Normalcy bias can trick us into thinking that life will just continue as it always has. Pre -pandemic, farmers got used to a market that traded sideways between $3 per bushel and $4 per bushel over a period of five years or so. For those that sold their corn in the $4 area anytime between 2015 and 2019, you were pretty much selling at the high of the year for the most part.

By the time the market reacted to low inventory, farmers were conditioned to believe that the market could not go much above $4 again. You all know what happened between 2020 and 2022. And now we find ourselves on the opposite side of that coin.

My outlook early this year was that if we got to spring season and planting conditions were optimal, the market was going to slide lower. It didn’t even take that long. By March the forecast looked at the spring weather outlook and decided it had seen enough. What the market saw was ideal planting conditions that would lead to a decent crop, which would in turn allow for the carryover stocks to surge.

Other than a couple of spikes in June and July, the market continually slid lower, never looking back. It looks like 2023 is going to end in a thud as the window for the harvest seasonal low has now come and gone with no acknowledgement from the Chicago Board of Trade. 

Related:Fertilizer Outlook: Global dynamics to influence 2024 fertilizer prices

Marketing history repeats itself

Many farmers still have a taste for $6 corn and are having a hard time letting go of it. Too many have gotten used to the way things were and are having a hard time accepting how things will now be. The past year reminds me too much of 2013. In 2012, we saw a great bull run only to slowly give it all back and then some in 2013. The low of 2013 was in December. The market did rally back in early 2014, adding back $1, but by May of that year, the market collapsed yet again before finally settling into what would eventually become a five-year trading range between $3.25 per bu and $4.25 per bu. My fear is the market, much like in 2013/14, is now trying to determine its adjusted trading range. Unfortunately, that range is lower than any of us like.

We need to be ready to temper our expectations as it is not realistic to expect another bull run like the one we just had, at least not for a while. There are positive things to look forward to. Corn exports are improving and should continue to remain strong as our global export prices are very competitive. Ethanol margins are profitable. We also think “safrinha” corn conditions in Brazil will face some challenges. Added up, it still does not guarantee a return to what was.

What this means is the outlook for farm profitability could be entering a period of “margin depression.” That is a fancy word some Wall Street bankers like to throw around referring to narrow profit margins. (Now I like to say it to sound smart.)

Curb input and capital costs

Commodity prices may be down, but input costs are coming down too. I already have all my fertilizer booked for next season and most of it was on par with fertilizer costs back in late 2019. Rent may not come down very quickly, but it should stabilize.

Those that got locked into $400 to $500 per acre multi-year rental agreements will likely regret it. Getting locked into those expensive, longer-term agreements is making a huge assumption that the good times would last forever when history shows they don’t.

Crop insurance premiums also should come down. If grain prices fall, the value of coverage per acre drops with it. While I paid for it through higher premiums this season, I remember thinking how fortunate I was to be able to have insurance coverage that matched what I had invested in the crop. I couldn’t lose money. This is rarely the case and with the market continuing to struggle, it doesn’t appear it will be the case next season.

One area that likely won’t decrease anytime soon is the cost of living. The money to pay for food, utilities or vacations is coming from somewhere even if it is not coming directly out of the farm account.

Overall, the agriculture industry is set up extremely well even if we really are entering into a new stage of margin depression. Interest rates are higher but farmers likely don’t need as much operating debt as they did four years ago. That doesn’t mean we should lower our guard. Along with tempering our expectations, we will have to work harder at managing any capital reductions going into 2024.

Matthew Kruse is President of Commstock Investments. Subscribe to their report at www.commstock.com.

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