Both the booms and busts of the agricultural industry are
related to exports, said Michael Boehlje, a distinguished professor in the
Department of Agricultural Economics at Purdue University.
“The booms have been created by export growth, and the busts
created by profound declines in exports,” he explained during the Taming
Agricultural Risks meeting hosted by the Federal Reserve Bank of Chicago.
“You got to watch exports because they account for about 25
percent of U.S. agricultural income and exports are twice as important to
agriculture as the entire U.S. economy,” the Purdue professor said.
Boehlje stressed that he is bullish about the long-term
future for agriculture. However, he is concerned about bumps in the road.
At various meetings, I have heard many speakers discuss the
need for continued increases in food production due to the rapid growth of the
world population, which is predicted to reach 9 billion people by 2050.
Boehlje said demand for food is not driven by population.
“It’s income growth that counts and that has to occur in the
right parts of the world,” he said. “Income growth is the primary driver for
demand for food.”
To meet some of these demands, more land has been converted
to farmland in several countries, Boehlje said.
“For the last eight years, 147 million additional acres have
been put under the plow. That acreage has come from South America, the former
Soviet Union, East Asia and North America,” he reported. “In the U.S., the land
has come from CRP and pastureland that was converted to cropland.”
And once this land is put into production, it remains in
production because agriculture is a high, fixed-cost industry.
“You do not shut down the plant even when prices go below
the total cost of production,” Boehlje said. “You only shut it down when it will
no longer cover variable costs.”
Boehlje, who owns a farm in Iowa, said his variable costs
are around $3.20 per bushel of corn.
“We’ve got to get sub $3 corn before that land will come out
of production,” he said. “That’s the problem in agriculture — the peaks are five
to eight years and the troughs are 10 to 15 years and we are moving into the
For 2014-2015, the Purdue professor said, farm income may
fall by 25 percent.
“I’m not concerned about debt-to-asset ratios. I’m worried
about repayment capacity,” he said. “Farm profits fluctuate around zero. That’s
the definition of a commodity business. There’s no pure profit in a commodity
business in the long run.”
The lower grain prices are the better it is for livestock
producers. However, the professor said, he is concerned about the growth demand
“The core base of demand for U.S. animal proteins is in the
U.S.,” he said. “We’ve had a 10 percent decline in animal protein consumption,
and it’s not clear how quickly that will recover.”
Boehlje is not expecting a collapse in ethanol in terms of
using corn. However, there won’t be expansion of ethanol plants.
“The two core components of demand for corn — exports and
ethanol — we think won’t grow, but not collapse either,” he said. “That’s why we
think we’ll have a soft landing.”
I hope he is correct. I can’t imagine anyone in the
agricultural industry who wants to relive that painful period of the 1980s.