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Prices Too Low To Plant? Bank Economist Says No

Corn, bean, and wheat prices have all taken the plunge the past couple years, but analysts and traders said they’re optimistic that futures will improve in 2016.

Corn futures on the Chicago Board of Trade have dropped 19% in the past two years, soybeans are down by a third, and wheat has dropped 24%. A readjustment of input costs, some negotiating over land rents, and a forecast La Niña weather system, however, could make 2016 a more profitable year for producers.

U.S. corn prices for the year were projected by the USDA to average as low as $3.35 to $3.85 a bushel vs. $3.70 in 2015 and $4.46 the prior year. Soybean prices are pegged from $8.05 to $8.55 a bushel, down from $10.10 last year and $13 in 2014. While lower prices are frowned upon, the silver lining is that they could spur demand.  

“What a lot of people are missing is the job of lower prices,” said Jeff Kaprelian, the trade desk manager at brokerage The Hueber Report in Sycamore, Illinois. “To this point, we’ve had weak exports because of the strong dollar as well as poor ethanol margins because of low energy prices, but if the dollar falls and we use the usual logistics problems out of Brazil during their upcoming harvest, we can add some value back to the grain.”

Global production of corn is expected by the U.S. Department of Agriculture to be the third-biggest in history while soybean and wheat stockpiles are forecast to be records, thanks to favorable weather conditions in several producing countries.

Inventories of corn will jump to 208.8 million metric tons, wheat carryout is seen at 238.9 million tons, and soybean stockpiles are pegged at 80.4 million tons – all record amounts, according to the USDA. Exports are down for corn, soybeans, and wheat year-over-year as importers turn to investors including Brazil, Russia, and Ukraine.

A stronger dollar, which has jumped this year, isn’t helping matters, and a warm winter has pushed down the price of oil, causing ethanol to fall out of favor. Fundamentally, the outlook isn’t exactly rosy for agricultural commodities, but some promising signs of a price increase are on the horizon, analysts said.

Global growth has slowed, led by China: It saw its gross domestic product increase at the slowest rate in 25 years in 2015. While the global economic downturn hasn’t been good for investors, it might be good for agricultural prices, analysts said.

The Dow Jones Industrial Average and the Standard & Poor’s 500 both lost more than 8% of their value in the first two months of the year. Investors taking money out of the stock markets might be looking for an alternative, Kaprelian said.

“Institutions will search for positive returns (and) the logical place is the fixed income market, but yields continue to fall as equity risk increases,” he said. “So there isn’t enough there to attract funds dollar for dollar.  So where do they go? Commodities. With funds as short as they are, it would be sure to usher in additional short covering and new index investment.”

Farmers this year will likely make some adjustments to improve their profits as commodity prices decline, said Michael Swanson, the chief agricultural economist at Wells Fargo, the biggest farm lender in the U.S.

They probably won’t reduce acreage because the risk of leaving land idle outweighs the risk of increased production, he said. Instead, savvy growers will adjust what they spend on inputs and land costs, Swanson said.

“It’s going to be a painful readjustment figuring out what everything is worth, whether it’s cash rent, seed costs, or fertilizer,” he said. “We’re going to have to readjust the whole cost structure and look at where the money is.”

Cash rent, seed, fertilizer, machinery, and crop chemicals make up about 80% of costs on a farm, Swanson said.

The first thing a producer needs to do is figure out how much he or she is spending on rent, and whether it makes sense to keep renting. Growers, however, often fear they’ll give up land with prices low and be unable to reclaim the rental property when futures rebound.   

Don’t be so emotional, Swanson said.

“Is it really a risk?” he said. “If you give it up and can’t get it back, maybe you shouldn’t have it in the first place. The land market isn’t fair. Realistically, lots of mediocre ground gets rented for the same as good ground, so (fears of losing rented land) is a natural reaction of people wanting as much land as possible.”

Farmers often know they should let land go or seed fewer acres but can’t bring themselves to make moves they know will help them in the long run out of fear of what will happen down the road. Usually that involves doing new things such as installing irrigation or building storage bins.

Asking for lower rent, or threatening to walk, is one of those unique things growers don’t like to do.

“There’s something called the knowing-doing gap,” Swanson said. “Farmers know what they should do but can’t bring themselves to do that. When prices were high, you could do anything with inputs and make money, now you have to understand the benefits of ag inputs.”

It’s not just lower input costs and adjustments to their outlay that will benefit farmers this year. Weather, as always, will be a major factor in determining prices. The El Niño weather system, called the strongest on record, that has led to a warmer-than-normal winter is forecast to give way to a La Niña weather system, which generally is associated with drier summer weather in the U.S. Corn Belt.

The last La Niña started in 2010 and ended in 2012.

Weather forecasts from the National Oceanic and Atmospheric Organization in the U.S. and the Australian Bureau of Meteorology both show a La Niña will be likely this year.

La Niña years are generally marked by a cooling in the Pacific Ocean. Those years are usually associated with droughts in Asia and the northern U.S. – the Corn Belt, specifically – while Southern states tend to get more rain.

Agriculture analysts from Citigroup and Societe Generale have said they expect any move from an El Niño to a La Niña to have a positive effect on futures. Other so-called black swan events including geopolitical upheavals or shipping complications from competitors such as Brazil or Argentina also may give prices a boost.

Regardless, growers need to be ready to move if and when prices begin to rebound, Kaprelian said. Producers should, as the old saying goes, expect the best but prepare for the worst.

“As with any year, we have opportunities for risk premium to be added to the markets based on risks to the growing season,” he said. “We can’t count on those happening, but there are strategies we have in place to take advantage of those opportunities.

“Years like this prove the importance of understanding risks, sharpening pencils, and understanding margins.”

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