Look At The Whole Picture Before Swinging the Budget Axe

September 19, 2011

By all accounts, 2011 looked like a banner year for American agriculture.  In May, despite flooding and late planting, USDA forecasted a record crop in corn—by far America’s largest row crop—of 13.5 million bushels, covering 92 million acres of prime farmland.  With corn being an important crop domestically—producing food, fuel, and feed—and being a huge export generator, America’s heartland was looking prosperous.

Indeed, news accounts speculated about historic grain prices for farmers and a boon in American agriculture while the rest of the country was in a bust.  And then out of the blue in early July, China purchased a staggering 540 million metric tons of corn, putting further pressure on the markets and sending prices even higher.   Some in the media speculated that farmers were going to get rich.

But before the budget cutters decide that America’s agriculture sector is now so strong and vibrant that it no longer needs risk management tools that serve as a backstop for farmers when the bottom falls out of prices or a weather catastrophe strikes, they need to realize one big factor:  assumptions of prosperity are only based on half of the pertinent information.

First of all, high commodity prices might sound great, but have you considered the high cost of inputs as well?   When consumers read about $7 a bushel corn or $13 a bushel soybeans, it would be easy to draw the inference that farmers are getting rich.  But the cost of the inputs—the seed, the fertilizer, the herbicide, the land, the machinery, the parts, and the fuel—to raise those crops, are staggering.

An April 2011 American Farm Bureau Federation white paper titled, “Cost-of-Production Report: the Rising Costs of Inputs,” addresses the rise in various agricultural input costs and how they truly effect the price of commodities.  “The most certain thing about economics,” the report begins, “is uncertainty.” And paired with the high-risk and unpredictable nature of the agricultural industry, farm economics trends are like uncertainty on steroids.

The report notes that there are several issues that have spurred across-the-board increases in agricultural input costs. Conflict throughout Northern Africa and the Middle East, combined with natural disasters and booming demand in Asia, along with a weakened U.S. dollar, have sent oil prices soaring.

And because diesel is a byproduct of crude oil, farm diesel prices have risen right along with the oil. For example, input costs for corn, related to fuel and fertilizer, are expected to rise once again from 2010 to 2011 as well, the report says. Fertilizer will cost $127.00 per acre, fuel will cost about $46.65 per acre, and seed will run about $94.72 per acre. The total operating cost projected to plant just one acre of corn is $324.96.  And the same trend applies to wheat, rice, and cotton.  Commodity prices might be up, but so are the costs to produce them.  And the difference between the two is not a lot of money.

And what good are strong crop prices if there is no crop to harvest?   And in many parts of the country, there will be no harvest.

The Texas panhandle has seen almost no rain since October 2010—making this the state’s driest period of time on record.   More than 82 percent of the state of Texas and much of the Southern plains finds itself in an extreme or exceptional drought right now.  And in other parts of the country, including the heartland and the Deep South, it’s been record flooding and massive devastation from Hurricane Irene.

Unfortunately, not only do farmers have to deal with wild weather fluctuations but also what’s going on in Washington with the impending budget cuts.  Although the Simpson-Bowles recommendations called for $10 billion in cuts to U.S. farm policy, sequestration or a “super committee” package would likely result in deeper reductions.

The good news on the budget front is that 66 percent of Americans oppose cuts to U.S. farm policy, according to a recent CNN poll.  In hard times, Americans have always and will always be there for those who feed, clothe, and provide fuel for their vehicles.

In reality, all the good news in the world isn’t going to save a single farmer who found himself or herself in the path of Mother Nature’s rampages this year.   What is going to save them are exceptional business practices and strong farm policies, which allow farmers to partner with the government to protect their businesses and their livelihoods while ensuring a safe, affordable and abundant food supply for American consumers.  With strong farm policies in action, that thin green line of farmers will be here to farm yet another year, providing tens of millions of more meals to their fellow Americans and consumers abroad.