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Grain Farmers: Get Ready For Some Tighter Years
Dan Basse is advising his farmer
clients to shift from maximizing farm revenues to instead protecting their
“The next three to six years
will be a readjustment period,” says
the president of AgResource
Company, Chicago. Basse spoke at this week’s American Seed Trade Association
Seed Expo in Chicago.
The Party’s Over…For Now
“The good times have come to
an end in corn,” he says.
In the past seven years, corn
prices rose from $2.50 per bushel in 2006 to drought highs of $8 per bushel in
No more. Instead, expect corn
prices to drift even below the current March 2014 futures price of around $4.25
Basse expects corn prices to
bottom in 2015 to below $3.40 per bushel. Then, he expects corn prices to
modestly rebound. Still, $5 per bushel may be the upper limit for the rest of
time a farmer can sell corn for $5, he better take it, unless it is a dire
drought,” he says.
If you have soybeans in the
bin now, it’s a good time to sell them before Brazil finishes its harvest later
this winter. The slump in corn prices also applies to soybeans.
“We are selling crop out as
far as 2016,” he says.
Why The Shift?
A number of factors have come
· A mature biofuels
market. “This market has not gone
away, but it has matured.” Basse says.
Protection Agency’s (EPA) recent decision to roll back the Renewable Fuels
Standard from 14.4 billion gallons for 2014 to 13 billion gallons has raised
the hackles of Midwestern corn farmers and politicians.
painful to the ethanol market, though, is a drive toward U.S. energy
America will be energy self-sufficient by 2020,” he says.
like fracking are raising domestic oil production. Meanwhile, U.S. consumers
are now energy misers. Urban consumers are swapping gas-guzzling sports-utility
vehicles for electrically powered cars like the Tesla. On top of that are
factors like Cash for Clunkers program that removed many fuel-inefficient cars
from the road.
demand decreases, gasoline and ethanol prices follow suit. Ultimately, less
ethanol demand means less demand and lower prices for corn.
consumption that’s been declining since 2008 was unexpected, but it’s real,
adds Basse. Even if EPA reversed its RFS decision for 2014, ethanol consumption
would likely run into the blend wall. For example, if consumers drop gasoline use
to 130 billion gallons in 2014, that by itself would limit ethanol use to the
13 billion gallons level, as there is a 10% blend of ethanol in unleaded gasoline.
Competition. High prices have made difficult for U.S. grain
and oilseeds to compete in export markets. That’s shifted exports to other
countries. The ABU countries—Argentina, Brazil, and the Ukraine—had 65% of the
world’s corn exports in the 2012-2013 marketing year.
U.S. export markets keep declining. In 2013, the U.S. share of world trade in
corn, soybeans, and wheat hovered around 27%. In 1980, that share was over 60%.
To increase market share, U.S. exports must be cost-competitive, and that means
being a low-cost producer.
World Meat Consumption. In China,
rising prices of mutton, beef, pork, and chicken has dinged demand. Meanwhile,
India’s gross domestic product has declined in recent years. That gives Indians
less money to spend on meat.
expected China to be the big (meat) buyer, followed by India,” says Basse. That’s no longer the case
U.S. red meat consumption is declining, down more than20 pounds per person
since its 2006 peak.
Investor Sentiment. “Ag commodities
are no longer favored by global investors,” he says. “The money has been
are instead flocking to the stock market. So far, this year’s S&P 500 stock
index has risen over 28%, and there’s still room to grow, notes Basse.
Compounding 2014’s situation
will be the approximately 9 million acres that weren’t in production in 2013,
due to placement in the Conservation Reserve Program (CRP) or due to prevented
plating. These factors, when combined with less demand, will build U.S. grain
and oilseed stockpiles and lower prices. In response, Basse thinks 20 to 24
million U.S. crop acres will be pulled from production over the next five
“The functionality of the market is to get fragile
land out of production,” he says. “It will probably take some kind of
All this will likely pressure
U.S. farmland values, particularly when interest rates rise from their current
“They could correct 5% to 35%, depending on
how fast interest rates will rise and on China’s future imports of soybeans and
grains,” he says.
Still, the break likely will
be gentler than during the 1980s, when land values dropped 30% to 40% in two
years, he adds.
All this will cause farmers
to carefully scrutinize the inputs they buy.
“With the bull market in
agriculture, everyone has had their hands in the farrmers’ pockets,” he says.
“Whether it’s land, seed or fertilizer, everything has gone up in price.”
That will change. If a farmer
is going to cut costs, here are the top four inputs, along the percentages that
typically make up the cost of growing corn for Midwestern farmers.
Keep in perspective that
historically, agriculture has had bull markets interspersed with sideways
markets. We likely are entering a sideways market.
This could change. Adverse
weather could positively alter the price picture. Demand—and ultimately
prices—could perk up if worldwide caloric intake rises.
For the next three to six years,
though, expect tighter margins than those you have enjoyed since 2006.
“This is a change in the
landscape from the last 7 years,” he says.