Falling prices are behind the bad year for farmers

Scott Tong Nov 25, 2015
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Falling prices are behind the bad year for farmers

Scott Tong Nov 25, 2015
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It’s been a rough year for the nation’s farmers. Profits in 2015 are projected to fall 38 percent below last year, according to the U.S. Department of Agriculture. It would be the biggest one-year drop in 32 years. 

The big reason: commodity prices are tumbling. 

“The decline in prices is broadly across the entire set of commodities,” said Jeffrey Hopkins, a USDA economist.

Demand has fallen for a range of products — including milk, hogs, cattle, wheat, soybeans. The big grain in the U.S. is corn. And corn is not just feeding fewer animals and fewer people; it’s feeding fewer cars. A large percentage of corn is processed into ethanol, which competes with petroleum-based gasoline.

“So, as you see the price of oil decrease, the price of corn is just reflecting competition with oil,” Hopkins said.

Others see a global commodity dynamic at work. It’s called a commodities super-cycle. From around 2002 to 2014, prices of food, minerals and oil all rose dramatically. To join the party, farmers invested more to produce more.

“And so they were willing to pay more for farmland and for cash rents and fertilizers,” said David Widmar of the consultancy Agricultural Economic Insights. “So, we saw that run up.”

Supply raced to catch up with demand. Then it outraced demand, putting downward pressure on prices.

“But now we’re on the adjustment side of that,” Widmar said. “And so this is where this is things get painful.”

To survive this rough patch, some farmers have arranged higher selling prices, or hedges. Some will borrow. And many will work their second jobs, as many family farmers are not pure farmers.

As for consumers, they may not enjoy the low prices much. For every dollar spent on food at the store, just 20 cents goes to farmers.

“You look at a box of cornflakes, and you think, ‘Well, corn. That’s got to be the major thing in there, that’s the major cost,’” said agricultural economist Chad Hart at Iowa State. “You probably actually pay more for the cardboard box around the cornflakes than you do for the corn in the box.”

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