Trade War Damages Investments in Agriculture

Trade War
Damages
Investments in
Agriculture
By www.ProfitableInvestingTips.com

http://profitableinvestingtips.com/profitable-investing-tips/trade-war-damages-investments-in-agriculture
Over the years much of American
agriculture has become a highly
leveraged and high cost of entry
business.

How the trade war damages
investments in agriculture is
compounded by these facts.

A recent article in The New York
Times focuses on the loss of soybean
markets in China due to the trade war
and the damage that is doing to North
Dakota soybean growers.

Many investors have never visited,
much less worked on, a farm or have
any idea about how US agriculture has
changed over the recent decades.

Mechanization and
Consolidation of US Farms

The Midwestern USA is one of the
breadbaskets of the world.

The climate and soil are ideal for
growing things and the USA is a major
producer of corn, soybeans, wheat,
cattle, pork, and poultry.

Over the decades, starting with farm
implement inventions in the 19th
century, farming has become
increasingly mechanized.

A farmer with more farmland and the
equipment to cultivate, plant, fertilize,
deal with weeds, and harvest more
efficiently makes a better profit.

Since a big tractor can just as easily be
used to plow and plant 320 acres
instead of 160 acres (half a square mile
versus a quarter of a square mile), a
farmer with more farmland can be more
efficient and more profitable than a
smaller farmer.

This has led to bigger farms, more
investment, and greater investment risk
in American agriculture. Here are just a
couple of examples.

Bigger Farms and More
Investment Required

In Iowa the average farm size in 1950
was 169 acres.

By 2002 the average farm size was 350
acres. (Iowa State University)

The average price per acre of medium
quality farmland in Iowa in 1950 was
$300 and by 2010 an acre sold for just
over $8,000.

In North Dakota the number of farms
was reduced by half between 1950 and
the average farm size increased by 647
acres to 1241 acres.
(SoyTransportation.org-Rural
Infrastructure)

North Dakota farmland sold for less
than $100 an acre in 1950 and now the
price is around $1,900 an acre.

The cost of running a farm is
demonstrated by this graph
from SoyTransportation.org-Rural
Infrastructure.

Farm Costs by Year North Dakota

This is a composite of all farm
expenses for the years 1949 to 2010.

The “bottom line” is that total costs of
operation across the state went from
around $300 million in 1950 to the $6
billion to $7 billion range by 2010.

Crop Prices, Markets, and
Farm Survival

When the price of corn, soybeans, or
wheat goes up dramatically, farmers
tend to plant more of that crop the next
year.

The law of supply and demand being
what it is, when there is more corn,
soybeans, or wheat produced the next
year, the price does down.

And, since other nations like Brazil,
Argentina, Ukraine, China, Australia,
and nations in Europe all grow these
crops, their production has be taken
into account as well.

The ideal situation is that you own your
farmland, buildings, and equipment
without any debt.

So, you “only” need a crop price that is
high enough to cover your production
costs and then you have a profit.

Unfortunately, crop prices go up and
down and they can do so dramatically.

A good many farmers have been ruined
by a bad year with low prices and high
production costs.

Those with money or credit survive, buy
more farmland, and thus farms get
bigger while there are fewer farmers.

But, how is it that the trade war
damages investments in agriculture?

Will the Trade War End or Will
the Soybeans Rot?

The New York Times published an
informative article about the dilemma of
North Dakota soybean farms and the
associated businesses that support
soybean production, storage, shipping,
and sales.

The bottom line is these farmers need
to trade war to end before their
soybeans rot because it has been a
great production year that has
outstripped storage capacity.

Farmers here in Cass County have
prospered over the last two decades by
growing more soybeans than any other
county in the United States, and by
shipping most of those beans across
the Pacific Ocean to feed Chinese pigs
and chickens.

But this year, the Chinese have all but
stopped buying.

The largest market for one of America’s
largest exports has shut its doors.

The Chinese government imposed a
tariff on American soybeans in
response to the Trump administration’s
tariffs on Chinese goods.

The latest federal data, through mid-
October, shows American soybean
sales to China have declined by 94
percent from last year’s harvest.

In the last 20 years North Dakota
farmers have increased acreage
devoted to planting soybeans from
450,000 to 6,400,000.

Along with this increase in production
has come the construction of millions of
dollars-worth of grain elevators (huge
buildings for storage), more loading
facilities, more hundred-car-trains to
carry the soybeans, and more farm
implements used plant and harvest
soybeans.

If you look at the graph from
SoyTransportation.Org, you can
appreciate how the total costs that go
into modern agricultural production
have led to a very high cost of entry
and very leveraged business.

A young farmer simply cannot afford to
buy the land and equipment to start in a
business like soybean farming.

And, if he does have some capital, he
runs the risk of two three bad years
when he starts out and being ruined
essentially before he starts. There is an
old joke in farm country.

What would you go if you inherited a
million dollars?

Well, I guess I would go into farming
until the money was all gone.

It is a measure of the risk of
investments in farming today that many
that grew up on farms did not stay
there.

However, they kept the land. The ideal
situation for these folks is that they
receive a rent check in the mail every
March 1 while the farmer working their
works the land and either profits from a
good year or sees losses when a trade
war takes away markets that took
decades to gain access to.

According to the Times, the trade war
may do lasting damage to soybean
growers.

“I’ve been to China 25 times in the last
decade talking about the dependability
of U.S. soybeans,” said Kirk Leeds, the
chief executive of the Iowa Soybean
Association.

By undermining that reputation, he
said, “We have done long-term damage
to the industry.”

Although the last couple of years were
very profitable, younger farmers with
more debt are in trouble.

But the mood is souring quickly. Mr.
Gebeke’s wife, Debra, a retired
psychologist, has returned to work at
North Dakota State University, to
counsel distraught farmers.

Public health officials in North Dakota,
already confronting a recent rise in
suicides, are concerned about the
impact of falling prices, particularly on
younger farmers with high levels of
debt.

Investments in agriculture can be very
profitable over the years but typically
one needs to have sufficient capital to
ride out down markets.

And, American agriculture needs to be
able to keep the markets that it has
cultivated over time.

Trade War Damages Investments in Agriculture

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Trade War Damages Investments in Agriculture