The Sweet Sixteen basketball tournament is my favorite in sports. A lot of hype goes into predicting who has the best fundamental chance to come out the winner.
With respect to the outcome in agriculture, we have more of a Sweet Trio—yield, harvested acres and demand. Whether 2016 will turn out to be sweet or not depends, of course, on total supply. USDA hinted in its January report that the demand side of the equation likely had peaked for the balance of 2015 and the 2016 estimate. This leaves supply reduction as the catalyst to price appreciation.
When crude oil fell below $30 per barrel in January, experts said someone has to quit pumping and some companies will need to go out of business before equilibrium evolves. Perhaps the same can be said for agriculture. If agricultural input prices drop the $100 per acre the University of Illinois says needs to happen for traditional corn states to be profitable, our breakeven in general will drop, and we’ll all likely continue to plant 100% of our tillable acreage to something. The economic law of supply and demand has not been repealed, thus someone needs to lower production. That someone is the U.S. or one of the major exporters of the world.
Prepare Now. Fundamentally, the macro focus and market psychology are still negative for all commodities. The agricultural side of the commodity universe is plagued by large global stocks against a backdrop of a strong dollar, which surged a year ago and has stayed relatively strong, putting pressure on our competitiveness. Without a major demand shock such as the ethanol mandate to get rid of excess corn, weather, planted acres or both appear to be the only catalysts left to neutralize supply and demand and also to change market psychology and bring money flow back into commodities.
Weather will most likely not affect prices until July or August, after planting is completed. The ball is in the court of the U.S. producer. What will we plant, and how anxious will we be to attempt to maximize production to lower the cost per bushel? In any case, we are left to manage our economic affairs accordingly and, more importantly, to be “prepared” for what is on the horizon. Certainly, the marketplace is not incentivizing us to throw caution to the wind and plant fence row to fence row with the excuse that prices can’t stay this low for long.
The phrase “the cure for low prices is low prices” has been attributed to Earl Butts, who served as secretary of agriculture under President Richard Nixon before being fired for politically incorrect statements. Mr. Butts was not a producer and didn’t have to deal with a major oversupply during his short tenure. So I took personal offense to his statement and vowed in my early years of farming that I would not be caught unprepared for what the future might hold.
Believing farming was as much a profession as medicine, law or education, I set out to earn an MBA to help make sense of economics and finances. I learned how to manage cash flow, calculate compound interest rates, master government intervention of agriculture and predict commodity price direction. As far as I can tell, the laws of economics have not been repealed and are still alive and well in this decade.
History Lessons. I understood what would happen in 1980 when President Ronald Reagan stated in his inaugural speech that “it was time U.S. farmers got what they deserved, a free marketplace that would dictate what to plant, not the government.” I remember being in an elevator in Stillman Valley, Ill., where farmers cheered when they heard that. I said then that we were ill-prepared for a free market in an un-level playing field. The result was the 1980s, the worst farming crisis in my lifetime. My concern today is that denial permeates agriculture and that only the faces have changed since the 1980s.