The boom on the farm

May 13, 2012

Sitting in the cab of a $350,000 John Deere tractor pulling a $150,000 Deere corn planter, Greg Carson embodies modern American agriculture. It’s capital-intensive, high-tech, efficient — and now immensely profitable. Looking for a bright spot in the U.S. economy? The farm belt is it.

Driven by high grain and soybean prices, farmers’ cash income hit a record $109 billion in 2011. Land values have followed high crop prices. Since 2006, an average acre of Iowa farmland has doubled in value. Last year, the increase was 33 percent to $6,708, reports Michael Duffy of Iowa State University. And farms sustain factories. In Cedar Rapids, a few miles from here, Cargill makes corn syrup and soybean oil; ADM produces ethanol; Quaker Oats makes cereal. Iowa’s unemployment rate is now 5.2 percent compared with 8.1 percent nationally.

“In the last 30 or 40 years, these are the best times we’ve seen,” says Kirk Weih of Hertz Farm Management, an advisory firm.

American agriculture is the story of unending small changes relentlessly boosting productivity. In 1960, an average acre of planted corn yielded 55 bushels; that’s now about 150 bushels. Behind the increase lie better seeds (including bio-tech seeds that combat corn borer and root worm — two threats to healthy corn), improved use of fertilizer, insecticides and herbicides, better planting techniques and advances in farm machinery.

Consider Carson’s tractor. It’s guided by GPS satellites. This makes for straighter and more productive rows. It also allows for the automatic adjustment of seed flow, depending on fields’ different soil types that have been programmed into the computerized controls. Sandier soils, says Carson, can’t handle higher seed rates. Seeds are saved; yields improve. And the Deere planter now puts in 24 rows of seeds simultaneously; that’s up from four or eight a few decades ago.

To cover costs and maximize use of expensive equipment, farmers need to cultivate more land. Encouraging consolidation, this has altered the farm belt’s sociology. Many farm families have left for Des Moines, Chicago and New York — but kept their farms and contracted with the remaining farmers to do the work. Perhaps half of Iowa’s acreage is leased by absentee owners, says Weih.

Could the present boom go bust? Well, yes. Agriculture is notoriously cyclical, and people here remember bitterly the 1970s and early 1980s. Initially, corn, wheat and soybean prices soared, pulling land values with them. Then, high interest rates in the early 1980s caused land prices to crash. Farmers couldn’t repay loans. Foreclosures multiplied. It was a human and economic calamity. There are eerie parallels between then and now. Farmers are vulnerable to a global economic downturn. But there are also crucial differences.

One is that farmers use less credit to buy land. “The lesson of the 1980s was that leverage (borrowing) is not a good thing,” says Weih. Lenders now require a 35 percent down payment, he says. With less debt, farmers are less vulnerable to repayment problems.

Price increases in the 1970s reflected general inflation. Present prices rest on sturdier pillars: for starters, corn demand for ethanol mandated to be mixed with gasoline. From 1999 to 2011, ethanol’s share of U.S. corn use climbed from 6 percent to 39 percent. Although ethanol use is flattening, the congressional mandate has been a lucrative boon to corn farmers. (It’s also unwise, raising food prices for modest gains in fuel.)

A second source of demand comes from developing countries, led by China, that are improving diets by shifting to more beef, pork, poultry and dairy products. This requires more corn and soybeans for animal feed. Poultry require roughly two pounds of feed for every pound gained, reports Janet Larsen of the Earth Policy Institute; for cattle, the ratio is seven-to-one. The United States is the largest exporter of corn and, along with Brazil and Argentina, in the top three for soybeans. Corn prices, which once averaged $2 to $3 a bushel, now hover around $6.

There is a lesson here for government. American agriculture transcends the Midwest farm belt. It also includes fruit and vegetable producers, poultry operators and cattle ranchers. But most of these others, dairy farmers excepted, are largely unsubsidized. Meanwhile, subsidies going mostly to grain and cotton now average about $12 billion annually, reports the Agriculture Department.

Begun in the Great Depression, these subsidies could once be justified as cushioning farming’s enduring insecurities: bad weather, big shifts in supply and demand, crop infestations. But most industries now face comparable uncertainties from new technologies, global markets and erratic business cycles. Congress is writing a new farm bill and is struggling with how much to trim subsidies. But why should prosperous grain farmers and absentee owners receive special treatment and windfalls? The proper level of subsidies is simple: zero.

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