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."
When scouting your fields, Johnson also suggests calculating early harvest yield estimates. "That will help you with preharvest sales," he says. "Then you can use those sales to cover your short-term cash flow needs while you store the rest of your crops."
Look ahead to 2014. As hard as it might be to focus on the 2014/15 crop now, Utterback says you must do so to adequately manage risk.
He suggests learning from the past few years, reducing your cost of production and focusing on how you can increase yields.
Johnson agrees. "Start now on your 2014 marketing plan. I believe we will try to grow as many corn acres next year—we’re not going to back off from corn. What else are you going to plant to offset high cash rents and other input costs?"
With that in mind, Johnson suggests pricing your fertilizer and seed for next year now. "Recognize there will be good demand for strong-performing corn and soybean seed in 2014. Fertilizer is the one cost that will likely drop with the lower corn prices."
Another major cost to start penciling out is next year’s cash rents. Chris Barron, an Iowa farmer and AgWeb’s Ask the Margins expert, says now is time of year when land rent levels are negotiated.
"When prices are at these lower levels, it gives us an opportunity to maybe negotiate for lower cash rents," Barron says. "This is especially true for producers who paid higher rents during higher prices."
He encourages farmers to be open with landlords about how lower grain prices could squeeze profit opportunities for the next few years.
Johnson says 2013 is not the year to do nothing in terms of marketing, and 2014 will also require planning.
"We’re coming off one of the most profitable multiyear runs for row crops in U.S. history," he says. "There will be challenges, but this is no time to put our heads in the sand."
On-the-Go Market Information
Don’t miss an opportunity to price your grain this fall. Stay connected to the latest farming news and market moves with AgWeb’s mobile apps.
AgWeb App: Download AgWeb’s app to receive direct feeds of up-to-date market quotes, weather radar, seven-day forecasts, agricultural news, three-times-daily market audio commentary with host Al Pell and more. To find the app, search for "AgWeb" in the iTunes and Android app stores.
Cash Grain Bids App: Wondering which local elevator is offering the best cash grain price? Download AgWeb.com’s Cash Grain Bids app. Available for iPhone, iPad and Android, this free app allows you to see cash bids for corn, soybeans and wheat. Select your crop, input your ZIP code (or activate location services), then choose one of five elevators closest to you and compare prices. You can also call your desired elevator. In the iTunes and Android app stores, search for "Cash Grain Bids."
You can e-mail Sara Schafer at email@example.com.