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

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
EmployeesAsmark Institute Dedicates New Training Center To Ford West
August 6, 2014
The Asmark Institute plans to recognize the retired industry leader's years of service to the fertilizer industry at the new state-of-the-art facility in Owensboro, KY. Read More
LegislationUSDA: Quick Implementation Of Disaster Assistance Programs A ‘Top Priority’
July 9, 2014
USDA has processed 106,000 payments to farmers in 40 states across the country who suffered livestock and grazing losses between Oct. 2011 and passage of the 2014 Farm Bill. Read More

Trending Articles

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
EquipmentNew Holland Acquires Miller-St. Nazianz
September 3, 2014
The assets of Miller acquired as part of the transaction will become part of New Holland Agriculture, a CNH Industrial brand, building on a successful four-year partnership between the two companies. Read More
CropLife 100Pinnacle Acquires East Kansas Chemical
September 2, 2014
Ranked 82nd on the CropLife 100, East Kansas Chemical will operate as part of Pinnacle's Performance Agriculture brand. Read More
MAGIE 2014 ShowStopper
EquipmentJohn Deere Again Wins MAGIE ShowStopper Award
August 25, 2014
For the second consecutive year, John Deere was honored at the Midwest AG Industries Exposition (MAGIE) for its new R4045 sprayer. Read More
ManagementExpert To Discuss Farmland Value, Rent At Farm Science Review
August 18, 2014
While cropland values in Ohio increased in the past two years, they have remained flat in 2014, declining in some cases, according to an Ohio State University agricultural economist. Read More
EquipmentAdvance Your Technology IQ At MAGIE
August 13, 2014
The Midwest AG Industries Exposition (August 20-21) is the place you need to be to see, study and evaluate how new advances in the equipment, operations, crop protection and fertility sectors can help your business prosper. Read More

Latest News

StewardshipSecretary Vilsack Highlights Innovative Conservation Ef…
September 15, 2014
Nearly $16 million in Conservation Innovation Grants (CIGs) will be awarded to 47 organizations to help develop cutting-edge ideas to accelerate innovation in private lands conservation. Read More
Seed/BiotechSyngenta Responds To Cargill Lawsuit
September 15, 2014
Syngenta believes that the lawsuit is without merit and strongly upholds the right of growers to have access to approved new technologies. Read More
Equipment2014 Farm Science Review Launches Mobile App
September 15, 2014
Smartphone and tablet users planning on attending the 2014 Farm Science Review can now download this year’s customized mobile application. Read More
CropLife 100Southern States Coop Grower Sets Georgia Soybean Yield …
September 15, 2014
Georgia farmer Randy Dowdy's soybeans yielded an astonishing 110.66 bushels per acre, crushing the previous record of 82 bushels-per-acre. Read More
NIMITZ Treated vs Untreated pepper plant
InsecticidesNIMITZ Nematicide Approved By EPA
September 12, 2014
NIMITZ is a novel, non-fumigant nematicide with simplified application features, user safety and an active ingredient with a unique mode of action. Read More
InsecticidesMarrone Bio Innovations Receives Patent For Chromobacte…
September 11, 2014
The patent is the first step for MBI in developing a commercially viable product to inhibit infestations of corn rootworm larvae across America and other regions. Read More
HerbicidesDow AgroSciences: Keeping The Pipeline Stocked
September 11, 2014
Dow AgroSciences is embracing product diversity to drive the company’s future. Read More
CropLife 100CHS Is Official Partner Of New St. Paul Ballpark
September 10, 2014
The new ballpark in St. Paul, MN, officially became CHS Field with Twin Cities-based CHS Inc. revealed as the naming rights partner. Read More
EquipmentHagie Honors Farming Stewardship Leaders
September 10, 2014
The Iowa Farm Environmental Leader award recognizes Iowa farmers as environmental leaders that are committed to healthy soils and improved water quality. Read More
Precision AgPlantBeat: Your Plants’ Pulse In The Palm Of Your Han…
September 10, 2014
A new agronomic monitoring and recommendation service from Phytech could rewrite the book on real-time plant health status monitoring. Read More
StewardshipCCAs Making Headway With 4R Program In Lake Erie Wester…
September 9, 2014
Certified Crop Advisers are implementing the 4R Nutrient Stewardship Certification program in Lake Erie's Western Basin to improve water quality. Read More
MicronutrientsMicronutrients Going Macro
September 9, 2014
Between 2014’s fantastic growing conditions and a heightened awareness on plant nutrition, the major players in micronutrients are gearing up for another big year. Read More
Crop InputsFMC Announces Cheminova Takeover
September 8, 2014
FMC Corporation today announced that it has signed a definitive agreement to acquire Cheminova, a wholly owned subsidiary of Auriga Industries. Read More
HerbicidesValent’s Fierce XLT Herbicide Receives EPA Approv…
September 8, 2014
Valent U.S.A. Corp. announced today that Fierce XLT Soybean Herbicide is now federally registered for preemergence weed control in soybeans Read More
Eric SfiligojIndustry Consolidation Set To Increase Going Forward
September 8, 2014
As the agricultural marketplace moves into fall, one observer predicts the pace of consolidation will grow at all levels. Read More
LegislationCropLife America Leaders Address Regulatory Landscape, …
September 8, 2014
As CropLife America enters its 81st year, the organization’s leaders have seen another period of rapid and visible policy and public issue activity. 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
Precision AgPrecision Agriculture: Finding The Payback
September 6, 2014
Profitability in precision ag is not about any one technology, but the result of employing technology in a total system approach that is agronomically sound. Read More