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Minnesota farm incomes plummet, but a recovery is slowly emerging

Minnesota farm incomes plummet, but a recovery is slowly emerging
REUTERS/Frank Polich
Costs of producing crops in Minnesota went up last year while prices fell sharply for almost everything farmers sell.

Minnesota farmers saw it coming long before the data were tallied: their incomes plummeted last year.

Hard times finally caught up with the second largest sector of Minnesota’s economy — the sector that carried a good share of the state through the Great Recession.

But the abrupt reversal in farm fortunes may not be as severe as the numbers suggest.

First, here are the grim numbers: Income dropped 63 percent in 2009 for some 3,000 farmers who participate in business management programs run by the Minnesota State Colleges and Universities system and the University of Minnesota Extension Service. The median net farm income was $33,417 in 2009, down from $91,242 in 2008.

What happened is a straightforward accounting problem: Costs of producing crops went up during the year while prices tanked for almost everything farmers sell, from corn to pork bellies.

Source: University of Minnesota Extension Service

The gravy years
The resulting losses aren’t suffered by farmers alone.

While only about 3 percent of Minnesotans are active farmers, agriculture generates $9.3 billion a year in income that is spread through rural towns and regional centers. Factor in the full sweep of the businesses that supply their needs, process their outputs and deliver their goods, and the tally rises to $55 billion worth of economic activity supporting more than 367,000 jobs, according to the Minnesota Department of Agriculture.

Agriculture showed its economic muscle when the recession bit hard on Minnesota. Unusually high farm profits in 2007 and 2008 kept rural towns going while other parts of the state suffered.

But those same gravy years, 2007 and 2008, distort the real picture of what happened last year. It was bad — just not as bad as the 63 percent drop in net farm income suggests.

“Normal” is not a common word on farms where profits can flip-flop because of everything from a summer storm to appetites in China. Look back to the years before 2007, though, and you see that a typical farmer’s net income (expressed in 2009 dollars) ranged somewhere between about $45,000 and $65,000 in most of the past 10 years.

Last year’s $33,417 still looks terrible by comparison. But it’s not as shocking as comparing it with incomes of more than $91,000 in 2008 and $109,000 in 2007.

Jibes with other signals
The 3,000 or so farmers who provided the data for the income calculations presumably are among the state’s most competent business managers because they took the trouble to participate in the programs run by MnSCU and the U of M.

Instructors in the programs teach farmers how to maintain business records, create and execute marketing plans, and interpret and apply business analysis information to their operations. The U of M’s Center for Farm Financial Management makes summaries of the farmers’ analysis available here.

While those in the management programs are not a representative sample of Minnesota’s 79,000 farmers, the analysis jibes with other measures of the farm economy.

dairy cows
MinnPost photo by Sharon Schmickle
U.S. pork and beef farmers depend on exports, and Minnesota ranks seventh among states in farm exports.

Distress signals flared last year in farmer-lender mediation programs around the state as farmers struggled to keep up with loan payments.

And nearly one-fourth of the Minnesota bankers who participate in surveys conducted by the Federal Reserve Bank of Minneapolis said that loan repayments slowed down during 2009. About one-third of the bankers also said that farm families had curbed their spending.

Not as dire
Still, the situation may not be as dire as the income drop suggests.

One reason is gradual recovery from the global recession, said Richard Joerger who directs MnSCU’s farm business management education programs. The global economic meltdown “had a tremendous impact on the demand for all livestock products,” he said.

American pork and beef farmers depend on exports. And Minnesota ranks seventh among states in farm exports, selling more than $5 billion in foodstuffs overseas each year.

“As global economies strengthen, so will our livestock industry,” Joerger predicted.

That’s already started to happen.

Depressed milk prices have begun to rebound as has demand for meat.

Recovery can’t come too soon for pork producers who suffered two disastrous years in a row. The median hog producer lost $73,525 in 2009 compared to making a modest profit of $4,876 in 2008, the farm management analysis showed.

If last year’s squeeze has forced any farmers out of business it probably was in their ranks, but Joerger said it’s too soon to know how many pork producers were forced to quit.

Living on the windfall
Crop farmers can’t hope to see a repeat any time soon of 2007 and 2008 when world supplies of wheat and other grain were critically short and prices skyrocketed. The reverse is true right now. There is a glut of wheat in particular.

Even corn growers, who benefited from ethanol-driven demand as well as tight grain supplies, face a year in which “it is going to be tough in the short range to ensure a profit” unless they have locked in prices in the futures markets, Joerger said.

Price drops came on top of a spike in their costs during 2009. Seed cost increased 23 percent, fertilizer costs went up by 35 percent, and land rent was up 9 percent.

But here’s another reason last year’s downturn may not bloom into a full farm crisis even if crop farmers face a few lean years. Many of those farmers used windfalls from 2007 and 2008 to build financial reserves. They updated equipment and invested in land, said Dale Nordquist, who is associate director of the U of M’s Center for Farm Financial Management.

Farmers are more cautious now about investing and creating reserves because of hard lessons learned during the crisis of the 1980s when some 20,000 Minnesota farmers were forced off the land, main street businesses folded in droves and 49 ag banks failed across the Upper Midwest.

What’s happening now is driven by different factors, Nordquist said, and he doesn’t foresee anything as severe.

“I don’t have too much concern that this is going to be a long-lasting problem,” Nordquist said. “If the general economy would come back, that would help a lot.”

But he added, “It’s really tough in the short term.”

Working capital will be tight, predicted Joerger at MnSCU, especially for livestock farmers. Many of them will be forced to rely more on off-farm income and credit.

“People do whatever they have to do to stay in business with the hopes they can turn it around,” he said.

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

Comments (1)

  1. Submitted by Greg Kapphahn on 04/23/2010 - 09:54 am.

    Farming is still the backbone of much of Minnesota’s economy. We can only hope for a general recovery of the farm economy and increasingly stable prosperity for all of our farmers.

    Of course that stability might be facilitated by the creation of new rules which would remove rank speculation from the commodity markets, i.e. limit the ability of investment houses to drive up prices investing in futures contracts hoping to make large profits.

    Such speculation, which occurred as the stock market came to seem too risky a few months ago, may have had more to do with recent price spikes than actual shortages of commodities did.

    It’s likely the only real shortage was the shortage of futures contracts available for purchase. Prices were driven higher because too much money was chasing what amounted to a scarce commodity – a limited number of futures contracts. There was a shortage of contracts more than there a shortage of commodities.

    Speculation is the likely cause of the current situation with the “price” of oil, as well (which should not really be used as a reason for rising gasoline prices, since the actual prices of barrels of oil when they change hands are never as high as the reported prices of futures contracts are). Recent spikes in natural gas futures contracts may reflect the same reality.

    If the prices of farm and other commodities actually reflected world supply and demand more closely, our farmers (and the rest of us) would face much more stable costs of required inputs and a much more predictable, stable market through which to sell the results of their labor.

    Then, of course, there’s the reality that Cargill and Archer, Daniels, Midland have bought up many of the cooperative ethanol plants through which their former farmer-owners used to pay themselves premium prices for their grain.

    It would be interesting to read an analysis of the current situation reflecting how much the spike in income for farmers who were earning top dollar for their corn and whose income jumped when their shares were bought up by Cargill and ADM has evaporated after those buyouts faded and the prices they’re receiving for their corn, even that being sold to make ethanol, dropped back down to market levels.

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