Isaac Newton may have been a pioneering scientist, but he must have known a little something about the laws of supply and demand of commodities and their effect on wholesale crop prices. Or so it would seem.
Newton's Third Law of physics, you might remember, states that for every action there is an opposing reaction, and if you are a corn or soybean producer carefully watching the falling prices of those commodities in recent days, then you know the rule certainly applies to your current crop.
Favorable weather conditions for many farmers this year across large crop-producing areas has been a welcome development for corn and soybean producers who were just beginning to celebrate early estimates of a bumper crop and better-than-average yields.
That would be the action of Newton's Law.
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But because market experts a now think there may be a greater supply than world demand for the commodities, prices have been slumping, what we might call the opposing reaction to an otherwise bright outlook for the crop year.
Truth be told, almost every farmer knows the principle of supply and demand—or action and reaction—isn't just a law of science, it's one of agricultural economics as well, and has been since the beginning of commercial farming.
But two Purdue agriculture economists say for many farmers the new safety net provided by the Agriculture Act of 2014 may help offset the negative reaction of falling prices, depending on the insurance options they have chosen or plan to choose for the years ahead.
With the threat of corn and soybean futures prices dropping to their lowest level since 2010—already under $4 a bushel for corn and under $11 for soybeans—farmers looking ahead to what seemed to be a good chance for high farm profits this year are now facing the possibility of less profit thanks to prime growing conditions. In other words, instead of high yields producing higher profits, those yields may actually result in much lower prices than expected.
"Crop producers have been shocked by the sharp drop in corn and soybean prices as favorable weather has increased yield prospects this summer," Michael Langemeier and Chris Hurt report in a review of crop insurance and a new government program. "Such large decreases in prices are raising anxieties among producers and their lenders regarding weak margins and the potential for tight cash flows."
But revenue policies within new crop insurance programs could help offset this type of loss they say.
The economists said that even with above-normal yields, prices could drop low enough to trigger insurance payouts on some high-coverage policies. By way of example, a farm with an 85 percent policy and yields this year 10 percent above its base actual production history of 170 bushels per acre might trigger an insurance payment if December corn futures in October average below $3.57 a bushel, a level the market is approaching.
The same farm with an 80 percent policy, however, would not trigger an insurance payout until the December corn futures average in October drops below $3.36 a bushel.
That situation is less likely the economists noted in their review, but still one that provides some protection against catastrophic low prices.
Corn producers would get the best benefit from revenue policies; soybean farmers may not benefit as much from insurance payouts at all coverage levels.
The other government program that might provide some relief from lower prices brought about by supply and demand issues is Agriculture Risk Coverage-County Option. This new program, also known as ARC-CO, currently has a higher probability of adding support to corn and soybean farmers, according to the economists.
Under the current projections of above-normal yields, the program would begin making payments when the marketing year average of corn drops below about $4 per bushel. The payments would increase as prices drop to about $3.50 a bushel.
For soybeans with above-normal yields, ARC-CO payments might begin with a marketing year average price below about $10.60, with maximum payments occurring at a price of about $9.40.
This is, of course, dependent on county figures. Langemeier and Hurt noted that the U.S. Department of Agriculture's Farm Service Agency is still working out details of the program and that payments will vary from county to county.
"The important point for producers is that the new government program appears to have a high potential of providing some protection against low revenues for corn and maybe some assistance with low soybean revenues," they said in a report published last week. "However, 2014 corn and soybean government payments will not be available until the fall of 2015 and thus will not be available to meet more immediate cash-flow needs."
The economists warn that crop insurance currently appears less likely to be of assistance for producers with strong yields, although those with high corn coverage levels have some chance of triggering crop insurance payouts. They advise farmers to consult with FSA officials or crop consultants to determine the best options for each operation.