WIUM Tristates Public Radio

Low Grain Prices Hurt More Than Farmers

Mar 5, 2015

Todd Mendenhall slouches in his barber's chair, his gaze fixed on the door of his shop, waiting for a customer to open it. The clock ticks to one o'clock on a gray Wednesday afternoon.  "I should be cutting hair instead of just sitting here," Mendenhall said. "That tells you something about our economy."

Havana, population 3,200, perches along the east bank of the Illinois River, surrounded by tens of thousands of acres of corn and soybean fields.

Mendenhall said after several factory closings in the past decade, Havana’s economy - and population - went into decline. The unemployment rate here is 8.4 percent - two points above the national average. One in four children in Havana live in poverty.

In recent years, the town’s prosperity has been propped up by farms and farm related businesses - with close to 40 percent of the county’s GDP linked to agriculture.

USDA’s Outlook for U.S. agriculture predicts that nationwide farmers will lose one-third of their income compared to last year.
Credit Photo by Abby Wendle

That support could falter in coming months as the price of corn plummets by more than half this year to about $3.80 a bushel from an all time high of $8.49 a bushel in August, 2012.

“Farming’s been real strong, and it’s helped keep us alive,” Mendenhall said. “Who knows how it will be with lower prices?”

Farmers are seeing the lowest prices in six years, a result of back to back years of record production with no increase in demand, as well as a leveling off of the market for ethanol.

The U.S. Department of Agriculture (USDA) predicted nationwide farmers will lose up to one-third of their income compared to last year. Some economists in Illinois are predicting grain growers in the Midwest will see their earnings sliced in half from 2014.

Havana is littered with hints of an agricultural economy in decline.

Frank Hofreiter, owner of Stelter Hofreiter, Inc., founded in 1945, employs 17 people at his New Holland farm equipment dealership on the edge of town.

Businesses like his are on the front lines of the economic shock of cheap grain. When corn prices peaked, Hofreiter sold close to $11 million worth of shiny blue tractors in a single year. He doesn’t expect to crack $3 million in 2015.

“Everybody’s just trimming back and not doing much buying on new equipment,” he said. “Especially big, large equipment, anything over $20,000.”

John Deere, the industry leader, reported sales are down by forty percent from this time last year, prompting the company to lay off nearly 2,000 workers in recent months. And more cuts could come.

Hofreiter hasn’t let anyone go yet. So far the company’s machine shop -- attached to the back of the dealership -- is keeping employees busy.

“You’ll see more when the economy’s like this, guy’s will spend more on repairs,” Hofreiter said. “Instead of that tractor’s got a bad engine, we'll trade it off today. Well, no, we’ll see if we can patch it together and fix it back up.”

Kyle Garman, technician, is taking apart the feeder head on a large combine. The bill for this fix will be about $20,000 compared to $600,000 for a new machine.
Credit Abby Wendle

If repair work falls off, Hofreiter said he’ll have to cut employees' hours. That worries other business owners in town who depend on people having a little extra pocket money to spend.

Todd and Kelli Schaeffer, owners of Babe’s Bar and Grill on Plum St., in downtown Havana, estimate that seven in ten of their customers work in the farm sector. Though their sales haven’t dropped just yet, Todd Schaeffer suspected they will.

“People will probably get laid off,” he said. “We'll have to get back behind the char broiler, behind the bar. Rather than just managing it, we'll have to work and manage it.”

Farmers Continuing to Get Squeezed

On a snowy afternoon on a farm outside of Roseville, Dan Byers parked his pickup at the end of a dirt road and looked out over a chunk of the fertile land he farms with his dad.

A few years ago, high grain prices earned farmers here about $400 per acre for their corn and soybean crops. This year, it’s possible that every acre Byers farms will cost him 50 bucks.

“It just takes a certain amount of fixed money to put a crop in and raise it,” Byers said. “At today’s prices, not much of anything works right now, until there’s a rebound.”

Even as grain prices plummet, grain farming isn’t getting any cheaper. The fixed cost of seed, fertilizer, and chemicals are about the same as when corn was selling for twice as much.

Land is one of the biggest expenses, with the average value of cropland in the Corn Belt climbing to about three times higher than it was a decade ago. Byers said he’s heard of people buying land where he farms in central Illinois for as much as $13,000 per acre.

The Federal Reserve recently reported that land values dropped three percent last year in the Chicago district. It was the first decline in decades.

Gary Schnitkey, professor of economics at the University of Illinois’ Department of Agriculture, said that’s good for farmers who want to buy land, but bad for those who already own it.

Economists call it the debt-to-asset ratio. Land is one leg of a farm’s asset base. If its value drops, the whole operation is worth less, while the amount of debt the farmer owes remains constant.  

Dan Byers said he's thankful to have a small beef cattle operation to offset the losses caused by the downward trend in corn prices. USDA’s Outlook for U.S. Agriculture predicts that nationwide farmers will lose a third of their income compared to last year.
Credit Abby Wendle

During the farm crisis of the 1980s, the average debt-to-asset ratio for farms was about 20 percent - so for every $10 of farm assets, $2 are owed back to the bank. The USDA reported the average right now is about half that. But for commercial grain farmers, Schnitkey said it’s probably closer to thirty percent.

Even with a decline in property values, land remains out of reach for many farmers - so they rent acreage instead.

Schnitkey said the rising price of grain pushed rents to unprecedented levels of $350-$400 per acre. And even though prices have fallen dramatically, rents have only come down a fraction of what they need to in order for farmers to balance out their budgets.

Rents are slow to follow the decline in corn prices because they’re not immediately impacted by the market’s fluctuations. For them to come down, farmer tenants have to negotiate a lower price with their landlords.

“No one likes to have that conversation,” Schnitkey said. “Landowners don’t want to take less payment and farmers have a hard time asking for a lower rent because they’re afraid of losing the land. And if you don’t have a land base, you don’t have income.”

Schnitkey said if corn prices stay low, rents will eventually have to follow. But in the meantime, many farmers are struggling to pay for their rented land. There are even reports of some farmers breaching their contracts - refusing to pay rent and walking away from the land.

Dan Byers rents some of the land he farms. Even though his budget is tight, he said he’s paying up and staying put.

“In our situation, we’ve got some very long term relationships,” he said. “You don’t want to screw those up.”

He’ll continue to farm even though it’s not likely to be profitable. With corn production expected to remain high, the USDA is predicting that prices will fall well into next year.