Next American Farm Bust? Outlook on Ag Economy?

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Question: 

I have read a few recent articles in the Wall Street Journal recently regarding farmers going out of business, prices for fertilizer inputs, and how well farmers have been doing producing crops. They were titled "The Next American Farm Bust Is Upon Us", "Here’s One Industry Where the U.S. Is Already Catching China—Fertilizers".

Regarding the first article, why are American farmers still incurring such high costs for production inputs and why do they really have no where to sell their grain and product to make any money? Secondly why are fertilizer inputs in particular so expensive when the second article talks about how our supply is expanding and we are producing more fertilizer than any other country? Shouldn't these input costs go down or be down because of such a high supply?

Lastly it seems that farm production has been peaking and they are doing extremely well in regards of yield and product output, consequently having no place to sell their grain. My question is where do Ag Economists forecast job growth will be greatest in the Agriculture Sector in the next five years? Which particular majors in certain sectors of the Ag industry will do the best and be in high demand?

Thank you for your time

Answer: 

While it is true that, in general, farmers are still facing high production costs.  They have also seen some of those costs fall over the past couple of years.  And it is not true that they have nowhere to sell their products.  Crop and livestock markets have been very active, moving the record production to users.  The challenge has been capturing prices that are high enough to cover production costs.

Let’s start with production costs.  There are several inputs that significantly impact production costs.  To see typical crop production budgets for Iowa, I recommend the crop budgets on Ag Decision Maker.  As those budgets show, the largest cost is land.  Whether the farmer is renting or owns the cropland, they face land costs.  For the renter, the cost is the rent.  For the owner, it is the property taxes and the opportunity costs of potential rents.  Machinery, seed, fertilizer, and chemicals also contribute substantially to total costs.  Total crop production costs peaked in 2013, aligned with the record crop prices at that time.  Since then, total production costs have fallen, slowly at first, but accelerating over the past couple of years.  And that reduction in costs has occurred across the cost categories, as land, machinery, fertilizer, and chemical costs have fallen.  Specifically, for fertilizer, in 2013, nitrogen was priced at 58 cents per pound, phosphate at 48 cents per pound, and potash at 50 cents per pound.  For 2017, nitrogen is priced at 31 cents per pound, phosphate at 34 cents per pound, and potash at 25 cents per pound.  So farmers are paying significantly less for fertilizer than they did a few years ago.  Fertilizer costs have gone down as fertilizer supplies have increased.

The financial challenges that farmers have faced over the past few years have relatively more to do with the speed at which crop prices fell with the production of record crops, than to the speed at which production costs fell.  Following the record high crop prices of 2012 and 2013, U.S. producers have grown a series of mammoth crops.  The 2013-2016 U.S. corn crops are the 4 largest the country has ever produced.  The 2014-16 U.S. soybean crops are the 3 largest on record.  Those record crops have been more than enough to fill desired usage needs.  Crop stocks have grown and crop prices have fallen.  Projections from the U.S. Department of Agriculture for 2017 show corn and soybean production falling, allowing crop usage to catch up with supplies, improving crop prices and the outlook for U.S. agriculture.

Looking forward, while the increased productivity has limited job growth directly in production agriculture (i.e. the number of farmers), we have seen and continue to see job growth in the sectors that sell to and service farmers.  From agricultural lenders and crop merchandizers to precision ag technicians and crop insurance providers, agriculture remains fairly strong on the job front.  At Iowa State University, we are proud to host the largest and 2nd largest agricultural career fairs in the country.  Based on the companies participating in the career fairs (here’s the list for the most recent ag career fair), there are a number of job opportunities for many agricultural majors, including for agricultural business students (a major in our Economics department).  Currently, the ISU College of Agriculture and Life Sciences has a 98% placement rate for their graduates (placement meaning graduates report either working, continuing their education, or serving in the military within 6 months of graduation). 

So while the U.S. agricultural sector has suffered from a financial downturn over the past few years, the picture is not as bleak as portrayed in those recent articles.  Agriculture, like every sector of an economy, goes through economic cycles.  The record agricultural profitability during the period from 2007 to 2013 was following by the financial reversal that the ag sector is hoping to emerge from in the coming year.  Some farmers and ag companies have struggled and failed in the downturn, but the ag sector as a whole remains in decent financial shape.

Last updated on May 12, 2017