Thursday, September 20, 2018

Summer Iowa Farm Report by Stanford Professor Walter Falcon 2018

Readers, once again, we are privileged to host this summer's end wrap-up on an Iowa farm by Stanford's Professor, Walter P. Falcon. There's nothing else like it that I'm aware of, given his incredibly unique perspective. He is an excellent writer and his writing always contains some real nuggets for those paying close attention. --k.m.

Field Notes from an Iowa Farm: Prices, Politics, and Precipitation
by Walter P. Falcon*
September 19, 2018

These field notes constitute my seventh summer report from our Iowa farm. As readers of prior postings may remember, my wife and I own a medium-sized farm in east-central Iowa that produces corn, soybeans, and beef from a cow-calf herd. We are fourth-generation custodians of these acres—a long-term family relationship that is typical for many Iowa farms. The atypical dimension of our operation is that I am also a Professor at Stanford University, where I have done research and taught courses on the world food economy for more than 40 years. This contrast in surroundings could not be more stark, which I hope generatees field notes of interest to friends at both locations.

The title for this year’s edition is probably redundant. Farmers throughout the world ALWAYS talk about bad weather, low prices, and inept governments. That combination has certainly been front-and-center this year. The 8 AM gathering of farmers at our old Waubeek “restaurant” on the Wapsipinicon River continues to produce interchanges on the latest farm happenings, usually about who or what is to blame for distressed rural conditions.

Trump-trade-wars-with-farmers-as-casualties came up frequently in the conversations. There also seemed to be less banter this year and fewer new pick-up trucks. Perhaps it was the coffee. Last year I argued that the brew could not possibly get worse, but it did—so bad, in fact, that several regulars now carry their own coffee when they go to have coffee!

There has been justifiable concern about the weather, since the 2018 crop year has been strange, even for Iowa. The year began very early, with corn tasseling by Independence Day—completely destroying the old maxim of knee-high by the Fourth of July. Many days of intense heat then occurred during the kernel-filling stage, prompting concerns about low test-weights for the projected harvest. Nevertheless, in late July, both corn and soybeans held prospects for record crops.

Then in August the rain gods became agitated. The local newspaper ran the headline “Rain, Rain, Rain—Heat, Humidity, Tornadoes & Floods.” We received 12 inches of rain in 10 days. Nearby creeks and rivers overflowed; soybeans got driven into the mud from the hard rains and the accompanying high winds; and we dodged a nearby tornado spinning away about four miles from us.

Wet conditions caused white mold and spurred “sudden death syndrome” in some soybean fields—the latter caused by a soil fungus that seems to thrive in damp conditions. And corn ears that had not “fallen” (going from their upright-pointed position on the stalk to the downward position that occurs with maturity) began to collect moisture and to create mildew and ear rot inside the husk. Corn having more than 4 percent damage is very difficult to sell without large price discounts, or to use as cattle feed.

Farmers are also growing increasingly concerned about added propane costs that will be incurred if corn must be dried before it can be sold. They worry as well that elevators and other shipping points will be “full” because of trade disruptions. Crops that had looked so promising on August 1st looked more dubious on September 15th.

There is a tendency always to generalize nationally from local conditions, but the prevailing neighborhood view is that the USDA has overestimated the harvest. These conditions have also created considerable discussion about climate change and extreme weather events. For farmers, the concerns are not about climate science, but are much more about risk, farm profitability, and upcoming conversations with bankers.

The weather uncertainty has been compounded by price and trade issues. Soybean prices plunged to a 9-year low, and in mid-September cash prices in rural Iowa markets were about $7.25 per bushel. That level was only about 70 percent of prices in 2013—even without adjusting for inflation. The soybean supply chain is congested with large stocks in elevators, and uncertainty about the direction of flows is affecting cash prices. Will Midwestern beans go to Pacific ports for shipment to China, as has been the case in recent years, or will they go to Atlantic and Gulf ports for shipment to Europe, as Brazil and the U.S. (partially) exchange customers because of trade disruptions?

At the other end of the crop-price spectrum, hay and straw markets have gone crazy in the opposite direction. Supplies of both are in short supply, largely because of drought in the southern plains and floods in the northern Midwest.

Prices of hay for our cowherd were more than double that of last year, and we also paid dearly—$75 per 3’ x 3’ square bale—for straw that originated in North Dakota! More farmers will bale corn stalks for use as bedding this year, but for reasons of nutrients, tilth, and erosion, we are reluctant to remove corn residues from our fields.

The livestock sector also poses a murky outlook for (the typically large) farmers who specialize in raising pigs and/or feeding cattle. Though helped by low feed prices, both the pork and beef sectors are plagued with large numbers of animals on feed, with uncertain exports to China, Mexico, and Europe, and with high prices for replacement animals.

Given the smallness of our cowherd—for us, a cheaper sport than golf—the economic consequences are not overly severe. Even so, we are looking at a great calf crop, the prize of which is “my” shorthorn steer calf shown below. “My” is used advisedly, since my wife would prefer than our herd be Angus, whereas my family’s tradition was with Shorthorns. I was in special trouble, therefore, when during my Stanford absence, my wife and neighbor had to pull this particular calf in the middle of the night in a driving rainstorm. As for the herd more generally, we have compromised. Half are Shorthorn and half are Angus, and this year my wife won the tiebreaker—our herd bull is mostly Angus. He is massive, fitting his name “Samson”, and he is both a pet and a pest. He is trained to lead, likes people, knows his name, and sometimes behaves like a kitten. Unfortunately, his well-intentioned shoulder nudges can send one sailing.

The implications of commodity prices on land prices are still uncertain as very little cropland is being offered for sale. But negotiations on cash rents are much more contentious this year. There is quite clear evidence that cash rents, many of which were in the $275-$300 per acre range only a couple of years ago, have come down by 20 percent.

This somewhat dismal rural outlook sets the scene for the upcoming midterm elections. Iowa voted for Trump in 2016, where he ran very strongly in rural areas. As an “outside-insider” (especially from California!) it has been especially challenging for me to read the current political attitudes of farmers. They do not talk politics very openly, so I first looked at what was happening at the Iowa State Fair.

Even without the obvious political overlay, the Fair was spectacular. It attracted more than a million visitors—remarkable given that Iowa has only 3.1 million people in total. The traditional cow, sculpted in 600 pounds of butter, stood alongside a butter version of a “1919 Waterloo Boy,” a forerunner to John Deere tractors.

Then there was also the new culinary treat—pork belly with brown sugar on a stick. This specialty was complemented by a demonstration of foot-stomping wine making. Not surprisingly, I drew MUCH anti-California ire when I suggested that this process might actually improve the quality of Iowa wine. And of course there was super bull (3,030 pounds) and superboar (1,165 pounds)!

What was most notable, at least to me, was the Fair’s political overtone—“corn dogs with a side of politics” noted one local pundit. There was lots of campaigning for state-level offices, and also for the races for the U.S. House of Representatives. At the national level, one would have thought it was 2020. Presidential hopefuls showed up in large numbers. One candidate known by almost no one, John Delaney, had already visited all 99 Iowa counties—a “full Grassley,” named after Iowa’s long-term Senator who has made 38 annual visits to all 99 counties an integral part of his political strategy.

The question that I most hear from my liberal California friends concerns buyer’s remorse. Their assumption is that with tariffs, trade, turmoil, and Trump, farmers must be up in arms and ready to change their political allegiance. My conjecture is that many are not changing—at least not yet—and that the reasons are complicated.

Iowa’s population is now more than 90 percent white, with the farmer percentage even higher. Many farmers, and especially rural women, do not care for Trump or his shaky moral compass; however they are not resonating to Democratic minority messaging either. They like tax cuts, and especially the prospects of E15 ethanol that the President and Secretary of Agriculture have been dangling in front of them.

Soybean farmers might seem to have the most to complain about as a result of the Chinese imposition of retaliatory tariffs on U.S. soybeans as part of the ingoing trade war. Soybean exports to China through July 2018 were down more than 50 percent as compared to last year. On the other hand, the value of total soybean exports was off by only 8 percent as a consequence of substituting customers among U.S., Brazilian, and other exporters.

I also sense two other related points. First, farmers seem to be assuming (hoping?) that the trade war will be a matter of months not years. Second, many have not yet “priced” (hedged or sold for forward delivery) much of the current year’s soybean crop. In that sense, the tariff/trade impacts have yet to hit home. When they do, political views may change. Interestingly, the bulk of the soybean harvest will occur just a month before the mid-term elections.

Government policy is also at work. While all of the key farm organizations are on record as preferring trade to subsidies, farmers will certainly cash Government checks! Under a supplemental program announced by the President (some would say cynically as an election-year “sweetener” for his wrong-headed tariff policy), soybean farmers with yields of 50 bushels per acre will receive a special bonus of about $40 per acre.

Finally, crop insurance serves as a safety net. More than 90 percent of Iowa soybean farmers purchase 80 percent, revenue-guaranteed insurance. This insurance contains key price and yield details, but basically, farmers are compensated for any gross-revenue posses—whether caused by yields or prices—of greater than 20 percent as compared to what they received in 2017.

Whatever one may think about farmer political preferences, the economics of their changing that support is much more compacted than first meets the eye. My conclusion is that Iowa will continue to be a fierce battleground state, and that neither Republicans nor Democrats can take Iowa for granted in either 2018 or 2020.

Iowa is not exactly a major tourist destination. With a few exceptions, like the State Fair and the bike ride across Iowa (RAGBRAI) where 20,000 bicyclists (willingly!) ride 450 miles in the summer heat from the Missouri River on the West to the Mississippi River on the East, the common view is that not much happens here.

When my wife and I were growing up, “tourism” meant going for short Sunday drives. Mostly these trips were for the purpose of our fathers comparing the straightness of neighbors’ corn rows. And there were always “Sauerkraut Days” in the town of Lisbon, “Pickle Days” in Walker, plus all of the church-sponsored ice cream socials and dinners.

Then as now, however, Iowa is dotted with interesting historical communities, especially the Amish who settled in Iowa during the last half of the 19th century. We have restarted the short-drive tradition, and one of the more interesting visits was to Hopkington, an Amish community just to our North. The devout members of the community do not believe in motors or electricity, and the local scenes are very bucolic: Large white houses, not electrified, for their typically large families; horse-drawn farming implements and horse-drawn buggies tied up in neat rows at the church; women in long skirts and bonnets and men with bib-overalls and wide brimmed hats; and wonderful baked goods, cheeses, quilts, and other specialties for sale at roadside stands.

Horse sales are big events in these communities, with both draft and driving horses featured at auction. Truth in advertising seems to be the order of the day—though I confess some of the descriptions had me thinking of Washington, D.C. For example, an 8-year old draft horse—“pulls hard from either the right or left side”, and a 3-year old gelding—“leads real well, but needs more time on the buggy.”

The Amish are struggling with the 21st century. Finding enough farmland, in keeping with their tradition of providing all sons with space to farm, is causing some of these communities to break apart. The correct type of schooling is also an issue. And adapting religious norms raises both questions and eyebrows.

It is interesting that a high percentage of all of the roofing of barns and other farm buildings in the entire region is done by Amish men. But how do they get to job sites? If it is too far to drive their horses, they now deem it acceptable to ride in autos with others, so long as they do not drive. A friend of ours is essentially the “Uber-driver” for the Amish roofers of Hopkington. It is interesting, in Iowa and the entire world, what happens when economics and religion clash.

For someone whose day job has been teaching risk analysis and the world food economy, being in Iowa during the summer of 2018 was like living in a 24/7 laboratory. I hope that this experience has given me both the inspiration and ammunition to keep ahead of a fresh batch of bright Stanford students, many of whom have never been on a farm. I will soon know—classes begin next week.

*During the academic year, Walter Falcon is a Senior Fellow and Farnsworth Professor (Emeritus) of international agricultural policy and economics at Stanford University. He spends summer with his wife, Laura, on their farm near Marion, Iowa.