Shrinking margins, banks capping rental rates (Grain Marketing)
(Editor’s note: John Hall is a professional commodities analyst.)
Farm Economy News released on Jan. 27, an article by Keith Good, University of Illinois that outlined 10 areas of focus in assessing the year ahead, including a closer look at the U.S. farm economy and trade issues.
The article stated that: “Continually rising costs in agriculture are expected to squeeze farmers and ranchers, causing further margin erosion and financial stress in 2019.
“Rural banks have already reported declining loan repayment rates and are implementing covenants on farm loans, like imposing caps on cash rents, or by raising collateral requirements.”
I want to expand on two points taken from this article: Shrinking margins and capping rental rates as well as address supply demand factors. First, input costs are expected to increase this year which should not come as a surprise. Even though fertilizer costs have followed grain prices in recent years, seed costs have steadily increased.
We also need to understand that as supplies increase beyond demand, prices will fall in a free trade system. When I spoke last month in Delaware, I said that agriculture had become a victim of its own success.
We can easily document the tremendous improvement in yields in recent years. I suggested this increased productivity was a cause for the increased ending grain stocks we are seeing today.
Last week Allendale Inc, presented their annual marketing outlook conference. Rich Nelson, chief strategist, presented some very thought provoking points.
First: he pointed out: we used to feel mandated to “feed the world” — but not so any more. Our current yields are increasing at a faster rate than the world population.
We know that yield times acres equals production. Later this month, USDA and the trade will meet in Washington to discuss planting intentions for 2019.
Since 2011, U.S. farmers have planted between 88 million to 97.3 million acres of corn, and from 75 million to 90.1 million acres of beans. In recent years total acres for the top 28 crops have leveled off at around 321 million acres in the United States. That said, when corn acres increase, bean acres decline or visa vera. Nelson pointed out that the global challenge for U.S. growers is that world acreage continues to increase.
Brazil is now the largest bean store in the world producing more than 93 million acres with expected yields between 49.4-50.1 bushels per acre. Can they fill the Chinese appetite for beans themselves? Do the Chinese need U.S. beans?
Nelson suggested that the United States needs to identify the emerging markets in Indonesia, Thailand, Malaysia, the Philippines and Vietnam and not place all our efforts on China. Is it just a coincidence that USDA recently doled out $200 million to help ag organizations develop foreign markets for U.S. farm goods with the largest portion going to soy exporters.
USDA Ag Secretary Sonny Perdue said the program was “seed money, leveraged by hundreds of millions of dollars from the private sector,” that would help U.S. producers become less dependent on “one large customer” (e.g. China). This is telling me not to expect a significant Chinese order if there is a trade agreement reached with China.
Given the current market information, Allendale sees an increase in corn acres of 4-plus million acres in the United States with trend line yields and a reduction in bean acres in 2019. Spring wetness in the Eastern Corn Belt is a concern. Too much rain could cause challenges at planting.
If rains continue, we could see an increase in preventive plant acres or a switch back to beans. Allendale is predicting December corn futures may peak at $4.35 and then could easily fall down to $3.30 by harvest.
In beans, they do not anticipate November bean future prices will reach $10, less basis or around $9.30 cash. They also do not see managed money getting back into commodities anytime soon.
Due to this lack of news, the markets have remained flat. On Wednesday, Feb. 6, March corn futures were $3.80, May futures $3.88 and Dec. $4.03. March bean futures closed at $9.21, May $9.36, and Nov. $9.63. July wheat was $5.33. When you add a plus 20-30 basis for corn and subtract a 70-80 basis for beans and wheat you get an idea of harvest prices.
This leads me to a discussion on budgeting and the second point I wanted to discuss from the Cobank article. Bankers in the Midwest have had to put a limit on cash rental rates for their borrowers.
This is so sad! I would have thought a good businessman would know that they had to do a budget, estimate their costs, and determine if there was an acceptable margin before they begin — not so with farmers. Is this a case of too much testosterone?
What can we expect in 2019? For this example I used the spreadsheets found at http://extension.umd.edu/grainmarketing/crop-budgets. In this example, I used 2018 numbers already in the spreadsheet for corn grain, No-Till non-irrigated. I assumed variable costs would increase 5 percent this year.
The table above (I used 2018 data for spreadsheet with increased variable costs at 5 percent, and a corn price of $4 per bushel) suggests breakeven costs at various yield and cash rental rates. If you do not understand spreadsheets, ask for help.
In summary, if any young “want-to-be” farmers read this, please take this advice. If you do not feel comfortable using a spreadsheet and doing a budget, you better learn! Operating on small margins is extremely challenging.
If farming is your goal, I suggest you go get additional business skills.
You will need them to survive!
(Note: I research material from Allendale, DTN, USDA, University Land Grants and other credible sources in compiling this article. It is not merely my opinion, but rather a consensus of experts in the trade. Looking for a marketing coach or someone to discuss strategies with? Contact me at firstname.lastname@example.org, or call 410-708-8781.)
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