U.S. Agriculture: Challenging Times Ahead

Seven Impacts Of ‘High Corn’

Regardless of how we got here, what’s clear is that commodity prices in general — and corn prices in particular — have been well above historical norms for most of the past five years. This period of high prices has caused several impacts that feel good in the short term but sow the seeds of distorted valuations and mal-investment (which ultimately don’t feel nearly as pleasant). These long-term impacts fit into seven primary categories:

1. New Technology Introduced into Agriculture. Technologies which generate an incremental few bushels of corn are very difficult to justify when prices are low. At higher prices, however, farmers can quickly justify the expenditure. The boom in biologics, specialty fertilizer and enhanced seed all provide evidence of this technology induction effect. A related phenomenon we are observing is technology migration from high value coastal crops to the Midwest. This is by far the most desirable and sustainable impact of the price boom, as these technologies will probably be around far longer than temporarily elevated corn prices.

2. New Land Introduced into Production. The value of corn and soybeans has resulted in significant acreage expansion in these crops. In many cases this acreage came from other crops such as wheat, oats, barley, and sorghum, but a great deal of this acreage came from conservation reserve (CRP) acreage that was rolled out of conservation and into production.  After five straight years of increases, in 2013 farmers planted the most acres of corn since 1936.

3. Demand Rationed Among Existing Users. Some of the loudest critics of ethanol have been livestock producers, for an obvious reason. The spike in corn prices over the past five years has resulted in significant profit declines for livestock producers, extraordinary efforts to incorporate alternatives like DDGSs into rations, and downsizing of herds to cope with decreased profitability.

4. Increased Farm Income. Farm income has spiked in recent years as enhanced corn profitability drifted down to the bottom line. U.S. growers have reaped record profits over the past several years, ironically even in the drought year of 2012, due partly to dramatically higher prices and partly to lucrative crop insurance payments.

5. Higher Seed, Chem and Equip­ment Sales. Sales of inputs, from fertilizer to chemicals to seeds to equipment, have all risen dramatically over the past five years. Part of this growth was volume growth due to greater acreage, but a substantial portion was unit pricing growth for primary inputs.

6. Increased Ag Asset Prices, Especially Land. We have all been reading for several years about the dramatic increases in farmland prices, with quality Midwest farm ground fetching $12,000 to $15,000 per acre. Cash rents have doubled with many growers paying $350 to $500/acre.

7. Outside Investment in Agricul­ture Stimulated. Outside ownership of farmland is increasing dramatically, with institutional and private investors buying substantial quantities of farmland. Private equity and venture firms have also substantially increased their investment in the sector.

Waning Ethanol Support

For those following the news on the RFS, a great debate is underway on whether U.S. government support to ethanol will be decreased. Regardless of the outcome of this debate, it seems the presence of the RFS has been largely priced into commodity markets, which means the only logical impact of a reduction in the RFS is a further decline in corn pricing.

This is critical as the markets have adjusted to a “new normal” of 13 billion gallons of corn ethanol.
The majority of the impact of this volume has already been built into the markets, which means the most likely impact of any changes to the RFS are downward as the market responds to less demand than what it had previously priced for corn in ethanol.

The high price of corn has had the impact that any economist would predict — expansion of supply and destruction of demand. More corn acres, both in the U.S. as well as abroad, have increased supply, as well as a deep focus on the development of yield enhancing technology. The livestock industry and corn export markets have borne the brunt of the corn demand destruction. Ethanol demand destruction is more erratic as variability in global oil prices, along with corn, determines the “spread” for ethanol production.

The Road From Here

Most importantly, the profit engine for producers is sputtering as higher land and input prices combine with reduced corn prices to dramatically shrink margins. At the likely contribution margin from corn production, today’s cash rents are simply unsustainable — cash rent negotiations between landowners and tenants is likely to be pretty painful this winter. We can also expect dramatically tighter production margins to negatively affect input and equipment sales volumes and pricing strength going into 2014. Recent declines in corn prices, when combined with better protein prices, should enhance livestock profits along with corn demand.

In economic terms, the ag market has “gotten ahead of itself” and we can expect a year or two of correction while we undergo some demand expansion and supply contraction, the exact opposite of the past few years. By 2016-17 a more sustainable long-term bull market built on global demand is likely to emerge after our secular agricultural uptrend experiences a cyclical correction.

Pages: 1 2

Topics: ,

Leave a Reply

Management Stories

ManagementMACA 2014: The State Of The Agricultural Industry, And Then Some
October 9, 2014
The trade association’s annual gathering featured speakers from across agriculture and beyond. Read More
StewardshipA Multi-Layered Approach To Water Quality
October 6, 2014
Illinois event highlights research and technology designed to better monitor and improve water quality — and the benefits of cooperative, coordinated effort. Read More
StewardshipMichigan Agriculture Leaders On Toledo Water Ban: We Want To Be Part Of The Conversation
August 8, 2014
Leaders of Michigan agricultural organizations said Thursday that the government should not have a “knee-jerk reaction” based on last weekend’s water ban in Toledo due to fertilizer run-off in Lake Erie. Read More
ManagementRussia Bans U.S. And EU Ag Product Imports In Ukraine Sanctions Battle
August 7, 2014
Russian President Vladimir Putin has banned the import of agricultural goods from countries that have imposed sanctions on Russia. Read More

Trending Articles

Crop InputsPlatform Specialty Products To Acquire Arysta LifeScience
October 20, 2014
Once the acquisition is complete, Platform Specialty Products will combine Arysta LifeScience with previously acquired companies Agriphar and Chemtura Crop Solutions. Read More
Seed/BiotechMonsanto Offers New Support For Ferguson, Area Communities
October 8, 2014
Monsanto Co. has committed $1 million in new support for several collaborative efforts in Ferguson, MO, and surrounding communities in North St. Louis County. Read More
Seed/BiotechUnapproved Genetically Modified Wheat Found In Montana
October 3, 2014
USDA reports that one year after discovery of Monsanto's unapproved wheat in a single Oregon field disrupted U.S. wheat export sales, the GMO wheat has again been found in Montana. Read More
Equipment2014 Product Of The Year Voting
September 19, 2014
The deadline to vote for the 2014 CropLife IRON Product of the Year is October 31. Please cast your vote today to help us determine the winner. Read More
FertilizerFall Fertility 2014: Forecasting Fertilizer Use
September 7, 2014
Great crops this year have tapped the soil, and fall work is definitely called for, but how challenging will that get? Read More
CropLife 100CHS To Build $3 Billion Fertilizer Plant In North Dakota
September 5, 2014
The fertilizer plant in Spiritwood will be the single largest investment in CHS history, as well as the single largest private investment project ever undertaken in North Dakota. Read More

Latest News

CropLife 100GROWMARK Announces Appointments In Plant Food Division
October 22, 2014
GROWMARK, Inc. has announced the three key staff changes in its Plant Food Division. Read More
CropLife 100GROWMARK Appoints New VP Of Finance And Risk Management
October 22, 2014
Wade Mittelstadt has been named GROWMARK Vice President, Financial and Risk Mangement, effective December 1, 2014. Read More
FungicidesEPA Approves BASF In-Furrow Corn Fungicide
October 22, 2014
Field trials show Xanthion In-furrow fungicide provides more rapid emergence, extended residual control and improved seedling health than untreated crops. Read More
EquipmentAgraScout App Available At No Cost To Universities
October 21, 2014
AgraScout, a fast and easy to use mobile crop scouting app, is now available at no cost to University students, Read More
LegislationNew Farm Bill Program To Provide Relief To Farmers Affe…
October 21, 2014
The USDA has implemented a new Farm Bill initiative that will provide relief to farmers affected by severe weather, including drought. Read More
ManagementGreenfield Scholars Program Aims To Sustain Agronomy Wo…
October 21, 2014
The program encourages talented students to study agronomy, crop and soil sciences while cultivating networks to develop the necessary workforce to sustain the profession. Read More
Paul SchrimpfPrecision Ag: Taking It To The Hill
October 21, 2014
A new coalition took the good news message of precision agriculture to Washington, DC, last month. Read More
ManagementUSDA Awards $18 Million In Small Business Research Gran…
October 21, 2014
The grants will provide high quality, advanced research and development that will lead to technological innovations and solutions for American agriculture. Read More
FertilizerCF Industries Terminates Merger Discussions With Yara I…
October 21, 2014
CF Industries Holdings and Yara International have terminated their discussions regarding a potential merger of equals transaction. Read More
Seed/BiotechSyngenta Ranked A Top 10 Biotech Employer For Third tim…
October 20, 2014
Syngenta ranked in the top 10 among the world’s top biotech employers, according to an annual survey conducted by Science magazine. Read More
CropLife 100Wheat Growers Break Ground For New Facility At Kennebec
October 20, 2014
Wheat Growers has broke ground for a state-of-the-art shuttle loader grain handling, fertilizer and agronomy facility in Kennebec, SD. Read More
FertilizerVerdesian Life Sciences Signs Agreement With Los Alamos…
October 20, 2014
Verdesian Life Sciences has signed a licensing agreement with Los Alamos National Laboratory to develop and market LANL’s latest nitrogen enhancement technology for plants. Read More
MicronutrientsStoller Group Announces Groundbreaking At New Office Bu…
October 20, 2014
Jerry Stoller, founder and president of Stoller Group, announced the groundbreaking at the site of the company’s future headquarters in Read More
Crop InputsBioSafe Systems Opens New Production Facility In Nevada
October 20, 2014
BioSafe Systems has completed construction of a state-of-art production facility in Sparks, NV, for its line of activated peroxygen products. Read More
Crop InputsPlatform Specialty Products To Acquire Arysta LifeScien…
October 20, 2014
Once the acquisition is complete, Platform Specialty Products will combine Arysta LifeScience with previously acquired companies Agriphar and Chemtura Crop Solutions. Read More
Seed/BiotechEPA Approves Dow’s Enlist Duo Herbicide
October 15, 2014
The Enlist Weed Control System, breakthrough technology to fight resistant and tough weeds, has received the long-awaited green light from federal regulatory authorities. Read More
MicronutrientsGypsum On Farms Could Help Keep Water Clean, Not Green
October 14, 2014
Gypsum, which has roots in the past as a farm soil treatment, also may have a bright future, and not just as a booster of crops but also as a protector of water. Read More
Photo credit: The United Soybean Board/The Soybean Checkoff.
Crop InputsVerdesian Grows Sales Staff
October 14, 2014
The new account managers will drive sales growth and support relationships with key customers in the plant nutrition and seed treatment and inoculants product categories. Read More