So when’s the farm rebound?
The U.S. Department of Agriculture can’t cut its forecasts of farm income fast enough.
Farm income will drop 38% in 2009 from 2008 levels, the USDA said on August 27. The forecast of $54 billion would mark a seven-year low in farm income and is down from a USDA forecast of $71 billion last February and down, down from the $87 billion projected at the end of 2008.
Falling prices for farm commodities are, of course, a big part of the problem. But farmers are also getting squeezed since prices for what they produce have fallen faster than the cost of things that they must buy.
The price of corn, the biggest U.S. crop, is down 46% in the past year, for example. Crop receipts will fall almost 10% in 2009, the USDA projects.
Revenue from livestock has plunged even faster—by 15%–as farmers hit by everything from swine flu to lower export demand have had to reduce herd size by sending more animals to slaughter. Which has, of course, sent prices falling even faster.
What the USDA calls input costs—the costs of things like fuel and fertilizer that farmers buy—have fallen by just 6.4% in contrast.
Deep contrarians and value investors are right to see opportunity here. The world needs to eat. World population is growing. Rising world incomes increase the demand for protein. Climate change is making global food production less reliable just as demand pushes up against global supply.
The USDA numbers don’t say that thesis is wrong—just that value investors will need to be more patient with the likes of Deere (DE), Potash of Saskatchewan (POT), Yara International (YARIY), Bunge (BG), and other farm stocks.
(Full disclosure: I own shares of Deere, Potash, and Yara International.)