Expect lower prices in 2014 and beyond
By Jean Caspers-Simmet
Date Modified: 11/22/2013 11:33 AM
DUBUQUE — Chad Hart, Extension grain marketing economist, said the direction being taken by the grain market won't make farmers happy.
"We've seen some of the best returns crop agriculture has ever had in the past five years," Hart said at the Oct. 30 Tri-State Agricultural Lenders Seminar in Dubuque. "Those aren't the returns we're staring at for this year. This year and the next five years, we'll be talking about break even pricing if we're lucky."
Agriculture loves cycles, Hart said. It has just been through a high price cycle, and that will be followed by a low cycle.
"We tend to overproduce," Hart said. "Neil Harl (Iowa State University economist and legal expert) said the cure for high prices is high prices. You put a high price out there, enough people chase after it, we create a lot of production, which drives the price down, and it stays down for awhile."
USDA numbers, which are a little outdated because of the federal government shutdown, show 2013 corn production at 13.8 billion bushels and total supply of 14.5 billion bushels, a record level.
Season average prices have set records in recent years, but that is changing with burgeoning supplies. The season average price now is hovering at $4. ISU's average production cost for corn is $4.40 per bushel, resulting in a 40 cent per bushel loss.
"We're seeing a drastically different market structure," Hart said.
Soybeans aren't quite as dramatic, and the change hasn't been as quick, but the same sort of pattern is happening. A 3.1 billion bushel crop with 3.3 billion bushels in total supply is forecast.
"We finally got a crop that caught up despite the weather," Hart said. "I'm hearing the same three words I heard last year, 'better than expected' for yields."
The September USDA estimates for corn show record yields in many areas outside the Corn Belt, and private forecasters are projecting great yields in many states —163 in Iowa, 180 in Illinois, 197 in Indiana and 200 in Ohio.
"There's a heck of a lot of corn weighing down the market," Hart said. "We're going to see this market remain under pressure for some time due to the sheer number of bushels we're dealing with out there."
Late August and September rains helped fill out soybeans, Hart said. Private soybean reports show a 50 bushel average in Iowa, 55 bushels in Illinois and 51 bushels in Indiana -- all better than the USDA's September projections.
Internationally, there also are strong crops.
"The high prices we've had over the past several years have been a hot incentive for everyone else to grow corn and soybeans," Hart said. "Foreign corn and soybean production is up."
The U.S. feed market will show slow to no growth in the coming year, and biofuels will be flat.
"If there's a spark in the market, it's going to come from exports," Hart said. "We are seeing recovery. With $4 corn, there are buying opportunities for our overseas customers."
Export customers have changed, Hart said. Japan, traditionally the top corn buyer, has been overshadowed by Mexico, which now accounts for 26 percent of corn export sales. China stands at 23 percent.
"China tries to be self-sufficient in corn.'' Hart said. "It is second to the United States in corn production. Traditionally, they've been able to keep up with internal demand but not this year, even with record corn yields there."
Export demand is picking up but not enough to match a 14 billion bushel corn crop.
With soybeans, the export market never slowed in 2012. Bean prices have held up in recent months because export demand continues to build. Most of the demand has come from China, which accounts for 65 percent to 70 percent of U.S. soybean exports.
As the markets stand, corn prices are running slightly below production costs, but the futures market is offering some carry into the winter and spring, Hart said. That should provide producers opportunities to catch prices that cover costs. The soybean market is maintaining prices above production costs. Based on Extension production costs the margin remains at about $1 per bushel.
"But with the inversion in the futures market, the margin is expected to disappear as the marketing year progresses," Hart said. "So, the outlook for this marketing year is around breakeven for corn and a little better than that for soybeans."
With tighter margins, marketing plans become even more important, risk management is crucial and cost savings matter.
"Remember what crop marketing was like before 2007 because the next few years may be very similar to that," Hart said.