Preparing for Uncertainty and Self Reliance

[SuburbanFarmer]

[C-Mag]

This video makes me unreasonably happy.

1938, that was early color footage.......... very cool.

No Thrashing, what's up with that ?

[C-Mag]

Hedgerows are super cool, I should consider that on my property. I want to learn how to set up the base of the hedgerow, basically start from scratch.

[Montegriffo]

This video makes me unreasonably happy.

Here at the farm they still do everything in that video. The main differences being that the binder has been converted to being pulled by a tractor, our beer comes from a bottle not a watering can and the straw stacks are covered with tarps not last years straw.
I can tell you that pitching the shocks of wheat up onto the carts really makes your forearms ache. Shame the video didn't show the threshing. Our threshing drum is from that era and until recently was powered by a steam engine (the owner sold it due to the maintenance costs). Now the straw is the main crop, used for thatching, and the wheat is almost a by-product.

[SuburbanFarmer]

Looks like the Swiss have this shit figured out. Wow.

http://www.zerohedge.com/news/2017-12-1 ... l-collapse

All around Switzerland, for example, one can find thousands of water fountains fed by natural springs. Zurich is famous for its 1200 fountains, some of them quite beautiful and ornate, but it’s the multiple small, simple fountains in every Swiss village that really tell the story. Elegant, yes, but if and when central water systems are destroyed these fountains are a decentralized and robust system for providing everyone with drinkable water.

The Swiss political system is also decentralized. If the central government fails, the Swiss might not even notice. The mountains and valleys also mean that Swiss towns and villages are geographically independent yet linked in a spider-web of robust connections.

As a further example of how ridiculously well prepared the Swiss are for any and all threats, there are things like hidden hydroelectric dams built inside of unmarked mountains so that in the event of mass bombings, they’ll still have electricity from these secret facilities. And, remember, these are the things the Swiss government has let us know about. It is thought that there are probably more fortifications and hidden goodies scattered about the country’s landscape. (ital. added, AT)

[SuburbanFarmer]

Wondering why food is so ridiculously cheap, that farmers can't survive? Wonder why they're killing themselves in record numbers? Well wonder no more.

http://www.zerohedge.com/news/2017-12-1 ... t-10840655

I hypothesize that the farm economy is in dire circumstances (recall article I sent you the other day: https://www.dtnpf.com/agriculture/web/a ... &DCMP=Todd )

Primarily because commodity prices skyrocketed during the 2004-2008 super-cycle triggered by the ethanol buildout combined with huge demand growth out of China and when the GFC occurred in 2007-2008, many sectors of the economy literally collapsed under their own weight but agriculture actually thrived because the QE provided the accelerant to keep things going. You see, agriculture did exactly what you would’ve expected - lower cost of money & greater availability of credit (greater supply) - commodity prices remained rather high so farmers levered up, borrowed money and banks were glad to loan it to them as many were using land as collateralization on loans and after all, the land values were based off of what people were willing to pay (rent) to farm it or what sort of return they needed to make it a worthwhile investment.

What we’ve seen happen is massive leveraging, steadily increasing cost of production (seed, chemical, fertilizer, equipment, insurance, land rents, etc) and now as prices come under pressure due to massive global oversupplies, margins have quickly collapsed and the cost structure hasn’t responded. Instead, farmers have levered up further by refinancing land and/or selling off some land to keep their bankers going along with them and the cycle has continued.

Why would the banks lend to farmers when they didn’t lend to normal citizens? Why would farmers be willing to borrow money when normal citizens weren’t willing to borrow money? Glad you asked.

CROP INSURANCE

Specifically, federally subsidized crop insurance.

Farmers take extraordinary risks doing what they do BUT they now have access (and have had access) to crop insurance that protects a portion of their historical production and/or projected revenue. When I say “a portion” I mean upwards of 75-85%. When I say “federally subsidized crop insurance” I mean that the federal govt pays upwards of 65% of the premium on behalf of the farmer on some crop insurance policies. WHOA.

Let me put figures to it for you. Imagine that you were a farmer and your history showed that your 5 year avg yield (actual production history) on your farm was 55 bu/ac and at planting time the insurance price for soybeans was $10.19/bu. Let’s say that it was going to cost you $550/ac to grow soybeans, so a breakeven type situation if you make ordinary yields at ordinary prices. Imagine that you could guarantee yourself $420.00/ac in revenue ($10.19/bu x 55 bu/ac = $560 bu/ac revenue x 75% coverage = $420 /ac) and it only cost you $3.70/ac. You’re paying $3.70/ac to guarantee yourself $420.00/ac in revenue. Pretty cheap, right? Yes, but the REAL cost of that insurance is more like $8.23/ac with the govt paying $4.53/ac and the farmer paying $3.70.

Granted, there are some situations in which you can lose more and some causes of loss, such as hail are not covered by basic crop insurance and require a separate policy but in the grand scheme of things, the cost of protecting 75% of revenue is reasonable enough that farmers buy it and banks make loans that they might not otherwise make sans crop insurance policies. There is also increased risks because the loss calculations are based on futures prices at planting and harvest time and do not address the cash markets which might have wide, unfavorable basis so it isn’t anywhere near a complete failsafe but enough to keep the borrowed money flowing.

Now we need to put it all together. The relatively “cheap” cost of subsidized crop insurance encourages the farmer to take risks he wouldn’t take otherwise. The balance sheet equity he has goes a lot further if you consider that he “really” only has $130/ac at risk instead of the full $550/ac so he’s willing to a) stay in the game and b) expand his acreage because if he hits a homerun on larger yields and/or higher prices, then JACKPOT!!. If it goes bad, he’s out $130/ac and it doesn’t completely wipe him out - plus he’s using the bank’s money at very low interest rates.

The farmer not only wants to stay in the game but he wants to grow so he’s bidding up inputs and more importantly land rents because if you don’t have the land, then you’re out of the game. Revenues continue to be good, in general so the farm cash flow has meat on the bone and where there is meat on the bone, the dogs come chewing. Seed costs are higher every year and sometimes much higher. Equipment costs have gone FREAKIN’ PARABOLIC. Land rents have skyrocketed. Since many farmers are self-insured, health insurance prices have… well you know what they’ve done. Much of this expansion has been done with debt financing on equipment meaning that while the interest rates are low, interest costs are accumulating. You see, there HAS been demand for debt from agriculture and the lenders have seen positive cash flows and the revenue safety net of crop insurance as courage to continue to lend to farmers.

Let’s take a detour for a moment here - banks have wanted to lend money but “conservatively” and if the average consumer really hasn’t had the appetite for borrowing money, that makes it a difficult task. If you’re a regional bank or small town bank and you can lend out money on 10-12 month agricultural operating notes to the tune of $500k-2.5 mil each isn’t it much easier to put $10-20 mil to work than if you were dealing with making retail loans for cars, houses, etc particularly since those loans are longer maturity loans? What if you could effectively put $20 mil out in annual operating loans with 12 month or less maturities at 4.5-5.5% via 25-30 loans PLUS the person borrowing it has 75% revenue protection bought via crop insurance as well as land & equipment collateralizing the notes at a time that equipment and land prices are zooming into the stratosphere?!?!?!?!?!

You see, the ag community kept growing and the appetite for debt was there from the start but encouraged by federally subsidized crop insurance. Lenders needed to put money to work and they found it too easy NOT to make large operating notes that renewed annually at decent interest rates to individuals/businesses that were a) looking at positive cash flows, b) partially protected by federally subsidized crop revenue protection in the form of crop insurance and c) collateralized by rapidly appreciating assets (equipment & land). Farmers get to expand, rural America gets a hand, bankers put money to work and everyone lives happily ever after…

Until commodity prices come under pressure because the supply side gets overstimulated, revenue side drops dramatically while the cost side remains sticky and then we get the massive transfer of equity from the farmer to a variety of beneficiaries including a) banks in the form of interest, b) landlords in the form of higher rent and higher asset(land) values, c) equipment companies in the form of inflated revenues due to inflated equipment prices, d) input providers in the form of higher prices for seed, chemical and fertilizer… all being transferred from the farmer’s balance sheet.


Then you add in the intangible side to the equation: what is the farmer going to do if he decides to quit because he doesn’t want to take all of these risks? If he decides NOT to farm because he sees what is happening in terms of greater and greater risks to his equity what is he going to do to put food on his table? If he doesn’t pay the extra $25/ac land rent to keep a neighbor from renting it out from under him he’ll lose the land and then what will he do? There are only so many jobs “in town” to get and rural America is drying up so what will he do? You see, here is the hard part. He made the decision to get in or stay in the rat race even when he knew that the numbers didn’t make sense because he didn’t see a viable “plan B” and there was a banker standing there able and willing to continue to give him more and more rope until he finally hanged himself when the mouse trap flipped on him.

THAT, fine sir, is where we are today in US agriculture.

I apologize that this turned out as lengthy as it did BUT I felt that it was a worthwhile exercise to put these thoughts into email and share them with you because you are a student of the markets and also because you will hopefully be joining us for our Commodity Roundtable in January so a better framing of the situation might help you understand the circumstances they are facing.

As a macroeconomist, how do we work out from under this situation? What is the roadmap for the US farmer? Higher commodity prices are a temporary fix as we’ve seen because as long as the money is available (available credit) and affordable (low interest rates) the inflationary explosion continues on the cost/input side of the equation. Currently we’re shrinking farmer balance sheets until banks won’t be able to lend to them any longer at which time the decisions will be made FOR the farmer not BY the farmer.

[C-Mag]

Someone help me out, a while back we talked about living earthen berms, not hedgerows, but similar.
Need a name of the technique.

[SuburbanFarmer]

Someone help me out, a while back we talked about living earthen berms, not hedgerows, but similar.
Need a name of the technique.

LugenKultur I think.

It’s just lying old wood down, and building earth over it. More square footage and fertilization for the crops.

[C-Mag]

Someone help me out, a while back we talked about living earthen berms, not hedgerows, but similar.
Need a name of the technique.

LugenKultur I think.

It’s just lying old wood down, and building earth over it. More square footage and fertilization for the crops.

Close enough............... it's Hugelkultur........ Thanks

[SuburbanFarmer]

Someone help me out, a while back we talked about living earthen berms, not hedgerows, but similar.
Need a name of the technique.

LugenKultur I think.

It’s just lying old wood down, and building earth over it. More square footage and fertilization for the crops.

Close enough............... it's Hugelkultur........ Thanks

Bah... goofy Dutch.

You putting a few together?