Hoard's Dairyman Editorial: High grain prices hit producers twice

Editorial: High grain prices hit producers twice

High corn and soybean prices continue to place dairy producers in a financial bind as rising feed costs erode milk checks. Industry analysts now project tight supplies and high prices well into the 2012 crop season despite more acres being devoted to corn. This strong demand for grain is extending its tentacles even further by elevating already record land rents and purchase prices.

In the Midwest, agricultural land posted a 12 percent gain during the past year. According to Chicago’s Federal Reserve Bank, that gain tied the second-largest price climb in the past 30 years. On top of that, the last quarter of 2010 matched the highest gain in Midwest land prices for any quarter since 1977. In Nebraska, the story is much the same where land prices rose 22 percent last year alone. What’s more, Nebraska farm land is selling for double the price of just six years ago.

As long as the world’s appetite for grain remains strong, biofuel mandates remain in place, and interest rates stay low, the pressure on land prices will continue. So, given today’s competitive land market, is it still a good buy?

The Federal Deposit Insurance Corporation (FDIC) just held a conference on this issue. Economists were mixed on the answer. Speakers noted it is difficult to draw comparisons to the late 1970s and early 1980s since different market conditions existed. They also noted agricultural returns on crops are subject to change, almost without notice. And finally, interest rate hikes likely would cause land prices to trend lower.

In the present market, growing dairy operations and their bankers will have difficulty tying up money into an asset that has a relatively low return on investment (ROA). In those instances, dairy producers will have to enter in partnerships to secure forage needs and, more importantly, area to disperse nutrients. Even dairy operations with large land bases need to take a serious look at enterprise budgets.

Based on current trends, we would get the most out of our feed dollars by feeding more high-quality, highly digestible forage. At the same time, more selective culling of marginally productive cows could reduce feed costs and allow us to capitalize on record beef prices. As long as strong grain prices continue, it will give all of us pause to determine what is the best balance for our operations.