The Financial Shape Of Agriculture
October 3, 2016 Many folks in the agricultural marketplace are probably asking each other the same question – what is the financial shape of the industry today and going forward? To help provide some possible answers, the Mid America CropLife Association invited Dr. Michael Swanson, Chief Agricultural Economist for Wells Fargo, to its recent annual meeting to discuss the matter.
And to better understand today, said Swanson, it’s helpful to review the recent past of the agricultural marketplace. “From 2005 to 2013-14, the wind was blowing at agriculture’s back,” he said. “To be a success, you didn’t need to have a strategy or good execution to be bullish about being in agriculture. But in a commodities market like agriculture, execution is the No. 1 thing to do to be successful.”
Loading ...To illustrate this point, Swanson compared net farm revenues from the early 2000s to today. “The thing you hear about farming right now is that it is not good and that people are not making money,” he said. “But in 2006, we had $57 billion in net farm income in this country. Today, we are at $55 billion. So why is this a crisis? Because if you had net farm income of $100 billion two to three years ago, $55 billion is a crisis – especially if you spent your money based upon this higher income level. Then you have a problem.”
According to Swanson, part of the problem for growers is the fact that so much of their asset bases are tied up in only two areas – real estate and machinery, and these are places where most tend to pool their money. “Back in the 1970s, real estate was approximately 70% of your average farmer’s balance sheet,” he said. “Today, real estate represents 83% and machinery is at 9%. So farmers have 91% of their balance sheets tied up in only two categories.”
But to be successful over the long haul, Swanson said growers need to place more emphasis on crop yields. “In 1948, labor was the key expense in crop production in the U.S.,” he said. “But today, farming is an input-intensive industry. It’s not a sweat business anymore. It’s a smart business.”
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