Continued uncertainty is seen for 2021, agricultural experts say
As agricultural experts frame up 2020 and look forward to 2021, the words uncertainty and volatility keep floating to the top.
Bryan Doherty, Total Farm Marketing, says that 2020 will go down as one of the strangest years in history.
The impact and ripple effect of the worldwide pandemic may take years before analysts believe they know what exactly happened, he stated in a late summer article on Agriculture.com.
In that article, Doherty noted that the world still has ample inventory of agriculture products. Trade deals, a growing hog herd in China, and the need for countries to secure inventory in case of additional COVID-19 outbreaks in the fall or winter of 2021 all suggest that commodities are moving from supply surpluses to demand-driven markets, Doherty says.
"In the commodity world, much like in equities, great uncertainty leads to wild volatility. Energy prices dropping into negative territory and milk prices dropping sharply only to rally to all-time highs illustrate the dichotomy of just how demand (or perception thereof) ebbs and flows at unprecedented speeds. These are just two examples of many markets that experienced extreme price moves," Doherty wrote in a late summer weekly article.
For agricultural commodities, demand drivers in the months ahead will be a rebounding world economy, supply disruptions due to weather, and the need for end users (domestic and worldwide) to cover needs more intentionally that in recent years, Doherty stated.
"There is a renewed sense of urgency to ensure inventory is on hand. The model of just-in-time inventories will likely be abandoned. Volatility will be on the rise and both producers and end users will need to be prepared," Doherty says.
In December, Michael Langemeier, Purdue University economist, wrote in a University of Illinois' farmdoc daily article about uncertainty in the livestock feeding industry in 2021.
Feed costs are closely tied to the whims of the corn and soybean meal markets.
"Corn and soybean meal prices declined sharply from late January to early August, and then increased significantly in response to deteriorating crop conditions and the potential for strong exports of corn and soybeans during the 20/21 marketing year. Given the uncertainty related to supply and demand, feed prices are likely to be volatile through at least the first half of 2021," Langemeier stated.
Using USDA data based on Indiana prices, Langemeier compared monthly corn and soybean meal prices from January 2007 to November 2020. Corn price averaged $4.48 per bushel from 2007 to the current month. Soybean meal price averaged $349 per ton from 2007 to the current month. Though higher than prices in early 2020, corn prices are expected to remain below $4.48 through June of 2021.
In contrast, for the first time since June of 2018, soybean meal prices are expected to be above the long-run average for the next several months, Langemeier staed in December.
In 2021, to feed out hogs to market weight, using 2021 corn and soybean meal futures prices in early December, feed costs are projected to be 6.5% above those experienced in 2019 and 8.2% higher than 2020, according to Langemeier.
"Current feed projections use 2021 corn prices, depending on the month, range from $3.80 to $4.05, and soybean meal prices ranging from $350 to $400 per ton. Corn and soybean prices will be determined by planted acreage as well as other supply and demand factors. Corn prices could be as low as $3.25 to as high as $4.25," the Purdue University economist stated.
Mark Jensen, CEO Farm Credit Services of America & Frontier Farm Credit, says that the next few years could bring more volatility.
For farmers seeking financing in 2021 it's one producer at a time and each operation is different, Jensen stated in a fall FCSofA webinar.
"But, going forward, farmers need to know their cost of production. We've talked about it for years. We feel like breakevens, for corn production, should be down around $3.50 to $3.75 per bushel. The cost structure has to be there and we will reinforce that point," Jensen says.
Jensen added, "If I were to bank on the next few years being more volatile or less volatile, I'd probably put my money on more. And one of the best ways to buffer the volatility is with your liquidity and equity position."
Doherty offered up his own advice for farmers, regarding being prepared for the uncertainty and volatility ahead.
"Become familiar with the tools in your marketing toolbox, whether a buyer or seller, and how they work. The next leg of volatility could mean dramatically higher rather than lower prices. Sellers need to learn how to sell and retain ownership. Buyers will need to know how to shift risk, in particular longer term. Be prepared for future price volatility," Doherty stated in a weekly article.