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Raising Coin

By wmadministrator

Building on significant growth the past few years, Kentucky’s agricultural economy is enjoying a financial harvest. Farm product prices, especially for grains, are at all-time highs. Unfortunately, so are production costs such as fertilizer and diesel. Current estimates for net farm income this year indicate that it will come in just short of the commonwealth’s 2005 record of $2.1 billion, a number achieved in part because many tobacco farmers took lump-sum payment on their buyouts that year.

The overall financial outlook for Kentucky farmers and the communities that rely on their financial health is bright, but it won’t be uniform. Rising operating costs mean individual farmers must make smart business decisions and be good managers.

“While cash receipts were near record levels in 2007, net farm income probably fell in 2007 (official data will not be released until late August) due to higher production expenses and a drop-off in tobacco buyout dollars,” said Will Snell, a University of Kentucky agriculture economist. “As for 2008, we estimated in December that cash receipts would increase to another record level – around $4.3 billion for the year. But we certainly did NOT anticipate $7-$8 corn and $13-$15 (soy)beans. Consequently cash receipts will likely be even higher than we thought in December, despite concerns in the livestock sector.”

Snell expects net Kentucky farm income to increase over the 2007 figures, despite increases in production costs, lower government payments and lower tobacco buyout dollars. He doubts, though, it will surpass the record 2005 level when tobacco buyout dollars poured into the state. In addition, drought last year forced some farmers to sell livestock they had not planned on due to hay/forage/water shortages, which means fewer animals to send to market this year.

Looking at the macro view of the state’s agriculture economy, it is easy to assume all Kentucky farmers are successful in the current thriving price environment. The problem, though, is that the macro view of Kentucky agribusiness does not always reflect the challenges and struggles taking place daily on family farms across the commonwealth.

Farm income growth the past several years has focused more in the western third of the state, Snell notes. This includes growth in grain production, poultry production and the shift of burley from the bluegrass and eastern Kentucky regions to larger operations in the west, coupled with expanding dark-tobacco acreage.

The macro view of the state’s agriculture economy also captures the growth in the equine and poultry industries, which are important to the state. Yet these numbers can be misleading, too, as they do not impact the large number of farms that an industry like the cattle sector impacts across the state.

Though the macroeconomic view of Kentucky’s agriculture may not tell the story of each farmer in the state, there are common factors that pose challenges and have a major impact on the health of all farms, be they grain, vegetable, or cattle operations.

The Young Farmer
With all the uncertainties in the agriculture economy, what is it that makes young professional choose to go into farming today?

“I grew up around farming and I enjoyed it,” said R.W. Eldridge, of Franklin County. “After college I was working at a regular job, and when there was an opportunity to come back and join the family operation I decided to take it.”

As a younger farmer, Eldridge realizes he will be facing unforeseen challenges by going into agriculture. On the farm there is no way of knowing what the year will bring when faced with the ever-changing weather and markets.

“You set goals and try to budget, but until the money is in the bank you don’t know what you’ve really made. Many times you have a paycheck that is a moving target,” said Eldridge.

Eldridge admits that in the feeder calf business that is the focus of his family operation, you have to understand the risk associated with the business.

“We are basically playing the stock market, just trading livestock instead of stocks on Wall Street,” said Eldridge. “We buy a commodity, which happens to be cattle; we try to stay in the market buying and selling each month, to balance out the risks.”

Eldridge believes what makes today’s market different from that of his father’s and grandfather’s generation is that the risk associated with the business is much greater, because it takes more cattle and more land just to make it with the higher cost of living.

“We still have three families living out of what we do here on the farm, so we have had to get bigger because we have more on the line” explained Eldridge. “It is a struggle at times with the economy as it is right now, but I don’t have plans of leaving the farm just because of that.”

The input factor
Talk to any farmer across Kentucky and the No. 1 issue they are facing this year is the escalating cost of inputs. From fuel to feed, farmers are facing the challenge of deciding where they can cut costs on inputs to stay on budget when some prices have more than doubled since the end of the year.

Grain farmers across the state might be celebrating the $7 corn and $13 soybeans, but livestock farmers are struggling to figure out how they are going to survive with feed costs growing.

“We feed very little corn, instead mainly soy hulls and corn gluten,” explained R.W. Eldridge, a beef and tobacco farmer in Franklin County, “but as the cost of corn goes up, others turn to alternative feeds, which increases the demand and, of course, the price.”

Eldridge went on to explain that higher grain prices on the farm aren’t the only impact that increased feed costs have on his operation. Feed lot operators have two main costs: corn and cattle. If corn prices go up but the price for the product they sell, fattened cattle, doesn’t go up too, then feed lot operators are going to pay less for feeder cattle. That means the many Kentucky cattle farmers who supply lot operators get less for the product they are raising.

When it comes to the increases in petroleum prices worldwide, farmers are facing a double whammy. It impacts them in the form of transportation costs, of course, but also in the cost of fertilizer for their fields.

“Fuel costs were high last year, but now we are looking at another 25 percent to 30 percent more that we are paying for fuel this year,” explained Eldridge. “We run feeder steers. Those animals have no less than three trips in a trailer, which adds to the cost of that animal.”

In late July, an AAA survey reported average diesel prices around $4.75 a gallon, which was nearly $2 a gallon more than a year earlier.

The climbing cost of fertilizer prices is taking its toll on production operations across the board, too. Livestock farmers are cutting corners on pasture fertilization this year as ways to offset the rising costs they are facing in both fuel and grain.

“It is difficult to pull the trigger and put nitrogen out on a hayfield,” said Josh Long, a Madison County farmer. “It isn’t only the fact that the fertilizer is more than double the cost of last year that gets many farmers; it is also that cost along with the cost of fuel it will take to spread the fertilizer.”

No-till lowers fuel costs
Even with high corn prices, with nitrogen fertilizer running $800 per ton and diesel fuel over $4 per gallon, it’s easy to see why Kentucky grain farmers are looking for ways to cut costs too.

“What these high prices have made people in this area do is think about things such as minimal tillage, no-till,” explained Josh Kirkland, a grain and tobacco farmer in McLean County. “No-till (farming) has been big here in the area, but I’m seeing more farmers that are turning to no-till to minimize their production costs, since it takes so much fuel for them to do tillage.”

Across the board, input prices are climbing for all farmers and that trend doesn’t appear to be changing anytime in the near future. The fact remains that farms are businesses and as with any business, it is the bottom line that matters at the end of the day.

“The cost of inputs have doubled, but at least for grain farmers some crop prices have doubled as well,” said Kirkland. “To be honest, it is just another year of struggle for all farmers, from tobacco, vegetable, cattle or grain.”

The weather factor
As the old saying goes, if you don’t like the weather in Kentucky, just wait a few hours and it will change. Unfortunately for Kentucky producers, the uncertainty of weather conditions in the state can wreak havoc on their planning and budgeting.

“The abnormal weather conditions from last year’s perfect storm has added another layer of difficulty to the high grain and petroleum prices farmers are facing this year,” said Long.

Last year’s early freeze followed by the drought was a problem that impacted the production and bottom line for producers in 2007. The extreme weather led to the loss of young trees and plants in orchards, wiped out grasses in productive pasture areas and led livestock producers to sell additional animals due to the lack of and cost of feed.

This year has proven to be better for most producers, even though planting and production across the state has run a little behind due to cool wet weather conditions in the spring.

“This year the cool weather put our blueberries almost two weeks behind schedule,” said Larry Martin of Bluegrass Blueberries in Metcalfe County. “We are not complaining though, because it looks like it will be a great crop, which is what we need after losing all the berries in last year’s freeze.”

Despite the recent flooding in the Midwest, Kentucky grain farmers did not suffer extensive acreage loss and overall Kentucky’s grain acreage looks strong for the year.

“While the recent flooding will hurt on the quantity side of the income ledger for U.S. grain farmers, it will be offset somewhat by higher commodity prices,” explained Snell. “That said, if Mother Nature is kind to Kentucky grain farmers the remainder of the growing season, high commodity prices could easily help Kentucky (gross) cash receipts soar above our previous record levels.”
This is not a good story for the individual farmers who did lose crops to the flooding, and of course the aggregate picture is not a bright one for the livestock sector in Kentucky and beyond with high grain prices.

The cyclical factor
To everything there is a season, and in the agriculture economy today it is the season for grain crops.

“In the short run the high grain prices are great for us; in the long run corn prices are way too high.” said Sam Hancock, a grain and hog farmer in Fulton County. “It will not last forever … never underestimate the American farmers’ ability to flood the market and bring the price down.”

Even as Hancock spoke, corn prices were falling from their June highs near $8 a bushel, backing off to under $6.50 as major Midwest producing regions recovered from early summer flooding. Hancock admits, though, that he doesn’t expect farmers to reach the market-flooding stage in the near future. The increased world demand from growing economies wanting better diets, more demand for bioenergy production, and the weakened dollar will continue to provide a strong market for U.S. grain.

It is the long-term market that is a concern for many grain farmers. Even with high input costs, high commodity prices make grain farming profitable. What happens, though, when grain prices drop and input prices remain high?

“As far as the grain farming goes, we are going to have a good year,” said Hancock. “What is happening in turn is the livestock people are hurting. It is not a good time to be a livestock farmer anywhere in the United States.”

Yet that, too, will change. As the agriculture cycles play out, markets will balance and livestock will come into season again. More acreage will go into grain production to capture the high commodity prices, and livestock farmers will step back their production to help offset the costs of feed.

“Once this (livestock) supply works its way through, there are going to be fewer animals on the market in the next 12 to 18 months, and that’s when you’re really going to see meat prices go up,” said Dr. Larry Jones, a UK agriculture economist.

Then as meat prices begin to improve, farmers will ramp up cattle production once again to capture the higher prices, and the cycle will continue.

“You have to remember that in agriculture not everyone is getting rich just if a commodity is at record prices,” reminded Josh Long. “For every farmer who is doing well, there are just as many if not more who are struggling to stay afloat.”