U.S. farmers nervous that slumping grain prices will crimp profits are increasingly leasing equipment instead of buying it, creating new risks for manufacturers like Deere & Co that could suffer from declining values for leased machinery.
Farmers, facing weak markets after years of cashing in on soaring crop prices, are readjusting to a new normal in which they scrutinize every expense, particularly high-ticket items like massive, shiny tractors and planters.
The shift toward leases is the latest ripple effect from the downturn in the farming economy, which USDA predicts will cut net farm income by more than 30 percent this year to $73.6 billion, the lowest since 2007.
Switching to equipment leases allows farmers to take advantage of historically low interest rates and frees up capital for other financial needs, such as buying seed produced by Monsanto and Pioneer, along with fertilizer and paying farmland rents.
Across the U.S. Midwest, the plunge in grain prices to near four-year lows is pitting landowners, determined to sustain rental incomes, against farmer tenants, worried about making rent payments because their revenues are squeezed.
Some grain farmers already see the burden as too big. They are taking an extreme step, one not widely seen since the 1980s – breaching lease contracts, reducing how much land they will sow this spring and risking years-long legal battles with landlords.
Many rent payments – which vary from a few thousand dollars for a tiny farm to millions for a major operation were due on Monday, just weeks after USDA estimated net farm income, which peaked at $129 billion in 2013, could slide by almost a third this year to $74 billion.
Landowners are reluctant to cut rents. Some are retirees who partly rely on the rental income from the land they once farmed, and the rising number of realty investors want to maintain returns. Landlords have also seen tenants spend on new machinery and buildings during the boom and feel renters should still be able to afford lease payments.
In 2014, there were just over 2 U.S. million farms. The total is down 18,000 from the year before.
According to a new USDA report, the average farm size is 438 acres, up three acres from 2013.
Minnesota has 74,000 farms, which is down 400 from the previous year, averaging 350 acres.
North Dakota has 30,300 farms, a drop of 500 farms from 2014, averaging 1,300 acres.
South Dakota has 31,700 farms, which represents a decline of 300 farms, averaging 1,366 acres.
Corn closed the week 1.75 cents lower.
Last week, private exporters reported a sale of 140,000 metric tons of corn to Saudi Arabia and 120,000 mt of sorghum to China.
Weekly export sales showed corn sales at 28.1 million bushels.
Annual corn sales now have reached 1.370 billion bushels and are now 43 mb below a year ago.
In March, we should expect traders to anticipate a decrease in planted acreage in the March 31 report of one to three million acres. A heavy snow cap over the Midwest combined with forecasts for a cool, wet spring will make planting additional corn acres difficult, thus corn should find strength in the last half of March and early April as the market will need to secure acres to meet record demand.
Commercial interests will view pullbacks in the market as buying opportunities with forecasts for a cool, wet spring could give way to flooding across the Midwest key growing regions during the heart of the growing season. Thus commercial entities as well as large speculators will want to be long ahead of the growing season.
As price levels rise, producers should be offsetting price risk by making cash sales and using options to manage the risk.
Strategy and outlook: Producers are 100 percent sold of the 2014/15 crop . They sold 10 percent of 2015 production. They should consider selling another 15 percent at $4.65 December.
They bought calls to re-own 50 percent of previous sales.
Soybeans closed the week 27.75 cents higher.
Last week, private exporters did not report any private sales.
Weekly export sales of soybeans were 16.8 mb. Annual sales have now reached 1.732 bb, up 133 mb from a year ago.
The key pod-setting stage in South America should be completed by March 15, leaving the market to remove any weather premium that may remain in values.
The next USDA supply/demand report will be released Tuesday. The USDA report should show very little change in U.S. ending stocks and with the South American growing season effectively over as well as an expectation for an increase in U.S. seeded acres in 2015, look for prices to work lower after the report.
In the March 31 acreage report, the trade should be expecting an increase in U.S. soybean seedings of 500,000 to 1 million acres. If wet growing conditions materialize this spring as forecast, corn will rally to buy acres as the market anticipates farmers will shift corn acres to soybeans.
A very wet forecast will limit the upside for soybeans.
Like with corn, technical breaks should be well supported by commercial entities as they begin to position long ahead of the growing season as they wish to extend coverage in case prices rally sharply on a weather-related event.
Strategy and outlook: Producers are sold 100 percent of 2014/15 production. They sold 10 percent of 2015/16 production. They should consider selling another 15 percent at $10.95 November.
They bought calls on 50 percent of 2014/15 production to re-own previous sales.
This material has been prepared by a sales or trading employee or agent of Midwest Market Solutions and is, or is in the nature of, a solicitation. This material is not a research report prepared by Midwest Market Solution’s Research Department. The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Midwest Market Solutions believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such.
Brian Hoops can be reached at (605) 660-1155.
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