Agribusinesses enjoying good times, but cautious about future

News
Dec 9, 2011
by DTN
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Agribusinesses are in high spirits at the end of the 2011 harvest season, but increasingly pessimistic about the future, according to the recent DTN/The Progressive Farmer Agribusiness Confidence Index.

Agribusiness owners put their present situation at 118.0, or very positive and second only to November 2010’s 122.2 rating. However, looking ahead, agribusinesses managers who do business with farmers are the most negative about the future since the index’s inception, giving a rating of 88.4 for their business expectations for the next 12 months.

Putting those scores together created an overall confidence index of 100.2, just above the mark of 100 which splits a “positive” opinion from a “negative” one. Overall, the index results are very similar to the first survey taken in August 2010.

“This makes perfect sense,” said Terry Kastens, emeritus professor in agricultural economics for Kansas State University. “Basically, farmers are coming into these businesses and just opening their wallets. For machinery dealers, this is the best it’s ever been in their lifetimes. It’s natural that everyone expects the outrageously good returns of the past year to ease— when things are fantastic, you expect them to become less fantastic. But I’ll bet if you ask them if things will be worse than 2008 or 2009 or any more ‘normal’ year, they would say no.”

Four times a year, DTN asks 100 agribusiness man agers, including bankers, machinery dealers, input suppliers, grain buyers, and others to appraise their current sale of products and services to farmers and ranchers and their business’ profitability as good, bad or normal. Looking out 12 months, they are asked their expectation of sales of products and services to farmers and ranchers, business profitability and overall prospects for business as better, worse or the same as now.

Looking at responses regarding current sales, 65 percent rated sales good and only 5 percent, bad. Thirty percent said sales were normal. Business profitability drew 45 percent “good” answers and only 5 percent “bad”—the strongest response ever. The remainder of respondents said profitability was normal for this time of year.

“Once crops were out, confidence was good. We had some beautiful fall weather and got a lot of lime spread, pre-emergence chemicals and cover crops on,” said Thad Shidler, owner of Howesville Farm Services in Clay City, IN. “Unfortunately, conditions are deteriorating now, with rain and then snow bringing a halt to field work.”

“We are definitely seeing a bump in seed orders and I think people made a fair amount of cash and are looking to buy inputs this year on anything yet this year where there’s a tax advantage,” said Chris Hoegemeyer, operations manager at Hoegemeyer Hybrids in Hooper, NE.

Robert Hill, principal at Caledonia Solutions in North Oaks, MN, who designed the survey for DTN, noted that expectations had already fallen by August. “This suggests things happened over the summer to make it drop. The current situation is better than August, though it is down slightly from a year ago. Perhaps it just hasn’t totally recovered,” he said. “It is likely harvest and pricing results may have been better than what most were thinking pre-harvest. We saw the same pattern last year. I don’t think the small drop from last year is significant.”

Hill points out that although the overall index hasn’t turned absolutely negative, it is down substantially from last November.

He suggests general economic events and the agricultural situation play a role.

“The market still has a hangover from events that arose during this past summer; things that have not gone away, have not been resolved. What has remained the same is the incredibly high level of uncertainty in the financial markets. Where fundamentals might support higher commodity prices, these fundamentals have been overwhelmed by the larger world events such as the Euro debt crisis, the MF Global failure, and the congressional budget impasse.

The MF Global failure is telling in that it has impacted ag producers directly and has shaken producers’ confidence in their ability to minimize risk through futures transactions. Within

this kind of environment, it is easy to see why local agribusinesses are skittish about next year.”

“Economists are predicting lower profits per acre next year,” Hill added. “Cash rents have caught up with profitability, and input costs are rising. Commodity prices have fallen off over the past couple of months. In the end, agribusinesses are expecting their farming customers to be less enthusiastic about parting with their dollars next year. It will be a tougher selling job all the way around,” said Hill. He noted that for retailers who rely on fertilizer margins to support their businesses, the high fertilizer prices and declining commodity prices are putting them in their own profit squeeze.

“Some people are more concerned lately about commodity prices, which are in a mini-slump,” said Hoegemeyer, who says that, in general, what he’s been hearing is very positive. “Prices are down a little bit from where they were recently and input costs are definitely up. But that’s not uncommon in a year when you have large profits.”

“I feel it has more to do with the general economy of the nation and world,” Shidler said. “Looking into a year out, my customers and friends are not going to spend money like they have been. It seems like they are going to knuckle down and wait to see what is happening. But regarding crop prices, everybody I talk to thinks this is just a blip in the market and that next year, things will be back up and good again.”

John Deere’s Nov. 28 outlook for fiscal 2012 holds out

a more optimistic view. “In spite of an unsettled global economy, demand for John Deere products is expected to experience substantial growth,” said the news release, which forecast global sales up 15 percent for the year. Deere expects 5 percent to 10 percent growth in farm machinery sales in North America, and level with the past year’s strong sales in South America. “Sales in Asia are forecast to be up strongly again in 2012,” said Deere, citing a favorable currency impact. Linda Smith, DTN


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