Current commodity prices impact S.D., farmers make tough planting decisions
May 7, 2015
Spring fever hasn't spread among South Dakota's farmers as expected this planting season. Jeff Kippley attributes the atypical behavior to current commodity prices which are down about 65 percent from the last five-year average.
"Normally, when you see a 70 degree day, guys are chomping at the bit to get into their fields. This spring very few farmers I have talked with are excited to get planting because they're worried they may not turn a profit on what they grow," says Kippley, a Brown County grain and livestock farmer who is also the co-owner of H&R Block of Aberdeen.
As a farmer and tax accountant, Kippley has a unique perspective on the situation. He has seen some clients' on-farm income drop as much as 85 percent due to 2014 corn markets. The current outlook for the 2015 crop is not an improvement.
"Days of guys looking for ways to spend money are gone," says Kippley, referencing corn market prices in surplus of $7 just a few years ago. "The markets were extremely strong from 2009 to 2013. I saw many farmers buying equipment trying to avoid paying the government more than $100,000 in taxes.
Today, they are looking for ways to cut costs." Farmers aren't the only folks impacted by low commodity prices. Cost cutting by an industry which accounts for about $25.6 billion, or 30 percent of South Dakota's total output, is sure to impact the entire state, explains South Dakota State Economist, Jim Terwilliger. "There are a lot of indirect and induced economic impacts that agriculture has on the economy," says Terwilliger, who points to the $43.9 million in tax revenue poured into the General Fund and generated by 2014 farm machinery sales.
Eight months into fiscal year 2015, Terwilliger says revenue from ag machinery sales is already down 22 percent. The state's fiscal year runs July1-June 30. "This accounts for about a $9.7 million reduction to the General Fund for 2015," he says, adding that in response to the reduction, he presented a revised version of General Fund Revenue on March 9, 2015, to the Appropriations Committee. "For the most part the Legislature was able to fund most of the things the Governor and Legislature wanted by making adjustments to other areas of the budget that were experiencing lower caseloads."
Recommended Stories For You
The general fund covers expenditures for the state such as Medicaid, State aid to schools, Board of Regents, Corrections, the Judicial System, Legislature and Elected officials, and Agriculture and Natural Resources.
As one would expect, when the state's No. 1 industry is cutting back, the ripple effect is sure to hit Main Street. Kippley says that the farm equipment sector is among the first to feel the financial blow. "I have seen some W-2s from guys who work in sales for ag machinery dealerships,earning $130,000 in 2013 drop to $55,000 in 2014. These guys are worried about losing their jobs in 2015," he says.
Terwilliger references Raven Industries' recent layoff of 75 employees.
"They suggested that the layoffs were in departments closely connected to agriculture and sales were down due to lower incomes generated in the farm sector," he says, adding that currently, other areas of South Dakota's economy remain strong.
This depends upon adjustments underway in rural communities across the state, says Doug Sombke, a fourth generation Conde crop and livestock farmer and President of South Dakota Farmers Union. "Farmers I visit with have really pulled back on their major investments, whether it's buying new equipment, pick-up trucks or family vacations," Sombke says. "The impact of low commodity prices isn't isolated to South Dakota's rural communities.
Farm families shop everywhere. These prices will impact Rapid City and Sioux Falls as well." Sombke says some farmers are deciding to plant fewer acres of corn because of the high input costs associated with the crop. "Right now, they have no positive break-even mark for pricing of the 2015 crop."
He pencils it out explaining with current prices, which hover around $3.30* per bushel of corn and current cost of production at about $2.84 per bushel, a farmer raising 300 acres of corn in 2014 would have earned about $19,800 after expenses based on the S.D. Dept. of Agriculture per acre statewide average of 148 bushels per acre. This is a 77 percent loss over 2012 prices.
Whereas in 2012, corn prices were at $6.72 and the state was in a drought, so average corn yields were only 101 bushels per acre. Cost of production was $3.91 per bushel resulting in the same farmer earning a net income of $85,116 on those same 300 acres.
Sombke says acres not planted to corn this year may be replaced by another commodity, like soybeans, or planted to forage which farmers will either feed to their cattle or sell to neighbors who raise livestock.
Local Markets Increase Profit Margins
The livestock industry and other local markets, like ethanol, provide a small profit advantage to South Dakota's grain farmers, explains Lucas Lentsch, S.D. Secretary of Agriculture.
"Local markets are absolutely the bread and butter of our farms and ranches in terms of adding value locally just look at what the ethanol industry has done for our state's economy," he says, referencing the industry which has a $3.8 billion impact on the state's economy each year. "Keep in mind, South Dakota is land locked. If commodities we raise here aren't sold to a local market, they have to be driven out or shipped out by rail car because we don't have access to barge traffic."
Lentsch explains that counties with a local demand for corn–stemming from ethanol plants and high concentrations of livestock including: dairy, beef, pork, poultry and sheep operations, are able to provide farmers with greater profits per bushel because basis levels are lower.
Basis is the cost associated with exporting commodities out of state, explains DuWayne Bosse, 36, a Britton crop farmer and co-owner of Bolt Marketing, LLC, a commodity marketing firm. "Basis is supply and demand in its purest form. In a farming community like Britton, we produce a lot of corn, but we don't have enough demand to meet the supply so to pay to ship it out, local elevators have to charge the farmer basis," Bosse says, explaining further that if the Chicago Mercantile Exchange is paying $3.94 for a bushel of corn, but it costs 64 cents to ship that corn, the local elevator will only pay farmers the difference, which as of March 25, 2015, was $3.30.
Whereas in a community with greater local demand, the basis may only be 34 cents, because the grain elevator is able to market more of the grain it purchases from local farmers, reducing the amount it needs to export.
"A 20 to 40 cent difference is a big deal in today's market. In some cases it means the difference between breaking even and losing money," Sombke says.
Lentsch adds, "The ripple effect of having a diversified ag portfolio within our communities is tremendously valuable to everyone." Lentsch points out that in South Dakota most concentrated animal feeding operations, or CAFOs, are family owned and operated. "Agriculture in South Dakota has not stood still. Family farmers have continued to invest in their operations and have discovered efficiencies, which in the case of CAFOs, provide a fantastic engine to process locally grown grains and forages."
To learn more about this topic and review more data, visit sdfu.org.
–South Dakota Farmers Union