Grain market volatility is on the minds of farmers and legislators
Volatility in grain markets is a topic that impacts farm policy in several ways. In fact, volatility in grain markets is a primary historical reason for the farm bill that exists today. Although the federal government has regulated agriculture since the early 1800s, the first farm bill took effect in the early 1930s, as the FDR-led federal government tried to stabilize the effects of the Great Depression in rural America.
Prior to that, though, the federal government did have programs that affected rural America, including the Homestead Act, which granted parcels of land to those who would agree to settle and farm the land. Additionally, it was federal government aid that established and supported land grant universities, which provided research and other assistance to farmers and families in rural America. This research and assistance still exists in the form of Cooperative Extension Services, such as the one based at North Dakota State University.
We are experiencing grain market volatility right now as harvest approaches, and this volatility is illustrative of why the federal farm bill is on the minds of farmers, as well as their federal legislators. Less than two months ago, farmers could contract to sell their wheat right off the combine at a price of $5.90 per bushel. A decent, but not "big" crop of 60 bushels per acre would bring revenue of $354 per acre at that price. According to the NDSU Extension service, a reasonable budget would project costs of $327 per acre to grow hard red spring wheat in "northern valley" North Dakota. So a 2,000 acre farm with a wheat-soybean rotation would average $354,000 in revenue, and $327,000 in expenses, for a net profit of $27,000 on wheat acres.
Flash forward to today. As we head into harvest, the average price at the local elevator is $4.75 per bushel. At that price, the same farmer with a 60 bushel yield will bring in revenue of $285.00 per acre of wheat. Expenses remain stable — unlike revenue — so the budget costs of $327 per acre remain unchanged. The farmer takes a $69,000 hit in revenue, and his/her net profit on 1,000 acres of wheat goes from a $27,000.00 profit to a $42,000 loss.
This microeconomics lesson works on soybeans, too. Soybeans off the combine at the end of May 2018, were approximately $9.50 per bushel. At a decent yield of 35 bushels per acre, that equates to $332.50 per acre in revenue on the same farm (1,000 acres of soybeans to match the 1,000 acres of wheat). That means gross soybean revenue of $332,500 on our model farm. The NDSU Extension service projects 2018 expenses in northern valley North Dakota to be $286.00 per acre. At those prices, the model farm will project a $46,500 profit on soybeans.
Today, soybeans are $7.25 per bushel off the combine this fall. The same 35 bushel yield will generate $253.75 per acre revenue. That's a decrease of $78,750 in revenue. That takes our model farm from a $46,500 profit to a $32,500 loss.
In a matter of less than sixty days, our model farm went from a profit of $73,500 to a loss of $74,500. This illustrates the "safety net" farm policy wonks refer to.
Back to farm policy: There is some form of federal or state government regulation in nearly every aspect of farming today. None is more directly impactful on farmers' finances than the federal farm bill. The farm bill contains nearly a dozen "titles." This year, the titles farmers will be paying the most attention to are Title I — commodity programs, Title V — farm credit, and Title XI — crop insurance. As this bill works through conference committee, pay close attention to these three titles. Local farmers will be paying attention, to be sure.