NEWS for North Dakotans
Agriculture Communication, North Dakota State University
7 Morrill Hall, Fargo, ND 58105-5665

December 17, 1998

The Market Advisor: Farm Planning for 1999

George Flaskerud, Extension Crops Economist
NDSU Extension Service

The focus in 1999 will likely be on strategies for dealing with low prices. But in the midst of current low prices, agriculture is undergoing many changes that need to be considered when planning farm operations for this next year. A global economy dominates the market, trade barriers are being removed, the government is providing less of a safety net, genetically modified crops are on the horizon and the market is increasingly being driven by the consumer. These changes can be opportunities, but they must be explored. We are likely to continue to see these changes evolve even after crop prices recover.

Current debt structure will likely receive immediate attention by producers. If it appears that loan repayment will be a problem, the producer needs to visit with the lender immediately on ways to restructure the loan. Delays could jeopardize credit availability for 1999. A problem situation may as well be recognized early so that alternative plans can be made.

Harlan Hughes, an agricultural economist with the North Dakota State University Extension Service, is coordinating an education program designed to help deal with difficult financial situations. Details will be forthcoming as they are finalized.

Cost of production, or how to produce the same with fewer resources, should be scrutinized. Be sure to examine both direct production costs as well as overhead costs. Land rental arrangements, the renting or leasing of needed equipment or custom work all need to be closely examined. Consider sharing an investment with a family member or neighbor.

The current crop and livestock mix needs to be evaluated. Minor oilseeds will continue to become more important in rotations because of favorable loan rates. Major changes may have to be delayed until the farm is on solid financial ground because there is substantial risk when doing something new.

Manage risks. When prices are low, unfavorable yields or even worse prices become intolerable. Survival has to be the number-one concern. Learn how to use the many elevator contracts available, how to use put options and learn about the latest crop insurance products.

Be sure the adjustments you make are compatible with some of the changes anticipated for the future. Consider what you want to be as well as what your resources will let you be. Do you plan to be or can you be a low-cost producer of bulk commodities? Do you plan to be or can you be a part of a system that focuses on contractual arrangements? Do you plan to be or can you be a producer of products for niche markets?

Farmers are looking at many alternatives: some are diversifying, some are considering organic production, some are getting bigger and some are leaving agriculture. Production problems in recent years plus current low prices have no doubt accelerated the changes taking place in agriculture. But technology appears to be the key factor.

The competitive market system allows only the lowest-cost producers to survive. Technology has been the driving force toward lower per-unit costs. The adoption of new technology has occurred intensely for the last 60 years. It has resulted in specialization of commodity production and consolidation of farms into larger units in an effort to gain economies of size and increase profits. New technology results in capital replacing labor, which improves the standard of living for those who adopt.

Unfortunately, new technology has resulted in far fewer farmers, and for those who have not fully adjusted, it has resulted in lower incomes. Further, the profit advantage of being an early adapter of new technology seems to last for a shorter and shorter time due to the rapid pace of adoption. Additionally, there may not even be much of a profit advantage with some of the latest technology.

A considerable amount of the latest production technology is being developed privately instead of by public institutions. Private developers commonly price the technology to leave very little extra profit for early adopters, perhaps with the justification that they are taking the risk of developing the technology. This certainly seems to be the case for genetically modified crops.

The impact of technology is not limited to production agriculture. New technology has facilitated the development of a global economy. Communication and transportation technology allows producers to learn about and quickly respond to market opportunities in other parts of the world.

A global economy leads to a demand by participants for a reduction in trade barriers. As barriers are eliminated, the level of competition increases. Added competition usually benefits consumers but at the expense of prices and profits for producers.

Trade agreements will continue to provide freer markets around the world as unfair practices are eliminated. This process will be facilitated by budgetary concerns and public perceptions that trade barriers and subsidies are unnecessary.

The government program has removed a part of the safety net, and many producers have not made the transition to market-oriented risk management tools. Perhaps more time is needed for the transition. In addition, the array of tools needs to be expanded, especially in the area of interyear price stability.

Agriculture will continue to change. The change cannot be stopped. Producers need to look for opportunities in this new agriculture.

"Understanding Agriculture's Transition into the 21st Century," by David Saxowsky and Marvin Duncan, is a must on your reading list. When ordering this publication, ask for Agricultural Economics Miscellaneous Report No. 181. It is available from the Department of Agricultural Economics, P.O. Box 5636, North Dakota State University, Fargo, ND 58105-5636.

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Source: George Flaskerud (701) 231-7377

Editor: Dean Hulse (701) 231-6136