Planning for the Unknowable Future
Written by Michael L Gustafson
Planning for the Unknowable Future
Projecting potential future agriculture commodity prices and financials is extremely difficult and complex. The USDA conducts a massive project every year that collects an incredible amount of data to provide a peak into the potential future for agriculture over the next ten (10) years.
Agricultural Projections: 2010 - 2019
In 2010 the USDA’s Agricultural Projections to 2019 report opens by stating, “The scenario presented in this report is not a USDA forecast about the future. Instead, it is a conditional, long run scenario about what would be expected to happen under a continuation of current farm legislation and specific assumptions about external conditions.”
One of the first observations of the 2010 projection is the flat corn, wheat and soybean prices through 2020. The USDA document states, “The projections are a conditional scenario based on specific assumptions about the macroeconomy, agricultural and trade policies, the weather, and international developments. The report assumes that there are no domestic or external shocks that would affect global agricultural markets. Normal weather is assumed.”
Note the title reads “…remain historically high” as compared to the past. But we all know that the last ten (10) year corn, soybean and wheat prices have been anything but flat and has certainly reset what ‘historically high’ means.
Agricultural Projections: 2020 – 2030
The “USDA Agricultural Projections to 2029.” report was published in February 2020. The annual report has huge amounts of data and information to review and digest as the document attempts to project current and potential future effects on agriculture. Let us continue to use corn, soybeans, and wheat for a comparison, looking back and looking forward.
The 2020 report states, “Over the projection period, prices of the major commodities are expected to rise. For most crops, this will happen slowly in nominal terms. Cotton prices increase the fastest. Trade tensions are likely to affect soybean prices the most, with an expected drop early in the decade and a slow recovery as new markets are found to replace the China market.” The following graphs (provided by USDA) show actual prices from 1998 and future projected prices from 2020 to 2030.
The Last Ten Years
Comparing what actually occurred over the last 10 years (Historical data shown in the 3 charts) vs projected in 2010 shows some stark differences:
Prices fluctuated dramatically reaching new highs in all three grains during the ten years span, not projected by the 2010 report.
2010 report displayed projections showing a smooth slow rise in all three grain prices, while the actual pricing spiked and fell based upon market pressures with significant volatility.
There appears to be a significant peak within each 10 year span of actual prices recorded, for each commodity, dropping to a new pricing ‘norm’ typically higher than the previous ‘norm.’
The Next Ten Years
As previously mentioned, the 2020 USDA report states that “…prices of the major commodities are expected to rise. For most crops, this will happen slowly in nominal terms.” referring to the next ten-year projection.
When we apply our ‘lessons learned’ from the past projections verses the actual results, to the observations about the next ten years in agriculture the following become apparent:
Prices will be anything but smooth. We should anticipate times of significant price variations both highs and lows.
There will be outside pressure on grains (and livestock) that are currently unforeseen that will cause momentary and, in some instances, long term price changes.
New price ‘norms’ will be established after significant pricing volatility.
How Then, Can We Plan for the Future?
Farmers First Trust is not in the business to foretell the future, nor do we claim to know what the future holds for agricultural pricing or economy. However, there are several basic time-honored financial approaches that hold up regardless of the environment:
The current grain prices/economy/interest rates/rainfall/temperature/etc. will not remain the same as it is today. Too many agricultural financial plans are based upon a constant and consistent financial environment experienced at the time the plan was developed. History continues to educate us that the business/financial/political/etc. environment in which we live will always change…it’s just a matter of time when that change will occur and the significance of that change.
Planning for the future should contain several scenarios and combinations of scenarios that provide insight into constructing your final plan. Stress test your plan under these scenarios to expose weaknesses, financially and otherwise, that provide alternatives so you don’t fall prey to the ‘unknowns.’ In retrospect, the unknown could be something that you knew ‘could happen’ but you had convinced yourself that it ‘wouldn’t happen.’
Identify a ‘risk proof’ debt to equity ratio and its associated working capital for your plans. Don’t put your financial future on life support due to lack of capital from your own decision making.
Decisions for Your Future
As a farmer or farmland owner, you make decisions about buying and selling farmland or farm commodities as a normal business practice. The choice to buy or sell is a key part of your plan for the future and should not be made as a standalone decision. Here is how Farmers First Trust can help:
Deferring capital gains and ordinary income taxes. MDPT provides a process, following US Tax Law, to defer the taxes on farm sales up to 30 years into the future.
Let the power of present value work in your favor for a change. When you can defer any cost, such as capital gains or ordinary income tax, into the future, you will be paying that cost with cheaper dollars. Inflation and time actually work in your favor with MDPT!
Farmers and farmland owners can lose from 25 – 35%+ in taxes when commodities and land are sold. The result is net funds actualized can be only 65% of the gross sale. When MDPT is used, the farmer (farmland seller) walks away with up to 95% of the net sale. More capital provides a way to establish future plans and provide a buffer for the associated future uncertainties.
MDPT can be a powerful part of your future plans. You may be selling farmland or farm commodities as part of your business/financial plan. When you incorporate MDPT into those plans, you can enable time honored planning to empower your future that prepares you for the unknown.
Michael L Gustafson is a Principal with Farmers First Trust
White papers from Farmers First Trust can be found here.
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 USDA Agricultural Projections to 2019 (OCE-2010-1), Interagency Agricultural Projections Committee, February 2010
 Office of the Chief Economist, World Agricultural Outlook Board, U.S. Department of Agriculture. Prepared by the Interagency Agricultural Projections Committee. Long-term Projections Report OCE-2020-1, February 2020