Grain elevators in late October were seeing corn trade for as low as $3.04 per bushel, more than 35 percent below the average price per bushel at the same time last year.
The top cash crop for Nebraska and Iowa today is fetching less than half the price it brought in October 2012.
And net farm income, the financial barometer of agricultural producers across the country, is forecast to fall to $113 billion nationally, about 14 percent below 2013 levels. In Nebraska, early projections predicted net farm income to fall 13 percent to $5.8 billion. Estimates for Iowa are not yet available.
Retailers, producers and economists all have known lower prices were waiting in the wings. The current correction should be seen not as a bust, but a moderation of the recent boom — a return to a new normal, said Michael Swanson, an agricultural economist with Wells Fargo.
Businesses like auto and farm equipment dealerships are struggling to adjust to the new normal, while other ag-related businesses — think ethanol producers and livestock producers — are benefiting from lower corn costs.
Higher yields and upswings in other agricultural sectors will mitigate some of the more broad economic impacts of significantly lower corn prices.
“Nebraska has been one area where there does appear to be quite a bit of optimism surrounding the livestock sector. When you add ethanol to this, the optimism there could help mitigate some of the damage” from lower corn prices, said Nathan Kauffman, Omaha branch executive with the Federal Reserve Bank of Kansas City.
“But as you start going to rural areas, some of which aren’t as diversified …, you obviously have to look at things differently.”
Demand for machinery swings with prices
When the 2012 drought pushed up corn prices to near or above $8, the effects rippled into the balance sheets of agriculture equipment manufacturers like Deere & Co., Omaha-based Valmont Industries and Claas of America, each of which had record sales years in 2013.
Now that the pendulum has swung the other way, however, the effects of significantly lower corn prices have been apparent.
John Deere manufacturing plants have laid off more than 1,000 employees, including at locations in Iowa cities like Des Moines and Waterloo, as sales forecasts continue to slump.
Valmont, a maker of irrigation equipment with almost 2,000 Omaha-area employees, in October reported a quarterly net income of $23.6 million, down more than half from $56.5 million in the same period a year ago.
Claas at its La Vista plant manufactures combines as well as other equipment used by livestock producers. Company president Leif Magnusson said roller coaster grain prices have actually been “a perfect storm” for the company.
A combination of record-high prices for corn in 2012 and federal tax benefits meant higher sales of equipment used to harvest it. Lower prices, predictably, have sent demand for that equipment the other way.
“The markets will settle down, but even if we lose 10 to 15 percent this year and next year, we’re still at the high end of the average over the last 10 or 15 years,” Magnusson said.
As competitors have reduced employee head counts — CNH Industrial reduced its Grand Island workforce by 240 people in October, citing weaker demand for combines made there — Magnusson said employment in the Omaha area has grown over last year to about 250 employees.
The reason? Those on the livestock production side have enjoyed record prices because of smaller herd sizes, and now they are enjoying lower feed costs.
So while combine sales have been flat so far in 2014, sales of Claas equipment used to cut and bale hay have grown 30 percent over last year.
Omaha, Lincoln banks are big ag lenders
First National Bank of Omaha and Pinnacle Bank of Lincoln are the fifth- and 10th-largest farm lenders in the country, respectively, together accounting for about $3.4 billion in loans to farms and agribusiness.
Loan officers at First National have seen growing demand for refinancing on shorter-term loans as borrowers angle to save cash for operating expenses next year, said Stephanie Moline, the bank’s executive vice president of corporate banking.
“Depending on whether you make any money on this crop or not, you’re really trying to bulk up working capital,” Moline said.
With a record corn harvest estimated at 14.5 billion bushels on deck, Moline expects prices will stay down. She thinks that should bode well for the bank’s livestock-heavy portfolio of ag borrowers.
“We really see a growing demand for capital on that side of our balance sheet for next year as (producers) put more animals on feed,” Moline said.
At Pinnacle Bank, President Marc Hock said farm clients emerged from the peak of the corn price cycle with lots of cash. It could be that record farm incomes over recent years could mute the impact of significantly lower grain prices.
“We’ve come out of unprecedented times over the last few years, with the revenue generated from crop and livestock sales at all-time highs,” Hock said. “Nebraskans are typically savers, and so that liquidity has become a cushion for these producers to deal with these cycles.”
Still, Hock expressed concern about crop prices’ effect on retailers and truck and equipment dealerships, especially in rural areas.
Truck dealers: Impact remains to be seen
More trucks on Nebraska dealer lots could also be a reflection of an increasingly strong auto market, however. Nationally, sales of light trucks through September increased 9.8 percent over the same period last year to about 6.4 million units, according to industry figures from Autodata Corp.
Chuck Diers, general manager of Diers Ford in Fremont, said business has been good and he anticipates a “very strong” late sales season. “We have definitely improved our year-to-date sales over last year.”
It’s the same story at Baxter Ford in the Elkhorn area. General sales manager Steve Oliver said that with a normal uptick after December, “it remains to be seen whether (grain prices) have any effect on sales.”
At Keast Chevrolet in Oakland, Iowa, about 35 miles east of Omaha, truck sales are down significantly over a year ago.
“During harvest time, our biggest buyers are all in the field, so maybe in a month things are going to pick up,” said Tom Williams, the dealership’s general manager. “It has been dramatic and it’s very surprising with incentives as strong as they are.”
In Blair, Nebraska, Sid Dillon Chevrolet general manager Jim Nelson hears more about tax treatment driving farmers’ truck-buying decisions than crop prices.
The Section 179 provision fluctuates annually and since 2009 has allowed businesses, including farms, to make up-front deductions for capital investments up to $500,000. That threshold dropped to $25,000 on Jan. 1, however, and qualifying purchases include some pickups.
“When we hear farmers talk, it’s more about tax and depreciation programs than it is grain prices,” Nelson said. “If things have slowed down, then it’s due to that.”
Lower prices a boon for ethanol
Lower corn prices mean ethanol producers are enjoying significantly lower costs.
Of 19 Nebraska ethanol plants reporting production to the Renewable Fuels Association, all but one are operating at full capacity. Of 40 Iowa plants reporting production, only one reported operating below 100 percent capacity.
Nationally, U.S. ethanol plants are operating at 96 percent capacity, according to the association.
Omaha-based Green Plains Inc., which operates 12 ethanol plants, is now producing corn ethanol at 100 percent capacity and is seeing “some of the best global demand we’ve ever had,” said Todd Becker, president and CEO.
Since Jan. 1, the company has increased its workforce by 17 percent to 831 employees.
“I’m not a believer of what we’re seeing today is highly negative to the Midwest economy,” Becker said. “The agriculture industry overall continues to remain extremely healthy and very focused on growth, and I don’t think anything’s going to stop the train right now; $3.50 corn is certainly not going to.”
Nebraska farmers received, on average, $3.30 per bushel of corn in September, according to the USDA. While monthly corn prices haven’t trended that low since mid-2010, the state’s average yield has increased about 9 percent since then.
Becker and others say yield is an important consideration when it comes to discussing grain prices.
“It’s not like 20 years ago when you were yielding 110 bushels an acre,” Becker said. “Your production per acre is a big driver, and you can’t just look at prices in a vacuum.”
Even with farm income forecast to decline, the Nebraska estimate of $5.8 billion is still about 84 percent above the six-year average net farm income from 2005 through 2010.
Stores see sales rise and fall on farm income
Last year, Nebraska Furniture Mart registered about $450 million in sales, up from more than $400 million in 2011, a record year for the home furnishings retailer — and for Nebraska farmers.
Bob Batt thinks that’s no coincidence.
Sixty percent of the store’s traffic comes from outside the Omaha metro area, he said, so he keeps a close watch on commodity prices.
“If farmers are doing well, we see an uptick in business from the rural areas of our state and Iowa and South Dakota,” said Batt, executive vice president of the Mart.
Data from the Nebraska Department of Revenue shows rural growth in net taxable retail and motor vehicle sales through July slowed to more than half the rates seen in 2011 and 2012, however.
“It’s probably going to have an effect,” Batt said.
In the western Nebraska city of Alliance, the effect is already apparent.
“It’s a big ripple effect,” Darren McCune, who co-owns the local Carquest store with his wife.
He said a $4,000 pressure washer has been collecting dust this fall. “When corn was $7, we sold four of those within two months and I haven’t even had anyone look at one this year.”
By this time a year ago, McCune said he had already sold 12 tool boxes that fit inside the bed of a pickup. This year, the store has sold two.
“They flat out tell me, ‘For $2.90 corn, we’ll make do.’”
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