Commodity Price Outlook: Is It The Boom Before A Collapse? | 2021-05-24
Soaring prices for commodities ranging from corn to cotton have fueled a sense of optimism for some farmers this growing season, but economists and land investors warn that highs could be short-lived and that rents and spending production could weigh on producers sooner than they do. expect.
Short-term futures prices for corn, soybeans, wheat, pork, cotton and milk have all registered healthy gains, and in some cases, prices have nearly doubled from pandemic levels.
A year ago around May 28, futures prices for nearby corn were around $ 3.18 a bushel, soybeans at $ 8.35 and wheat at $ 5.16, according to Brock Partners, an Indiana-based commodities futures consultancy firm. This year, prices were $ 6.59, $ 15.26 and $ 6.74 respectively on May 28.
Pork prices hit seven-year highs last week, but the beef industry hasn’t seen the same price recovery after the pandemic as other commodities, said Chad Hart, an economist at the Iowa State University.
“Beef export sales increased 22% over the same time last year, so this is a huge increase in international purchases,” he said. However, producers are still feeling the effects of more limited processing, which has weighed on livestock prices, Hart noted.
“We’ve seen record to near record export sales and export shipments for a lot of our agricultural products, and then you add to that the idea of this drought last year that hasn’t stopped.” , Hart said. Agri-Pulse. “We are still concerned about the drought conditions as we plant this year’s crop. “
And ranchers are feeling the squeeze on their margins due to high grain prices.
In West Texas, growers are happy with the rise in cotton prices – prices hit 90 cents a pound in early May, up from 56 cents the previous year – but farmers in the area were face an exceptional drought this springsaid Plains Cotton Growers president Brent Nelson.
Some recent rains have helped some farmers, but the accompanying hail also ruined part of Nelson’s harvest. “It’s kind of a double-edged sword now. Our plantation is currently at a standstill in my area, and we have a lot to replant, ”he said. Agri-Pulse.
“Sure, the high prices are great, but you have to harvest and right now it seems like our problem is to start a harvest,” he noted. In Texas, 40% of the cotton crop is planted as of May 24, compared to 49% the previous year, according to USDA.
With strong commodity markets and historically low interest rates, some farmers are flocking to land auctions and equipment dealers.
“Selling prices for farmland have increased 5 to 15% in the past six months, with most of the increase occurring since the first of the year,” said Randy Dickhut, senior vice president of real estate operations at Farmers National Company, based in Omaha. “Competitive tendering among interested buyers is really putting pressure on land prices right now.”
Steve Bruere, president of People’s Company, a real estate company based in Clive, Iowa, said an increase in land values is particularly evident in the Midwest.
“Some of those crazy sales that you hear about, I mean you hear about it quite regularly,” he said. Agri-Pulse. “There was one in northeast Iowa that cost $ 18,900 an acre, and these are farm buyers paying aggressive prices.”
“The scary thing is that not 12 months ago there was a lot of talk about distress and farm failures and you went from that to the hottest farm markets I’ve ever seen,” he said. he declared.
Tractor sales continue to post double-digit growth in the United States, according to the Association of Equipment Manufacturers. Total farm tractor sales jumped 22.7% in April from 2020, the first month of the current trend.
Bankers are also seeing the impact of strong commodity markets in many parts of the country, with many borrowers refinancing at lower interest rates or paying off debt. Agricultural loan repayment rates increased during the first quarter, according to the Federal Reserve Bank of Kansas City, which covers the 10th Fed District of Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern half of New Mexico, and the western third of Missouri.
“After several years of steady deterioration, about 70% of all participating bankers said farm income was higher than a year ago,” the report says. Average interest rates remain low – the fixed rate on all farm loans was about 40 basis points lower than last year and 170 basis points lower than the 20-year average.
“Government payments and P3s have made all the difference in preventing credit deterioration from a combination of drought and pandemic disruption,” a Southeast Colorado banker noted in the most recent Agricultural credit survey, referring to the Paycheck Protection Program.
However, another northwest Oklahoma lender noted that producers could still see tight margins and more volatility this year, saying the increase in input costs “is going to be significant for 2021.”
With global supplies short and China’s rapid buying pace, some analysts have raised the possibility that the Asian giant could meet its pledge to buy $ 40.4 billion in U.S. raw materials this year.
“Given what we have seen so far in 2021 in terms of significant purchase commitments for new crop produce expected to ship in the final months of 2021 and current commodity prices, there is There is a real chance that the 2021 Phase 1 commitment level will be reached. According to a recent analysis by the American Farm Bureau Federation.
But Hart expects exports to decline at some point due to rising prices, specifically citing some foreshadowing in May’s report on estimates of global agricultural supply and demand.
“They ended up going back on some of their export expectations over the next 12 to 18 months,” he said, noting that the USDA forecast in February to maintain near-record exports for several. basic products. The USDA updated this forecast last week with even more bullish numbers.
Ag Resource Co. chairman Dan Basse believes this year’s grain markets are fundamentally different from the latest commodity price spike, when widespread drought devastated corn belt crops in 2012, leading to a surge in supply-related prices.
Some 80% of U.S. agricultural crops were affected by drought in 2012, and corn export prices soared 128% above the historical 20-year average, measured by the Bureau of Labor Statistics.
Basse said the current corn market is largely influenced by China’s import needs and US ethanol production, and he believes the market will remain strong for a few years.
Cash inflows for all products in 2021 are forecast at $ 390 billion compared to $ 401 billion in 2012, according to the USDA’s economic research service.
However, Basse said a weather disruption this year – something less severe and widespread than the drought of 2012 – could push prices even higher, given stocks are so low, especially for soybeans.
Government payments topped $ 46 billion in 2020, USDA RHS and are expected to remain relatively high at $ 25.2B in 2021.
“The USDA is already forecasting US soybean stock utilization rates in a new crop position at an all time high. Never before have we had old and new crops for which we simply could not find a solution, even with a large acreage.
USDA predicts ending soybean stocks for the 2021/2022 crop year will be 140 million bushels, well below 525 million bushels for 2019/2020.
Meanwhile, the size of the corn crop in Brazil and Argentina continues to adjust lower, pushing down global ending stocks, Basse said. The USDA currently estimates the South American crop at 109 million metric tonnes, but Basse believes it will eventually be closer to 91 million or 95 million metric tonnes.
“We need the world to somehow find an additional 12 million acres of corn over the longer term to meet this Chinese demand,” Basse said. Some will have to come from Brazil, Argentina and Ukraine, but China does not currently have a phytosanitary agreement. take Brazilian or Argentinian corn, he said.
But some farmers and economists warn that a market downturn is inevitable, referring to the adage that “the cure for high prices is high prices.” And even if commodity prices remain relatively high, rising rent costs in cash, as well as inputs like fuel, fertilizers, seeds, and crop protection chemicals can squeeze margins.
Ben Reinsche, who grows corn and soybeans near Jesup, Iowa, said Agri-Pulse farmers need a downward strategy to prepare for the next five years.
“You get by and then have devastating losses in any given year, and every once in a while you get a windfall… the farmers have to bank that one,” he said.
In North Dakota, farmer Paul Anderson of Coleharbor is also worried that a market correction could occur after additional liquidity pushed up commodity prices.
“When the correction comes after that, that’s what’s kinda scary,” Anderson said. Agri-Pulse.
Bruere warned that producers need to be careful because typically farmers have problems when they start making decisions based on high commodity prices, such as buying farmland for $ 12,000 to $ 14,000 a year. acre, only to find out later that they can’t afford it when prices sink.
Mark Jensen, CEO of Farm Credit Services of America, said he has been in the farm lending business for 29 years and “we feel like we’ve seen this movie play out before.”
“Our caution towards our producers is to be careful,” he said. “Make sure you create liquidity and watch the cash flow because we’ve seen those margins go the other way before and we will probably see it again in the future.”
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