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State of the farm

Farm lenders, agricultural educators and producers had the opportunity to learn about the state of the industry at a series of meetings sponsored by North Dakota State University's Extension Service last month.

Farm lenders, agricultural educators and producers had the opportunity to learn about the state of the industry at a series of meetings sponsored by North Dakota State University's Extension Service last month.

The latest Extension Service research seems to indicate that, in this region, it takes a good-sized farm operation to make ends meet.

"Larger farms make more money," extension farm management economist Andrew Swenson told the group gathered in Grand Forks, N.D. "For small farms, it's very, very tough, and you have to have significant off-farm income."

This season's profit and loss information still is being compiled, but Swenson offered detailed information from the 2005 season, provided by farm operations participating in the Extension Service's farm business management program. The farms are from all over North Dakota and also the Minnesota side of the Red River Valley.

Average farm stats

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The farms averaged $833,961 in assets, $350,226 in gross revenue and $59,607 in net income. On the average, they were able to convert 42 percent of their assets into gross revenue and 17 percent of gross revenue into net income.

Swenson says in most years, unless there is spotty weather damage, the numbers are fairly consistent across the region. But not last year.

"This was a highly unusual situation in 2005, the only time in the past 10 years that the Red River Valley area hasn't been king of the hill, so to speak," Swenson says.

Disastrously wet weather resulted in huge crop losses in extreme northeastern North Dakota that year. Also, the final sugar beet payment came late, raising the region's sales figures after the report was compiled.

In that report, the western region had an average net income of $59,711, the north-central averaged $35,934, the Red River Valley average was $44,160 (without the final beet payment) and the south-central region averaged a whopping $91,141.

"Overall, it was a pretty decent year for North Dakota," Swenson admits. "Net farm income was high, and we had record corn, soybean, sunflower and flax yields and great beef cattle prices."

Growing challenges

Still, Swenson says their participating farmers, like others throughout the region, struggled with the highest production costs ever last year, and he expect those costs will be even higher for 2006.

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He says family living costs for farmers, as well as most North Dakotans, skyrocketed in 2005.

"We've really seen a big problem with medical and health-care costs, making up 18 percent of the family budget, and as you well know, that's a real problem."

On a brighter note, Swenson says farm sales figures have risen dramatically in the region. Referring to charts showing the median (not average) farm sales figures for 2005, Swenson points out that 20 percent of farms, or one in five, posted more than half a million dollars in sales.

Acreage is up, too.

"When we started doing this in 1991, the even split, with 50 percent larger and 50 percent smaller, was 1,200 acres," he says.

By 1996, the midpoint was 1,600 acres, and now it is roughly 2,000 acres.

The hot crops

Extension crops economist George Flaskerud provides a more detailed look at specific crop performance and marketing strategies for the coming months. He says 2006 is shaping up to be a good year for the region's crop producers.

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"I don't know if we've ever had a year when all of the prices were this strong at this time of the year," he says. "Of course, the reason for this is, essentially, the fact that we've got ethanol on the horizon, so there's a tight stock scenario. It's sort of like a perfect storm here."

Increased demand for corn to fuel the region's new ethanol plants should make other crops less plentiful and more valuable, Flaskerud says.

"These factors will be driving prices throughout the fall and into the spring, and it looks like for the next year or two," he predicts.

"Prices are going to be volatile, but there will be opportunities for farmers to lock in very profitable prices. And that should hold true unless extremely good crops are produced this next year.

"Of course, there's about an equal opportunity for yields to be below average and prices could go sharply higher, which would be a very, very interesting situation," he adds.

Corn isn't the only crop needed to produce biofuels, and Flaskerud says there will be plenty of demand for soybeans and other oilseeds. He recommends watching for 50-cent rallies in the soybean markets, and expects futures prices to peak in April or May.

The recent agreement Frito-Lay signed with sunflower growers should keep demand high for that commodity. The snack food giant will need an ample supply of sunflower oil in the coming months, and that should intensify the competition for acres in other crops.

"Sunflowers is not a crop where we can give up acres; in fact, we have to add about a half million acres," Flaskerud says.

Other growing opportunities

New biodiesel facilities are expected to create more demand for canola, which Flaskerud believes will compete for wheat acres in Canada. In fact, he sees unique opportunities in the wheat market across the board because of the biofuel boom.

"Wheat production is down for all the major exporters for the current marketing year, including Canada, Europe and especially Australia," he says. "Australia's production is so much less than anybody anticipated (because of this year's severe drought).

"They're ending their harvesting season now, then perhaps our exports will improve. From that we could see, not only stronger futures prices, but maybe an improvement in the basis as we go into November, which is kind of that critical time for wheat," he concludes.

Flaskerud believes some U.S. farmers will take a hard look at wheat for the first time in many years.

"In the western part of North Dakota, I expect that every conceivable extra acre will be planted with hard red spring wheat."

According to Flaskerud, world durum production is at an all-time low, and because so many acres were lost last year, he expects today's strong prices to strengthen even more. He recommends incremental durum sales when prices are good in the coming months.

Biofuel domination

Though the market picture appears bright for crops across the board, the experts agree that biofuels dominate and, at the moment, corn is king.

Extension farm management economist Dwight Aakre says as of June 2006, 102 ethanol plants were operating nationwide, and 32 more were under construction. Plans for more than 120 more have been announced, but whether they actually will be built remains to be seen.

Altogether, those plants would have the capacity to produce 16 billion gallons of ethanol.

"At this point, nearly all of that is expected to come from corn, and that's a good part of what is driving the markets today," Aakre says.

His statistics show that last year, about 11 percent of the U.S. corn crop went into ethanol production, and by next year, that's expected to more than double, with nearly one-quarter of the country's corn used for ethanol production.

"In North Dakota, by 2008, assuming the plants under construction are online, we would use the equivalent of 90 percent of this year's corn crop," Aakre says.

Proceed with caution

At the same time, he warns against being overly optimistic about ethanol's future growth. He says recent increases in demand for ethanol can be largely attributed to the fuel industry's decision to move away from use of methyl tertiary-butyl ether as a gasoline oxygenate.

"That was a huge part of the market, and a one-time increase in demand for ethanol," Aakre says. "In the last year as oil companies made that shift to using ethanol as opposed to MTBE, and the demand for ethanol grew more quickly than the supply.

"There was a squeeze on the supply and we saw the price of ethanol skyrocket, and profitability of the plants skyrocketed as well. All that leads to enthusiasm, and consequently, we have the building boom that's going on right now, but that was a one-time occurrence," he cautions.

Aakre says one big hurdle the ethanol industry must overcome is getting the fuel to the customer. He says while biorefineries are heavily concentrated in Iowa, southern Minnesota and Nebraska, there is more demand for ethanol in densely populated urban areas.

"It's costly to move, and we don't have a pipeline system in place," he notes.

Aakre also warns that some job projections released by the ethanol industry may be somewhat misleading. He says some don't take into account existing farmers and farm employees already growing other crops who may switch to corn production for ethanol.

Other factors

For the ethanol and biodiesel industries to thrive, Aakre says several factors must be taken into consideration.

"We've had several years of very good crops, but what happens if we have a 10 (percent), 15 (percent), 20 percent shortfall in corn production in one year?" he asks. "That's a big risk for ethanol production."

Aakre says biodiesel is about three years behind ethanol in terms of research and regulations, and biodiesel plants tend to have a smaller capacity than ethanol plants.

Experts say 4.5 million additional soybean acres will be needed by 2011 to keep up with biodiesel demand, but Aakre says a recent study by the Food and Agriculture Policy Research Institute suggests soybean acreage actually may be lost to corn.

"The present acreage for soybeans will probably decrease by 3.3 million acres, so down the road, there could be a squeeze on the soybean supply," he warns.

He says Corn Belt rotations typically have been corn, soybeans and winter wheat, but that is expected to change.

"I think we're going to see acres come out of soybeans and winter wheat and going into corn. Two years corn, one year soybeans, and some growers down there will be growing nothing but corn."

In this region, Aakre expects more strength from soybeans. For one thing, soybean-crushing facilities produce ample supplies of meal for livestock feed. Since meal is relatively expensive to ship long distances, this convenient feed supply might bring more livestock back into the Midwest.

Many growers also have found soybeans to be a valuable addition to their crop rotation.

"Soybeans have done a wonderful job of breaking the disease cycle. Obviously Mother Nature assisted us quite a bit and Roundup Ready beans have been a very easy technology to adopt.

"I don't think we're going to pull an awful lot of acres out of soybeans in this part of the country," Aakre says. "I think they're going to hang in there."

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