Greater Efficiency Yields Lower Prices: A Vicious Cycle

Sprayer 375     I disconnected my rate controller from my sprayer today and removed it physically from my tractor.  Back in the day, we never used to spray crops because the herbicide technology wasn’t available.  So we hoed all summer.  I certainly don’t want to go back to those days.

So it is now 2014 and I still carry a hoe in the back of the truck.  However, that rate controller actually made it easy to spray any particular volume of spray solution no matter how fast I drove.  When I combined that technology with the RTK guidance, it made my springtime work so much easier, efficient and safer.  At the end of the day of course that’s what’s we want, greater efficiency.  As I’ve said many times for, it’s agriculture’s greatest vicious cycle.

I say that because farmers are continually caught in the production efficiency paradigm.  Over the last few weeks we have seen the grain markets turn into bear heaven.  Prices have gone down and it’s a little bit different this time.  Where we had the corn demand driven market over the last 5 years, it is somewhat over now if we get benign weather the rest of the way.  Ending stocks of soybeans are off the charts and corn ending stocks could easily be over 2 billion bushels at the end of this year.  In other words, we are in a supply driven market, just like we used to be, back in the day.

Back in the day for me goes back to the 1970s.  What I think about is an agricultural production machine, which constantly pushes out big crops.  In the past the inherent nature of our agricultural economics meant that we’ve always had a propensity to overproduce leading to a price environment, which is always challenging the cost of production.  This all changed with the advent of the ethanol revolution in the United States and the renewable fuel standard.  It took quite some time for us to build up production levels to satisfy all this new demand.  If we don’t have a hiccup in the next few weeks, it looks like 2014 represents that time when supply has finally overtaken that huge demand.  This might be an extended period of low prices.

Of course we got here through sheer determination and the drive toward greater efficiency.  The last few years of big profits in agriculture have been reinvested into technologies to boost production.  Yes, it is true that the last few years US corn production has actually decreased and soybean production has been somewhat stagnant.  We’ve had greater acreages planted, with everybody getting more efficient.  So like it or not, it was only a matter of time before our efficiency caught up with us and in 2014 we might be here.

As many of you know this past year along with my super sprayer and RTK technology I am also using guidance on an older tractor and combine.  When I look at the job it did this spring I am quite satisfied and I only wish the people who went before me could have the pleasure of looking at those straight rows.  Underneath that satisfaction is the realization that everything was working efficiently and because of that I should have greater profits ahead.  Sometimes it doesn’t work out that way, but that’s what I’m hoping for.  Multiply that across the whole North American farm belt and you have tremendous production and a lowering of costs.  The only problem is you need those lowering costs because you’re getting less revenue.  That’s the efficiency vicious cycle.

The efficiency vicious cycle does not end at the farm gate.  Our grain companies are trying to manage and process and transport greater amounts of grain efficiently and reduce their costs.   At the same time, new land is opening up in places like Russia, Brazil and Africa.  It is opening up on a bigger scale than many of us can imagine.  Our 50 acre fields in Ontario and even smaller fields in Quebec  have become structural barriers to our own efficiency.  If you have a 500 hp combine with a 40 foot Draper head, you move it on the road more in a day the time you need to combine in those 50 fields.  The high cost of land in places like Ontario reduces our field efficiency.

There is no cure for this except to get on that vicious efficiency cycle.  When I first started spraying I had about a 15 foot boom and now I have a 90 foot boom which is guided to the field by itself.  So what is next?   I don’t know.  In some ways we need even newer technology to make us that much more efficient and try to get there before the other guy.  Maybe that will involve drones, or something I cannot even imagine.  However, its coming and you need to catch the next wave.  Avoiding that agricultural efficiency vicious cycle will mean you just get passed by.