CHICAGO — U.S. farmers may experience some challenging times during the next two to three years.

“I’m positive about the long-term future for agriculture, but I am worried about the bumps in the road,” said Michael Boehlje, distinguished professor in the Department of Agricultural Economics and the Center for Food and Agricultural Business at Purdue University.

“When you look at what happened in the past, the booms have been created by export growth and the busts created by profound declines in exports,” he explained during the Taming Agricultural Risks meeting hosted by the Federal Reserve Bank of Chicago.

“You got to watch exports because they account for about 25 percent of U.S. agricultural income, and exports are twice as important to agriculture as the entire U.S. economy,” he said.

Both China and India’s economic growth is slowing down.

“The growth in Asia is really critical to the longtime future of agriculture,” Boehlje noted. “If it goes down more, we have some concerns.”

The demand for food is not driven by population, the professor stressed.

“It’s not the 9 billion people we have to worry about — it’s the income growth that counts,” he said. “Income growth is the primary driver for demand for food.”

Over the last eight years, Boehlje said, 147 million additional acres have been put under the plow.

“That acreage has come from South America, the former Soviet Union, East Asia and North America,” he reported. “In the U.S., the land has come from CRP and pastureland that was converted to cropland.”

Once land comes into production, it usually does not go out of production.

“Agriculture is a high fixed cost industry, so you do not shut down the plant even when prices go below total cost of production,” Boehlje explained. “You only shut it down when it will no longer cover variable costs.”

For example, for Boehlje’s farm in Iowa, his variable costs are $3.20 per bushel of corn.

“We’ve got to get sub-$3 corn before that land will come out of production,” he said. “That’s the problem in agriculture — the peaks are five to eight years and the troughs are 10 to 15 years and we are moving into the trough cycle.”

Farm income may fall by 25 percent in 2014-’15, the professor said.

“I’m not concerned about debt-to-asset ratio. I’m worried about repayment capacity,” he said. “Farm profits fluctuate around zero. That’s the definition of a commodity business. There’s no pure profit in a commodity business in the long run.”

The good news is the livestock sector will improve since grain prices will be lower, Boehlje predicted.

“The concern longer term is where the demand growth will come from,” he said.

“The core base of demand for U.S. animal proteins is in the U.S.,” he added. “We’ve had a 10-percent decline in animal protein consumption, and it’s not clear how quickly that will recover.”

Boehlje is not expecting a collapse in ethanol in terms of using corn. However, he said, there won’t be expansion of ethanol plants.

“The two core components of demand for corn, exports and ethanol, we think won’t grow, but not collapse either,” he said. “That’s why we think we’ll have a soft landing.”

The land value-to-cash rent ratio normally runs less than 20, Boehlje noted.

“We saw that ratio run up in the 1970s, and then we had a crash in the 1980s,” he said. “Today that ratio is over 30. How can you maintain a 30 ratio?”

For the first time in eight years during the outlook session at Purdue University, Boehlje said, economists predicted a softening in land values.

“We think over the next three years there could be a 15-percent decline in land values,” he said.

Boehlje identified things to watch that indicate a bust sequence has begun.

The first step is reduced working capital due to lower incomes and large capital expenditures of land, machinery and facilities.

“When we don’t have working capital, we restructure and refinance appreciated assets to rebuild working capital,” the professor said. “Then low prices combined with high costs and cash rents create operating losses and a second cycle of working capital shortages.”

As the bust cycle continues, there is an attempt to refinance again to pay down the operating line or rebuild working capital.

“The lender bulks at the second refinance, and the next step is land and capital assets are sold to cover the cash flow shortages and pay down or restructure debt,” Boehlje explained.

“Excess asset sales flood the market, and the final step is asset values decline further feeding additional stress,” he said.

“I believe we’re in step one, headed to step two,” he reported.

The professor noted several uncertainties that could impact the agricultural sector, including a sluggish recovery of the U.S. economy, the financial crisis in Europe, the unpredictable future growth of income in China, the changing value of the dollar and the global grain supply-and-demand balance.

Additional uncertainties include increased tillable land in the world, uncertainty about changes in farm policy, current and future regulations on production systems, timing and amount of future changes in interest rates and fluctuations in fertilizer, seed, chemical and energy prices.

Boehlje advised every business to put together budgets for three scenarios — expectation, upside potential and downside risk.

“You can’t accurately predict the future, so position for the uncertainty,” he said.