August 1, 2012
Actually, I’m not going to answer that. No one knows for sure. But I will give you reason to at least be concerned that the ag economy is making a bubble and that these grain prices are not going to last. As the drought hit, the fundamentals of the corn and soybean market changed dramatically, and this was one surge in prices that we did not need for the long-term benefit of grain producers’ profits.
This is a supply-driven Bull Marketin corn and soybeans. The drought was the most severe since 1988 and drove prices to unprecedented levels. Crop insurance will pay off big dividends this year, and producers with a big crop will have the best year of their life, while those who had poor crops and inadequate crop insurance coverage will be at the other end of the financial spectrum. It’s going to be a very unusual year.
On the positive side for corn and soybean prices:
1. Supplies are tight.
2. Almost all producers are benefiting from the sharp increase in farmland values. This has been driven by crop prices and even more so by lack of investment options for cash.
3. Genetic improvements are still continuing, and we’ve had three years where national average yields have not benefitted from such improvements.
On the negative side consider the following:
1. The European economy has fallen apart and will not recover any time soon. Its economy is pulling down both the U.S. and the Chinese economies. We are likely headed for a worldwide recession.
2. This is slowing energy demand, pressuring energy prices, which is deflationary.
3. Few would have anticipated the sharp reduction in corn demand as a result of this spike in prices. A substantial number of ethanol plants have closed, and final usage numbers will not come close to the USDA’s forecast number of 5.05 billion bushels for this crop year. It will take months for the ethanol industry to recover – but it will.
4. Livestock feed demand is curtailed.
5. Exports have been hurt significantly. Last year alone, U.S. farmers lost 9% of the world export market for corn, and this year it will be likely worse.
6. Sharp price increases now will encourage even more increases in worldwide corn and soybean production, and the competition will become even more keen. This weakens long-term demand for U.S. grain products.
What’s important now is to concentrate on the macro (long-term) impact of the last six months: It is not positive for agriculture. We all need balance. Commodity buyers and sellers both need a more moderate price where both sides can make money. Extremes such as we have just witnessed will not benefit us long-term.
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