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High commodity prices new norm for farmers

High commodity prices new norm for farmers

The new norm for farmers worldwide is high commodity prices, high volatility of production costs and little or no safety net for crop failures.

“The new norm for farmers worldwide is high commodity prices, high volatility of production costs and little or no safety net for crop failures,” says Sterling Liddell, vice-president for Rabo Agrifinance.

Speaking at the Southern Peanut Growers Association meeting in Panama City Beach, Fla., Liddell said prices U.S. farmers get for their crops over the next few years will in part be driven by farm decisions made in China, India, Russia and Brazil.

Over the past four to five years corn has been a driver in the commodity market and indications it will remain the crop to watch over the coming years, Liddell says.

By 2006, corn prices had stabilized over a period of years at less than three dollars a bushel — that’s what corn growers expected to get paid for their crop.

In 2006, corn prices started to go up and continued to go up and now appear to be stabilized at nearly double the price farmers received prior to 2006.

Two primary factors caused the price of corn to go up and thus influenced the price of other crops that had to compete for acreage and markets. The near worldwide recession and the emergence of ethanol as a major market for corn created demand and reduced supply.

Any time new demand on the scale of that created by ethanol for corn two things happen: You either increase supply or you increase price.  Since 2006, ethanol use has grown to five billion bushels a year — and continues to increase, but at a slower rate, while demand for livestock feed and other corn uses has decreased slightly.

At the same time ethanol was driving up demand for corn, the world, or most of it, experienced a recession. Two countries least affected by the recession were China and India. Both have emerging global economies and rapidly rising middle classes, thus increased demand.

Brazil was only marginally affected by the recession and recovered quickly, primarily because of their ability to produce their own energy in the form of ethanol from sugar, Liddell explains.

In the Midwest, soybeans and wheat had to compete with corn for acreage, driving supply down. Combined with worldwide production problems, the increased demand for grain from emerging countries, the need to price other grains competitive with corn, and other economic factors significantly reduced worldwide stocks of wheat and soybeans, creating more demand and increasing prices.

Two primary factors

“So, two primary factors, ethanol and China, have moved corn prices from a norm of around $3 a bushel to a norm of over $5 a bushel. Ethanol, most experts agree raised the value of corn by$1 to $1.50 and demand from China increased the remaining amount,” Liddell says.

“In the early 2000s stocks to use ratios for corn, cotton, soybeans and wheat began to decline dramatically. If you take China out of the equation, stocks to use ratio remains about flat — with little change through the early to late 2000s,” Liddell says.

“China became a huge consumer of commodities, and this has really manifested itself over the past 5-6 years. What it does is close down stocks to use ratio and allows tiny movements in demand to create huge volatility in the market,” he adds.

Cotton is a good example. Stocks to use ratio of cotton in China was 140 percent a couple of years ago and now it’s down to 40 percent. 

China has policies in place requiring self sufficiency in grains, and they are 95 percent self-sufficient. To reach this goal, they had to give up acreage in other crops and cotton has been the ‘give up’ crop over the past few years.

In addition to cotton, the grain crop the Chinese gave up is soybeans. China now imports enough soybeans to make up about a third of the U.S. soybean crop. In the past few years, China has become a major importer of U.S. soybeans and prices continue to reflect this demand, Liddell says.

Cotton stocks remain tight in part because the other Asian economic juggernaut, India, is sitting on a huge supply of cotton that it’s holding for use in Indian textile mills. While this has kept demand high among other cotton importing countries, it has also kept risk and volatility high, since no one can be sure when or if India will release any of the cotton it currently holds, to the world market.

There are a number of factors analysts are watching carefully in China, Liddell says.

One of those is the Chinese pork industry. By 2013, the Chinese will have converted in less than 10 years from having a swine industry that is 70 percent raised in backyard pens and free ranges to more than 70 percent raised in 1,000 unit or higher commercial operations.

“When feeding backyard animals the primary diet was whatever was available, mostly table scraps. In a modern confinement production system, the primary feed will be grain. They will either have to plant more grain for livestock feed or import more grain for livestock feed. At this point, it appears China has made a commitment to import the additional grain it needs to feed hogs in a modern production system,” Liddell says.

Investing in infrastructure

China has moved away from land development, which has raised production per acre. Instead, they are now investing more heavily in their agricultural infrastructure.

So, the demand for corn and soybeans in China is expected to go up in the coming years. Where China goes other emerging economies, like India and Pakistan, tend to follow.

Brazil is a major supplier of soybeans to China and a major competitor with the U.S. for Chinese markets. However, Liddell stresses the U.S. at current currency standards has a big advantage over Brazil. In the major soybean producing states of Brazil it costs as much to move soybeans to a port as it costs U.S. soybean growers to ship their crop to China.

The end result is that Brazil will have to raise the price of soybeans to cover the cost of transporting their crop to China, which also bodes well for U.S. soybean producers and is a good testament to the value of a strong agricultural infrastructure when it comes to global commodity trading.

In the U.S. the four major crops — corn, soybeans, wheat and cotton — set a record with just over 237 million acres planted this year. These four major crops are driving higher commodity prices for peanuts and other crops in the U.S.

The biggest challenge to U.S. wheat production in the future will likely come from the former Soviet Union, primarily Russia and the Ukraine. 

About one year out of three this area of the world will have a big crop of wheat and the other two years some disaster or another will reduce production below what is needed for domestic use.

Russia has a government policy that calls for self sufficiency in poultry production. This year, drought dramatically cut back grain production, so the Russian government banned exports. The Russians asked the Ukraine and other neighbors to reserve enough grain to feed Russia’s poultry population.

The request came in the form of, “If you want natural gas for heating fuel this winter you will reserve enough of your grain to feed our chickens.” That’s how economic diplomacy works in that part of the world, Liddell explains.

“The end result is that about 25 percent of the grain expected on the market was gone. Will there be a similar shortage next year? “Who knows, as an economist I haven’t developed the ability to predict the weather — and similar challenges exist in predicting the commodity market,” he adds.

At the end of the day, the best guess is that high commodity prices are likely to be around for a while.

High prices seem to insure volatility and that appears to be another good bet in the near future.  And, high commodity prices are going to drive up input costs and generally double the risk farmers now face to grow a crop.

“The good news for farmers is that there is literally a mountain of money available for investment in agriculture. Over the past four to five years, agriculture has been the safest investment worldwide, so money will be available to farmers, if they are willing to accept the high risk from volatile markets, Liddell says.

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