There are still opportunities for profits come harvest time, but experts say farmers will have to work harder for them (photo from stance ventures.com)
There’s no question that commodity prices have taken a pretty big tumble in the last several months. That doesn’t mean profitability has left agriculture, but it does mean farmers will have to work a little harder for it than they did in recent years.
“We’ve had opportunities over the last 5 to 6 years where if you ride the market, you could hit a home run with your marketing by selling at $6.50 or $7 a bushel,” said Arlan Suderman, the Senior Market Analyst for Waterstreet Solutions in Peoria, Illinois. “Now you’re going to have to hit a lot of singles.”
In agriculture, what goes up has to come down. Marketing experts and financial analysts looked at the recent high commodity prices with wonder, and more than a little trepidation.
“It’s kind of like a storm you see on radar. You know something’s coming, you’re just not sure what it’s going to be,” said Bob Campbell, Vice President of the southwest territory, which includes Nebraska and Wyoming, for Farm Credit Services of America (FCS).
Campbell said, “We knew that prices couldn’t sustain themselves at the 7 or 8 dollar level, and really, even over 6.” He added, “In agriculture, the best cure for high prices is high prices.”
Campbell said the downturn in prices is going to hurt producers this year. “It’s happened fast enough that, in this cycle, producers will not have had the ability to adjust their cost structure yet, so we expect producers to incur a loss this year. However, that’s coming on the heels of several years with profits that they’ve never seen before.”
As a result, going into the downturn in prices, Campbell said, “Financially, they’re generally really strong, so they’ll be able to weather the price decrease in this cycle.”
Campbell said, “If there’s any upside at all, we know that low prices are coming, and will continue if you forecast prices on the Board. Producers have some time to really evaluate their cost structure going forward, and find out if they can handle a two or three year window of low prices.”
Campbell said FCS built forecast models in case prices began to drop in land prices during the run-up, and they’ve been doing the same thing with commodity prices.
He said, “We saw the real estate prices escalating, we started a model that said we’re not going to start lending money to producers as this land market escalates. We figured out what land could service on $4 to $4.50 corn, and what kind of debt service it could handle from that point.”
“We created models in our four states that said, based on the production, and based on the area and it’s proven yields, this is the amount of debt we’re willing to extend on that acre of ground,” said Campbell.
Campbell said, “In an area where we thought the land could handle $4,500 of debt over the long term, if someone wanted to pay 10 to 12,000 dollars, that’s fine, because they’re coming in with a lot more equity. Without the equity, we knew in the long term that wouldn’t be sustainable.”
He did notice caution among lenders during the recent run-up in commodity prices. Campbell said, “What we saw going forward is most lenders didn’t follow the rising prices with increased levels of lending or credit. They kept their level of lending pretty moderate.”
Going into the price downturn, Campbell said most grain producers shouldn’t be over-leveraged. “All they really have to figure out now is what’s their cost structure. For fixed cost structure like payments, rent, your land taxes, can you do anything to lower those so we can lower the break-even point?”
Market experts are worried commodity prices may continue lower yet before we see a price floor. (Photo from ace.illinois.edu)
They’re even advising their clients to lower their family-living costs. Campbell said, “We know those costs have gone up because they could. Can you bring those back down to some degree?”
Suderman, the Senior Market Analyst at Waterstreet Solutions, said it’s going to be important for farmers to take Campbell’s advice into consideration, because he doesn’t see prices rising in the short term.
“Given outside factors pressuring the markets, and the lack of outside money in the commodity markets, we’re looking at December corn in the area of $2.85, which is lower than the market fundamentals justify.” He added, “I could see November or January soybeans going to the $9.60 area, and if it’s a really big crop, maybe $8.80.”
“Farmers are going to have to be more careful, watch their expenses, and recognize profit opportunities when they come,” said Suderman. “They have to be able to make a business decision and lock in that profit, because opportunities are not going to last very long.”
Here’s an interesting video from KRCG TV in Missouri that may support what the experts are saying about lower commodity prices as we head into the harvest season: