American farmers have again surprised the world by producing another record-setting corn and soybean crop. Agricultural leaders give a portion of the obvious credit to a highly cooperative weather pattern, but other important factors include significant strides in technological advancements, and U.S. farmers who have been willing to adapt and implement best-of-practice procedures. Who would have thought just a few years back we would be harvesting a national soybean yield north of 50.0 bushels per acre or a corn crop in excess of 15 billion bushels? Unfortunately, with our consecutive string of record production, we've run into a glut of supply and low crop prices.
We now find ourselves in an environment where prices seem pinned at, or below break-even, for most all U.S. producers, and many of us are asking...now what?
Macro markets have also been creating headwinds as the U.S. dollar continues to trade well above the levels we enjoyed back when corn was trading north of $5.00 and soybeans above $12.00 per bushel. With global central bankers in regions like the European Union, Japan, China, etc., continuing to battle deflation and economic uncertainty, they have again resorted to calling upon further "quantitative easing.” Some have even taken more aggressive steps moving towards negative interest rates.
Keep in mind: while many of the world’s central bankers are clearly moving their boats towards more "quantitative easing,” the U.S. Fed is turning their ship in the opposite direction. In fact, the Fed appears on the surface to be moving more aggressively towards a "rate hiking cycle.” With the world’s biggest banking boats moving in opposite directions, the investment waters have become extremely rough and dangerous—all reasons for the recent strength in the U.S. dollar and outside macro market headwinds being created for commodities.
Record crop production, large global supply, global economic uncertainty, combined with lack of commodity interest by the funds, have been the recipe for low prices. Generally, at this point, the market’s job becomes inflicting enough pain that it squeezes out the high-cost producer. Unfortunately, the strength in the U.S. dollar has made many here in the U.S. that very target.
In fact, many American operations are being labeled as the world’s highest-cost producer. It's crystal clear, at least for the immediate future, the world needs fewer acres in play...but who's going to cut?
The recent estimates out of Argentina show their producers are going to increase corn acres by as much as +30% this coming season. Their new government completely eliminated the export tariff on corn, but left in play the export tariff on soybeans, hence incentivizing Argentinian producers to plant more corn acres.
The latest estimates out of Brazil show production forecasts at 83 to 84 MMTs vs. the 66.7 MMTs they produced this past season. Keep in mind most harvesting in South America will not take place for several more months (February-May), so there is still a ton of weather uncertainty and headlines ahead, but as you can clearly see South American producers are not backing off their acres.
Ukraine production isn't stepping back either. About 10 years ago, Ukraine produced around 200,000 tons of soybeans. This year, production reached 3.8 million tons and is expected to grow in 2016-2017 to 4.3 million tons. Corn is actually the biggest commodity in Ukraine, with estimated production this year pushing to 25 million tons or possibly higher.
Bottom-line, the market is clearly looking for production cuts to balance supply. I suspect if we don't have a major weather hiccup or reduction in total acres, prices will continue to grind lower until enough pain is inflicted to drive some producers out of the business. Just take a look at what has happened to our friends over in the energy sector. The high cost drillers have been pushed out of the business.
Technology is a wonderful tool, but remember, by nature it's extremely "deflationary.” Meaning it helps push production higher by making the process much more efficient. As more producers around the world start to embrace the advancements, I have to imagine those who have not bought into the new-world "ag tech revolution" will simply be left behind in the dust.
Again, simply look at what's happened to your neighbors in the energy sector. Those who have been leaders in technology have been able to increase production to a level which has helped offset a larger portion of the operating expense. So how do we battle a wave of lower prices? In my opinion, we have to try and out-produce it by embracing the technological gains that have become available. We have to be extremely cautious where we look to cut expenses. We can not afford to cut in areas that will stall or negatively impact yields. We have to be extremely diligent in our marketing efforts. We can not afford to be swinging for the fences.
Remember, when we are in an oversupplied environment the market’s job is to create enough pain to reduce supply.
With this in mind, we have to approach our marketing efforts as if we are up to bat with a two strike approach. All we are trying to do is put the bat on the ball and get to first base. To do this properly we have to know and fully understand all of the working parts inside our operation. We have to know down to the penny our "break-evens" so when the opportunities to market profitably do arise we can pull the trigger and lock in small gains. Please understand, I am not all "Doom & Gloom." In fact, I believe the market will provide us a handful of opportunities in 2017 to market our crops at profitable margins. Unfortunately many will not be prepared or in a position to shoot when the ducks are in the air. Without a major weather story or massive break in the U.S. dollar, which doesn't appear to be in the cards, I have to believe profitable marketing opportunities will remain fleeting. Those who have the best information will be able to make the best and most timely decisions! I hope I can be a part of your daily read...