Farmers are producing too much wheat and corn, dragging down economic growth and pushing some farmers out of business.
Farming has unique challenges. Start-up and expansion costs are large, investments take years to mature and the nation’s vast network of farmers is too disjointed to cooperate on production cuts. This can result in an economic enigma: rising output amid falling prices.
“We call this the irreversible supply curve,” said Chris Hurt, an agriculture economist at Purdue University. “You get a period of higher prices where there becomes a feeling among producers that it’s a new era, and they’re willing to make big investments. It is the big fixed cost once you have invested in [new land or equipment], and you can’t reverse it.”
Global prices of wheat and corn have tumbled since 2014. That’s squeezed many farmers’ profits and dented economic growth in 23 U.S. states.
Still, it often doesn’t make financial sense for farmers to pull back production. By the time investments in certain crops or livestock mature, supply could have already begun to swell or prices could have dropped dramatically.
Some farmers hope to ride out inevitable price swings. Rodney Schronk, a central Texas farmer who grows wheat, corn and other crops, began growing more corn despite a global oversupply and low prices. He acknowledges increasing his production adds to an already oversaturated market.
“Global markets are just flooded,” Mr. Schronk said. “It’s one of those situations where you choose what you’re going to lose [the] least money on. We still have to plant those acres. We have to eat. If everything works perfectly…we still can make a small profit sometimes.”
The hefty initial price farmers pay to get land into production or to expand production explains, in part, the excess.
“The farmer’s got his combine sitting there at $750,000, he’s got his tractor sitting there at $500,000,” said Houston-area farmer Allen Kaminski. “He’s got on hand what he’s already making payments on.”
Timing also is an issue. By the time a farmer reacts to increasing demand and rising prices, so have his competitors. Supply levels creep up and prices sag.
“If there’s a demand for watches or electronics, it’s easier for a manufacturing plant to add another shift, flip a switch and and add more,” said Tim Woods, an agriculture and business professor at the University of Kentucky. “They can add more almost immediately. You can’t go to a farmer and tell him, ‘We need your cows to start having more babies.’ It takes time.”
Even if these unique agriculture quirks didn’t delay farmers’ ability to respond to supply and demand, it’s hard to get those working in agriculture to collectively pull back production in times of low prices. The network of farmers that make up the U.S. agriculture sector is vast and often disjointed.
“Those kinds of voluntary strikes or voluntary destruction of production never work,” said David Anderson, an economist in Texas A&M’s Department of Agricultural Economics. “You never have enough participation, and you have very mixed feeling among farmers about whether that’s the right thing to do.”
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Low Food Prices Are Hurting Farm-State Economies (Dec. 6, 2017)
The Transformation of the American Farm, in 18 Charts (Dec. 28, 2017)