Contributed by Kelvin Leibold, Extension Farm Management Field Specialist, firstname.lastname@example.org.
With several years of extremely high grain prices the world of agriculture is changing.
1). We are seeing profits increasing to all-time highs. This is creating a strong incentive to expand land use which could result in a substantial decline in crop prices worldwide.
2). Cost of production has increased but not as much as revenues have increased resulting in motivation for producers to boost output.
3). Boosts in production may outpace increase in demand in the short run. Boosts in production of wheat, for example, will drag down the price of all crops.
I recently returned from Voronezh, Russia which is located in the “black earth zone” where the soils are as black as Iowa and they have enough organic matter you can scrape it loose with your foot. These are ideal soils for raising sugar beets or potatoes. They can also raise corn and soybeans. In the short run they are seeing a lot of demand for feed from the domestic livestock industry. Dairy is growing extremely fast with assistance from the government in the form of interest rate subsidies.
Land values for top land range from $250 to $750 per acre, depending on the quality of the “land title” and no property taxes. If they get adequate rain corn yields can reach 175 bushels per acre. One feels quite at home talking about seed corn companies, machinery suppliers and GPS technology. Labor is a lot different as are certain overhead costs.
Walking the fields of EKONIVA, http://ekoniva-apk.ru/en, gives one a good sense of their vastness at almost 460,000 acres. They have almost 3,000 employees. Not bad for a company that started off with $200,000 in capital less than twenty years ago. This is just one example. Black Earth Farms, http://blackearthfarming.com/about.html, is another operation with over 750,000 acres, mostly owned, which has been operating since 2005. High prices have encouraged the expansion of these and the development of many more farms. Producers from the UK, Germany, Sweden and other western European countries all faced with limited land availability and high taxes have looked to the east for opportunities.
It remains to be seen how competitive these farms will be in the long run. Competition is a function of production costs, land rents, and infrastructure (ex. Transportation costs). Russia also joined the World Trade Organization in 2012 and this will impact their domestic livestock in the coming years as we should export more meats and dairy products into their country.
On a closing note and a little closer to home: in 2012 which was more profitable on the average – an acre of corn in Iowa or in North Dakota? It’s not only the Russians to think about!
An agricultural economics and business website.
Crop Outlook, Crops, Whole Farm