Farm commodity prices are falling, sending a dangerous warning that one of Minnesota’s economic strengths – its agriculture – may be coming back down to earth.
The cash price for corn paid at country elevators in south-central Minnesota dropped below $4 a bushel on Friday while Chicago futures contract prices for corn to be delivered in December fell to $4.54 a bushel. Those prices are still high by historic standards, but we’re seeing between $500 million and $1 billion in potential Minnesota farm income disappear while the broader state economy is in the doldrums.
Minnesota 2020 will look at two of Minnesota’s economic strengths in a two-part series beginning today. Both agriculture – today’s subject – and our export trade sector – to be examined tomorrow – are propping up the state economy at this time. Unfortunately, both are vulnerable to external influences that cannot be influenced within the state.
This downturn in agricultural prices is a threat to the state because it represents a weakening link in the giant food and agriculture industries that generate employment, add value to our raw materials and return capital earned throughout the country and around the world to Minnesota. This retreat in prices comes after nearly two years of steady build up in prices, farm income, agribusiness profits and employment gains at all but the retail level of the food chain.
For example, the Minnesota office of the National Agricultural Statistics Service pegs 2007 Minnesota net farm income at $3.4 billion, a 34 percent increase from 2006 and double the $1.7 billion in net farm income realized in 2003. This is spread among 79,000 farm enterprises that range from mid- to large-scale farms on down to small hobby and small-scale farms operated by families that have other primary sources of income.
The net income was derived from gross sales of farm crops and livestock that reached $12.54 billion in 2007, up 24 percent from 2006. This included $6.91 billion in cash receipts from crops and $5.63 billion from livestock marketing.
The mid-and larger-scale farm units, often referred to as “commercial” farms, actually had median farm income increase by 70 percent last year, based on findings of the farm management program operated by the University of Minnesota Extension Service and local campuses of the Minnesota State Colleges and Universities system. Working with 2,600 such farms, the program found median net income jumped from $61,000 in 2006 to $105,000 in 2007.
This made 2007 the most explosive year for Minnesota farm income since 1973 when, not coincidentally, the value of the U.S. dollar also fell through the floor in world currency markets. The impact of cheap dollars make American exports a real bargain in international trade, and that was the cause of booming trade 35 years ago as well as last year.
“One thing we can usually count on is that increases in farm income get spent as farmers re-invest in their farms,” said Kent Thiesse, vice president of MinnStar Bank at Lake Crystal
This is helping southern Minnesota center cities, at least, although small towns aren’t benefiting as much because of business consolidations that have occurred since the last low-dollar, high-export cycle in the 1970s, Thiesse said. Rochester, Marshall, Winona and Mankato are examples of local economies that remain strong, he added.
Douglas Greenley, chair of the economics department at Minnesota State University Moorhead, sees the same occurring in northwestern Minnesota. Farm equipment sales are strong, there is still some farm home construction, and residential real estate prices have held up and continue to rise in the Fargo-Moorhead area, he said.
“Farm income does come to town and is helping our economy,” Greenley said. “This is setting us apart from the large (population) Twin Cities metro area.”
This means the so-called multiplier effect from farm production and marketing is helping keep the state’s economy afloat away from the Twin Cities. It adds up to this: the multiplier effect is dividing Minnesota between rural and metro.
Even that understates agriculture’s importance to the broader Minnesota economy, said C. Ford Runge, an applied economist at the University of Minnesota. Agriculture and related trade activities do reach into the Twin Cities area and are reflected in strong sales and earnings for agribusinesses such as General Mills, CHS Cooperatives, Land O’Lakes, Cargill, Mosaic and several dozen other firms involved with the supply chain, Runge said. They have also been steady places of employment while layoffs have become
commonplace elsewhere in urban industry.
“What this tells me is that agriculture is helping us in the Twin Cities, too,” Runge said. “Our economy would look a lot worse without them.”
That’s where this past week’s retreating farm commodity markets pose a threat. Lake Crystal’s Thiesse, in a weekly column written for bank clients and southern Minnesota newspapers, notes that corn futures prices have fallen by more than $2 a bushel since mid-July and soybean futures prices have dropped by nearly $6 a bushel in that time.
Multiply that price drop by the anticipated bushels for this year’s harvest does mean the markets have shaved more than $1 billion off potential farm income for this year. No one can say exactly how much at this point because farmers do use futures, options and forward trading contracts to lock in prices during the year.
Even more threatening to the economy, however, is the rising costs for farm production expenses that are largely driven by oil and energy costs. Thiesse said market analysts now expect 2009 “break even” corn prices to be in the $4.50 to $5 a bushel range, and soybean prices would need to be near $9 a bushel to cover costs.
“If that is true, the recent sharp drop in grain prices may have pushed 2009 harvest corn and soybean prices to ‘breakeven’ levels, or lower,” he warned.
We should all heed the warning. The foundations under one of Minnesota’s greatest strengths are starting to crumble.