Grain, livestock markets rebalancing -- economist
But grain prices have fallen. Farmland values have mostly plateaued. Now there is speculation that the biofuels sector's corn use is going to trip and fall if EPA limits how much ethanol enters the U.S. fuel supply. Seems like the bulls are all gone and that the bears are running the show, right? Wrong, one economist says.
Why? Look at the other side of the ag marketplace: Beef prices are at record-high levels, and that's likely to stay in place for the next two years. If that holds true, things in the other sectors will snap back into a scenario where everything's on more even footing.
It adds up to more of a rebalancing of supply and demand in the intertwined crop, livestock, and fuel sectors, says Purdue University Extension ag economist Chris Hurt. And, that new balance, while possibly trimming some profit potential for crop farmers, may wind up good for everybody in the ag sector.
"It's very important for a market to send you a signal that we're not going up forever. The reality is that setbacks in markets like these are good, in how they allow people to reset expectations," Hurt says. "If something goes up for too many years -- like the housing market in the U.S. from 1991 to 2007 -- 16 years of unabated growth -- you had a whole generation of bankers who said it always goes up. Well, guess what? If the housing market could've sent a signal to the market in 2000, that industry would've never been so aggressive in lending money like they did."
That's what today's markets comprise, Hurt says: A signal to participants of the importance of the relationship between the grains and the primary industries they serve, namely the livestock sector. Without cattle and hogs, Hurt says, there'd be little reason to raise the immense crops U.S. farmers are raising. However, three years of short crops kept production closer to the demand line while farmers continued to ramp up production. The net result has been supply -- both real and potential -- that overshadows demand, with or without a massive Renewable Fuels Standard.
"Why didn't supply keep up with demand? Three short crops in a row. The 2010 crop was 10 bushels short of normal, not horrible. The 2011 crop was about 15 bushels short of the normal U.S. yield, then the big drought in 2012, we were 40 bushels short. The U.S. just had limited production. Demand wasn't growing, but supply was falling because of weather," Hurt says. "It gave us this continued illusion that demand for corn was growing so much. That's not true -- it was not growing. It was supply in those three years."
Then, along came this fall. According to the most recent data on this fall's harvest, yields are just shy of normal ("if you want to try to define 'normal,' Hurt adds). Now all of a sudden, it's that massive production capability and resulting shift in the supply/demand table -- not an expected decline in corn ethanol refining -- that's keeping a lid on corn prices. And while that's not the best news for grain farmers, it is good news for livestock farmers.