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Al Kluis: Crop revenues increase to record levels

In the 36 years I’ve been working with farmers, I have finally figured out what most crop producers want each year: They want a big crop and a big price. But that’s rarely happened. That’s because farmers had high prices when they had poor crops (or they were already sold out) or they had large crops and low prices.

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In 2005, I began to see changes in the grain markets. The market was always well supported when prices dropped back after negative reports. And I was impressed with how fast prices could go up when the news turned bullish.

I knew that for the individual subscribers I worked with, it was yield × price – or in other words, crop revenue per acre – that counted. So I began to chart revenue per acre, and then I began looking at total revenue charts of the entire U.S. corn and soybean crops. What I noticed was corn and soybean crop revenues really took off after 2000.

What Caused The Increases?

I can list three primary factors that caused the climbs. (Note: I will refer to the total crop revenue for corn and for soybeans as though they are each a company: U.S. Corn Inc. and U.S. Soybean Inc.)

1. China. The increased demand for more protein in China and the fact that it now has the ability to pay for this protein were the major game changers for U.S. Soybean Inc. In this year, China also started to become a major factor for U.S. Corn Inc.

2. Increased supply and increased productivity of U.S. corn and soybean farmers. The world needs more corn and soybeans. And with today’s seed and technology, U.S. farmers will increase acreage and manage each farm to maximize yield. If Mother Nature cooperates, the U.S. will produce the 14 billion bushels of corn and the 3.6 billion bushels of soybeans the world needs by 2013.

3. Freedom to Farm ag policy. With the government encouraging farmers to plant for the market, producers increased corn and soybean acres at a time when the world needed more of those crops. Sure, the U.S. has major competition from South America, but with the global increase in food demand, these increased supplies are all getting used up.

Can Record Levels Last?

As long as the demand from China, India, and other developing nations continues to increase, yes, record levels can last.

This year, China has raised bank reserve requirements and has taken other steps to slow down the rapid growth in its economy and accelerating domestic food inflation. The measures were intended to slow down speculation in the real estate, stock, and commodity markets. This created quite a sell-off in the stock market in China and in the grain markets in the U.S. when it was initially announced in November. But if you think it through, if China wants to slow down domestic food inflation, the last thing it is likely to do is reduce grain imports. In fact, China is likely to buy more. 

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What Will Signal The Top?

As a trend follower, I cannot usually see that prices have topped until I get a sell signal.

The major indicator that I would watch is if total crop revenue for both U.S. Corn Inc. and U.S. Soybean Inc. drops lower for two consecutive years. I do not think the current rate of increase in crop revenue will continue, but I would be surprised to see it drop back.

The one caution sign is a more severe global recession. If that develops, then look for the U.S. dollar to strengthen, and corn and soybean prices will drop back. The overall trend is still for higher prices for U.S. Corn Inc. and U.S. Soybean Inc.

Some Final Thoughts

One farmer who participated in a recent Webinar asked, “If the news is bullish at the top, could we be making a top in commodity and land prices?

Right now, crop and land prices are at some historic highs. And with higher input costs, margins are being squeezed.

It is very difficult for most farmers to project a 2011 or 2012 profit that is equal to what was made in 2010. Be careful. Higher revenue does not guarantee higher profits.

In fact, because of higher input costs and cutbacks in the farm program, farmers have even more risk.

I still like the long-term prospects for U.S. Corn Inc. and U.S. Soybean Inc. And I think farmers who can manage input expenses and are disciplined marketers will stay profitable in future years. I would rate both companies as a buy and hold.

The long-term corn revenue chart on the previous page shows the rally in corn prices during World War I and World War II. It also shows the first major rally in commodity prices in the early 1970s and the explosion in corn revenue since 1999. Also note that the 30-year commodity price cycle shows up with lows in 1939, 1969, and 1999.

The long-term soybean revenue chart on this page shows that USDA did not start keeping soybean price and production information until 1924. This chart indicates modest growths from the 1920s right though the 1960s. The first big run-up was the 1969-1980 rally. The soybean market and land market pulled back into the 1980s before the next rally went up in 1997 then dropped down into the 1999 low. Revenue has been jumping dramatically the past 11 years. And as long as China keeps buying, the trend is for more increased revenue in future years. The long-term 30-year cycle in commodity prices shows the lows in 1969 and 1999. So watch out in 2029.

For More Information

I will update and discuss these charts and the outlook for 2011 at my Second Tuesday Profit Check Webinar.

This Webinar is free to readers of Successful Farming magazine and will be held on Tuesday, February 8, 2011, at 8:00 p.m. CST. To register, go to www.alkluis.com.

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