Agriculture is a significant part of this region’s economy, so changes in farm profitability and spending practices eventually will impact the local economy and related businesses in the region. The challenge is to try to understand and anticipate what changes may occur.
Lower grain prices as of late and increasing production costs have caused farmers to adjust their spending priorities. One immediate effect has been a cut in farm equipment purchases, which is challenging machinery dealers and manufacturers. Farmers’ equipment purchases are closely linked to farm profitability.
Because farm equipment has a multi-year life expectancy, an easy way to reduce cash expenses when margins are tight is to limit machinery purchases. Farm machinery dealers are responding by lowering used machinery prices and focusing on equipment repair and servicing. Farm machinery manufacturers are cutting production and reducing their workforce.
Lower grain prices put pressure on the profits of crop farms but are not necessarily negative for everyone in agriculture. Lower corn and soybean prices have reduced the cost of feed ingredients for livestock producers, which is helping increase their profitability.
Cow-calf enterprises are North Dakota’s leading livestock segment. Even though cow-calf producers rely on pasture grazing and hay for feed, corn and soybean meal prices affect calf prices. The profitability of feedlot operations, which buy and grow the calves born in the region, is heavily influenced by feed prices. Lower feed prices allow these operations to bid more aggressively for the calves entering their feedlots.
Large grain volumes reduce crop prices but can benefit companies that merchandize and process crops for food, feed and fuel. Modern grain elevators are designed to handle high volumes of grain efficiently and have considerable overhead, or fixed, costs. As a result, their total costs don’t change much between years with low and high grain volumes. Big crop production in the region helps maintain the profitability of grain elevators.
Lower crop prices and large regional production also benefit companies that process crops into food products and ethanol. This region has a substantial base of companies that produce wheat flour, pasta, sugar, corn sweeteners, cooking oils, barley malt for beer and specialized food ingredients. In addition, four ethanol plants are within 100 miles of FargoMoorhead.
This area will always have businesses that benefit and others that suffer from changing crop prices. But the diversity of the region’s agricultural sector will help buffer the net impacts of these changes to our community.
Frayne Olson is a crop economist/marketing specialist with North Dakota State University.