Current Farm News and Commentary
By Lynn Paulson, Senior Vice President, Director of Agribusiness Development, Bell State Bank & Trust
This year’s crop seems to be turning out better than many producers had anticipated with respect to yields. It’s been estimated that somewhere around 75 to 80 percent of producers surveyed this fall reported yields higher than expected. That’s probably both good news and bad news as it relates to profitability and commodity prices.
With good yields being reported in many areas, this crop begs the question, “What is the new average?” with respect to expected yields. With improved genetics, precision seeding, comprehensive spraying programs and optimum fertilizer applications, there’s clearly a new and increased level of yields being produced – in both good and less than optimum conditions.
This year’s corn crop is expected to restore the supply pipeline, as well as reserves and carryover. A corn crop that is approaching 14 billion bushels could spell concern for prices in the short and longer term.
We need to get the demand back – especially for corn. That could be challenging, given that we’ve essentially reached a plateau in corn usage for ethanol that now takes about one out of every four acres of corn grown in the U.S. The good news is that you’re more likely to buy back demand with $4 corn than with $7 or $8 corn. The best cure for low prices is low prices.
We’ve been on a decade-long run of prosperity in agriculture, but it looks as though this current party might be coming to an end for grain producers. Hopefully, the party was financed with profits and not with excess borrowed capital. We don’t need an extensive hangover.
We’ve had a perfect storm in many respects. Ethanol, emerging market demand, low interest rates and favorable weather for increased commodity prices have all contributed to this prosperity.
Long-term outlook for production agriculture is still bright. The world is adding 200,000 people per day! If incomes and economics allow, demand for commodities will clearly grow.
With lower corn prices projected for 2014, I suspect in some areas you may see diversification, with alternative crops making a comeback. Maybe a few more acres of wheat, barley, dry beans, canola or sunflowers can be expected. Moreover, the soft landing crop revenue insurance policies provided in 2013 likely will be less attractive in 2014.
Many producers will need to deal with deferred tax liabilities in 2013, given the amount of 2013 expenses being pre-paid in 2012, as well as a significant amount of 2012 income deferred into 2013. It may bode well for fourth quarter equipment purchases. It’s an issue that needs close attention and managing – especially going into what looks to be an economic slowdown.
As lenders, our concern isn’t necessarily with the overall level of debt in the farm sector. We’re more concerned with the distribution of debt among producers. There are still a considerable number of farm operations that carry little or no debt. Some producers have considerable levels of debt and have been able to handle the debt load with decent commodity prices and historically low interest rates. That may be a challenge in the coming years.
Input costs will also warrant watching. Fertilizer, and possibly fuel, should be cheaper than in 2013. Seed costs (corn and beans) and chemicals likely will be slightly higher.
Land rents are a bit of a wildcard. While it’s likely that some of the abnormally high rents being paid may be scaled back, it’s also possible that some rents that have been lagging the market for various reasons may actually rise. The net effect could actually be higher average land rents for 2014.
Despite the expected headwinds, good management will be the cornerstone for successful operations going forward. There are well-heeled operations that have a lot of liquidity and reasonable debt loads that see a downturn in the ag economy as opportunities for growth. Adversity for some is opportunity for others.
American farmers added an estimated 2.5 billion bushels of grain storage capacity in the last five years. So, it’s not a surprise that according to a recent survey, it’s estimated that around 80% of this year’s corn crop will be stored. Of producers surveyed, 21 percent indicated they would not be storing any of their 2013 corn, while 16 percent said they would be storing 100 percent of this year’s crop. Eventually, it all has to be sold and used somewhere.
Where’s the star shining the brightest? Probably in some of the livestock sectors. While grain farmers will cringe at $4 corn (or less), many livestock producers will be smiling. Good for them. They deserve and have earned their good fortune as well. For those livestock producers in western North Dakota and South Dakota who experienced heavy death losses due to the early blizzard recently, we keep you in our thoughts.
Prices for soybeans seem to be a little more optimistic. It’s estimated that one in every four acres of soybeans in the U.S. goes to China. There’s a prevailing opinion that China has essentially “outsourced” much of its protein needs to the rest of the world. Clearly, assuming the Chinese economy can continue to grow, this could bode well for U.S. soybean producers.
We often hear about the South American corn and soybean crops and their impact on the prices U.S. producers receive – and rightfully so.
It’s interesting to note that while our South American counterparts likely can raise their commodities more cheaply than we can, our logistical advantages continue to be significant. Brazil for example, relies on trucks to move about 82 percent of its transport needs for soybeans. Freight-wise, that’s about $145/ton from field to port, which is six times higher than U.S. costs.
You probably heard about lines of trucks many, many miles long waiting at ports in Brazil this winter. Also, being a truck driver in Brazil is reportedly the second most dangerous activity right after being a gangster.
The reality however, is that these South American countries will continue to make significant investments in infrastructure to make their agricultural exports more competitive on the world market. The U.S. will need to continue to become even more efficient in the future if we want to be a major player in the global export market.
If you’d like to talk more about ag lending, call Lynn Paulson to start the conversation.
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