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Trade War Damages Investments in Agriculture

Over the years much of American agriculture has become a highly leveraged and high cost of entry business. How the trade war damages investments in agriculture is compounded by these facts. A recent article in The New York Times focuses on the loss of soybean markets in China due to the trade war and the damage that is doing to North Dakota soybean growers. Many investors have never visited, much less worked on, a farm or have any idea about how US agriculture has changed over the recent decades.

Mechanization and Consolidation of US Farms

The Midwestern USA is one of the breadbaskets of the world. The climate and soil are ideal for growing things and the USA is a major producer of corn, soybeans, wheat, cattle, pork, and poultry. Over the decades, starting with farm implement inventions in the 19th century, farming has become increasingly mechanized. A farmer with more farmland and the equipment to cultivate, plant, fertilize, deal with weeds, and harvest more efficiently makes a better profit. Since a big tractor can just as easily be used to plow and plant 320 acres instead of 160 acres (half a square mile versus a quarter of a square mile), a farmer with more farmland can be more efficient and more profitable than a smaller farmer. This has led to bigger farms, more investment, and greater investment risk in American agriculture. Here are just a couple of examples.

Bigger Farms and More Investment Required

In Iowa the average farm size in 1950 was 169 acres. By 2002 the average farm size was 350 acres. (Iowa State University)

The average price per acre of medium quality farmland in Iowa in 1950 was $300 and by 2010 an acre sold for just over $8,000.

In North Dakota the number of farms was reduced by half between 1950 and the average farm size increased by 647 acres to 1241 acres. (SoyTransportation.org-Rural Infrastructure)
North Dakota farmland sold for less than $100 an acre in 1950 and now the price is around $1,900 an acre.

The cost of running a farm is demonstrated by this graph from SoyTransportation.org-Rural Infrastructure.

 

To understand how the trade war damages investments in agriculture, look at the costs agricultural production.

Farm Costs by Year North Dakota

 

This is a composite of all farm expenses for the years 1949 to 2010. The “bottom line” is that total costs of operation across the state went from around $300 million in 1950 to the $6 billion to $7 billion range by 2010.

Crop Prices, Markets, and Farm Survival

When the price of corn, soybeans, or wheat goes up dramatically, farmers tend to plant more of that crop the next year. The law of supply and demand being what it is, when there is more corn, soybeans, or wheat produced the next year, the price does down. And, since other nations like Brazil, Argentina, Ukraine, China, Australia, and nations in Europe all grow these crops, their production has be taken into account as well.

The ideal situation is that you own your farmland, buildings, and equipment without any debt. So, you “only” need a crop price that is high enough to cover your production costs and then you have a profit. Unfortunately, crop prices go up and down and they can do so dramatically. A good many farmers have been ruined by a bad year with low prices and high production costs. Those with money or credit survive, buy more farmland, and thus farms get bigger while there are fewer farmers. But, how is it that the trade war damages investments in agriculture?

Will the Trade War End or Will the Soybeans Rot?

The New York Times published an informative article about the dilemma of North Dakota soybean farms and the associated businesses that support soybean production, storage, shipping, and sales. The bottom line is these farmers need to trade war to end before their soybeans rot because it has been a great production year that has outstripped storage capacity.

Farmers here in Cass County have prospered over the last two decades by growing more soybeans than any other county in the United States, and by shipping most of those beans across the Pacific Ocean to feed Chinese pigs and chickens.

But this year, the Chinese have all but stopped buying. The largest market for one of America’s largest exports has shut its doors. The Chinese government imposed a tariff on American soybeans in response to the Trump administration’s tariffs on Chinese goods. The latest federal data, through mid-October, shows American soybean sales to China have declined by 94 percent from last year’s harvest.

In the last 20 years North Dakota farmers have increased acreage devoted to planting soybeans from 450,000 to 6,400,000. Along with this increase in production has come the construction of millions of dollars-worth of grain elevators (huge buildings for storage), more loading facilities, more hundred-car-trains to carry the soybeans, and more farm implements used plant and harvest soybeans.

If you look at the graph from SoyTransportation.Org, you can appreciate how the total costs that go into modern agricultural production have led to a very high cost of entry and very leveraged business. A young farmer simply cannot afford to buy the land and equipment to start in a business like soybean farming. And, if he does have some capital, he runs the risk of two three bad years when he starts out and being ruined essentially before he starts. There is an old joke in farm country.

What would you go if you inherited a million dollars?
Well, I guess I would go into farming until the money was all gone.

It is a measure of the risk of investments in farming today that many that grew up on farms did not stay there. However, they kept the land. The ideal situation for these folks is that they receive a rent check in the mail every March 1 while the farmer working their works the land and either profits from a good year or sees losses when a trade war takes away markets that took decades to gain access to.

According to the Times, the trade war may do lasting damage to soybean growers.

“I’ve been to China 25 times in the last decade talking about the dependability of U.S. soybeans,” said Kirk Leeds, the chief executive of the Iowa Soybean Association. By undermining that reputation, he said, “We have done long-term damage to the industry.”

Although the last couple of years were very profitable, younger farmers with more debt are in trouble.

But the mood is souring quickly. Mr. Gebeke’s wife, Debra, a retired psychologist, has returned to work at North Dakota State University, to counsel distraught farmers. Public health officials in North Dakota, already confronting a recent rise in suicides, are concerned about the impact of falling prices, particularly on younger farmers with high levels of debt.

Investments in agriculture can be very profitable over the years but typically one needs to have sufficient capital to ride out down markets. And, American agriculture needs to be able to keep the markets that it has cultivated over time.





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