Iowa crop farmers could face $2.6 billion hit this year

After a half-dozen years of struggling, Dan Hanrahan is snagging prices for his feeder cattle that he says he may never see again in his lifetime.

"This year is pretty exceptional," said Hanrahan, 38, a fourth-generation cattleman who runs a cow-calf operation with his parents outside of Cumming.

As good as the outlook is for cattle producers over the next couple of years, it is about as grim for Iowa corn and soybean growers, thanks to tumbling commodity prices and the stubbornly high cost of growing crops.

Lower grain prices have helped cattle, pork and other livestock producers post improved profits. But the price slump also creates economic uncertainty in a state that leads the nation in corn production and ranks second in soybeans. As Iowa grain farmers brace for potential losses, leaders ask: How much will farm income drop, and how far will it ripple?

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Chad Hart, an Iowa State University farm economist, estimates that grain production losses in Iowa this year could be as high as $2.6 billion, based on year-end pricing. Farmers who nailed down higher prices earlier in the year will fare better. Overall, improved profits from livestock producers are expected to more than offset grain losses.

Another worrisome yardstick: If Iowa matches the 23 percent income decline projected last week for U.S. farmers, in part because of record-high expenses, it would be a $2 billion reduction in income this year. The shift would more than erase gains Iowa farmers made last year, when income climbed 23 percent to $8.8 billion, new federal data show.

"It's a significant reversal of fortune from where we've been over the past several years," Hart said. Farming has been a bright spot for Iowa as it struggled through the recession. Companies like Deere & Co., DuPont Pioneer, Hagie Manufacturing and others added workers and invested in manufacturing space and laboratories during some of the darkest years of the downturn.

But Iowa is already beginning to see ag companies make cuts. In August, Deere said it would lay off about 1,000 workers at Iowa plants that make tractors, combines and other farm equipment. It also extended seasonal shutdowns to adjust inventories to meet lower market demand.

"The price of corn affects how many tractors John Deere is able to sell, and that affects how many people can be employed," said Tom Ralston, president of United Auto Workers Local 838 in Waterloo. The Moline, Ill.-based company laid off nearly 500 workers at its Waterloo tractor plant in October.

Ralston and other Waterloo leaders are optimistic that laid-off workers will be picked up by other area manufacturers. Ralston said the city hasn't yet seen the effect of the layoff.

"John Deere is definitely a driving force here," especially in creating middle-class incomes, he said. "It will affect the town in the long run, but it's too early to say how. ... We just hope this is a blip and not a downturn."

On Wednesday, Deere said its farm and lawn equipment sales were down 9 percent for its fiscal year, ending Oct. 31, and expected sales would fall 20 percent next fiscal year. The company said lower global commodity prices and falling incomes would especially pressure the sales of larger equipment.

Drought, flooding or other growing challenges can change commodity prices relatively quickly, but a record U.S. corn harvest this year means low commodity prices could be around for awhile. Hart projects Iowa grain losses this year could be followed by a hit as high as $2 billion in grain losses next year, based on futures prices.

"We have record demand, but we also have record supplies," Hart said. "Supply is overwhelming the market."

Farmers will still buy seed, chemicals

Even though about a quarter of Iowa's economy is tied to agriculture — through manufacturing, food processing and other industries — the effect of the farm slowdown on Iowa's economy could be somewhat muted, say Hart and other Iowa economists.

One reason is that farmers will continue to grow corn and soybeans, primarily because no other crops are showing profit opportunities either, Hart said.

"Almost all crops look like corn and soybeans right now. When you look across wheat, unfavorable margins; cotton, unfavorable margins; almost every crop I look at is in a similar situation to corn and soybeans," he said.

"That's why when we look at the prospects for 2015, a lot of the projections are similar to 2014. We'll see a similar number of acres remaining in corn, remaining in soybeans, because there's nowhere to go where there's a strong profitability signal."

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That means "everything you need to grow crops will get purchased," said Dave Swenson, also an ISU economist. That includes seeds from companies like DuPont Pioneer and Monsanto, both large Iowa employers.

"The part of the Iowa economy that depends on farming is still going to get all the payments it typically receives from farmers to plant their crops," Swenson said.

Sectors that could stall involve large-equipment purchases, such as demand for Deere tractors and combines, Hagie sprayers, Kinze planters, and Sukup grain bins and drying equipment.

Ernie Goss, a Creighton University economist, said an index used to track the sale of farm equipment in the Midwest has slumped for 15 months. The index has hit its lowest reading since he started measuring the rural economy in 2006.

"The sale of agricultural equipment is still very weak," Goss said. A few implement dealers across the Midwest have closed their doors, he said, but the cases have been isolated.

But Goss believes the result of farming's slowdown in Iowa will be to temper the state's growth over the next year or so, rather than delivering a bigger hit, given improvement in other sectors such as insurance, finance, construction and manufacturing outside of farm equipment.

Crop revenue support payments also will help reduce the losses that farmers see, Swenson said. "We're not talking about devastation on the farm," he said.

Hart agreed that government subsidies will help mute the effect of lower prices and compensate some Iowa farmers for crop damage this year, such as heavy spring rains in north Iowa. "But it doesn't get you out of the hole," he said. "It just makes the hole less deep."

Record returns to grain farmers in recent years should help them — and lenders — ride out the downturn.

Farmers have used improved profits to lower debt and replace equipment. And farmers are making moves to reduce their costs as much as possible, such as negotiating lower land rents. "They recognize that lower prices mean lowering costs as much as possible," he said. "They're trying to cushion the blow."

Downturn will hit small towns harder

Swenson said the farm slowdown is likely to hurt rural areas, especially midsized towns, more than metro areas such as Des Moines and Cedar Falls-Waterloo, even though they're home to large agricultural manufacturers.

The reason: Rural areas are still struggling to recover from the recession, while Iowa's metros — and the state as a whole — have fully rebounded and are growing.

The loss of local spending "is exacerbating an already tenuous recovery," said Swenson, who points to cities like Ottumwa, Fort Dodge and Mason City as still struggling to recover.

It's that reality that makes Ottumwa Mayor Tom Lazio jubilant that Deere has recalled about 500 workers who were part of a seasonal shutdown in August. The farm implement manufacturer announced it is adding a new line of large hay-baling equipment that should appeal to cattle producers.

A continued plant shutdown would have been devastating to the community of nearly 25,000, Lazio said. "When you look at the price of corn, it makes a lot of people nervous. If farmers aren't spending, we don't get much done."

In northwest Iowa, where most farmers raise cattle, pigs or chickens or operate dairies, producers are spending money to replace worn-out pickups, investing in tiling, and upgrading tractors and other equipment, said Dale Kooima, president of Peoples Bank in Rock Valley.

"Farmers are the lifeblood of the community. When they make money, they spend money," he said. And "they've had very good years."

Kooima said northwest Iowa livestock producers bounced around break-even levels throughout the recession. "Some lost a little money, some made a little money, but now everyone is making money," he said. "We have guys who have farmed for 40 years, and it's the best they've seen."

Hanrahan, of the cow-calf operation near Cumming, is taking advantage of improved profitability to continue rebuilding his family's herd.

Cattle supplies shrank as producers battled high prices for corn and other input costs and middling market prices. Hog supplies also have shrunk as the industry struggles with a disease that's fatal to piglets.

Hanrahan said improved profitability means more young people might consider raising livestock as a career. "It could bring some families back to the farms," he said. "It creates optimism for the next generation."

How big could the loss be?

$2.6 BILLION: Highest estimate of income loss that Iowa corn and soybean farmers could face this year, based on year-end prices. Offsetting those losses are profits that grain producers locked in earlier this year, and improved profitability from livestock producers.

$2 BILLION: The reduction in farm income Iowa farmers would face if the state matched the projected 23 percent income reduction for U.S. farmers.

Snapshot: Iowa/US farm income

2013: $8.78 billion/$126.5 billion

2012: $7.13 billion/$98.4 billion

2011 : $9.48 billion/$109.0 billion

2010: $3.42 billion/$70 billion

Source: USDA

Breaking even

Iowa State economist Chad Hart estimates that farmers need to sell corn for around $4.50 a bushel to break even — meaning cover the cost of production — and sell soybeans for about $11 a bushel. He expects many farmers could struggle with prices that are 50 cents to $1 per bushel below the cost to produce them.