Last week we talked about agriculture and some of the benefits that our largest industry in America and in Montana provides us. This week we want to discuss some of the unique issues facing agriculture. Agriculture is all around us; yet, most of us do not have a good understanding of what goes on and some of the basic underlying facts affecting agriculture in the world marketplace.
Our agriculture producers in the food chain are called a “price taker.” This means they do not have control over the price received for their grain or livestock product. They can withhold supply and it will not affect prices given the constant amount of demand. As you move through the food supply chain from the producer level to the retail level, the market structure moves from the “price taker” to “monopolistic competition.” By this, I mean, we have highly concentrated companies that handle the bulk of the product. For example, the top four beef-packing companies control in excess of 83 percent of the daily slaughtering of livestock. In flour milling, 55 percent of the market is handled by three companies: Cargill, Archer Daniels Midland and ConAgra. The top five grocery retailers in the United States control half of the sales. This would be Wal-Mart, Kroger, Albertsons, Safeway and Ahold.
In many manufacturing venues, supply can be changed very quickly to respond to increases in demand. When there is an increase in demand for small grains, it is a four- to six-month response period. When there is an increase in beef demand, measuring the time a cow/calf operator decides to build his herd up to meet the demand until more beef reaches the consumer’s plate, it takes three years! This is due to the lengthy life cycle and the time it takes from birth to finishing of the typical beef animal. This three-year response time in agriculture is quite a long timeframe when you consider that most other manufacturers may only need to re-tool and hire extra assembly line workers in order for their production to increase when demand is strong.
Weather, supply, demand and/or trader expectations all have a huge impact on our product prices. Wheat prices in 2012 averaged right under $8 per bushel in the U.S. In 2009, it was under $5 per bushel and in 2004 it was approximately $3.30 per bushel. We are on an upward trend, but forces that are beyond the producer are what dictate the price. Since 2006, in four out of the six years the average wheat price has been above $6.50 per bushel. Many are calling these the “Golden Years” of agriculture. Most commodity prices have been up as well. With the farmer being a price taker, how do they survive in this type of a business environment? They thrive through estate planning, business management, the ability to grow tremendous crop, and being as efficient as possible by incorporating, for example, properly sized equipment for their operation.
Dave Heine is a licensed real estate broker, a certified general appraiser and an accredited rural appraiser. He works at Premiere Real Estate Professionals, Inc.