Touch the Soil News #168
Recently (8/27/2015), Bloomberg Business writer, Alan Bjerga, did a story on FarmLink, which has a subsidiary called “MachineryLink.” The idea is that many farmers plant and harvest at different times – creating an opportunity to share equipment. MachineryLink is in the business of facilitating farmers sharing equipment – helping offset low income levels. While the idea has merit, it will fall short in addressing the recent announcement by the USDA that 2015 net farm income will be over 50 percent less than in 2013.
Large pieces of equipment, like combines, are often used only 20 to 30 days a year. New combines can range in price from $300,000 to $500,000 or more depending upon models and options. It is financially punishing when the equipment depreciates 50 percent or more in the first three years. To put it into perspective, the debts farmers owe on combines, earns the bank interest 365 days a year. The combine only works 20-30 days a year. If the combine has premature mechanical problems, there may be no profit potential.
In addition to equipment ownership challenges, farmers, who raise major crops, must face challenges from a Las Vegas-style gambling mechanism attached to their markets. Speculators bet billions of dollars as to which way the crop is going to turn out. Positive news about yields and quality can quickly turn against the farmer as the market interprets it as an oversupply – which can lead to collapsing prices below the cost of production. This gambling market mechanism has contributed to the colossal decline of rural America.
This gambling market and interpretation of supplies is one of the primary reasons “net farm income” has dropped so dramatically in 2015. So here we are in 2015, with almost 1 billion starving people and the “market” is sending signals to farmers that you have been bad.
Since 1797, America has experienced over 47 depressions, panics, recessions and crisis. Since 1935, 70 percent of farm families by number have gone out of business. Wild market swings are but one reason why many new farmers entering food production opt out of the mainstream model and chose smaller, local and sustainable models. How can farming be sustainable if the prices farmers receive are unpredictable and unsustainable?
Having spent a 20 year banking career in agricultural lending and 17 years consulting distressed farmers there is one thing that is really clear: When the “market” decides to push prices to farmers below the cost of production – which happens numerous times during a farmer’s life – most farmers never recover and ultimately go out of business. This “market” mechanism has materially contributed to pushing agriculture into unsustainable practices.
For reference, we have uploaded the chart from Touch the Soil News #167 which illustrates the volatility of farm income.