Commodity price losses good for farmers
Huge losses in grain markets have occurred in the past few weeks, with $1.50 losses in corn and $3 losses in soybeans sending shock waves throughout the agriculture community. Stock markets have been pummeled, including ag stocks such as manufacturing and fertilizer stocks. These huge losses have everyone concerned these days, most especially farmers who have been concerned that price gains made recently will quickly evaporate, much like in 1996 when we endured extremely low prices for 5 years or more following that price spike.
However, Pro Ag is not so certain that the recent break in commodity prices is all bad for producers. First of all, the first fertilizer price declines in years has come during the past month, with most fertilizer prices declining rather sharply from the stratosphere. This could be an extremely positive development for farmers, as the fertilizer demand has been fueled by the saying that "the price is going up next week, so buy today". We've crammed 3 years of fertilizer purchases in the last 2 years based on that mantra. Now that this mantra is no longer true, it could be surprising how much fertilizer prices drop in the next 6-12 months! In fact, fertilizer warehouses are crammed full of fertilizer, and many producers don't need to purchase any fertilizer for the next 12 months. Markets are ruthless at balancing supply and demand, and it could be interesting how this balance will be retained over the coming year, but for once, the farmers have the clear upper hand.
Fuel prices also have declined by about 25% or more, with crude oil down even more percentage wise. These also are price declines which producers will welcome. The cost of production for 2009 might be much smaller than producers expected, with the first cost of production decline for inputs in years likely the coming year. Since July, Pro Ag has been saying $6.50 corn might look much better than we expect for 2009, 2010, and 2011 as the 25-50% annual hike in input costs could very well have been ending (and with great fanfare). Sure enough, the CRB index monthly downside reversal which we recognized in July said volumes about future input costs!
With a decline in commodity prices, we are reminded of our new revenue price insurance coverage, which was designed to protect producers from price declines between February and harvest. February base prices for grains were $11.11 for HRS wheat, $13.36 for soybeans, and $5.40 for corn. The harvest price for HRS wheat was $9.11, or a 18% price decline from the base. In essence, that increased the coverage level about 18% so that in effect a 70% revenue policy became a 88% yield policy.
If corn futures average $4.30 (near current levels) during October, trigger yield levels would be hiked by about 20% which is the percentage decline in prices (from $5.40 to $4.30). 70% revenue coverage becomes 90% yield trigger levels for claims. Better yet, 90% GRIP coverage becomes 110% effective yield coverage on the average yield in the county (was GRIP the best choice in 2008, especially for the best land in the county?) Soybean price declines have been larger as if soybeans average around $9.70 (near current futures levels), we will have a $3.66 decline or about 27% price decline. 70% RA revenue coverage (CRC price coverage is limited to $3) becomes 97% yield triggers, and 90% GRIP coverage becomes 112% yield triggers for losses (again limited to $3 price changes)! It's very likely insurance companies will be paying some huge claims on revenue soybean insurance in 2008 (especially GRIP), as the huge price declines combined with disappointing northern Corn Belt harvest yields are a perfect storm for ag producers (and the perfect nightmare for crop insurance companies/reinsurers/RMA).