Ag expert: Prepare for more volatilityBank economist speaks to large crowd in Mitchell, saying "It's about the bushels, not the acres."
By: Chris Mueller, The Daily Republic
Farmers must consider all their investment options before buying highly priced farmland, one expert says.
“It’s about the bushels, not the acres,” said Michael Swanson, a Wells Fargo agricultural economist, to a crowd of more than 100 gathered Wednesday at the Highland Conference Center in Mitchell. “Reality says you don’t want to buy more land,” Swanson said. “You want to buy more corn.” The farm economy is still growing, but the growth rate has slowed from what it once was, Swanson said. “We have to be prepared for more volatility,” he said. Low interest rates have made the cost of long-term borrowing lower than in decades, which, paired with extremely high demand for U.S. crops, has helped create strong farm profits in the last five years. All those variables have caused the value of farmland to soar.
“I want to give you an alternative to buying more ground,” Swanson said.
According to the U.S. Department of Agriculture, the average value of cropland in South Dakota increased 24.7 percent to $2,320 per acre from 2011 to 2012.
That growth rate is the third highest in the nation, behind only North Dakota, 29.8 percent, and Kansas, 25 percent.
The average value of cropland in South Dakota has increased 65.7 percent since 2008.
Instead of always using excess revenue to purchase more land, farmers should consider other cheaper alternatives, like irrigation, to increase production, Swanson said.
When a great opportunity presents itself, farmers shouldn’t hesitate to purchase land, Swanson said, but it shouldn’t become a default strategy.
“More often, you should do what you can to make your current investments work harder,” he said.
Despite a widespread drought that hammered yields across the U.S. last year, Swanson said farmers shouldn’t be afraid to continue to make investments in their business.
Nationwide, corn production in 2012 fell to 10.7 billion bushels, a 13 percent drop from 2011 and the lowest total since 2006, according to the USDA.
“We have never really seen back-to-back major droughts in the U.S.,” Swanson said. “That’s not a promise it can’t happen, but it’s playing a game of odds.”
Farmers must make well-informed decisions when their money and livelihoods are at stake, Swanson said.
“I’m not saying do not invest,” he said, “But just look at all the options.
China has been and will likely continue to drive growth in the U.S. farm economy, Swanson said.
“We’ve had one country to thank for our trade differential, and that is China,” he said.
Between the agriculture, fishery and forestry industries, Swanson said, China is responsible for 90 percent of gains that have led to a $22.5 billion trade surplus.
“Ninety cents out of every trade dollar is coming from China,” he said.
China’s enormous role in the farm economy is of some concern, Swanson admitted.
“When China is the source of your growth, what happens when they play hardball?” he said.
Ethanol production has also helped grow the farm economy in recent years. However, with more fuel-efficient cars on the roads and stricter emission standards, gasoline consumption is expected to decline and “ethanol producers need to pay attention,” Swanson said.