Low Corn Prices Will Force Competitors to Cut Back

November 1, 2013 09:45 AM
Low Corn Prices Will Force Competitors to Cut Back


The U.S. will regain a major chunk of corn export market share lost to competitors, but not overnight. "It will take the U.S. a while to recover," said Carl Casale, president and CEO of CHS, the largest U.S. ag cooperative.

Even so, he said that U.S. export market share has peaked because agricultural production has become more global. "The challenge is that we taught the rest of the world how to grow corn," he said at the Oilseed & Grain Trade Summit in Minneapolis.

During the next several years, Casale looks for corn to trade in the $4.50 to $7 per bushel range. Asked in an interview what CHS uses as a planning price, he said, "we model more at the lower end than the higher end."

High corn prices have stimulated farmers elsewhere, even if they can only grow 80 to 100 bushel corn, he said. "It will become difficult for them at $4.50." As a result, he predicted a cutback in corn acres by the two countries where it has expanded the most: Brazil and Ukraine. "It’s not just the price for them but logistics. It can take $1 per bushel or more to get grain to ports." 

Some North American producers will do the same as marginal corn acres are taken out of production, Casale said. Montana, the Dakotas and Canada, for example, will reduce corn acres and plant more small grains and other crops they’ve historically grown, he added.

The increasing global platform of corn production means that shocks of supply disruptions become more common and that adds up to increased volatility. "Risk management becomes very important," Casale said. "Price variability is a significant fact."

He acknowledged short-term challenges for farmers as corn prices have dropped $3 per bushel from peak levels. "At $4.50, life isn’t as much fun as it used to be, but if you own your own land, you’re doing just fine," Casale said. The greatest risk to producers as margins tighten is land rents that will take time to adjust, he said. "I don’t see a significant decline in land values, but marginal land could decline by as much as 30% in some cases. The land market will fix itself."

 "The long-term trend is very favorable," Casale said. The combination of future income growth and population in developing countries bodes well for U.S. exports, he stated. Most important is the outlook for China, the world’s largest ag importer. Casale does not expect a softening of China’s economy like some do. "China will be importing a high percentage of its corn," he predicted. It’s not just China. "The big picture is that Asia is where it’s going to be at. The world will continue to be hungry."

Casale said developing countries don’t need high incomes to become major growth markets. "The first $10,000 of income drives changes in diets. We don’t need rich economies, just those with incomes of $10,000." Diets don’t change all that much as consumer incomes go beyond that, he added.

Adapting to global shifts is key to staying competitive, he said. "As fast as the world is changing, doing nothing is a path to irrelevance." One change he sees happening for soybeans is growth in global demand for soy ingredients. CHS has acquired an Israeli firm to produce them.

While some see Africa as a potential U.S. ag competitor, Casale has a different view. "Agriculture is not indigenous. There is no good rule of law. There is no private land ownership. Farming there is beyond frontier spirit." It will take several decades before commercial agriculture takes root in Africa because of the major challenge the continent faces, including investment capital, he said. The establishment of rule of law alone could take a decade to become fully established, an important precursor to capital formation, Casale added.

In the very long term, however, there may be opportunities for U.S. producers to operate farms in Africa, but greater opportunities in the short term are probably in Eastern Europe, he said. "Some have been doing it in Latin America."


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