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.

Topics: ,

Leave a Reply

Management Stories

ManagementDow Field Day and More Cooperative Consolidation
June 28, 2017
CropLife Editor discusses his recent attendance at the Dow AgroSciences Field Day in Indiana and shares news on another pair Read More
ManagementConsolidation Update
June 22, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss progress on manufacturer consolidation, and another big move for Midwest cooperative Central Valley Read More
ManagementPlotting Corn, AGCO/Asmark’s Applicator Training Center, and Bayer-Monsanto Sell-Off News
June 15, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about their recent visits to Columbus, OH, and Bloomington, IL, along with an Read More
ASMARK AGCO Applicator Training Center
EmployeesAsmark, AGCO Open Training Center for Beginning Applicators
June 13, 2017
AGCO Corp. and the Asmark Institute have opened a new Applicator Training Center, created in a collaboration between the two Read More
Trending Articles
PrecisionAg Vision Conference
Precision AgPrecisionAg® Vision Conference: Focused on the Future
June 13, 2017
PrecisionAg® is pleased to announce the return of its PrecisionAg Vision Conference, October 10-12, 2017. Based on overwhelmingly positive response Read More
Redbanded-stinkbug-on-soybean-Photo-credit-Thomas-County-Ag
Crop InputsExperts: Mild Winter, Early Planting Will Increase Soybean Insect Threat
June 12, 2017
Higher than average temperatures this past winter affected much of the nation, especially the South and Midwest. The National Centers Read More
Eric SfiligojMonsanto ‘Picks Its Battles’ by Nixing Deere Deal
May 23, 2017
Having been in the trade journalism game since the mid-1980s, I remember several watershed moments during my career. One of Read More
Migrant farm workers
LegislationTrump: Immigration Crackdown Won’t Impact U.S. Agriculture
May 16, 2017
President Donald Trump said he would seek to keep his tough immigration enforcement policies from harming the U.S. farm industry Read More
AGCO Ratliff featured
Eric SfiligojRemembering Robert Ratliff
May 15, 2017
With all the fast-paced happenings in agriculture this spring, with multiple mergers in the works and planting season in full Read More
Case sprayer nozzle closeup
EquipmentSpray Application: A Nozzle Renaissance
May 2, 2017
If you had asked four-decade ag veteran Mark Bartel, President of Wilger Inc., just a few years ago what lay Read More
Latest News
ManagementDow Field Day and More Cooperative Consolidation
June 28, 2017
CropLife Editor discusses his recent attendance at the Dow AgroSciences Field Day in Indiana and shares news on another pair Read More
Young Corn Plants
Eric SfiligojLaunching New Seed Traits: Wait on China . . . Or Else!
June 26, 2017
In life, no one likes the waiting game. In agriculture, however, playing the waiting game is very important – especially Read More
Monsanto sign
Crop InputsMonsanto Speaks on Dicamba Issues in Arkansas
June 26, 2017
Monsanto’s Chief Technology Officer, Robb Fraley, issued the following statement following the Arkansas State Plant Board’s proposal to ban dicamba, Read More
Corn Field
Seed/BiotechCorn Insect Bt Technologies Offer Cost-effective, Proac…
June 26, 2017
When farm economics are challenging, farmers look for ways to bolster profit margins, including reducing input costs. Some may think Read More
Crop InputsArkansas Plant Board Votes to Ban Dicamba — Now W…
June 23, 2017
The Arkansas State Plant Board has voted to pass a proposed emergency rule to ban the use of in-crop dicamba, Read More
Engenia soybeans
Crop InputsBASF: ‘Closely Monitoring’ Dicamba Situatio…
June 22, 2017
BASF, whose Engenia herbicide is the target of more than 200 drift complaints in Arkansas, emailed the following statement to Read More
ManagementConsolidation Update
June 22, 2017
Editors Paul Schrimpf and Eric Sfiligoj discuss progress on manufacturer consolidation, and another big move for Midwest cooperative Central Valley Read More
Palmer pigweed seedhead in cotton
Crop InputsThreat of Dicamba Ban Looms in Arkansas
June 22, 2017
The Arkansas State Plant Board has rejected a proposed ban on the use of dicamba herbicide, but a procedural error Read More
Potash Agrium
Crop InputsAgrium-PotashCorp to become Nutrien upon Merger Complet…
June 21, 2017
Potash Corporation of Saskatchewan Inc. and Agrium Inc. have announced today that once the anticipated merger transaction closes, the new Read More
Crop InputsMidwestern BioAg Hosts TerraNu Fertilizer Plant Opening…
June 20, 2017
Last Friday, Midwestern BioAg was joined by over 80 local farmers, media and staff to celebrate the grand opening of Read More
Soybean Field
Industry NewsAligned Ag Distributors Names New President
June 19, 2017
Aligned Ag Distributors LLC announced this morning the appointment of Mary Tolke to the position of President/CEO, effective July 1. Read More
ManagementPlotting Corn, AGCO/Asmark’s Applicator Training Center…
June 15, 2017
Editors Paul Schrimpf and Eric Sfiligoj talk about their recent visits to Columbus, OH, and Bloomington, IL, along with an Read More
Seed/BiotechDow AgroSciences Announces Launch of Enlist Corn for 20…
June 14, 2017
Enlist corn will be commercially available in the U.S. for the 2018 growing season. Dow AgroSciences announced the launch today Read More
ASMARK AGCO Applicator Training Center
EmployeesAsmark, AGCO Open Training Center for Beginning Applica…
June 13, 2017
AGCO Corp. and the Asmark Institute have opened a new Applicator Training Center, created in a collaboration between the two Read More
Power to Do More Contest Winners
HerbicidesDow AgroSciences Announces Three Winners in Power to Do…
June 13, 2017
Thousands of votes have been cast and three farmers have been awarded the power to do more with a $10,000 Read More
Frogeye leaf spot
FungicidesStrobilurin-resistant Frogeye Leaf Spot Threat Looms wi…
June 13, 2017
Heavy spring rainfall throughout the South and Midwest delayed planting and created the perfect environment for diseases like frogeye leaf Read More
PrecisionAg Vision Conference
Precision AgPrecisionAg® Vision Conference: Focused on the Future
June 13, 2017
PrecisionAg® is pleased to announce the return of its PrecisionAg Vision Conference, October 10-12, 2017. Based on overwhelmingly positive response Read More
CHS St. Paul, MN fertilizer terminal
LegislationICGA Praises President Trump’s Remarks on Waterwa…
June 12, 2017
Illinois Corn Growers Association President Justin Durdan, a farmer from Utica, issued the following statement regarding President Donald Trump’s comments Read More