August 5, 2014

Kansas agriculture sector on pace for ‘a belt-tightening year’

Last year, despite an off-and-on drought, Kansas’ booming agricultural sector contributed almost a third of the income that fueled the state’s modest economic recovery.

Last year, despite an off-and-on drought, Kansas’ booming agricultural sector contributed almost a third of the income that fueled the state’s modest economic recovery.

Well, not this year.

The state’s wheat harvest was the worst in decades, down 26 percent from last year, according to the U.S. Department of Agriculture. The fall crops look terrific after bountiful rains and cool temperatures in June and July, but because of that rain across the Midwest, the country is on track for the second biggest corn crop ever and the biggest soybean crop ever.

As a result, the price for corn has fallen more than a $1 a bushel in the last month to the mid-to-high $3 range per bushel now.

And in the livestock sector, feedlots and packing plants have seen the fewest cattle in decades, as ranchers who cut herds in the drought are now holding back heifers for breeding.

It’s part of the DNA of farmers and ranchers to know that some years will be good and some will be bad. After several great years for farm incomes, it won’t be John Cougar Mellencamp “Rain on the Scarecrow” bad, but farmers do expect to take a substantial hit in income this year.

The USDA predicted early this year that U.S farm net cash income would decline by 26.6 percent in 2014, after four consecutive years of record highs.

“This will be a belt-tightening year,” said Dan O’Brien, an economist with Kansas State University Agricultural Extension Service.

Impact on Main Street

According to the Kansas Farm Management Association, Kansas family-owned farms net incomes averaged $146,000 a year over the last five years.

That bought a lot of tractors and helped drive up land prices from 2010 through 2013. But not this year.

Mick Rausch, a farmer near Garden Plain, said his wheat crop was about half what it was last year, and the price of that wheat keeps falling. The price for his grain sorghum also keeps drifting down and is now below his cost of production.

“It’s going to affect us, and it’s going to affect Main Street,” he said. “We’re not going to be buying Cadillacs anytime real soon.”

Most farmers, he said, hopefully planned for the down years.

“We’ll just kind of ride it out, make do,” he said.

The ripple effect already is being felt across businesses related to agriculture.

Larry Straub of Straub International, a farm machinery dealer in Wichita and elsewhere in central Kansas, said farmers are starting to cut back on purchases.

Some bigger farms are still buying new, he said, but the smaller ones are holding back in anticipation of less cash. That has cut into the amount of used equipment flowing through the market for sale.

“We’re having to readjust our budgets a little,” he said. “But most folks are not panicking. If you look at the ag equipment industry, it’s used to peaks and valleys. We knew we were eventually were going to have a downturn. All the farmers and dealers are bracing ourselves for it.”

“Still,” he added, “to have the industry make the turn (down) and then, on top of that, have a historic drought in the Midwest ... just makes it that much more – exciting.”

30,000-foot view

Agricultural economists say the down year will show itself in a number of ways: lower equipment sales, drops in farmland rental rates and sale prices, a reduction in available credit as asset values fall, higher inventories at grain elevators as farmers hold on to their crops and wait for higher prices, and farmers switching acreage from corn to soybeans.

The fall in crop prices is actually good news to some segments of the ag economy.

Livestock producers, including the state’s ranchers, are likely to perform much better financially, said economists. The feed for livestock is cheaper now.

Ranchers are beginning to rebuild their herds, and the number of cattle going to slaughter is the lowest in decades. That means the profit per head is large, estimated by an economist in December to be about $300, about twice the previous high.

The impact of the tough year for crop farmers won’t be obvious to most Kansans because relatively few people depend directly on agriculture for their income. But that understates agriculture’s true value: It underpins much of the state’s rural economy and constitutes one of the state’s sources of direct wealth, where products are sold outside the immediate area rather than traded inside of it. This means it generates spillover into other sectors.

The downturn in agriculture could mean slower growth in the overall Kansas economy, economists said, unless other sectors speed up.

“That has ramifications for the Kansas economy,” said agricultural economist Brian Briggeman of KSU.

He estimated that Kansas farm incomes are headed for a below-average, rather than a disastrous, year. But, he added, if crop prices continue to fall, the impact would be more severe and more widespread as farmers lose more money on the fall harvest.

Briggeman said that if the price for a bushel for corn falls to $3 to $3.25 per bushel, “then we’re talking trouble.”

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