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BRIAN HOOPS

By Staff | Mar 1, 2013

I firmly believe that history repeats itself and those that don’t learn from history; will repeat the mistakes of the past.

That brings us to the focal point of this article. At some point soon, I believe another financial crisis will hit the farm economy and we again may see another exodus of producers leave the most honorable profession in the world- production agriculture.

Do you remember the early 1980s? Increased expenses, combined with a steep rise in interest rates, huge carryout levels that pressured commodity prices all led to a weakening farm economy and a massive exodus from the farm to the cities where some farmers took extra jobs to pay their bills.

Another wave of contraction occurred in 1998, this time in the livestock sector as the price of lean hogs fell below 30 cents per hundreweight and live cattle were below 60 cents/cwt.

In 1996 and 1997, large grain production led to plentiful supplies of world commodities.

Feeding of hogs and cattle were profitable and with the cheap feed costs due to the large gain inventory levels; farmers expanded their livestock production facilities past the point the market was able to bear; and livestock prices plunged under the extra supplies.

This brought another wave of liquidation from the farm sector. The handwriting is on the wall for the farm economy. A record demand base has been built through the early part of this decade, which has driven commodity prices to all time record highs.

Farm expenses quickly followed in the wake of rising commodity prices. Land values have risen, including cash rent for farmland; fuel expenses, seed expenses, chemical and fertilizer expenses and every other expense needed to produce either grain or livestock also soared to record high levels.

As long as the prices farmers receive for their produce remains high, the farm economy will remain healthy. But what happens if those prices fall sharply lower?

The ability of the American farmer has never been underestimated and the ability should never come into question. However, compared to 30 years ago, the ability of the world’s farmers must be contemplated.

The United States is the world’s largest producer of corn, but is now the second largest soybean producer behind Brazil. I am concerned for grain producers over the next several years as world production continues to increase at the same time operating expenses for U.S. farmers are at an all time high. Cash rental rates, seed and fertilizer prices, equipment values, and now income tax rates are all substantially higher than they were a year ago.

Demand trends are starting to show warning signs of fading. The corn export market has slowed as foreign buyers have either shifted their buying patterns to other countries to save on the high freight costs or produced corn themselves.

Ethanol expansion has stopped completely and some proposed ethanol plants have now been delayed due to the economic conditions. Additionally, if government subsidies of ethanol production are repealed by congress, ethanol demand would diminish quickly.

The livestock sector, still the largest consumer of corn for feed purposes; is starting to show signs of contraction due to the lack of productivity. Once the pork, cattle and poultry industries begin to contract, it takes several years before the contract phase ends and the next expansion phase begins. The bottom line is; once demand begins to fade, it can take several years before the lost demand begins to resurface.

If production begins to expand, it would quickly outpace the slowing demand trends and the commodity price bubble would burst. Commodity prices paid to farmers would be the first to fall with farm expenses slowly following.

Commodity cycles is a basic economic principle that has been around for hundreds of years and soon the commodity boom period will end and the next farm liquidation phase will begin.

CORN ANALYSIS

Corn closed the week $.08 1/2 lower. Last week, private exporters did not report any private sales.

In the weekly export sales report, corn sales shows 15 million bushels slated for 2012/13. This is above the 12.2 mb that is needed to stay on pace with the USDA forecasts of 900 mb.

Corn is struggling during February, which is the seasonal tendency for grain prices. It is widely anticipated ending stocks will significantly increase this year if the U.S. has a normal growing season. Dryness in the Western Corn Belt remains corn’s best bet for a spring and summer rally.

Those states e are still locked in drought and until it is broken, limited downside risk remains for the corn market.

Upside is limited until the crop is threatened as exports remain poor, so choppy trade is expected until farmers begin seeding the 2013 crop.

At the Outlook Conference, the USDA estimated 2013/2014 corn acres at 96.5 million acres planted, 14.53 billion bushels produced, 163.6 bushels per acre national average yield and a whopping 2.177 billion bushel carryout.

Strategy and outlook: Producers are now 80 percent of 2012/13 crop and are also 40 percent sold of the 2013/14 crop. They re-owned 50 percent of the 2012/13 corn crop with July calls.

SOYBEAN ANALYSIS

Soybeans closed the week $.36 3/4 higher from last week. Last week, private exporters announced a sale of 570,000 metric tons of U.S. soybeans to China and 130,450 mt to an unknown destination.

In the weekly export sales report, soybean sales were a reduction of 4.4 mb. This is above the 3.3 mb that is needed to stay on pace with the current USDA forecast of 1.345 billion bushels.

Last week, soybeans rallied to match the highs established in early February. Prices near the $15 mark attracted hedging interests from South America.

Typically, we advise producers from making cash sales until after April 1, when hedgers in South America have made most of their sales and basis levels are narrowest.

Better marketing opportunities lie ahead for U.S. producers.

At the Outlook Conference, the USDA estimated planting acres for 2013/2014 at 77.5 million acres planted, 3.4 billion bushels produced, 44.5 bpa national average yield and 250 million bushel carryout.

Strategy and outlook: Producers are 80 percent sold of the 2012/13 production and are 40 percent sold of 2013/14. Re-own 50 percent of 2012/13 production with July soybean calls if July futures hit $13.75.

Brian Hoops is president and senior market analyst of Midwest Market Solutions Inc. Midwest Market Solutions is a full-service commodity brokerage and marketing advisory service, clearing through R.J. O’Brien. He can be contacted at 605-660-1155.

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