The missing data...  

I have long been suspicious of most microeconomic analysis done on farms when it is based on FBFM (or whatever the equivalent is in your state).  There are several reasons.

First, the data sample is relatively small and not random. Indeed it is self-selected, and I think there are reasons to think it represents a unique sub-sector of any state's farmers. I cannot find any comparisons between the participators and the general farming population, but I suspect FBFM is highly concentrated on smaller and older farmers. Since one reason for continuing I have heard from neighbors who do use FBFM is to "get their taxes done", I'm uncomfortable reaching broad conclusions about the state of farm economics from this (possibly) divergent sample.

Second, I am persuaded FBFM gets little data from larger farm operations. Probably it is because they have their own accountants and tax preparers, or the comfort and skills needed to manage Quickbooks, TurboTax, etc. You can kinda see this in the reports where the numbers from large farms are pretty thin. Without good sampling in this group, any results are certainly skewed.

Similarly, I think FBFM is dealing with older - mostly Boomer - producers. It was very popular when I was younger, but not so much today, and the ease of stating with what you know may be the biasing factor for membership. Again, not a representative or statistically solid sample, IMHO.

Finally, I am concerned about the survivorship bias. We're reaching conclusions about farm business decisions based on winners alone.

Simply put, survivorship bias is your tendency to focus on survivors instead of whatever you would call a non-survivor depending on the situation. Sometimes that means you tend to focus on the living instead of the dead, or on winners instead of losers, or on successes instead of failures. In Wald’s problem, the military focused on the planes that made it home and almost made a terrible decision because they ignored the ones that got shot down.

It is easy to do. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all.

You must remind yourself that when you start to pick apart winners and losers, successes and failures, the living and dead, that by paying attention to one side of that equation you are always neglecting the other. If you are thinking about opening a restaurant because there are so many successful restaurants in your hometown, you are ignoring the fact the only successful restaurants survive to become examples. Maybe on average 90 percent of restaurants in your city fail in the first year. You can’t see all those failures because when they fail they also disappear from view. As Nassim Taleb writes in his book The Black Swan, “The cemetery of failed restaurants is very silent.” Of course the few that don’t fail in that deadly of an environment are wildly successful because only the very best and the very lucky can survive. All you are left with are super successes, and looking at them day after day you might think it’s a great business to get into when you are actually seeing evidence that you should avoid it. [More worth reading]

My hypothesis is the losers in our industry are not so different from the winners, except for luck. We don't like to think random chance has that much influence on success, but between, birth, location, marriage, and weather, an awful lot of what we call success is delivered to us free.

That said, I will readily admit we don't have any other sources we could use to generate any kind of decision aids. But the fact FBFM is the best we can do still doesn't make it good information or the analysis useful for many. In fact, it could be, I suspect, a major paralyzing force for farmers who are trying to stay in the middle of the herd and avoid risk. By not being able to see what the both big players do and what failed producers have done, we can reach some false conclusions, and the competitive level we now face leaves little room for blunders based on bad data.

A consultant caveat...  

I have never been an ardent advocate of consultants for farmers. Indeed, they often strike as a very minimal result for an exorbitant cost. But if you look at the example of consultants use in industry, there may be another deliverable I was discounting too heavily.

The puzzle is why firms pay huge sums to big name consulting firms, when their advice comes from kids fresh out of college, who spend only a few months studying an industry they previous knew nothing about. How could such quick-made advice from ignorant recent grads be worth millions? Why don’t firms just ask their own internal recent college grads?
Some say that consulting firms use their access to collect data on best practices, data that other firms are eager to pay for. But while this probably contributes, I find it hard to see as the main effect.
My guess is that most intellectuals underestimate just how dysfunctional most firms are. Firms often have big obvious misallocations of resources, where lots of folks in the firm know about the problems and workable solutions. The main issue is that many highest status folks in the firm resist such changes, as they correctly see that their status will be lowered if they embrace such solutions.
The CEO often understands what needs to be done, but does not have the resources to fight this blocking coalition. But if a prestigious outside consulting firm weighs in, that can turn the status tide. Coalitions can often successfully block a CEO initiative, and yet not resist the further support of a prestigious outside consultant.
To serve this function, management consulting firms need to have the strongest prestige money can buy. They also need to be able to quickly walk around a firm, hear the different arguments, and judge where the weight of reason lies. And they need to be relatively immune to accusations of bias – that their advice follows from interests, affiliations, or commitments.
All three of these functions seem to be achieved at a low cost by hiring good-looking kids from our most prestigious schools. These are the cheapest folks you can buy with our most prestigious affiliations, they are smart enough to judge where reason lies, and they have few prior affiliations to taint them with bias. They can not only “borrow your watch to tell you the time,” but can also cow you into submission in accepting that time.
Yes the information contained in consulting advice can be obtained elsewhere at a lower cost. Firms could hire most any smart independent folks, or set up a prediction market. But alas those sources don’t have the raw strength of status to cow opponents into submission, opponents who in practice can block changes no matter what a CEO declares.
So mine is a signaling and status story (surprise surprise). The weight of status often decides outcomes, no matter what the CEOs commands, and so CEOs often need to bring out status ringers, to cow opponents into submission. [More]

My summary: we bring in consultants as ratifiers of actions we already know need doing, but require uncomfortable changes in our group.

OK, I can follow that. But for groups or businesses without high levels of dysfunction I assert there is a considerable competitive advantage. They do not need to fork out for expensive and often redundant statements of the obvious; they can react much more quickly in a high-speed business environment; they develop a confidence in their ability to face an uncertain future without hand-holding.

I will grant consultants can add some value to some business groups. But I would suggest, those who can develop a working environment that utilizes equally qualified in-house talent more effectively will achieve a substantial competitive advantage. It may also be that continued reliance on consultants would possibly minimize the chances for such group skills to develop and flourish.

More black swan stuff...

My commentary this week is about black swans, and as luck would have it, they have just wandered onto the baseball diamond.

The most inexplicable fact about perfect games is that, over the past generation, they have been happening more often. In the 100 years through 1980, there were nine perfect games, less than one per decade. Since then, pitchers have thrown 11 more, better than one every third year. Perfect games were once black swans, as infrequent as severe financial panics. Now they are becoming commonplace.
Changing Dynamics
Come to think of it, the same is true of financial crises. Have we, in either arena, merely experienced a spate of bizarre luck -- an unusual drawing from nature’s urn? Or have the internal dynamics of the games changed, so that once-unlikely results will be the norm? Perhaps the modern ballplayer, built for power more than contact, is less able to squeeze out a late- inning hit when needed. Perhaps financial institutions are so conditioned to depend on the market’s judgment -- or on the government’s willingness to prop it up that -- when either fails, they have less room for error, more propensity to panic.
Our financial architecture is based on our supposed ability to forecast; every time an investor speaks of risk-weighted returns, he or she presupposes knowledge of what the risks really are. The odds against 27 straight outs are no longer what they were; what of the odds of a run of bad financial luck? Those who mechanically rely on a historical pattern take the biggest risk of all. [More]

How this all impacts my farm decisions still is unclear. One thing I do know: increased volatility is exhausting. At least at my age.

Which leads me to the suspicion many of us Boomers will look at land prices, machinery prices, and rents and see an exit strategy.

[Update:  Due to a technical glitch the wrong commentary was run this weekend. The "Black Swan" will air later (probably July)]

Now I know why there 50 in the package...

I have always done my own taxes (with mucho help from TurboTax) but one thing that griped me was the only way to get 1099's for my landowners (other than remember to order them from the IRS, of course) was to buy them in Staples, etc. The minimum choice was fifty for about $25 or so - a real ripoff, IMHO.

The good news is I won't be wasting as many in the future.  The BAD NEWS is, as a small business, I now will soon have to report payments of over $600 not just to service providers, but dang near everybody.  You heard me - my JD dealer, Lowes, corporations, you name it.

I read on FatWallet that a hidden gem in the new health care reform law will require a business to issue a 1099 Form to all vendors starting in 2012 if the business purchases $600 or more in goods or services in a year from that vendor.

Currently a business is only required to issue 1099s for payments for services, not goods, purchased from individual persons, not corporations, if the total payments to that person exceed $600 a year.

I find this quite unbelievable. Small business owners buying from Costco will have to send a 1099 to Costco at the end of the year. Because chain stores are often owned by different entities under a franchise agreement, a business buying from one store versus another under the same chain will have to track the corporate entities behind each one separately. What a nightmare.

Because it’s so unbelievable, I had to look up the laws myself. It’s amazing but true. Section 9006 of Patient Protection and Affordable Care Act says (the key phrases are in bold):

SEC. 9006. EXPANSION OF INFORMATION REPORTING REQUIREMENTS.
(a) IN GENERAL.—Section 6041 of the Internal Revenue Code of 1986 is amended by adding at the end the following new subsections:
    "(h) APPLICATION TO CORPORATIONS.—Notwithstanding any regulation prescribed by the Secretary before the date of the enactment of this subsection, for purposes of this section the term ‘person’ includes any corporation that is not an organization exempt from tax under section 501(a).
… …
(b) PAYMENTS FOR PROPERTY AND OTHER GROSS PROCEEDS.— Subsection (a) of section 6041 of the Internal Revenue Code of 1986 is amended—
    (1) by inserting "amounts in consideration for property," after "wages,",
    (2) by inserting "gross proceeds," after "emoluments, or other", and
    (3) by inserting "gross proceeds," after "setting forth the amount of such".
(c) EFFECTIVE DATE.—The amendments made by this section shall apply to payments made after December 31, 2011.

After all the insertions, the amended Section 6041(a) of the Internal Revenue Code becomes (the inserted words are in bold):

(a) Payments of $600 or more

All persons engaged in a trade or business and making payment in the course of such trade or business to another person, of rent, salaries, wages, amounts in consideration for property, premiums, annuities, compensations, remunerations, emoluments, or other gross proceeds, fixed or determinable gains, profits, and income (other than payments to which section 6042(a)(1), 6044(a)(1), 6047(e), 6049(a), or 6050N(a) applies, and other than payments with respect to which a statement is required under the authority of section 6042(a)(2), 6044(a)(2), or 6045), of $600 or more in any taxable year, or, in the case of such payments made by the United States, the officers or employees of the United States having information as to such payments and required to make returns in regard thereto by the regulations hereinafter provided for, shall render a true and accurate return to the Secretary, under such regulations and in such form and manner and to such extent as may be prescribed by the Secretary, setting forth the amount of such gross proceeds, gains, profits, and income, and the name and address of the recipient of such payment. [More - with especially helpful Q & A in the comments]

This gem was buried in the Affordable Care Act, so be sure to add that to your list of grievances with health care reform. Only it is exactly the same concept the Bush administration tried to get passed to close the "federal tax gap.

For many years I have been hearing about the “federal tax gap”.  The tax gap is what the federal government believes should be paid in taxes versus what is actually paid in taxes.  The tax gap is estimated to be approximately $350 billion annually.  The tax gap comes primarily from three areas of noncompliance with the tax law: under reporting of taxable income (by under reporting revenue or over reporting expenses), underpayment of taxes, or non-filing of returns.  A significant majority of the tax gap is created by those that under report their taxable income. 

The federal government is running a $1.6 trillion deficit in the current fiscal year.  Additionally, the new healthcare entitlement program will create huge cash drains on the federal budget in future years.  To help close the tax gap and fund this deficit spending, the federal government has expanded informational reporting requirements of businesses. Under current tax law, if a business makes payments in excess of $600 to a person or a business over the course of a year, it must file Form 1099 to report those payments. One copy of the form is sent to the IRS, and another copy is sent to the person to whom you made the payments.  Payments made to a corporation and payments made in exchange for merchandise are not required to be reported on a 1099. [More]

This could be good news for credit card companies and accountants, of course.  Card companies could do this automatically for a modest fee, and accountants could nag you even more about your record-keeping.  Farmers/spouses with accounting backgrounds might have more opportunity for a second income, especially if they get out ahead of this in their community.

It is just one consequence of the screams for eliminating waste and fraud in the federal budget.  This is one tactic stop some well-documented fraud.  Unless objectors have a better way to cut down the "tax gap" we'll have to adjust.  I agree with the aim, but many probably had hoped a "W & F" fairy could just make it go away if we closed our eyes and wished really hard. This seems like a logical, albeit onerous answer to the concerns anyway.

But it also, I believe is another load for small business and a powerful incentive to merge into larger farms that can dedicate personnel to bookkeeping/accounting full-time - rather that when it rains. I don't see much hope of letting small businesses skate on this one.  We probably have our fair share of under-reporting (heh).  It will also be a selling point and price booster for accounting/tax software, I would guess.

And of course there will be merely oodles of pages in farm mags about this, as well.

Update:  I have been pondering the implications of this regulation since I posted. I gotta believe this will be non-paper reporting - online/electronic submission of information to the IRS. There's just no way in Hades that many 1099's are going to be mailed to Kansas City, etc., dontcha think?

Remind me again...

What I'm trying to accomplish. A commenter points out an interesting development touched on by my earlier post.

Your friend Ron Swanson wants you to know about the story, 'Life Cycle Budgets: The Next Step in Accounting', on the Farm Futures site. You can get to the story by clicking here or typing http://www.farmfutures.com/story.aspx?s=33813&c=18 into your web browser.

Here is what Ron Swanson has to say about the story 'Life Cycle Budgets: The Next Step in Accounting' on the Farm Futures site:
John FYI - since this seems to be the topic of the day. Ron

The article linked is of importance to farmers right now, but it continues some introspection mentioned before. Not only that, Ron, but it directly ties into a book I have plodding though:

An introduction to econometrics may not seem like the stuff that would keep listeners riveted—much less awake—during a long car ride, but Ayres's provocative audio does just that. Ever wonder how an airline decides to lower its prices? Or why businesses have preferred shopper cards? The answer is data, gigabytes upon terabytes of data. Companies are increasingly relying on data and number-crunching statisticians to make decisions, like how much money they can extract from consumers while still retaining their loyalty. Ayres's exploration of super crunching and its influence makes up the bulk of the audio, but listeners needn't navigate a sea of numbers. The discussion is illustrated by eye-opening examples such as how Continental Airlines took customer service to a new, personalized level and how Mexico instituted an innovative pay-for-performance parenting program. The final chapter on standard deviations may have some longing for the printed page or a PDF file with a graph or two, but overall, Lurie's mellow reading will make listeners firm believers in Ayres's refrain: in a super crunching world, consumers can't afford to be asleep at the wheel. [More]

To be fair, I'm not quite finished, but I already suspect this approach to be shaken by the quant meltdown on Wall Street.  Faith in computer-modeling at all levels (even ours) has been shaken by both the obvious economic prediction failure and the vitriolic climate change debate.  From what I have read, ag isn't easily amenable to randomized testing either, one of the author's key tenets.

In fact, as assertions of non-linear, even random brain processes inherent in our decision making are revealed (more later), I place less emphasis on my lovingly constructed budgets than I do maintaining the correct mental orientation to choose alternate courses in the heat of battle.

As one example, I now suspect when I make decisions, and what happened just before have crucial - even controlling - influence compared to the most intricate and logical analysis. Now add in the growing uneasiness in farming minds that all our thoughtful calculations can be swept aside by a hedge fund rumor.

Looking at my figures, my farm operation has been kept afloat and battered in large part by macroeconomic trends that were buried in the assumptions for cost analyses.  One in particular is the tide of land prices.  While accounting standards would encourage us to discount that effect because it can override unprofitable economic decisions, the truth is guys who rode the wave have overtaken cautious and meticulous allocators of where wealth is generated.

This is a second macro trend our economic decisions must take into account: we are in a zero-sum game in grain farming. Furthermore this boundary is hardened by our immobility.  You don't normally give up on 200-year farms for one far away regardless of the economic benefit. 

Long story slightly shorter: budgets/cash flows will be helpful exercises for securing necessary borrowed capital, but of little predictive use (IMHO).  The form and scope of these devices will be set by the whims of the regulators for the lenders. (Hint: always ask your loan officer what the Comptroller is looking at this year). 

Far better, I think, to have a firm understanding of your internal economic compass and some idea of where happiness comes from. One way I try to remind myself is our Mission (Impossible) Statement:

• Farm well. Farm close.  Be the competition in our township.
• Own the land. Unite the land. Improve the land.
• Be the neighbor you want next to you. Bear more than your share of community load.
• Plant trees in the shade of which you will never rest.
• Avoid working at night.
  

When years like 2009 detonate in your face, it helps to remember which way is up.  Calculating the exact degree of catastrophe is of lesser value.

Free at last...

I have been metaphorically chained to my computer, trying to get my books up to date and budget for next year. Since I had declined to engage in this sort of activity for... umm,  several months, it was an all-day chore.  And I'm still not done.

However, I have turned the bookkeeping corner. [BTW, did you know "bookkeeping" is the only word with a "triple-double"?]

Forecasting 2010 is proving a challenge. I'm not normally too pessimistic, but bad results this year have probably spooked me. I also think listening to the Cargill market experts several times, has encouraged me to take the profits I can when I can.  Maybe I've reached the point where I begrudge less the guys who can hold and sell at extreme market tops.

I just want to sleep well and show up next spring.

Update: a loyal viewer sent his helpful reassurance my desk demonstrates an ordered mind.

Let 'em be Senators and governors...

But maybe not board members.  An interesting study on the effect of women on corporate boards and the ensuing changes in governance and behavior of the boards could easily be misterpreted.

Justin Fox outlines the findings.

1. Women boost attendance. Female directors are 30% less likely to not show up to meetings. When there are female directors around, men show up more often, too.
2. Women have a significant impact on corporate governance. Once you've got a woman in the mix, CEOs are more likely to lose their jobs over poor stock performance. You see the same effect when boards have a large fraction of outside directors. Women do not, however, meaningfully alter the level of CEO pay or the amount of it that is incentive-based. (It's worth noting, women are less likely to sit on compensation committees.)

3. Women hurt corporate profits. Well, that's not exactly what the researchers say. What they say is when companies score high on a particular measure of corporate governance (the ability to resist takeovers), having women on the board hurts performance—as measured by return on assets and Tobin's q. However, when corporate governance is weak, they actually give companies a boost. [More]

It was my observation as women began showing up on Farm Bureau, school, and other organizational boards similar things happened.  I think the meetings went better because the discussions stayed away from ribald jokes and farming stories. There was a tendency for a woman to be elected secretary or at least tasked to take notes, which made a quantum leap in board efficiency since you weren't always starting at square one, and the notes were actually legible.

These days locally, women may be carry the larger burden of community governance simply because they volunteer.

As women slowly become more common in the hierarchy of agriculture it will be interesting to see what changes in our traditional patterns of behavior and commerce will result.

Fewer farmers = harsher competition?...

As I sat in a meeting recently with mostly younger farmers (but then aren't they all these days?), they seemed to agree upon the idea that the level of competitiveness is much higher today, which has lowered what they considered ethical business standards.

I demurred.  The stories from my early days, and stories my father told me suggested older farmers were simply less obvious, and without cash rent transparency, the competitive level was harder to document.

But maybe their perceptions were closer to the truth of the matter.

Imagine that you're taking a test in a large public hall. Obviously, your knowledge and confidence will determine your score, but could the number of people around you have an influence too? According to psychologists Stephen Garcia from the University of Michigan and Avishalom Tor from the University of Haifa, the answer is yes. They have found that our motivation to compete falls as the number of competitors rises, even if the chances of success are the same.
The simple act of comparing yourself against someone else can stoke the fires of competition. When there are just a few competitors around, making such comparisons is easy but they become more difficult when challengers are plentiful. As a result, the presence of extra contenders, far from spurring us on by adding extra challenge, can actually have the opposite effect. Garcia and Avishalom call this the "N-effect" and they demonstrated it through a number of experiments. [More]

To be sure the headcount dwindles, but I also think the non-local nature of so much land competition (widespread operations) affects practices even more.  In other words, competing against a neighbor at least prompts some concerns over long term consequences of having to live together.  Competing against a guy two counties over doesn't make that issue seem too relevant, IMHO. 

Pondering the average...

Have you checked your county's average cash rent*?  How close to accurate do you think it is?

The data will be based on information NASS gathered from 700,000 agricultural producers nationwide during the 2008 end-of-year surveys: the biannual cattle survey, the biannual sheep and goats survey, the quarterly crops/stocks survey, the annual acreage and production survey, and the first-ever county-level cash rents survey. [More]

 I think several cautions should be considered when utilizing this data.

First, it is self-reported.  While I do not question respondents' honesty, there is an inherent conflict of interest in putting out your highest rents for public knowledge.

Second, there is significant inertia in cash rents.  Some multi-year rents are still stuck on below market rates and won't show up for 3+ years, for example.

Third, some cash rents are simply tenants taking advantage of clueless owners and operating on figures from years ago.  I know this, since like many farmers who have rented new ground, I have seen the astonishment and subsequent irritation when I offered my bid.

Fourth, I think smart operators are working to find ways to make their rents non-comparable to avoid constantly chasing some reported figure. One reason for variable rents is to do just this.  If a tenant is tiling or improving the ground, building storage, clearing trees, etc. the rent could be altered by the value of that work.

Fifth, these are county averages.  What would really add some value is to have the standard deviation.
 
Still, these numbers will be what folks work with to explain the plight/good fortune of farmers.  Remember, with low reported average rents more of us look like we're making a killing our here.

* Some driving hints:

• select one filter at a time starting from the upper left
• you can skip selecting a county to see a list of all counties
  
• wait for the screen to refresh each time
  
• click for the data
  

No farmer cap, thank you...

It is entirely predictable, of course.  Since few farmers would be caught dead supporting the idea of anthropogenic climate change - an issue too closely identified with the left - few of us want to participate in any wrong-headed effort to limit emissions. (Interestingly, several serious minutes of searching could not produce any polling on farmers regarding attitudes on climate change, so this is my impression from talking to producers this winter.)

Unless you pay us.

Now that the EPA has served notice they don't care what farmers think particularly - or Congress fro that matter - the political reality that SOMETHING is going to happen is sinking in.  The knee jerk reaction, based on long years of very lucrative lobbying, is to 1) get a slice of any "free" money being handed out, and 2) make sure agriculture doesn't have to contribute to the bill.

A system to cap carbon emissions presents both an opportunity and potential pitfall for farmers. Fred Yoder of the National Corn Growers Association said carbon caps would likely cause increased input costs for farmers. Fertilizer prices -- which track the cost of oil and natural gas and have seen major increases over the past year -- could go up even more under a climate bill, he said.

"Our costs are going to go up even if agriculture remains an uncapped entity -- we will be profoundly impacted by everyone else's carbon," Yoder said. "Really what we are looking for is an offset to bring back some of those extra costs."

The potential boon for farmers in climate legislation would be if they could get payments for their conservation efforts to trap greenhouse gas emissions. Farm groups are calling on Congress to give agriculture a significant portion of offsets in the bill.

"It scares all farmers about viability," Yoder told the panel. "If we're going to go down this road, we have to have some kind of mechanism to offset costs."

The issue of carbon offsets in the bill has caused some anxiety among advocacy groups. Offsets refer to projects that would indirectly cut heat-trapping gases in the atmosphere -- such as funding mass plantings of trees, which absorb carbon dioxide, practicing "no-till" farming or installing equipment to capture methane from animal feedlots. Companies could invest in some of these green-energy projects to offset their own emissions. [More]

No sane farm organization executive or leader would open with any other stance. But the point of climate change efforts is to cause changes in our generation/consumption of energy, which translated into "farmerese" means: expensive hydrocarbon fuels and for most of us, electricity.

The problem with this is that any politically tolerable carbon price, enacted by cap-and-trade or tax, would add mere cents to the price of a gallon of gas. I don’t remember the exact data point, but I recall George Bush railing against Lieberman-Warner by saying that it would add 40 cents to the price of gasoline by the year 2020 (or something like that). At a time when prices were rising by well over a dollar in a matter of months, this was not a particularly frightening statement.

But people hate the idea of expensive gas, and it could be the case that even a small potential increase in prices would make it more difficult to pass a carbon price. For this reason, some greens (Dave Roberts, for instance) argue that a carbon pricing system should exempt transportation. I disagree — the idea of pricing is that emission reductions will occur in difficult to predict places, which makes me extremely reluctant to exempt such a large sector of the economy — but I understand where he’s coming from.

But the most important thing to understand about the above is that consumers are far more vulnerable to market-driven swings in the price of gasoline than they are to regulation-driven changes. Any potential government-engineered gas price increase pales in comparison to the spike markets delivered in 2007 and 2008. Given the macroeconomic fallout from that spike, we should look at overwhelming autodependency not in terms of the threat it poses to environmental legislation, but in terms of the danger it represents for economic stability and consumer welfare. Whatever happens to carbon legislation, there’s a strong case to be made that other policies should be adopted to reduce American dependency on oil. You all know my preferred options — an increased gas tax, a move toward congestion pricing, new investments in rail and transit, and adjustment to incentives that encourage autocentric development patterns. [More]

I heave learned to hold the farm lobby in great respect.  If any sector could pull off opting out of the cost of emissions control or even make a buck doing it, it would be us (and the lobbying industry, of course). But the result will be to once again make farmers an "exception".

We've obtained special status on our income taxes for years.  Many of us get unique subsidies for keeping our body temperature close to 98 degrees.  Our real estate is valued by special rules.  Our trucks get special license plates.

No wonder we have people stacked ten-deep wanting to be farmers.  Who wouldn't?  Our specialness can be acquired simply by renting some ground and filing a Schedule F. 

So the one effect will be even more competitive pressure from within and without.  And because the any benefits will be unearned by our own efforts, the curious phenomenon of higher income and lower margins will repeat itself, I think.

Say we get really, really "lucky" and end up with $100 per acre payments for piddling efforts on our part, or even continuing to do what we do now (i.e. no-till).  That payment will be targeted immediately by input suppliers (no-till machinery makers, for example) and landowners (since it accrues to acres, even if paid to operators).

Voila! Since if previous margin m had been the difference of income i and costs c, the equilibrium margin will be the same only derived by (i + 100) minus (c + 100) which of course equals m.

However our margin percentage has dropped from m/i to m/(i + 100).  Admittedly, this is over-simplified, and would take a couple of years to settle out, but as we have found with the doubling of corn prices, way too soon we're operating for similar margins (unless we own the ground and can keep that portion of the increase).  As margin rates decrease risk rises, since you are spending more dollars to make one.

Fixed income increases flow to the scarcest inputs, which is usually land cost.  Consequently, I am figuring any "exceptionalist" outcome for farmers will almost immediately reward landowners and vendors.  It will also reward risk takers who had bid over the market either for rents or ownership of land.

In short, we are making all the right moves at the farm organization level to select for aggressive consolidators.  Oddly enough, the most successful of these rarely are seen in organization meetings. How smooth are guys who can get the folks they are shouldering out competitively to smooth the path for their own replacement?

Our "exceptional" status could come to mean that there will be exceptionally few of us.

One guy, one computer, many repercussions...

I've been following Greg Vincent's adventure with the "Family McFarms" business.  It was a great article, but like some other readers, I haven't reached any different conclusions than I had before before about what this means. 

For my money, these guys come and go. And the idea of buying a farm management company seesm to leap to the conclusion that the farmowners involved are totally under the control of the current managers - little more than assets in the managment company balance sheet.  According to the farm managers I know, this idea is very suspect. In fact, if any connection has been made between tenant and owner (and smart tenants make sure that happens), the book of business could evaporate after current contracts expire.


But I was struck by his after-post about the article containing this paragraph.

How do they benefit their members?
That’s the $1,000,000 question. From what I have gathered from talking with Rosentreter and Mehmen the benefit is that it has helped them grow and become better managers. That is what they see as the benefit. Illinois Family Farms growth is mentioned in the article by the acreage numbers presented. The only information I could gather on the Mehmens’ (MBS) growth is their rise in the subsidy database. This obviously isn’t definitive on their growth, but it is a good indication of how much they’ve grown in three years. I understand that some readers may not see that as a benefit and that’s OK, this is simply one approach this company is deciding to take. [My emphasis]

Unless I'm mistaken, he is referring to the EWG database and analysis of farm subsidies. This is a stunning confirmation of something I suspected years ago: the best information we have on our own grain production industry structure comes from folks many consider our harshest critics.

This reinforces my assertion that NASS is useless, but I don't want to beat that deceased equine. But when one dude with a computer can do more to bring transparency to the farm program than farm organizations and government agencies, it demonstrates a strong preference for obscurity on these matters by producers and government.

Transparency is relentlessly change-producing.  And the Internet makes it sooo easy and cheap. Just like farmers are discovering with articles like Greg's shining bright lights on formerly mysterious transactions, the easy access to subsidy data will also change our business models to cope with scrutiny.  And in case you've missed it, transparency is all the rage nowadays.

I think we are underestimating how profound that change could become.

The next great ag breakthough...

Utilizing all our human resources.

Less radical, and likely to wreak less havoc on the male endocrine system, is just getting a better gender balance in the financial industry and markets. We need to counter the geysers of over-confidence that can lead to dangerous risk-taking, says Jonah Lehrer, a neuroscientist and author of the recent book “How We Decide.” “Perhaps what that requires is a few less men in the boardroom,” he says.
It’s already happening. In Iceland, two women were put in charge of troubled, nationalized banks. In Norway, the law requires that 40 percent of the directors of public companies be women. Sylvia Ann Hewlett, president of the New York-based Center for Work-Life Policy, suggests the same mandate for companies in the U.S.
Michel Ferrary, human resources professor at Ceram, the French business school, calculated the percentages of women in management positions at publicly held French companies to see if gender made a difference in the crashing markets of 2008. Companies such as Hermes International, with 55 percent female managers, outperformed the CAC 40 last year while those such as Credit Agricole, with 16 percent female managers, underperformed, he found.

In the next bubble, maybe the guy-heavy companies will do best. But wouldn’t we all feel better if the highs were lower and the lows were higher? While we work on the problem, have some sympathy for your guy friends in finance. It isn’t easy getting mocked about how you’ve been making a mess of things with your flighty, out-of-control hormones. [More]

Farming badly lags other industries in deploying women into positions of power, and more importantly counterbalancing influence.

Too bad.


Those operations who do will, I believe, verify the implications of the story above.

Long answers...

Are perhaps my only true talent.

A reader poses this challenge:

 I always enjoy your perspective on the trials and tribulations of modern production agriculture. I thought your piece on honoring cash rent agreements was insightful and now would like to hear what you have to say about taking it to the next level and commenting on Greg Vincent's piece about "the ask" in the latest issue. Many have a double standard when they see their sweet heart rental deals threatened by the aggressive expansionist, yet have few qualms about letting a land lord know how much better they could do in today's market. Think you can navigate that one?

In a sense, I have to navigate it - I'm living it.  He refers to an editorial by Greg Vincent, the editor of Top Producer which refers back to the occasion of the Top Producer Seminar.  In part, this is Greg's view:

"I decided about three years ago my job was to ask,” said Richter, who farms about 7,500 acres with his brother and another partner. “I don’t say I’ll give you X amount, but I tell landowners what we do. I tell them what information they’ll receive from us. I ask that if they ever think about changing renters, to please think of us. You’ve got to at least let people know you’re interested.”

“I don’t think it’s unethical to ask,” Lasley said. “Now, I do think there are times when it may be inappropriate to ask.”

Joking while making a point, Richter responded, “Is that before or after the wake?”

I believe most agree that preying on landowners at a funeral, which has been done before, is not acceptable. But simply asking? Even that crosses the line in some people’s minds. Others are conflicted because they want to grow, but feel they can’t and still be a good citizen of the community. This was something the panelists understood, but didn’t feel was that difficult to balance.

“Why would it be bad? And maybe that’s the obvious question,” Spafford pointed out. “I’m not sure who gets upset at the ask. The landlord couldn’t be upset at the ask. But why would the current renter get upset? Is it because he’s paying under the market rate?

“I may be throwing stones out there, and that’s not the intent,” he added. “But maybe the obvious question is: If we’re upset because we’re paying under a market rate, maybe the ask doesn’t matter, because now who’s not being ethical?”

Is it simply that those who are threatened by farm growth and who are making accusations of unethical behavior are actually living in glass houses? Or is farming immune from business reality? [More]

This topic is going to be beaten to death while consolidation proceeds apace for several reasons that underlie the issue rather than the issue itself. So get comfortable - I'm going in.

First, issues of competition should be examined with respect to the cultural atmosphere of the community in which each particular acres is located.  I have blithered on at length between the different points of view of Yankee and Yeoman farming cultures, but a brief recap.

• Yankee farmers tend to be descended from Anglo - American stock(British, Scot, Irish).  Not always but often.  They are several generations in this country and carry in them some internalized values: more libertarian outlook (individual rights are very important), less inter-generational responsibility beyond those necessary for raising children, less tendency to form coops, strong belief in laws over traditions, high activity in government and legal systems, less exclusive communities (strangers are people too), comfortable as traders and dealers as well as producers, and seem to have a stronger attraction to risk. Land ownership is not a mandatory virtue, and remaining in one place not absolutely critical.
  
• Yeoman farmers tend to be more recent arrivals and hence are more numerous from Illinois westward.  The come from Northern Europe and Scandanavia, and often immigrated en masse to establish entire towns from one area. Their attachment to land and community is stronger, as are the filial duties in families (getting sons established in farming, and caring for aging parents, for example).  They have tended to be more patriarchical and less likely to encourage women to own and operate farms. They have a stronger sense of community and cooperation, designating individual rights a lower priority. They are more exclusive, both within families and communities (land should not leave either, as a rule).  As later arrivals who kept their native tongues until about WWII, they were in a poor position to participate in the establishment of the legal and legislative system and frequently chose to avoid both.  As a result, US law does not reflect their values as much as Yankees.

So when talking about how competition should work in farm communities, check the plat book first for last names. If they look like "Phipps", you're in a Yankee county; if you have to check how to spell them, you are more likely in Yeoman country.  Then refer back to the tendencies to get some perspective on where folks are "coming from".

Within each neighborhood, relationships also hinged on, oddly enough, church attendance. Since Yeoman communities tended to have one large Catholic/Lutheran church, discord within the congregation was avoided and even occasionally a matter for the clergy to ajudicate.  In Yankee communities with a flock of Protestant churches, disagreement between local farmers was less concerning - "What can you expect from a Methodist/Baptist/etc.?"  But the larger point, I think is that the ruling from the church body carried the weight of autority and hence a sense of a "right" answer more often is sought, and used as precedent in Yeoman communities.

Which brings us to absolutism. [Legalism].  Consider the questions outlined by Greg and frequently heard in farmer discussions. Most of them arise from strong aversion to tackling these increasingly common issues of ethical behavior on their own merits, case-by-case, without detailed moral or religious guidance.  If only there was an Eleventh Commandment to quote, these headaches would end!

But the question is elusively relativistic, I believe.  Within broad outlines of moral conduct that apply to all people, we have to apply our value system each time and rebalance the good and bad; costs and benefits.  (Of course, this could simply be the Yankee in me talking.) Some of us create some guidelines to prevent covering the same arguments again and again, but even these are subject to revision as the world and people change.

For me, the question is almost one of physics, rooted in time and space.

The first is time.  The old canard about funeral home behavior is a dated issue. The conversations to rent ground are best initiated years, even decades earlier.  My experience is farmers without long range plans are the ones who resort to unfortunate last second actions, whereas those who are committed to be farming (or their descendants) are constantly sowing local seeds of reminders of interest in the land. When you speak is as important as what you say, and can even be game-deciding.  My rule of thumb: you can't be too early.

But what form should this conversation take?  Subject to community tradition (although my guess is Yankee standards are dominating competition practice) certainly numbers could be used, but that can be counterproductive in the long run. Those who live by the high bid, lose by it as well.  But at the same time, the attitude that the local competitor should be given a break is poor logic.  The local should value the land more and bid higher.

Another tactic could be a refusal to name a figure unless it will be considered a legitimate bid that could lead to actually renting the farm. Otherwise, you are simply doing an appraiser's job for free, and escalating a neighbor's rent for what resembles spite alone.

But more important, IMHO is the factor of space (location). Imagine a ring of concentric circles centered on your farm. As you journey outward, you decrease geometrically the power of your personal reputation and connections.  After all, those closest to you have lived with (put up with) you the longest. In fact, I consider the ruckus over aggressive cash-renters to be about 75% caused by simple displacement.

This feeling could arise from the deeply ingrained agrarian principle of farming as a "rooted" occupation, and our exploitation of that image for subsidies. The image we choose to offer even today is of a localized producer.  Until we decide to face the non-farm world as we are, we will continue to struggle to balance our widespread operations with our homey PR feint.  Too often we don't even realize this self-deception is what gets up our nose when a farmer three counties over moves into farm next door.  We really buy into our own spin.

Even the comment that you can't rent ground close betrays the fact that among those who know you best, you are less persuasive than strangers.  This too strikes me as short-term (less than 20 years) planning.  Besides our instinctive reverence for contiguous (or at least nearby) land is so universal, even competitors will grudgingly admit at least understanding your aggressiveness to rent it.  In short, distance alters the expectations of conduct.  It is my impression that producers have discovered acting like a jerk far from homw is not as bad as pulling the same shenanigans at home.The power of shame diminishes with distance as well.  This is a golden opportunity for favorable comparison by locals, it seems to me.

Most astounding to me are neighbors who will resent a rental coup by one to the extent they would prefer an outsider whom they both can despise. Now that's a strategy!

The "ask" could be a common part of prospective conversations are between neighbors who have many discussions, and who in the course of normal communication will touch on business matters.  Especially if couched in terms of a succeeding generation (my son may be farming and...) few will condemn the ethics of laying our your hopes for a future for your farm.  But this grace should not be expected to extend beyond your immediate community.

There is a moral proximity premium. But it can be negated by poor choices with your landowners. If you do not establish a framework of operation that can withstand competition from the outside or even the consequences of terms reached with other landowners, the personal good will you have established can evaporate, only to be recovered with enormous effort and time.

More than that, I have always suspected we undervalue farming close under the pressure to farm large.  Size is lionized on magazine covers, I know. But the subtle grip ACRES alone can have on your thought processes too often skews our value decisions. Nonetheless, BTO's exist because we as a profession allow them to, whether by refusing to invest in land (following some extremely bogus financial advice in the 80's) or by astonishing insensitivity to landowner goals or by a sense of entitlement via family or residence.

In fact, if your gripe is some yahoo from across the state (or even county) can rent ground next to you, it is your business model that needs upgrading - not his. Simple proximity should add $40-50 from efficiency alone (fewer miles, central storage, larger fields,etc.)  Personal reputation should clinch the deal.

Even the argument of "subsidized" bidders is groundless.  Outside sources of income are not only fair, but dang effective.  The question is better framed, "Which renter wants to farm more - the one who will work off-farm or devote personal wealth, or the one expects a "decent profit"? Farmers have long since learned to quietly leave unmentioned a wife's salary that effectively subsidizes the farm when complaining about competitors with "outside money".  Until you find a way to legislate how individuals deploy their own wealth which - despite incessant jeremiads of "looming socialism" - would require more than few revisions to the Constitution, the right to farm for nothing is still inviolable.

Much of the antagonism is rooted in sheer intimidation by size.  This too is bogus, as even economies of scale cannot overcome vibrant, living personal ties.  In my opinion, few people ever rent ground away from satisfied landowners. But big guys just make us crazy because down deep we want to be one.  So we create a stereotype that often doesn't match reality.  Consider this thoughtful message I got recently referring to an earlier post:

I enjoy reading your "incoming" blog everyday, your posts are always insightful and interesting.  As a professional farmer and a faithful member of The Church of Jesus Christ of Latter Day Saints I was particularly interested in your recent post about "large corporate farms".  Your mention of the Mormon church as the largest agricultural operation in the US is to my knowledge correct.  I live and farm adjacent to one such welfare farm here in XXXX, I sometimes contribute time and labor, I also have a younger brother employed on a church owned farm in another state.  Because of my background I thought I could add some additional information if you have any interest.  The Wikipedia articles linked about the church farms and bishop's storehouses are substantially accurate.  In addition to the welfare system farms mentioned, the church owns several large operations in the US and internationally operated under the name "Ag Reserves Inc."  These operations, (one of which employs my brother) are operated for profit and pay taxes as any other company would.  Neither type of farm accepts USDA subsidy payments.  The stated purpose of the Ag Reserves unit is implied by its name, to hold and improve ag properties until which time their production may be needed to supplement the existing demand on the current welfare system.  The church does not typically publicize it's holdings, but a general outline of the purpose and scope of the system is not meant to be "top secret" either.

I have managed a small irrigated operation raising alfalfa, wheat, and corn for 15 years and provided for my family on all rented land.  I recognize many would say I am disadvantaged as compared to any large farm operation.  I strongly disagree.  I literally farm across the fence from the largest farm operation in the US and voluntarily tithe my income to contribute to their expansion, yet I don't fear their competitive advantage or anyone else's for that matter.  The church farms are remarkably well managed and I am aware of some of their advantages, (I wish I could get the same volume refund on new JD equipment they have arranged with Deere after they purchase from the local dealer for example).  Certainly there is such a thing as economies of scale, but there are also competitive advantages I have that don't transfer to large operations.  I am proud of my industry but I am disappointed in our frequent crying foul at anyone we think is too big.  The big guys face the same challenges I do with two more zeros.  

The zero-sum nature of farming has been long denied even as it was obvious to all in the profession. We have very few frontiers to expand, although global warming could change that somewhat. Coupled with the need for very few farms as we deploy enormously powerful technology, a tiny handful of industrial producers will dominate grain farming just as has occurred with livestock and other ag sectors.

One skill these operators seem to have in common may be an ability to express their ambitions in a way that dovetails with the hopes and dreams of those they seek to serve.  And if you have not caught on the the fact that grain farming is a service industry, you're already way behind the curve.

If you are competitive today, it is risky to bet your continued success on outside forces like tradition or professional ethics.  One really good reason is we have no "professional ethics".  Not necessarily because we are all scoundrels, but because farmers refuse to accept any of the responsibilities incumbent with a true profession.

When I suggested licensing farmers, I was well and truly battered by incensed farmers protesting regulations and interference.  But in order to address the tumult of what professional conduct should be and propagate a "Code of the Midwest" (whatever), producers must first of all be  willing to abide by professional standards.  In short, if you think competitors are behaving badly, you too must agree to the same standards of ethical behavior you want to impose on them.  We can have a street fight or an association meeting, but not both.

If we want ethical professional behavior, we need to 1) agree on what that entails and write it down, and 2) raise our hands and swear to abide by them.

Or we can keep pointing out the mote in our brother's eye.

And (literally) losing ground.

Write if you find work...

As bad as the unemployment numbers are globally, this layoff-fest is remarkable for introducing some new aspects of economy shrinkage.  More importantly, there are serious questions about what emplymant will look like on the other side of this recession.

For too many folks, there were already targets on their backs when the slowdown began.  Much of the employment gains in the past decades have been in the ranks of contractual labor, or as I like to think of it: 1099 World.

Structural changes in Europe’s labour markets suggest that jobs will go faster than in previous downturns. Temporary contracts have proliferated in many countries, as a way around the expense and difficulty of firing permanent workers. Much of the reduction in European unemployment earlier this decade was due to the rapid growth of these contracts. Now the process is going into reverse. In Spain, Europe’s most extreme example of a “dual” labour market, all the job loss of the past year has been borne by temps. In France employment on temporary contracts has fallen by a fifth. Permanent jobs have so far been barely touched.
Although the profusion of temporary contracts has brought greater flexibility, it has laid the burden of adjustment disproportionately on the low-skilled, the young and immigrants. The rising share of immigrants in Europe’s workforce also makes the likely path of unemployment less certain. As Samuel Bentolila, an economist at CEMFI, a Spanish graduate school, points out, the jump in Spain’s jobless rate is not due to fewer jobs alone. Thanks to continued immigration, the labour force is still growing apace. In Britain, in contrast, hundreds of thousands of migrant Polish workers are reckoned to have gone home.
Despite having few immigrants, Japan is also showing the strains of a dual labour market. Indeed, its workforce is more starkly divided than that of any other industrial country. “Regular” workers enjoy strong protection; the floating army of temporary, contract and part-time staff have almost none. Since the 1990s, the “lost decade”, firms have relied increasingly on these irregulars, who now account for one-third of all workers, up from 20% in 1990.

As Japanese industry has collapsed, almost all the jobs shed have been theirs. Most are ineligible for unemployment assistance. A labour-ministry official estimates that a third of the 160,000 who have lost work in recent months have lost their homes as well, sometimes with only a few days’ notice. Earlier this year several hundred homeless temporary workers set up a tent village in Hibiya Park in central Tokyo, across from the labour ministry and a few blocks from the Imperial Palace. Worse lies ahead. Overall unemployment, now 4.1%, is widely expected to surpass the post-war peak of 5.8% within the year. In Japan too, some economists talk of double digits. [More]

Another unusual facet of this downturn has been the elimination of an astonishing number of very high-paying jobs indeed in the financial sector  (if we still have one).

Geneva: There have been over 325,000 announced layoffs in the financial sector since August 2007, the International Labour Organization said on Monday, noting that 40 percent of those cuts, or about 130,000 jobs, were made since October of last year. More job cuts in the financial sector were to be expected as the full extent of the economic crisis became clear, the ILO said. The numbers did not include independent contractors and subcontractors.

Some of the largest announced cuts have come from US-based banks including Bank of America and Citigroup, together making up over 35 percent of global job cuts. The Swiss bank UBS, the largest wealth manager in the world, also announced 11,000 layoffs. In a report released ahead of a two day conference set to begin on Tuesday about the future of the 20 million jobs in the global financial sector, the ILO said that while the entire world's economy would feel the fallout, centres like New York and London were to bear the immediate brunt of these layoffs. "The impact will be major, considering that jobs in New York City's finance, insurance and real estate sectors account for one-third of personal income earned in the city," the report said. "The combined New York metropolitan area alone is expected to lose up to 100,000 financial services jobs." The impact on London and other hubs would be similar. Moreover, for each financial sector job lost, one to two other layoffs would be expected, feeding a vicious cycle of economic downturn. In the US, some 4.1 million people worked in the sector while in Europe, in 2006, 5.6 million people were employed in finance. [More]

If you cross these two trends, and then add in spiraling employee health care costs, wouldn't it be reasonable to predict any recovery would point toward a vastly different workforce structure?  Will there be so many unemployed highly-skilled workers that companies can draw from a pool without offering any benefits or promises for the future?  For that matter, what promises would folks believe after this job-shedding?

In addition, if our auto industry fails, eviscerating one of the last union fortresses, we will have reduced employment security across the spectrum of workers.  Economists often argue that such binding employment arrangements are cartel-like in nature and bad for the overall economy.  I agree, but in the absence of any job security, I'm not sure we know how bad productivity could get.

More uncomfortable yet is the growing realization that technology and other forces are conspiring to reduce the amount of workers needed.  Look at our farms, for one example.

So if consumption returns at a much lower pace as permanently frightened citizens save much more, I think is unreasonable to expect employment to match population growth.  Maybe as Boomers shuffle slowly off-stage more openings will occur, but this 401k-evaporating recession has undoubtedly postponed that overdue event.

I think Time got it right.  Your number one asset is now a job - not your investments or house.

Human capital is worth quite a lot. Gary Becker, the Nobel Prize-winning University of Chicago economist, figures that in a modern industrialized economy, 75% to 80% of a person's economic output comes from human capital (as opposed to, say, land or machinery). Of course, during the bubble years (first stocks, then housing), the noneconomists among us didn't exactly think about it that way. "People became mesmerized by how rich they were," says Becker, "and didn't realize the crucial asset they had in their earning power."

The tide is now turning. To see how, let's check back in with the savings rate. After it went negative in late 2005, it meandered back into minimally positive territory. Then, last year, it started bounding upward. By the fourth quarter, we were saving 3.2% of what we brought in. In January we hit 5%. No longer are we disrespecting our paychecks, treating employment income as an also-ran source of wealth. "People are realizing their job is their real source of financial stability," says Ellison, "that they have to live within the means of their job, not within the means of their assets. We're relearning how to create wealth."

As we do this, we'll start looking at our jobs differently. If that thing you do at the office every day is suddenly your sole financial lifeline, you'll approach it more cautiously. When you've got only one chip left, you're much less willing to put it on the table. In this new era, a predictable salary is more appealing than the chance of scoring big with bonuses and stock options. And having a government job — one of the last bastions of security — looks even better. One day soon you might find yourself perusing a list of the fastest-growing, best-paying professions, trying to picture yourself as an actuary. And instead of spending thousands of dollars to build a new deck, you're more likely to use that money to take a class.

Careers expert Dick Bolles sees another shift coming. If as a society, we turn our attention back to work — if we dote on our jobs as much as we did on our homes and portfolios in an earlier era — then we'll have to start asking deeper questions about why we do what we do. In December, Bolles noticed that a book he wrote in 1970 was back on the best-seller list. What Color Is Your Parachute? is about job-hunting and career-changing, but it's also about figuring out who you are as a person and what you want out of life. "Why are people rushing out to buy a book that talks about more meaningful work?" asks Bolles. "They're realizing they have to rethink work if they've got no Plan B. It reframes the whole issue of, What type of work am I willing to do?" [More]

This is why I think successful farmers will outsource LESS of their business activity, contary to the ag media paradigm of a team of experts informing every decision.  At some point the producer simply becomes a general contractor arranging for subs to do work.  It strikes me as better plan to constantly invest in in-house human capital via education and expansion into services now "off-shored".

In other words, farmers who can do double entry accounting, spot nematodes, program yield monitors, and troubleshoot hydraulic systems will have the human capital to compete more powerfully with those who hire out.  I know, the constant promise is such service providers "more than pay for themselves", but absent any serious effort to try, we never really know.  I think it's worth testing, as I have run into several producers whose in-depth knowledge far surpassed hired expertise.

At the very least, cooperative efforts between even competitors to share experise could be another tactic. This captive-capacity approach could be the core of farming companies I think will arise to dominate grain production here in the US.

For individuals, work will be the new "wealth" for the near future.  [I just realized this new axiom implies that staying healthy then becomes absolutely paramount!]

This imperative to make your human capital as deep and high-utility as possible. While specialization may still be a strategy, being able to adapt and take on different types of work could be more career-stabilizing.  Especially on farms.

Economic justice first...

In a wonderful dinner conversation with old friends this weekend, I found an edge to some opinions that surprised me.  These are folks I admire and deeply respect.  To some extent, the feelings (more than their thoughts) are partially captured by this post on Andrew Sullivan:

A reader writes:

I live in Santa Cruz California where the median home price shot up close to $900,000 at the peak of the real estate boom. My wife & I realized that there was no way that we could afford to buy a home responsibly, so we reluctantly decided to rent forever. Many of our friends who are financially reckless decided to buy condos with no money down adjustable rate interest only loans.
I don't understand why the government should bail these people out. If I had known that reckless financial behavior was going to be bailed out I would have bought one of these homes. I know that we need to fix the economy, but I feel like we are going to be punished for being responsible.

I understand the systemic dangers of letting a wave of foreclosures trigger another wave of collapsing demand. But I also know that I never took out risky loans, diligently paid back three separate mortgages, saved for my retirement, and now pay more than half my income to the government ... to give to those who gave in to greed, wishful thinking and recklessness. Another reader adds:

No one is talking about MEWs (mortgage-equity withdrawals), so it must be the elephant in the room. What really frosts people is not that their neighbors bought "too much house," because often it's the same as their house --- simply purchased at a much higher price. Rather, it's the Toyota Highlander Hybrid in the driveway, purchased with money from a MEW (via a cash-out refi), that pits neighbor against neighbor.  The responsible neighbor is reminded EVERY DAY that he is paying for the irresponsible neighbor's Highlander, and probably the deck and the big TV as well. 
Until there's a plan that deals with this inequity, the anger will not go away.

Nor should it.

[Link]  [My apology for excerpting the whole post]

Andrew is not given to high dudgeon and calls for retribution, so his reply caught me off guard as well. And heaven knows the sentiments expressed by his reader are quite common.

But if it is important to not reward/excuse/compensate for bad decisions, do we truly believe it will end there? I agree it is not fair, and has no justification in our American economic system, but my question is how do we prevent their just consequences from spreading to the "righteous"?  In short, if we simply let the housing market find a bottom on its own, is there not a significant chance we will in the process drag underwater folks who saved for a 20% downpayment and affordable payments as well?

Many of these comments seem to come from folks who have been in homes (and seemingly safe jobs, to boot) since before the great run-up, and it will take at least a few more years to destroy their equity.   But is the point that people who were given a promotion and moved to the Los Angeles office in 2007 should have sought out what few wretched houses a sensible price would buy (if any) instead of using realized gains from their sale in Topeka to buy stay within very conservative underwriting/appraisal standards?  That would have required an amazingly dour outlook.

When house prices drop by 50%, it's not only the wastrels they describe who lose, but folks who simply did not have the good fortune to have geographically fixed employment.  I can see the point of outrage in helping bad actors, although the statements about current taxpayers having to pay is nonsense.  Taxes are being cut - for crying out loud!  Any pain we will feel will be in the future, so unless critics are suffering pre-emptive financial agony, that complaint rings hollow.

Worse still, most economists see little hope of reversing the deflationary spiral until housing prices at least stabilize.  We have lost unstable demand from home-equity withdrawals to be sure, but that demand for goods and services was nonetheless real demand which produced real GDP.  I suspect few of the bailout critics have beeen laid off, but my sad estimate is a majority of Americans will experience some employement crisis before this is over, whether by actually being laid off, lower salaries, loss of advancement due to superiors who can no longer retire, lower commissions, loss of investment income - [insert your personal money headche here].

Is punishing the foolish an open-ended exercise to be continued until the collateral damage stops just short of your own door?

As well, too many who scorn the idea of helping the foolish sadly will be victims of simple bad luck as their own income casualties suddenly makes their mortgage too much.  It will be interesting to note if there is a tipping point for home/asset devaluation and job losses where the combined effects moves public opinion to look beyond the desire for justice for free spenders.  My guess would be 50% and 9%, respectively

Given the linkage we now have to each other, watching others fall off the cliff because they walked too close to the edge and remarking matter-of-factly they deserved it ignores the ropes that tie us all together.

Permit this analogy to the banking crisis that now, I think, applies to all of us.


The credit crisis as Antarctic expedition from Marketplace on Vimeo.

The same perhaps instinctive desire for "getting what they deserve" pops up in our sector among those who refused to pay high land prices and rents.  This is one reason I have been surprised at the gullibility that variable rate cash rents will protect us from predatory risk-taking competitors.  Hasn't it occurred to variable-raters that those bids can be escalated as well?

At church on Sunday, I heard a new one. A landowner was asking a reasonable-but-not-cheap cash rent PLUS  1/3 of the crop.  When it comes to competition for land, you can run, but you can't hide.

And if grain prices [continue to] tank, doubtless there will be louder cries for making sure high-rollers suffer the consequences, but in a similar way, that will come back to bite many of us, I'm willing to bet. 


I also bet many farmers who rail against bailing our homeowners will have no qualms about lobbying to raise the mandate or other ag bailouts.

Some time ago, I would have agreed more with justice-seekers.  Two factors have altered my position: 1) I have found it a cheerless result; 2) I become more convinced every day much of what I claim as the product of great decsions and hard work is actually luck.  There but for the Grace of God, etc.

Most importantly, in this economic crisis, demand for economic penance may border on self-destructive. 

Corn acres and sunk costs...

As we awake this morning hoping yesterday's markets were a really bad dream (no such luck), more fuel is dripping onto the flaming controversy of corn acres.  One assertion is many producers had time last fall to apply some very pricey fertilizer and have prepaid some equally expensive seed, hence they are locked in to growing corn.  This is a strong argument.

I suspect this outlook also has to do with changing your mind, something we are not very good at as a profession.  Our customers rely on it as well. It shows up in the deeply ingrained, albeit economically questionable, conviction that rotation will pay off better in the the long run than trying to grow what the market seems to be wanting each year.

But if you have parted with the money, that is a sunk cost, and should not be part of your break-even calculations for your crop mix. 

In economics and business decision-making, sunk costs are costs that cannot be recovered once they have been incurred. Sunk costs are sometimes contrasted with variable costs, which are the costs that will change due to the proposed course of action, and prospective costs which are costs that will be incurred if an action is taken. In microeconomic theory, only variable costs are relevant to a decision. Economics proposes that a rational actor does not let sunk costs influence one's decisions, because doing so would not be assessing a decision exclusively on its own merits. The decision-maker may make rational decisions according to their own incentives; these incentives may dictate different decisions than would be dictated by efficiency or profitability, and this is considered an incentive problem and distinct from a sunk cost problem.

For example, when one pre-orders a non-refundable and non-transferable movie ticket, the price of the ticket becomes a sunk cost. Even if the ticket-buyer decides that he would rather not go to the movie, there is no way to get back the money he originally paid. Therefore, the sunk cost of the ticket should have no bearing on the decision of whether or not to actually go to the movie. In other words, it is a fallacy to conclude that he should go to the movie so as to avoid "wasting" the cost of the ticket.

While sunk costs should not affect the rational decision maker's best choice, the sinking of a cost can. Until you commit your resources, the sunk cost becomes known as an avoidable fixed cost, and should be included in any decision making processes.^[1] If the cost is large enough, it could potentially alter your next best choice, or opportunity cost. For example, if you are considering pre-ordering movie tickets, but haven't actually purchased them yet, the cost to you remains avoidable. If the price of the tickets rises to an amount that requires you to pay more than the value you place on them, the cost should be figured into your decision-making, and you should reallocate your resources to your next best choice. [More]

It simply doesn't matter what applied fertilizer cost, since that money is gone. When you drop input costs like that out of your profit calculations, corn looks like a winner even at dismal prices.  Beans simply lack the gross income.

This may be what is going on in farmer brains, but conveniently set aside too often is the whacking loss that will still be realized since despite not being used to compare planting choices, sunk costs have been paid.  For those have there by constrained their range of choices by prepaying, two words: accrual accounting.  Letting a tax decision you made waaay back in your career (to advance crop input costs) lock in your actions regardless of market signals may not optimize your results.

My guess is shifting to accrual accounting would drastically improve our thinking process by neutralizing our inordinate glee from postponing (NOT eliminating) income taxes.  You're talking to a man of 60 who's trying to figure out how to unwind these strategies.  It's not easy or cheap.

Nor are those applied inputs necessarily all sunk costs.  To be sure, if you applied N you're hosed, but the P & K could be better considered unfortunate, but still valuable inventory additions. After all they are still out there, right.  And they could be available for corn in 2010.

Those of us who have yet to apply/buy such inputs have a more different set of numbers - which demonstrate a loss that may be preventable.  While we don't deserve the good fortune of a break because we were poorly prepared last year, we don't have to squander our advantage right now.

Sunk costs are hard for our brains to deal with rationally.

Last March, I decided to tackle my physical fitness by setting some big goals for myself. One of those was to go from couch-potato to marathon runner in about six months. To goad myself into action, I paid about $100 (non-refundable, non-transferable) to sign up for the Portland Marathon (which is being run at this very moment).
For a while, this seemed like a brilliant idea. Having paid for the marathon in advance, I was motivated to train so that my money didn’t go to waste. I began to run with a group. I lost weight. I felt great.
At the end of May, however, I hurt myself. I took some time off. I didn’t worry too much, because there were still four months left before the marathon. But when I tried to return to running, the pain persisted. I went to see a physical therapist. June turned to July turned to August. Eventually I decided that maybe I could walk the marathon. I’d paid $100 for it, dammit, and I wasn’t going to let that money go to waste!
Over the last couple months, however, I’ve come to realize that I’m engaging in the sunk-cost fallacy again. The fact that I’ve already spent $100 for the marathon is meaningless. It’s a sunk cost. It’s not recoverable. What matters is the future cost in time and money. And, as it turns out, health.
I could have continued to push myself to prepare for the marathon, but the most likely result would have been additional doctor bills and physical therapy visits. I would be spending future money attempting to make past money “good” again.
Instead, I’ve changed my focus.

I’ve begun to prepare for the 2009 Portland Marathon. I’m running short distances (three miles) a couple times a week. I’m lifting weights to build my leg strength. Meanwhile, I’ve learned a lesson. In the future, I won’t sign up for the marathon until later in the summer, when I’m sure that I’m physically ready to go. [More]

This admittedly off-topic example of sunk costs illustrates how much we dread realizing a loss.  As long as the grain is unpriced we can, with varying degrees of legitimacy, fantasize about making a profit.  Once we cash the check, those happy moments are no more.  Brains don't like those feelings.

Overall, I think a fair analog for corn acres could be percent of normal fall applications that actually got spread. As cash corn drops below $3 the odds that any of the high-priced fertilizer and other inputs gets fully utilized drops with it.

I may well be wrong on corn acres, and they will be much higher than I think. But a case can be reluctantly made that this year is one to minimize losses versus maximizing profits.  In that case, coping rationally with sunk costs will be a crucial component of our planning.