Wheat and More…or Less
By Vance Ehmke
3-2-24
As they say, “In front of every silver lining, there’s a dark cloud”. The silver lining was the good years in farming of 2021 and 2022. And the dark cloud, well, that’s what’s staring us in the face right now.
Indeed, the good years were good. After wheat prices soared to $12 and $13/bushel locally when Russia invaded Ukraine, so did net farm incomes. As measured by the Kansas Farm Management Association, net income shot up to a record high of $310,000 per farm. But having observed several of these super cycles over the past 50 years, it’s fair to say they all start the same. And they all end the same.
Take a look at the Granddaddy of them all—the Russian Grain Robbery of the 1970’s that led to a doubling of wheat prices and gigantic increases in net farm Incomes. But with all the newfound wealth created by $5 wheat, farmers took the bait, hook, line and sinker. They quickly capitalized their new earnings into land which also more than doubled in price. And you had to wait a whole year before you could get a new John Deere tractor. But who cared: the dealers paid more for your trade in than you had paid for it new. Let the good times roll.
But whether you’re talking about basketball games or movies or farm cycles, they all end. And that particular farm boom ended badly. While Secretary of Agriculture Earl Butz was preaching, “Plant fence row to fence row”, over at the Fed, Paul Volker was determined to “Whip Inflation Now”. And when Volker hit the brakes, interest rates soared like a Roman candle—and shot from 6% to 18% in the blink of an eye.
What followed was called The Mid-80s Ag Crisis. I once read an economic analysis comparing the mid-80s to farming in the Depression of the Thirties. The mid-80s were worse. There was an explosion in farm bankruptcies as commodity prices collapsed and surpluses started building. The corn carryover, for instance, walked right on past 3 billion bushels. Farmers, who on paper were worth millions because their land had rapidly inflated, were now no longer paying taxes because they had no income because of high debt loads and high production costs. They were discovering that you service debt out of earnings, not net worth. All that was followed by a collapse in land values.
Land prices that had peaked in 1981 dropped 50% from that point to the bottom in 1985, 1986 and 1987. Here in Lane County we peaked at between $667 and $700/acre. In Thomas County where it always peaks, land hit highs of $900-$950. When it settled, land in Lane County sold for $250-$300.
Now I don’t want to spook you by talking about the mid 80s, because nothing that severe is going to happen again. Still, it’s a perfect model for illustrating what happens in the boom-and-bust farm cycles.
Since then, we’ve gone through several more of those. The one in ’08 was triggered by our nation’s move to lessen dependence on imported oil by making ethanol which resulted in a huge jump in corn prices—zooming all the way to $7 as farmers frantically planted more and more acres to corn in an effort to satisfy the new demand. Then in lockstep with the big jumps in net farm income came the big increases in land prices and just about every farm input you could imagine.
Land is the residual beneficiary of net farm income. After paying all your debts at the end of the year, if you have money left over, you go to land sales and bid against your neighbor who also has excess money. That competition causes land prices to go up. But then the adjustment comes and the bust arrives. And in the ethanol case, land dropped at least a hard 30%. The important thing to remember, though, is while the retracements can be severe and normally run between 30 and 50%, they always end higher than where they started. That makes land a very good long term investment.
The recent boom was triggered by Russia invading Ukraine and potentially disrupting important international grain trade. Consequently, wheat prices soared while economic uncertainty triggered a run up in the value of the dollar. The strong dollar today still haunts us and for us producers of exportable commodities like wheat, it’s made even worse by the cheap Russian ruble. In short, the boom is over and the adjustment has started.
By my bookkeeping, I’d say 2023 was the first year of the readjustment. And it is going to get worse. This year is going to be a real challenge. KSU ag economist Dan O’Brien says with 54-bushel dryland western Kansas wheat yields, our breakeven price is $7.50/bu., but our current cash prices are more like $5. In
brief, that means we’re spending $7.50 to produce a product we’ll sell for $5. That is not going to work.
But as they say, the cure for low prices is low prices. Because we’re no longer making as much money, or any money, we quit going to land sales and prices start down. Cash rents follow. We also throttle back on other expenses like crop insurance, fertilizers, seed and equipment purchases. And if you do have
excess money, the best deal in town is paying off old debt. Where else can you get a 9% return?
How long will this adjustment take? Going back to the mid-80s example, it took 5 years to get from the high in the land market to the low. While that was an extreme event, I’d prepare for probably another 3 years of humble incomes. And in the meantime, I’d plan for the land market to lose probably a good 30% of current value. The way I figure that is to take 30% off the extreme highs which here in Lane County ranged between $3100 and $3400/acre. That should take us down to a stable market of $2100 to $2200 for good quality cropland. But if it goes down 50%, it’s going to take more courage on the part of both farmers and ag lenders.
In summary, it’s not like we didn’t know this would happen. And that is why it always pays to keep a little slack in the rope.