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How to Endure the New Reality of Low Crop Prices

The easy days of crop production are gone. Here’s how to position yourself for the future.

Note to self: Next time new-crop corn futures have $4 and new-crop soybean futures have $10 in front of them, forward-sell. The days of $6 and $7 corn (three to four years ago) are over for a long time.

That’s what Steve Meyer, vice president for EMI Analytics, told those attending this week’s Top Farmer Conference at Purdue University. There’s a reason why corn and soybean prices rallied this spring before melting down in the last couple of weeks. Dryness in northern Brazil and flooding in Argentinan soybean fields cut crop supply coming out of South America.

“That set off things in the U.S. market,” says Meyer.

Accordingly, fund money flowed into commodities.

“The third whammy was the drought that never was,” Meyer says. He noted that this spring was what an Iowa State University official termed “the wettest drought in history.” Although above-normal temperatures occurred, they were not that much out of line and were coupled by normal precipitation.

“Our corn crop is pretty much made, in my opinion,” says Meyer. “Carryout will be above 2 billion bushels, a comfortable level that will push down corn prices.” He foresees new-crop prices pushed down into low-$3 level (minus local basis) come fall.

What To Do Now?

In future years, continue to watch weather rallies and act on them. “It is not unusual to get late-spring/early-summer weather scares,” says Mayer.

Acting on these seasonal rallies will backfire at times, for drought can spur stratospheric rallies. That’s not likely to occur for a long time. “In my opinion, 2012 and 2013 are ancient history,” says Meyer. “Yields continue to grow, acreage continues to grow, and the supply situation has caught up with the demand situation. Now we have to deal with the aftermath from $7 corn because rents and other costs went up.”

On the other hand, don’t ignore the upside of the new reality. Focus on opportunities. Now may be the time to buy that farmland – sold at stratospheric levels four years ago – that might be coming back on the market.

“We have been paying too much for farmland,” says Mike Boehlje, Purdue University Extension agricultural economist.

The only consolation about paying high cash rent is you aren’t locked into it forever as you are with a high purchase price for farmland. Paying $22,900 per acre — as actually occurred in an Iowa sale several years ago — locks you into a high-cost structure.

“You have committed yourself to being a high-cost producer forever,” says Bohelje. “That is not a good strategy.”

What is a good strategy is now keying in on farmers who could have retired back in 2012 but were having too much fun growing $7 corn. That’s not the case now. If these farmers have no heirs in their operation, it may be soon coming on the block.

“We have a backlog of people who have not exited this industry in the last seven to eight years,” says Boehlje.

The economic downturn may prompt this land to come back on the block. It may also spur some good buys on machinery.

“Now is the chance to buy that fully warranted combine with 100 hours and all the latest features on it available at a 30% discount compared with
two years ago,” says Boehlje.

Look beyond the crop area, too. For example, a new pork plant coming into Michigan may spell opportunity for farmers in that area.

“Those kind of opportunities don’t stick around for a long period of time,” says Boehlje. “I suspect there are already people who want to be part of that. I can already tell you there are people standing outside its door. When those contracts fill up, they are done.”

Also see Farmers Urged to Eye Dollar, Not Interest Changes for more coverage of the Top Farmer Conference.

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