Plan to weather the potential storm of lower prices
What goes up ... must come down. Farmers saw record-high corn and soybean prices in 2012, and while prices are far from rock-bottom, they are dramatically lower.
Farm Journal Economist Bob Utterback reminds us that markets are cyclical and says the bull-market years that crop farmers have been experiencing might soon give way to a bear market—if it hasn’t already.
"We’ve had some fantastic, record-level profits in agriculture," Utterback says. "I make the analogy of, we just had a great party; we got up on the table and danced and had a great time. But so did everyone else in the world."
Now we’re moving into the hangover year, he says. "Unfortunately, it’s time to pay the bills for all the fun, but nobody wants to pay the bills. Therein lies the problem; how long is that bill going to be due?" Utterback asks.
Demand overhaul. While high corn and soybean prices have put extra cash in grain farmers’ pockets, it caused a lot of pain for end users. Livestock producers reduced herds, ethanol plants went on hiatus and foreign buyers found cheaper sources than U.S. crops.
Utterback says now the U.S. must buy back demand. "You don’t buy back demand with $7 or $8 corn; you buy it back with $4 corn."
Steve Johnson, Iowa State University farm business management specialist, says farmers need to do a reality check.
"We are moving into a new reality—$4 to $5 cash corn," he says. "But this might be the best thing that could happen to row-crop agriculture in the long run. We’re going to have to rebuild our demand base that was decimated by high crop prices."
Demand isn’t the only problem, as U.S. corn stocks will triple and soybeans will double compared with this past year, Johnson says. That’s based on USDA acreage and yield estimates.
Storage game plan. So, what will farmers do with $4 corn at harvest? "Probably store it," Johnson says. "I think farmers will want to store corn rather than beans. Bins could be full of unpriced grain throughout most the winter into the spring months, waiting for deferred futures prices to rally and basis to narrow."
Due to recent smaller crops, Johnson says a lot of farmers haven’t used their entire grain storage or drying systems for several years. "Now is the time to clean out your bins and make sure they are working properly," he says. "You know this crop will be late and likely wet, especially in the northern Corn Belt states."
By having your own bins ready, you can avoid lines and long-term commercial storage costs. "I’m not saying don’t take your corn to town to dry and sell," Johnson says. "But you’ll have to pay roughly 30¢ to 50¢ a bushel to commercially dry wet corn and be locked into the basis at that facility. Those costs can add up fast."
He also advises to make sure you have plenty of propane to fuel the extra drying. "There will be a greater demand for propane this year than any year since probably 2009," he says.
Another task Johnson recommends farmers do sooner than later is scout fields to know which ones will mature first. "In a corn field that you planted three times, you’re probably not going to harvest it all in the same day."
- September 2013