Power Hour: Pendulum Could Swing in 2013

January 4, 2013 08:30 AM
Power Hour: Pendulum Could Swing in 2013

The hallmark of farming 2013 can be summed up in one word you’ve become used to the past two years: volatility.

Early forecasts for harvest corn prices, for instance, range all the way from $4 to $7, and no one, frankly, has any idea which is correct. A bearish scenario for all major crops could play out if global acreage responds in a major way to last year’s record prices, weather and in turn yields, return to historical averages and trend lines reemerge, says Nathan Kauffman, economist with the Federal Reserve Bank of Kansas City.

To illustrate just how fast things can turn, consider this: Last May, analysts were projecting season average 2012 prices below $5/bu. That seemed reasonable given all the additional acres that had come into production, but even the nation’s smartest weather forecasters weren’t foreseeing the drought that slashed yields and production and made farming the No. 1 news story.

The bearish price scenario is no means a given, however, not even necessarily likely. Looking at corn, stocks remain very tight and a good chunk of the country remains locked in a serious drought. Even in areas that have received moisture, soils remain very far from being recharged. If dry conditions once again slash yields and production, "we could see a spike in prices," closer to the $7 level, Kauffman admits

A return to trend yields and lower crop prices could greater improve the margins for livestock producers in 2013, however, Kauffman says, particularly when combined with lower numbers that several livestock sectors are carrying right now. Continuation of the drought would delay any economic recovery for livestock producers, however.

"High volatility is not going away," Kauffman says. That makes it very difficult for producers to plan, he acknowledges. Because of that, it’s crucial for producers to maintain adequate levels of working capital, Kauffman adds.

While the pendulum may swing on farm income in 2013, particularly when compared with the past two years, land values, particularly in the first half of the year, are likely to remain strong. Longer term, a leveling off of the rate of farmland value increases is likely to come with present increases not sustainable, but nobody knows just when that will be, in Kauffman’s view. The drought, for instance, did not slow down farmland value increases. One determinate of farmland values longer term will be the performance of the global economy, Kauffman says.

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