November 29, 2021

Policy Pennings: Put some money away for the inevitable

It seems like it was just yesterday that we were writing about the problems some farmers were having getting the financial support they needed to be able to put in the 2020 crop.

Between 2014 and 2019, corn prices, and thus most other crop prices, were below the full cost of production. No one was talking about purchases of new equipment and land.

What a difference two years make!

The U.S. Department of Agriculture has projected a $5.45 average price for a bushel of corn during the 2021 crop marketing year. That’s a price that will cover the full cost of production and then some. The result of these higher prices is a scramble for land and new equipment, driving up the prices of both.

Higher prices are extremely common in this COVID-19 era where almost all areas of the economy are experiencing supply chain problems for newly manufactured or produced items.

These supply chain problems range from the lack of chicken livers in grocery stores — must have them to go fishing for catfish or train pups to hunt — to intermittent supplies of the electronic chips that are used to operate most anything.

This translates into a shortage of new cars and, by extension, other mechanical equipment, resulting in high demand for quality used cars and equipment.

Supply chain problems in the new product category have driven up the price of used cars, lumber and farm machinery. We have even seen the price of farmland move up sharply.

At the same time, the World Agricultural Supply and Demand Estimates in September showed a drop of 30 cents per bushel in the 2021 crop marketing year projected price for corn compared to a month earlier.

While the $5.45 price is certainly respectable given that the 2019 average price for a bushel of corn was $3.56 per bushel, a price that was below the full cost of production for many farmers, it may not last long enough to pay off expensive land and equipment.

Even if the corn price remains above $4 per bushel, the question is: How long it will be before the price is again below the full cost of production?

Current crop market prices tell us one thing. History tells another.

Over the last century and a half and more, crop markets have been characterized by long periods of low prices, punctuated by short periods of high prices.

If low prices return, as history would suggest, we all need to remember that the current farm programs are not very robust. Even if prices fall, farm program payments will not be large enough to come to the rescue.

Our hope is that most farmers have used the high prices of last year and those projected for the 2021 crop marketing year to pay down their debt and put some money away for the inevitable.

Daryll Ray

Harwood Schaffer and Daryll Ray

© 2021 Agricultural Policy Analysis Center.