.
Corn budgets show a whopping $72.97 per acre loss in the southern Red River Valley, and negative $52.19 per acre in the northern valley. No one in the state is expected to make money on corn.
Soybean losses are expected at up to $14.10 per acre in the southeast part of the state and negative $13.65 in the east central part of the state — both outside the Red River Valley.
Similarly, there’s mostly red ink projected for oil sunflowers. It’s worst in the Red River Valley, with negative $54.94 per acre results expected in the southern valley, negative $58.30 for the northern valley. The only black ink for sunflowers is projected in the southwest part of the state, at $1.53 per acre profit.
Aakre says that prior to the 2006 boom in commodity prices, driven by world demand and drought, crop budgets often showed negative projections. The difference is that not everything was bad, while “this year it’s almost everything.”
Aakre says farmers will probably plant about the same things they’ve always planted. Family living expenses may change some, but not everybody has been overspending. Reserves from previous profit years will be depleted. Land rents are “sticky” and won’t come down much. Fertilizer prices are down 20 percent, diesel down 35 percent.
“This is the third year down,” Aakre says. “It’s noticeable each year.”
Paul Coppin, manager of the Reynolds United Co-op, says there is more apprehension this year, but most are hopeful there will be some rally that can keep farmers close to break-even, or a bit higher.
It could be an early spring, which could be good for production. Farmers are scratching around in the fields to prepare seedbeds. We’re within three weeks of planting in eastern North Dakota, depending on weather. Things looks grim now, but if corn prices rallied by 50 cents a bushel, things would change for the better.