Grain boom may spark rural revival Rising prices will boost state's economy, but consumers will have to pay more for goods. By Jeff Swiatek Posted: March 9, 2008
Jon Castongia can't keep enough farm equipment in his John Deere dealership. "I've got nothing that's not sold," he says. "Across the board, new and used, everything's popular right now."
Castongia's business boom is evidence of a new golden era for farmers.
All-time high prices for soybeans and wheat and near-record high prices for corn and other farm goods have pumped up farm incomes by 50 percent since 2006 in Indiana and other Farm Belt states.
The value of Indiana farmland has soared from an average of $3,500 an acre to more than $4,000 in the past two years.
The boom is expected to plow billions of dollars of extra income into Indiana's economy in the next few years. Big beneficiaries range from co-ops and ag suppliers to rural restaurants and retailers.
But consumers could have something to lose -- disposable income as they face higher costs for food staples such as flour, poultry, milk and beef, all increasing because of the rising cost of grain.
Still, Indiana has much to gain from the grain boom because it's the nation's fifth-largest producer of corn and fourth-largest soybean grower.
The higher grain prices, if they last, should firm up the state's rural property tax base, adding to the tax revenue streams of local governments and schools. At the same time, prices are so high that crop farmers don't require the heavy federal commodity subsidies they collected in the past, saving the nation's taxpayers about $6 billion a year.
Exports of grain and other agricultural products will hit a record $79 billion this year, much of it going to the developing economies of China and India. Adding to the demand are dozens of new ethanol plants that this year will convert 25 percent of the U.S. corn crop into fuel.
"This is one of the biggest opportunities for Indiana agriculture and U.S. agriculture for maybe a century," says Andy Miller, Indiana agriculture director. Blessing and a curse
The boom isn't happening without some pain -- for both farmers and consumers.
Though grain prices make up just a fraction of the overall cost of processed foods, they helped fuel a 5 percent inflation rate on food last year that hit everything from bread and cereal to soft drinks and cookies.
Farmers, with more cash to spend, are facing inflated costs for many of the materials they need to farm. In the past two years, prices of nitrogen, potash and phosphate fertilizers have roughly doubled. Values of farmland last year jumped about 17 percent, the largest annual increase since 1977, according to Purdue University. And land rents have shot up as well.
The jump in production costs has occurred as farmers strive to plant as much cropland as possible and boost output by using lots of fertilizer and pesticides and double-cropping winter wheat and soybeans on the same field when possible.
"It's all about yield now," says Allen Baird, who farms several thousand acres with a brother and two nephews in Tipton County. He marvels at how much his crops are worth. "I've never seen it in my lifetime, never seen anything like it," says Baird, who has farmed since 1964.
Long mired at less than $2 a bushel, corn now trades at more than $5. Soybeans have jumped from less than $6 a bushel to more than $15, while wheat has spiked from under $4 to more than $10.
The last time grain prices jumped across the board so dramatically was in the early 1970s when the former Soviet Union began massive grain purchases on the world market.
The price run-up contrasts with the low- or no-growth era of the past 30 years when much of the ag industry withered. As their farmer-customers struggled to make a living, subsisting only by dint of federal subsidies, even big chemical and seed suppliers such as Dow AgroSciences trimmed their costs and tried to eke out profits.
"All of a sudden, in an 18-month period, you get a whole different demand," said Tom Wiltrout, global business leader for corn at Dow AgroSciences.
Surprised by the new high-growth climate, the Indianapolis-based company finds itself hard-pressed to supply all the pesticides and seeds farmers now want, especially in Latin America and Asia, Wiltrout said.
In response, the Dow Chemical ag unit, which posted record high sales and profits last year, has budgeted significantly more money for research this year, added salespeople and launched major expansions of seed plants in Nebraska and Latin America.
The story is much the same at farm equipment maker Deere & Co. It recently announced a $90 million expansion of its largest tractor factory, in Waterloo, Iowa, to increase capacity by 25 percent for high-horsepower farm tractors.
With orders pouring in, Deere dealer Castongia has resorted to calling dealerships across the country to find new or used equipment for his Indiana and Illinois customers. The wait to take delivery of a new farm tractor or combine is now as long as 11 months.
"We brought some tractors in from Mississippi," Castongia said. He had less luck satisfying a local farmer who wanted to buy some self-propelled hay mowers.
"I could have sold four new windrowers, and I just flat couldn't get 'em. I had to turn down a near half-million-dollar sale," Castongia said. Facing an uncertain future
Farmers have plenty of money to spend. Farm incomes in Indiana grew from $1.5 billion in 2006 to $2.2 billion last year.
Nationally, farm cash receipts from crops will jump from $120 billion in 2006 to an estimated $165 billion this year, according to Deere.
Demand for grain is running so strong that the nation's wheat supply is almost gone, while soybean and corn inventories by August should hit their lowest levels since 1973-75, says Chris Hurt, a Purdue ag economist. "The cupboard is almost bare. It's too tight for comfort. It'll be until (the) 2010 crop before we can catch up and rebuild these inventories."
The upshot: grain markets in the next two years could see "enormous volatility in prices," Hurt said, as traders react to weather scares, droughts and scarcity. Adding to the uncertainty is the low value of the dollar relative to the euro, which makes U.S. grains cheaper for foreign buyers.
Ronnie Mohr, a Hancock County crop farmer who is a director of the 50-state farm co-op Land O'Lakes Inc., says although he reaps the benefit of high grain prices, he worries they'll cripple his main customers: hog farmers and other livestock operators who buy more than half of each year's U.S. corn harvest to feed to their animals.
"I don't like $5 corn. I'm taking advantage of it, don't get me wrong. But it's a little scary long-term. I have friends that it has really hurt."
Another worry is that farmers will leverage their higher-valued land to borrow money, a debt-loading scenario that played out in the 1970s to devastating consequences for many farmers when the grain demand bubble burst and farmland prices sank.
Steve Pettet, president of Fowler State Bank in Benton County, says he warned his loan officers against making big operating or equipment loans based on freshly inflated farmland values.
"It's real easy to do that," he says, but "I lived through this (in the 1970s), and we're not going to go there. To get all exuberant and over-leverage on this . . . we are not going to do it."
Even so, Pettet can't help but marvel at the financial fortunes of his farm clients. "It makes it a lot easier for a banker who's lending money to farmers. I've seen guys' incomes go up five times what it was. They can show me a cash flow that's amazing."
Don Villwock, president of Indiana Farm Bureau, which counts 80 percent of the state's farmers as members, says farm states like Indiana should be thrilled with the run-up in grain prices.
"There is a lot of optimism. Even our younger farmers, you hear them talking more optimistically about a future in agriculture. These are golden years for agriculture."
