From Scarcity to Surplus

January 7, 2014 06:44 PM
 
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Increased global grain production and lower domestic demand for corn for ethanol means crop producers should prepare now for lower grain prices in 2014, says an expert from Ohio State University.

"Prices reflect that we have moved from an era of scarcity to one of adequate inventories, and prices have responded by moving lower," says Matt Roberts, an Ohio State University Extension economist. "We already see lower prices, and unless U.S. or South American acreage declines, those prices are likely to continue to move lower. The prices we had earlier in the year aren’t guaranteed to return."

Markets are moving back toward matching supply and demand because of several factors, including no growth in ethanol demand and expanded global crop acreage. Add another year of corn yields higher than 160 bu. per acre and soybean yields of 42 bu. per acre, and Roberts says growers can expect to see even lower prices.

"Prices will only return to profitable levels if supply declines due to acreage leaving primary row crops, or demand returns," he says. "This will likely create a significant financial strain in crop-growing areas."

To prepare for lower prices, farmers should build a working capital cushion of a year to 1.5 years of land charges above what they need to operate, Roberts says. Growers should also: avoid expenditures just to take advantage of section 179, refinance loans and mortgages into 10-year fixed rates, hold off buying land or entering into multi-year leases, and evaluate living expenses.

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