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.)
I own (non-traded) shares in Organic Valley/CROPP, which is a marketing and distribution co-op for organic dairy, meat, and produce. 6 percent dividend. Recently got the financial report and revenues were down 1% while profits were up (though compared against some major infrastructure spending last year). Demand is down a bit and pricing for organic and conventional milk is down significantly to the farmer (though pricing seems to be holding firm at the market, and OV can return that extra margin to the co-op member farmers). They are selling lots of excess organic milk into conventional production, and they will be urging farmers to curtail production going forward.
I’ve owned these shares for a few years — putting my money where my locavore mouth is, so to speak. Will be watching how OV handles this downturn before committing more $. However, I do think that the OV/CROPP model is the sustainable future for family farmers and there will be a market for the products.
I have been involved in agriculture for a long time and today’s situation reminds me of many previous Ag booms or as I once read somewhere, it may not be the same song, but it rhymes. Ag generally has a boom followed by many years of low commodity prices with an occasional year of profitability. At the time of the boom, it is proclaimed that we are in a new era, or it is a new paradigm but then comes the crash. If you were around in the 70’s you may recall the secretary of agriculture, Earl Butz, calling on farmers to plant fence row to fence row because we are in a new era of commodity shortages. In short, I am skeptical of the profitability of most agriculture stocks over the next couple of years. But then again, I could be completely wrong and it really is different this time.