There are many eyes watching the near future of the crop markets and they nearly all agree that the outlook is grim for the short term but strong over the long term.
Mike Mock from The Anderson’s, Inc. recently talked about the market outlook and some strategies for farms to weather the tough times.
“You know that when you are selling corn for $7 or $8 that there are going to be problems. The next time that farm income will be as good as it has been, I won’t be here to talk about it,” Mock said. “Prices were too high for too long and we invited everyone to our corn growing party. We are in the process of a global reset that will hurt some and create opportunities for others. Some areas and growers have costs that will be too high given the current outlook.”
Crop prices have a significant downside risk in the next couple of years.
“We think prices are going to be significantly lower and margins are going to be squeezed, with oil prices looking to flatten out. We think crude oil around the $65 level is going to stay flat for a long time and that will bring down production costs,” Mock said. “And, if crude oil can drop like it has, then why can’t corn?”
The value of the dollar compared to other world currencies will have a significant impact on the situation.
“The dollar is getting stronger and the two time periods of the highest value dollar have been the two worst periods of farm income in the last 50 years,” Mock said. “I talked to a Brazilian grower who sold beans last year for 63 reals and yesterday he sold his beans for 62 reals. So even though beans are down $4 or $5 in Chicago in that time frame, he is getting roughly the same price he did a year ago. World currency value is falling and so is their purchasing power for U.S. goods. There is also tremendous incentive for Eastern Europe and Ukraine to plant wall to wall because of their currency advantage. We think over the next year or two we are going to be struggling in the commodities as a whole with cheaper energy prices and a very strong currency that make it difficult to compete in the export market.”
Moving forward, this means that farmers need to manage risk with their marketing and not swing for the fences.
“There are going to be fewer opportunities to make money and you have to decide how you will handle it. If you give something up you can get something in return in risk management,” Mock said. “We really have to work on establishing floors for crop prices and you can do it at a lower cost by setting a ceiling. If you give up that upper end you can protect the floor. This is about price risk management not forecasting. We take two kinds of contracts and put them together. If you can layer in a floor at a worst-case breakeven scenario, this can be a really useful tool.”
In the coming weeks the markets will be closely watching Brazil and the Prospective Plantings Report from USDA.
“The next really big report is going to be the March 30 Prospective Plantings Report. We are using a mix of 177 million row crop acres. That is a split between corn and beans depending on how those price relationships go in the spring and how the spring planting weather will play out,” Mock said. “Internally we are using just under 90 million acres, which is down about a million from last year. Beans will be another record. We think we are going to lose 1.7 million in cotton and about a million in soft red wheat year on year. Spring wheat prices are down. We think we are going to add corn and beans.”
No matter what the final acreage numbers end up being, the bearish trend looks to be a likely scenario after some very good times for crop profitability.
“You have to be my age to remember this situation. This is the nature of agriculture. It is cyclical and we’ll get through it,” Mock said. “You have to understand that farming does not guarantee an income every year.”