Agriculture contributes $3 billion to Idaho’s economy, making up 5 percent of the total state gross domestic product. Idaho is ranked first in the nation in the production of potatoes and barley, and fourth in the nation for milk and milk cow production. Although these numbers are high as well as farm productivity and exports increasing, farm income has fallen over the past several years.
At IBR’s April 3 breakfast series on agriculture, five panelists talked about the state of the agricultural economy, lending, labor, land use, and commodity prices. They spoke about issues including immigration reform and cyclical issues with crops as well as what areas are growing in Idaho agriculture and innovations within the industry.
Celia Gould, Director, Idaho State Department of Agriculture
Mary Hasenoehrl, Grower representative, Idaho Potato Commission
Jon W. Maughan, Managing director and vice president, mid-Mountain region, Rabo AgriFinance
Rick Naerebout, CEO, Idaho Dairymen’s Association
Patricia Nilsson, Director of development services, Canyon County
Moderator: Sheila Schwager, Partner, Hawley Troxell
Economic forces that shape the agricultural economy
Over 36 years I’ve seen a lot of cycles in agriculture, particularly from a lending standpoint. One thing that we have learned is you can’t panic if you’re going to lend in agriculture, because it is such a cyclical business. Right now, things that are impacting our lending in particular in the Magic Valley, I’ve been in the Magic Valley for 30 years, and during that time there’s always been an adequate amount of milk processing capacity in the valley. We’ve let that industry just continue to grow and grow. In late 2017, early 2018, what’s happened is that there is such an overabundance of milk supply, that the milk processors have basically said “we can’t take any more milk.”
For the first time of living in 30 years in the valley, we have dairy facilities that are shutting down because there’s just no place for that milk to go. Again, it’s a cyclical business. We have one of the larger processors that’s planning on a large expansion, but they’re starting now, and that won’t alleviate the problem for two years. As a lender, just looking down the road, you try not to panic. You hope that you’ve selected the right people to do business with and you kind of hunker down in times like this and try to ride out the storm.
The other cycles that we have, in particular in Idaho, have to do with potatoes. We have a large exposure in the potato business as well as dairy. The potato business has been extremely volatile. Over the 30 years I’ve been lending in that business, it’s either feast or famine. You almost used to be able to set your clock by how potato markets would go. You’d have one really, really good year, then you’d have a really bad year, then you’d have two okay years, then you’d have another good year, and you could just go through that cycle.
That cycle has been broken up here lately because prior to 2017, we had several years of really not very good potato prices. 2017 was a little bit better, so those are the cycles that we have to look at from a lending standpoint and they’re critical to understand from a community standpoint like Rick indicated. Whether you’re involved in agriculture or not, if you look far enough back in your own individual business, whether you’re selling cars or you’re selling groceries, in some form or fashion, your businesses will be impacted by how well or how not well agriculture is doing in particular.
Low milk prices hit the Magic Valley’s dairy industry hard
Agriculture in general right now is probably on the lower side of the cycle, regardless of what commodity or crop you’re looking at. There are specialized crops out there where some are doing better than others. If you look at the mainstays of Idaho which are dairy, potatoes, and sugar beets, sugar beets has always been fairly stable.
Dairy is probably in its worst down cycle right now. Potatoes had a pretty good 2017, which usually means we’ll overplant and kill it for 2018. What is really interesting, If you look over the course of history, at least in my history of 30 years, whenever the rest of the economy and the country is doing really well, which I think we can all agree that things are doing pretty well in business communities and everywhere else in the economics out there, agriculture is always the last to be pulled along. It’s the last to benefit from any increase in the business cycle.
Over the last four years, the price of potatoes has dropped about 7.5 percent. He’s right; agriculture is different from most businesses. If you make a widget, you just go in and flip the switch and say we need more widgets, well in agriculture it takes a year to get that product out. So if the price is good, the next year we plant more, because we didn’t have enough in the market the year before. Then we have too many potatoes or whatever crop we’re growing. Then that also creates a problem because you have oversold. Then you have a reserve of stocks that are setting there for the next year. It takes a while to get it through that whole cycle.
The other thing that affects prices, especially here in the Treasure Valley, are land prices going up drastically. For the farmer to be competitive, he has to buy or rent that land at a higher price. Then there is a shortage of labor, all of those things weigh into the farmer’s bottom line.
In the U.S. we export about 15 percent of the dairy we produce to foreign countries, so we are a big player in that export market.
We can’t and don’t want to control the amount of milk our dairymen produce. It’s a very independent-minded group of producers. The big hang up we have and the reason we don’t have a processor that’s growing at the rate of our milk supply is that nobody really knows what do we produce that’s going to be profitable for the manufacturer as well as the dairy producer. There’s not that understanding out there today.
We have an oversupply of proteins, cheese, butter. We’re trying to identify what product mix can we point to, that will be profitable for the entire supply chain.
Three bill dollars is attributed to agriculture. When you food processing, that translates to $16 billion or 20 percent of the sales in the state of Idaho.
That becomes an Idaho problem, not just an agriculture problem. It translates into every one of your businesses as the dollar trickles through the state or through the tax base. It accounts for 14 percent of the jobs in Idaho and makes up 16 percent of our gross domestic product.
When you look at the 50 states, Idaho ranks No. 4 for reliance on agriculture as percentage of their gross domestic product. You might think California, Florida, or Washington, but no, it’s the heartland, Iowa, Nebraska, North Dakota, then Idaho. Williamson Winery on there about the tariffs, and talking about China’s retaliation of $3 billion. Then they’re talking pork sector, maybe down the road soy beans, those kinds of things. So you think it just affects the pork industry. Well the Williamsons don’t export any wine. But when the wine that’s been going to China stays on the domestic market, that really hurts their sales.
All that pork that was going to China is now back in the domestic market competing with all the other proteins; it affects pricing of the other proteins. Maybe you’re thinking, “It’s just a little bit of wine, a little bit of the grains and soybeans,” but it affects everything in agriculture. This trade deal is huge and it’s devastating to agriculture. I hope everyone watches that pretty carefully because it won’t just affect our bottom line, it will affect your bottom lines as well.
The role of land use in the economic health of Idaho agriculture
The residential real estate development on agricultural land is just not happening way out in the country, because you have to put in septic systems and drill wells and all of that. So we’re seeing most of that occur through extension of city services in Nampa and Caldwell.
That’s something that the approval processes try to make easy. The few attempts in the last few years that I’ve seen in Canyon County, that didn’t already have some property right, the commissioners have actually denied a couple of smaller proposals.
One was right next to the composting operation of the dairy so we didn’t really believe the residential development would really hold its value very well in that regard. Another one was south of Nampa, way beyond any possibility for water and sewer.
Neighbors came out against it with a lot of agriculture interest. Letting agriculture be agriculture and letting cities grow is really important.
Infrastructure barriers in some of our smaller towns are probably more threatening to agriculture. Wilder needs to find a better sewer solution, Melba had to put a lot of money into a new city well, they didn’t have any water connections. How can you grow if you can’t expand your city water system? Parma and Notus have overcome some significant issues with their sewer systems.
If you want to save farmland you need to save the towns too; it’s a two-edged sword.
Regarding land prices, we had people come in the office just two months ago, a real estate broker and a property owner, and that property owner was going to give up development rights because they had an out-of-state agriculture buyer for their irrigated farmland. The value that they were getting paid was obviously worth more than the few development permits that they had. We’ve seen that a few times; that’s my clue that there’s something going on in the market.
You see a lot of growth for Meridian in particular and to some degree Kuna coming at us. The metric that’s most useful to me is the people that qualify for the agriculture exemption through the county assessor, that’s actually gone up like 3,000 acres over the last 10 years. That might be some background noise but it’s holding steady over the last 10 years so we’ll just see how that goes over the next years.
Whether it’s churches, pension funds, insurance companies, institutional investors want to find a place to park their money. Some of that is going into agriculture land, in fact our family recently lost a chunk of land because the institutional money was willing to pay a lot more for it then we could afford as farmers to pay for it. I think that’s another aspect of it that people maybe aren’t aware of.
Since probably 2014, 2015, and 2016, the institutional investor has been coming in and buying large tracts. They aren’t interested in 80 acres or 40 acres; they want 1,000- or 2,000-acre parcels.
They’ll buy it and turn around and rent it out. Typically, they’re looking for a 5 percent return on their money. In 2014, 2015, and 2016, say they purchase a property for $10,000 an acre, they want to rent it back to either the person they bought it from or another farming operation, that’s $500 an acre cash rent for that land.
In 2014, 2015, 2016, farmers were willing to pay that because market prices were still holding up. Going into 2017 and into 2018 we’ve seen a pullback by the institutional buyer and real estate, primarily because the driving force behind their purchases is that 5 percent return. But they can’t get the 5 percent return anymore because the farmer can’t rent that property for $500 an acre and make a profit.
The last deal that we saw happened in late 2017, that return went from 5 percent to 4 percent which knocked that down to closer to $400 an acre. Those large institutional investors are still out there. If you look back to prior 8 or 10 years, investors didn’t have a lot of other options where they could put their money and get any kind of guaranteed return. The stock market was flat, the general economy was kind of flat, so they were looking to real estate, which is always a great investment. They’re not creating any more dirt, so the institutional investor came out looking for that 5 percent return to their pension funds.
Our own state’s PERSI fund invested in large-tract real estate in our area. There are other alternatives now with the economy picking up that these investors may be looking at. They might be pulling back that institutional investor from continuing to buy. Plus, there aren’t that many large tracts of land that are for sale, which is also what they’re looking for.
Regulation as a factor in agricultural business
Federal regulations are typically more of the concern than state. That doesn’t mean that we’re not as strict, or in lots of cases stricter than federal regulations. It just means they would rather have the closer governmental entity regulating rather than the feds who don’t really understand what’s going on.
One of the things that was on the table that was of concern to all of agriculture was the Waters of the U.S. regulations that dealt with how close you could use chemical applications to any water bodies. That has gone back to the drawing board. We do have some very reasoned people in the regulatory agencies in this administration that have been willing to work with us and visit with us.
Another issue that’s coming down the pipe is what we call FSMA, Food Safety Modernization Act, a huge undertaking on all food safety right now. We do the pasteurized milk ordinances in the state of Idaho. On all the food safety concerns on any of your dairy products, we’re the regulatory body.
On other issues, it’s the FDA. That regulatory presence on the farm will come to the department of agriculture. It’s a huge undertaking for us, but it’s something that we’re quite frankly okay with them passing down to us, because we’d rather be the on-farm presence than have the federal government there.
We don’t look for new regulations, but we look for opportunities to try to create a level playing field. When we talk to industry partners and we have to go out and smack somebody, it’s not because we want to be the heavy handed regulatory agency, but we apply our standards or the law of the land and the rules of the land, across the board evenly or fairly.
Something that I try to keep in the closet is that I’m married to the ex-Speaker of the House, Bruce Newcomb. But I always say to our folks at the agency, I don’t care if the name on the complaint is Bruce Newcomb or John Doe. They get treated the same. If we don’t treat everyone fairly, it creates a competitive advantage for the person that gets the edge.
We try to communicate to the regulated community that it’s not that we’re picking on them. Our producers live under a myriad of regulations. We try to do an outreach and education and treat them fairly.
Electronic logging devices, ELDs, for truckers have been a big issue for agriculture and sometimes people don’t associate it with that. It’s a device that’s in your truck that says how long you have stopped and how long you have rested.
Transportation is a huge issue for agriculture right now and having this electronic logging device in place could eventually be a good thing. But, right now it’s holding up transportation. There’s talk that producers will also have to have ELDs, and they’re expensive. That’s just another example of things that filter down to the farmer.
When we export, it’s generally to the West Coast. In the West Coast shipping area, what happens is the trucks that have ELDs already installed are getting preference. The other truck drivers are sitting in the back waiting to unload.
We prefer a state regulatory agency as opposed to a federal regulatory agency. The fact of the matter is our state agencies, whether you’re talking about the Department of Agriculture, which honestly is who we prefer to work with on our issues, or if it’s Department of Environmental Quality, they’re much more responsive. Within a short period of time, I can talk to the person. If I’ve got a dairy producer coming to me saying, “Hey I’ve got this issues, can you help me work through it?” I can talk to the inspector, and the inspector’s supervisor, and at the end of the day if I don’t get the response I want I can talk to Celia and say, “Hey, this is what’s going on, can you help me?”
It takes the Environmental Protection Agency years to get through a single issue of violation. You don’t have that responsiveness from the federal agency, you don’t have that connection to talk to a decision maker, to solve the problem. That’s where a lot of the frustration comes from.
Federal agencies just don’t have that boots-on-the-ground presence to understand what’s happening on our facilities in Idaho to help solve the problem.
Patricia Nilsson: Some of our smaller agriculture producers who want to expand, and are investing to expand, run into the buzzsaw of transportation agencies. You might know how many trips a residential development or shopping center produce, you mitigate that affect on the system. Agriculture isn’t listed in all those technical manuals. Not to be critical; the agencies are doing their job, they don’t know what to do with agriculture.
I’ll be working with COMPASS to come up with our local trip generation rates. Even Williamson Winery ran into a buzzsaw of maybe having to do a traffic impact survey. Those are incredibly expensive studies. We found a way through making the land use approvals administrative, that we could just work directly with the agencies and kind of customize the thresholds of what they have to put in. We want to make sure we don’t kill the little business and let it have some time to grow some roots.
So far the state agencies have been great to work with; we’ve been able to kind of customize those conditions.
Water supply and water regulation
It’s something that we watch pretty closely. Idaho is exceptional in the leadership they’ve shown to address those issues to where we now have a stabilized aquifer. To be able to know that we’re addressing that issue, and that natural resource concern, and having a positive impact on our aquifer is something that we can hold out there that most other western states that are in this climate can’t do.
We’ve got the refill issue going on here in the Treasure Valley, and the potential impact there in agriculture. At the end of the day I think agriculture interests are well represented.
Water is a commodity that we need immensely here. Without the irrigation water, we wouldn’t be the agriculture community that we are. Our potato contracts require that we tell how much water we use on those potatoes. We have developed a very efficient way to water potatoes.
We’ve seen a big drop in the dry grazing areas in areas that don’t have water because our land use policies really direct us. Even at a very micro scale, we’re seeing the use of the non-irrigated areas of Canyon County – we put the homes on the pivot corners. We have been able to grow to some degree and still maintain agriculture. We’re working to try and see if we can fit four units in one pivot corner and have room for the well and septic. There really is a concerted effort that every area square inch of agriculture is precious. As much as we can creatively design pockets of small areas of residential development, then we figure that out, we have to.
Meeting the labor needs of an agricultural operation
Understanding our labor force is one of the most critical issues to agriculture right now. In Idaho, 90 percent of the folks that work on dairies are foreign-born. Nationally, 45 percent of the agriculture labor force reported that they were illegal immigrants.
Almost half of your plate of food is being produced by illegal immigrants. I’m talking illegal immigrants, not just foreign-born. For me, it’s a business issue, but it’s also a moral issue because our farms and ranches are family-owned. When they become part of our labor force, they become part of our family. My family farm is third-generation, my son and daughter-in-law have come back from the military and they’re now the fourth generation on our ranch.
When I grew up, we had a Native American family from Duck Valley, I was the foreign-born laborer on our ranch, I was the immigrant on the ranch, not the Hispanic family that worked for us as well.
We need to be a lot more tolerant and understanding. I really believe that we need to understand that all illegal immigrants are not created equally. We need to focus on the ones that we are doing an injustice. There are a number of folks that have come here legally and illegally that have contributed a lot to our economy and to our culture, and to our lifestyle, and we need to figure out how with not just a broad swathe, how to make our immigration system work. If it wasn’t broken, they wouldn’t be illegal.
On our ranch, we have just one H-2 worker. I will tell you it is such a pain to go through that process. It works for me because we only need him here to irrigate. He is a member of our family. He goes back to Mexico and takes care of and enjoys his four little kids during the winter and comes back and works his heart out for us all summer long. That doesn’t work for the dairy industry because those cows have to be milked all year long and so under the H-2 program, they have to go back.
The H-2 program is a worker visa program where workers come up for a defined period of time. You have to advertise for someone local first, and spend like $800 advertising somewhere that nobody is going to read it. It’s just ridiculous; that’s just the problem with the H2 program. For us to spend that kind of money advertising is just crazy. I’d rather give that money to the worker that’s doing the job. Again, they have to go back, it doesn’t work for the dairy program. But that same worker comes back to us every year. It’s an expensive program, the requirements are outdated, and nobody does anything about it. I think people are halfway afraid in this climate to mess with it much because it could end up worse.
If we would cowboy up on the deal and fix the immigration problems in this nation, then I think you would get tough on illegal immigrants, but not until they fix the problem. That’s not fair, that’s not reasonable, and it doesn’t work for agriculture.
H-2A is for temporary and seasonal workers. There’s nothing about a dairy farm that’s temporary or seasonal.
We actually requested a legal opinion from the Department of Justice to ask if we could use this program as a work-around to find some way to get workers to this country. They said no, if your dairy producers use the H-2A program, we’ll prosecute them, because there’s nothing seasonal or temporary about your industry.
As a dairy industry, we don’t have a decent program. Without a foreign-born workforce our industry does not exist in this state or in the western U.S. That is just the plain facts.
The individuals that try and claim that they’re taking jobs from the kids and people in this country are pretty ridiculous. I speak to kids at the Canyon Ridge High School in Twin Falls where I live, and they had a career day where I said “Alright, when you guys graduate high school, how many of you want to go and milk cows in the dairy?” Shocking, nobody raised their hand.
These are entry level jobs, but at the end of the day they pay exceptionally well. The average starting wage on our dairies is $12-15 an hour to go and milk cows. You stack that up against a McDonald’s job, or some of these other jobs those same workers can get, and they make a little bit more than half that.
In the Magic Valley, we have less than 3 percent unemployment, so it’s a very competitive environment. It’s something that our dairymen are struggling with on a daily basis. You talk to your average dairy producer and he is just short one, two, three, or four workers at any given time. There is just not the flow of workers to fill all of the jobs we have available. For us, this is our biggest issue; we have to find some sort of solution to immigration reform.
We’ve been working at this for over 10 years. When you go to the polling place this May, you have the opportunity to have an impact and your vote counts on this. Rep. Labrador, as the first congressional district representative, has been on House Judiciary Committee in his term in D.C. That is the committee that immigration reform has worked its way through and that’s the committee that would hear that process of him putting a bill forward for consideration. It’s been frustrating because there hasn’t been a response from his office. He has tried to give us less than our bare minimum needs to pass immigration reform.
He is the cosponsor of that Goodlatte bill that’s up for debate right now, and that might get a consideration. But at the end of the day, when we talk to our congressional representatives that have the ability to impact this issue, and he wants to deliver less than a bare minimum need for the agriculture industries in this state, that tells you something about how he might lead this state.
People often ask, what can we do and how can we have an impact on this issue? You have that opportunity.
Immigration is also very critical to food processing. Twin Falls has a huge refugee population. Chobani founder Hamdi Ulukaya has been a leader in advocating for the refugee population. First of all, he’s an immigrant, and second of all, he’s definitely dependent on the refugee population in Twin Falls to run the world’s, not Idaho’s, but the world’s largest yogurt plant.
As Hamdi Ulukaya says, “If you give a refugee a job, they’re not a refugee anymore, they’re a part of your workforce.” They’ve been critical to filling the needs in the Magic Valley. It’s desperate, I know that because we’re trying to hire people, a state agency, and we can’t hire people. We’re desperate without that workforce. We can be as critical and judgmental as we want, but we are absolutely dependent on foreign born labor, both illegal and the refugee population.
The role of agricultural exports in Idaho’s economy
One in six potatoes rows that are planted are exported, we know that for sure.
The average person eats 80 pounds of potatoes a year. It would take four average-size farms in Idaho to feed Idahoans the potatoes they want to eat. You know we have a lot more than four. The U.S. is the top exporter of processed potatoes.
Twenty percent or $2 billion of Idaho’s agriculture products are exported. Our top two trading partners are Canada and Mexico. The NAFTA question is of great concern to all of Idaho. We’re desperately trying to protect these markets. We’re clawing and hanging onto those relationships. At the end of the day if we lose those relationships, it will be devastating.
NAFTA partners have been Idaho’s biggest export market for more than a decade. Since the agreement went into effect, Idaho exports to Canada grew by almost 290 percent and 1,000 percent to Mexico. So that has an account for half of the agriculture exports, so that tells you where we’re at with NAFTA.
Then of course the Asian markets are critical. China’s the market that is our future, that’s where we have to go. I think that we’ve gotten kind of cavalier in the past because we do our jobs so well, we can just grow anything and people want it. Other countries haven’t been able to do that. They’ve not had the technology, they’ve not had the capacity. But, they’re catching up to us, and if we think that they can’t fill some of those needs, or Brazil can’t come in and fill some of those markets, we’re absolutely kidding ourselves. If you lose those markets, they don’t come back. If you want to protect agriculture in the United States of America, we better figure out the trade policy or we’ll be in trouble.
I did a little bit of research and according to USDA, 20 percent of U.S. farm products are sold to China and Idaho ships $600 million worth of agriculture products to China alone. Those are some important numbers as we try to work through all these trade wars that are looming.
We’re concerned when it comes to this trade war and the potential impacts to our dairy producers or our agriculture producers in general. We’re going to be in the crosshairs early in this and that has a significant impact for us, and the state of Idaho as well.
Food processing innovations
There’s been a significant drive toward robotic milkers in the dairy industry, driven by the labor issues. We’ve just seen the tip of the iceberg on robotic milkers. We are looking at least three new facilities in the Magic Valley that are being built that will be all robotic.
Production is up, the cows are more calm, they’re healthier, there’s a lot of benefits from not being pushed into milking parlors, so there’s some benefits that way. Right now it’s an extremely capital intensive process; they’re not cheap. But, I think we’re at the tip of the iceberg on that technology and I think over the next several years that will get better and better and take more hold on the industry as well.
One thing we’re seeing is product innovation within the dairy industry. The Idaho milk products plant in Jerome is one of the only milk protein concentrated plants in the United States. Product innovation is happening here in Idaho, partly because we sit in a regulated market when it comes to milk pricing and milk price regulation. That really encourages innovation. You don’t have to fit a specific pricing scheme with whatever product mix you’re making. You can make whatever product mix and pay what the market will bear for the milk to supply.
We’re starting to see some of that product innovation, where you’re fractionating the milk and the milk proteins apart and their ingredients whether it’s a Clif Bar, energy drink, or protein shake. We’ll still have the staples of cheese, butter, and milk, but you’re going to see a lot of growth from product and milk fractionation in some of those more innovative processes.