Risk managers will be the survivors
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 1980’s?
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/cwt 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 thirty 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. Many plants have been shut down due to more operating margins. 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.
Call any of our offices around the Midwest to discuss a personalized marketing program for your farm operation.
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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