Moving into the latter half of the decade, grain farmers are faced with a good news/bad news scenario.
Long term, economists are bullish for grain markets. Short-term, the situation is dire. Here's the good news first.
In 2008, University of Illinois economists Darrel Good and Scott Irwin put together a detailed forecast of corn prices for the coming years. In that report, they noted corn had indeed reached a new price structure. They pegged the average price of corn at $4.60 for this new "ethanol" era.
For several years, it seemed their projection may be a tad low. The 2012 drought extended the period of extreme profitability. By 2014, two big crops back to back had reduced nearby futures under the $4 mark. With that backstory, U of I ag economist John Newton asks if Good and Irwin's $4.60 corn price is still relevant in today's market.
Newton begins by looking at the three distinct price eras established by Good and Irwin. The first began in 1947 and went until 1973. Average price in this era was $1.28/bushel. Era 2 ran from 1973 to 2006, with an average price of $2.42/bushel. Looking at the price charts the delineations are fairly clear.
In recent years, Newton notes corn spent 35 months above the $4.60 average price projection. It's only been below that projection for five months now.
"The point is one monster crop will not end the era of higher grain prices," Newton adds. "We will see price runs in this new era. They may be long or short."
He adds that prices are expected to slowly creep above the $4 range. And, while many have knocked ethanol recently, he sees it as a safety net that has boosted corn consumption by 3.5 billion bushels since it hit the big time in 2005.
Too many soybeans
Now for the bad news. On Jan. 12, USDA surprised industry analysts by leaving their soybean production number largely unchanged.
Farm Futures' senior market analyst Bryce Knorr notes the January soybean estimate came in at 3.969 billion bushels. The number is a lot higher than most industry guesses, including Farm Futures' estimate at 3.844 billion bushels.
The USDA's news is compounded with a higher than normal percentage of prospective soybean acres. Using Farm Futures' survey results, Knorr estimates growers will plant about an equal number of corn and soybean acres in 2015 (88.51 million acres of corn, 88.3 million acres of soybeans). The last time this happened was 1983.
For many, the decision to move to soybeans is more about reducing risk, rather than boosting profit, Knorr notes. The survey results indicate fall fertilizer applications were down some 5% to 7% last year. (For more on taking risk off the table with soybeans, turn to page XX.)
Responding to the report and increased soybean planting intentions, the University of Illinois adjusted its price projections for 2015. For soybeans, they expect an average futures price of $9.75 per bushel. They put corn futures at $4.20 per bushel.
With breakeven around $4 cash for corn and $10.50 cash for soybeans, Knorr expects the next rally will come just to get acres planted.
"I expect we'll see even weaker prices in February and folks will start to talk about not planting acres," Knorr says. "We may see a slight rally to get acres planted."
Lock in slim profits
The most important work farmers will do this year is in the farm office pushing the pencil.
Knorr says this is a year when folks need to limit risk and lock in profit when possible. Knorr recently detailed his marketing plan at the Farm Futures Summit.
His goal is for farmers to be 30% sold around the first planting intentions report in late March and early April. By the second week of planting, he recommends having 50% of the crop sold. And, by July 15, he suggests have 2/3 sold.
Also, try to remove emotion from the equation. Too many folks have fallen victim to "cancel if close" thinking. Knorr explains they'll mark a target price. Then, as the market gets close to the target, they'll call and cancel the sell order, trying to ride it just a bit higher.
"Forget trying to predict the market," Knorr adds. "Nobody predicted $45 crude oil."
Purdue University economist Mike Boehlje notes growers must get accustomed to locking in slim profits during this downturn.
"The profit margins you can expect in the next two to three years will not even be close to the last five years," he adds.
In this new game, it's all about controlling the cost of production, knowing the cost of production and locking in positive margins, Boehlje says. And, unfortunately in some cases, it may be about minimizing losses.