The New Year brings new challenges for farmers across the United States. And while experts predict high commodity prices and less dependence on government payments to bolster farm income, there are still obstacles ahead.
Kansas State University agricultural economics department head Allen Featherstone shared his outlook on the overall farm economy ahead.
“Kansas Farm Management net farm income has increased each of the last four years,” Featherstone said. “Government payments have also increased — to about 75% of net farm income — and it’s important to recognize that that’s probably not sustainable.”
Keeping an eye on changing farmland values while managing marketplace risk will be a key to maintaining un-supplemented farm income numbers in 2021.
“One of the things I think is important to realize is that land values in Kansas declined slightly from 2013 to 2014,” Featherstone said. “Again, from 2019 to 2020, values declined with USDA reporting 3% lower nominal land values.”
In 1950, an acre of land in Kansas averaged $66, today it averages $1,900, but Featherstone said not to let one year of lower land values deter purchase plans.
“Year in and year out, land is still a good investment,” Featherstone said. “Basically eight out of ten years, land values increase in Kansas and two out of ten years they decrease.”
Since 1950, land values in Kansas have had an inflation rate around 1.7%. Aside from the farm crisis in the 1980s, purchasing land in Kansas has remained a good investment over time, with some producers hoping the investment in property will stand the test of time against inflation.
“Roughly 36% of the time, the land value change is less than the inflation rate,” Featherstone said. “Land, again, is a good investment at a 4.92% return since 1950 and that's just from an investment perspective where you're looking at price appreciation alone without operating earnings figured in.”
Prices and Protection
While farm programs have provided a nice safety net the past few years, producers would always prefer to profit from high prices and hopefully 2021 will offer the chance.
“One of the things we talked about is whether we can unwind out of the government farm program payments and, with current prices for PLC and ARC, hopefully we never get to that safety net simply because we will have quite a decline in prices to get there,” Featherstone said. “We are in a very big paradigm shift in terms of the market is now suggesting we're going to have to use traditional marketing type programs and other types of risk management programs in that, while the safety net is still there from a farm income perspective and traditional titles, that safety net is quite a bit lower than perhaps any of us would like.”
While traditional crop insurance is still an option for producers, Featherstone said volatility of the market in 2020 and early 2021 has left the premium prices high and price predictions lower than expected.
“Certainly crop insurance premiums are going to be higher,” Featherstone said. “We’re going to see them be higher than they’ve been since 2014 for corn and grain sorghum and since 2013 for soybeans, essentially because volatility has increased along with the guaranteed price increases.”
While this is true for most commodities, Featherstone said wheat operates on its own schedule, often opposite the rest of the marketplace.
“In some respects, you see that wheat is counter cyclical to the rest of the crops in terms of the volatility actually went down, which in some respects made this, the revenue products on wheat, a bit cheaper in the fall,” Featherstone said. “However, if you look at the current window, there's a lot more volatility in the market and likely what you're going to see is you're going to see more expensive crop insurance contracts even if you stay at the same level simply because of the increased volatility.”
Featherstone said high crop insurance premiums will necessitate a greater attention to other market factors for producers, as well as a closer examination of all risk management options.
“One of the things I think that you may want to give some thought to is whether or not buying up from the 65% or 70% guarantee, to a higher guarantee might be a prudent decision here, especially if your overall financial situation is not there,” Featherstone said.
Overall, Featherstone said farmers’ best options are to market effectively and manage risks through any available outlet that complements their individual operation.
“I think risk management decisions are going to be really key through crop insurance or other marketing programs,” Featherstone said.