Swanson: 'It's not about you'
With farmland prices reaching crazy-high prices mixed with ultra-low interest rates, agricultural producers' heads might be spinning.
But Michael Swanson, an agricultural economist and Minneapolis-based consultant with Wells Fargo, tried to assure producers at the 17th annual Diversity, Direction and Dollars Ag Forum at the Ramada Grand Dakota Lodge in Dickinson Tuesday.
While he does not believe the price of farmland is reasonable, it is about policy, not farmers, he said.
"You make decisions based on the prices that are put out in front of you, the input and output prices, and the input and output prices are dependent upon outside factors. It's not about you," he said. "For example, corn prices look at oil prices. There is a strong feedback loop in the system, but it's not about you."
Risk, though, is nothing new.
"(Farmers) understand the roll of the dice, but that's not the big deal. The big deal is the uncertainty," Swanson said. "The things we can't quantify that happen once in a while and they move in huge directions unpredictably. Your world is more about uncertainty today than risk, which is ongoing.
"The real world is a system and systems by definition have parts that interact with each other and interaction makes predictability impossible. But unpredictable does not mean you can't look at the pattern and understand the system. What unpredictable means is that you can't put a value on something and the exact moment of time in the future and be right."
Swanson said when looking at economic performance, there are four categories to examine: personal consumption, business investment, net trade and government.
"What's got people is modest employment growth at 3.1 percent and below average real wage increases, which is important to the farm sector because if we're going to feed grain to livestock, we've got to understand what it is worth to the consumer and what they can buy for," he said.
Phil Westra, professor of weed science at Colorado State University, asked how much of the U.S. economy is made up of agriculture. Swanson said it is a $375 billion industry.
Swanson and the producers seemed to agree that government fiscal performance being "out of whack," which leads to uncertainty for farmers.
"The problem with fiscal and monetary policy is that government is relying on a factious, imaginary line to predict a potential GDP figures and
generate a lot of policy," Swanson said. "That's uncertainty, not risk, because if they realize they're wrong and have to adjust to a new line that is much lower, they're not going to have as much revenue and might have a lot more inflation than they anticipated.
"If they're wrong, you get a shock to the policy and sometimes a much different interest rate environment."
The problem, in a flat real wage environment, Swanson said, are some prices going up faster than others.
"When you look at the cattle sector and the price of beef, it has risen so much faster than the general inflation index and people are look at beef and saying that's the thing they can't afford," he said. "The beef side has been much stronger and higher in price and that's a signal.
"When real world wages are flat and beef is the only nail that sticks up, it's also the nail that gets hammered down, in terms of demand."
Dairy producers had similar fears late last year when U.S. lawmakers failed to pass a farm bill before Jan. 1, which could have caused milk prices to spike to $7 or $8 per gallon without the last minute extension that was passed.
The uncertainty that not passing a new farm bill to replace the 2008 bill that expired Sept. 30 could have chased customers away, said Gary Hoffman, North Dakota Dairy Coalition executive director.
That could have halted domestic milk consumption, which would have struck dairy producers in the wallets.
But with or without uncertainty in the national economy or within governmental policies, Swanson said agricultural producers across the nation need to be aware of when the best time is for them to buy land and when it is in their best interest not to expand their business and hold off on making land purchases until another time that may be better for them.
"Farmland is a great asset," he said. "But I want to argue that there are times when you should acquire it and there are times when you should sit on your hand.
"It's really about the bushels that can be produced on that land, not the acres."