A low-margin outlook ahead for US farmers

A low-margin outlook ahead for US farmers

Cropping
Rabobank forecasts US grain demand to grow at less than 1 per cent per annum for the next decade, while in Australia local cereal grain demand is expected to rise by 2.3 per cent a year.

Rabobank forecasts US grain demand to grow at less than 1 per cent per annum for the next decade, while in Australia local cereal grain demand is expected to rise by 2.3 per cent a year.

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Rabobank forecasts US grain demand to grow at less than 1 per cent per annum for the next decade, while in Australia local cereal grain demand is expected to rise by 2.3 per cent a year.

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US grain growers will face sustained margin pressure over the coming decade, primarily as a result of sluggish commodity prices and high input costs, according to baseline Rabobank projections.

We expect flat US demand and increased grain production to result in higher US grain stocks and lower US prices over the next 10 year period.

In contrast to Australia, where we expect domestic demand to keep growing, long-term US growth is one of the biggest challenges facing the industry.

To put this into perspective, Rabobank forecasts US grain (wheat and corn) demand to grow at less than 1 per cent per annum for the next decade, while in Australia local cereal grain demand is expected to rise by 2.3 per cent per year, more than double the US rate.

On the supply side, we expect increased US production to result in higher US stocks, with yield growth to outweigh any reduction in planted area.

In addition, strong grain production growth in the Black Sea region - resulting from continued productivity improvements and strong annual yield gains - will likely see increased global production, impeding US export growth as a result, and also contributing to higher US stocks.

We expect the resulting oversupply of grain to put downward pressure on prices and squeeze margins for US farmers, and for Australian growers as well.

That said, individual farmers in both Australia and the US can achieve notable cost savings by using new practices and adopting technology, making them well placed to ride the margin pressure over the coming decade.

Scale has commonly been associated with increased efficiency and improved operating margins, however, on its own, it will not define successful farming operations this decade.

Given the less-than-rosy outlook, farm operators will need to move away from a season-to-season perspective on farming and towards a long-term strategic mindset, where investment in technology and farm data utilisation becomes critical in improving (or retaining) their margins.

While shifting away from traditional production practices has its associated challenges and may be viewed as a luxury only affordable during good seasons and profitable price environments, it is not so.

As the cost of technology has decreased and become easier to use over the years, the benefits have started to outweigh the costs and notable efficiency gains can now be made.

For example, our research shows that by adopting data gathering and analysis techniques in the use of farm inputs, US farmers with a 2500-acre grains and oilseeds operation can lower operating costs by US$20 an acre.

Converted to Australian dollar terms, on the same size operation, that equates to AU$72,000 a year.

That's savings enough to buy a brand new Land Cruiser Prado every 10 months!

Increasing the use of digital technology in farming activity will allow farm operators to collect granular data on their operations, quantify it, analyse it, and make decisions that can increase their business bottom line.

Given some of the operational similarities between row crop farming in the US and Australia, this margin pressure may bring faster technological development and adoption in Australian paddocks.

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