Corn and wheat prices may be trading close to ten-month highs but contrary to public opinion many farmers are not reaping fat profits.
The stark reality is that growers' margins are razor thin and many are even losing money because food crops are priced well-below the cost of production, former Australian farmer Paul Hickey explains.
Hickey speaks from personal experience. Unable to contain spiraling losses, he stopped production last year at his 1,000-hectare farm in Howlong in New South Wales, ending more than one-and-a-half centuries of "continuous food production in Australia by our family."
The story is the same globally, he says. "From growers I know in the U.S., U.K. and particularly Australia and Canada, there is no one making anything out of grain. Beef, dairy, fruit and vegetables are much the same."
Drought in the U.S. grain belt has sent benchmark prices in the agricultural commodities complex surging and those markets have remained resilient to the global economic slowdown.
Relentless heat in the key U.S. corn- and soybean-growing areas drove benchmark Chicago corn futures higher on Tuesday, marking the grain's biggest eight-day advance in three-and-a-half years.
Soybean prices jumped to their highest levels since 2008, less than a dollar per bushel off that year's top, while U.S. wheat hit its highest price in over a year, tracking corn's rally. That's raising fears of soaring costs for consumer food items such as bread, breakfast cereal and cooking oil, which in turn could fuel inflationary pressures.
But from a farmers' point of view high food prices are an "urban myth", Hickey says. And he argues that food should be priced much higher to take into account producers rising production costs. "This food production crisis is coming to a head. Low-priced food cannot continue. "
Prices Way Below Breakeven
On average, an Australian farmer's "breakeven" wheat price last year was $180 (Australian dollars) a ton but they were paid between $130 and 140 a ton with rising input and fixed costs a major drag on farm incomes, Hickey explained.
"In Australia, many midsize farmers cannot afford to buy a $500,000 harvester or a new $350,000 tractor when you're struggling to cover the fixed costs of growing grain or of producing meat. This is why much larger operators than us had machinery 30 years old that they could not afford to replace."
Abah Ofon, senior agriculture commodities analyst at Standard Chartered in Singapore, said anecdotal evidence from farmers he'd spoken to "definitely tally" with the theme of tight or negative margins.
"This is largely a result of higher production costs for fertilizer, energy, labor, insurance and machinery juxtaposed with stiff price competition," Ofon said. "This rings true for sugarcane farmers in India, onion farmers in Tasmania, cotton farmers in Benin or wheat farmers in Kansas."
He added: "One of the best ways to think about costs is to relate it to yields. Poor yields mean that you are spreading your cost over a smaller volume of produce and that really eats into margins - which is why the weather and yields are so important" in the agriculture sector.
However, some analysts say falling farm incomes isn't a consensus view across the industry.
"At least in the U.S., farmers are extremely cash rich," said Christopher Narayanan, Societe Generale's head of agricultural commodity research. "One of the reasons why corn supplies are currently low in the market is because farmers refuse to sell until they get a clearer picture of what new-crop will look like. The clock is ticking, of course, but they aren't in any hurry as the past few years have been good to them."
U.S. and U.K. farmland prices are also on the rise with record highs in several U.S. farm states. Research in the U.K. predicts British farmland will outperform gold, oil and residential real estate in London's most exclusive neighborhoods, Reuters reported on June 27.
Ultimately, Hickey says, the end result is that farming isn't considered a viable career option for many young Australians. "You won't find many farmers in Australia under 40. Many have got up and got out. Here in Australia they have gone to the mines, or like myself back to their old professional jobs," said Hickey, who holds an MBA and BA degree in Agricultural Sciences, and now works as an agronomist.
The official statistics support his view. Australian agriculture employed 307,000 people in the 2010-11 financial year, down from 325,000 in 2009-10, according to the Australian Bureau of Statistics.
Australia's farm sector faces a "significant undersupply of graduates," according to the Australian Council of Deans of Agriculture, with Australian universities graduating fewer than 800 graduates per year in agriculture.
Christopher Narayanan, Societe Generale's head of agricultural commodity research, says aging farmers is a theme that's resonating in the U.S. too.
"There is waning interest in farming," he said. "In the end, I believe areas such as South America, Eastern Europe and Sub-Saharan Africa offer the best chances for agriculture expansion. To that end, there is some truth to crop prices versus inputs. With rising global population and shrinking arable land, the long-term trend certainly suggests eventual constraints unless these production practices can be improved. For that, I remain a long-term bull on agri-prices to encourage farmers to adopt - and afford - these technologies and practices."
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