In 2012, punishing drought was the major story for many of the nation’s farmers. The aftereffects of the parched farmland will linger for quite some time said Chad Hart, associate professor and Extension economist at Iowa State University, at the American Farm Bureau Federation annual meeting.
The Jan. 11 USDA supply and demand reports shows “a fairly bullish” situation with corn. “While production has raised a bit (123.4 bushels per acre – about a one bushel rise over USDA’s previous report), we’re seeing a production number that was knocked down by the 2012 drought. There’s no doubt drought had a major influence on crop markets in 2012.
“And I argue that influence continues as we look forward into 2013.”
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When Hart originally moved to Iowa in 1991, “if you told someone (there would be) a 10.7 billion bushel corn crop it would have been a record level. As it stands, this (2012) drought-reduced crop is still the eighth biggest corn crop we’ve ever produced.”
This, said Hart, “was based upon the amount of acreage we devoted to corn (in 2012). When you look at the 97.2 million acres planted, that’s a tremendous increase in area compared to just a decade ago. We have seen agriculture evolve and keep changing its crop mix to meet various demands…
“Looking back over the last four years, we’ve built up a tremendous demand for agricultural products. We’ve used 12 billion to 13 billion bushels of corn. Projections for 2012 show a decline in that demand. But it’s a decline that had to happen.”
What the markets did in 2012 “is what they’re supposed to do. A market is meant to balance out the supply and demand of a crop. When we saw the drought coming and the impact it was having on production, the market went into action, prices rose and it dropped demand down to match the supply.”
Hart said one of the big questions going into 2013 is, “How quickly can that demand rebound?
“One of the key numbers (in the latest USDA report) is the feed number. We’re looking at 40.45 billion bushels of corn being utilized for livestock feed out of the 2012 crop. That’s an increase on USDA’s projection by 300 million bushels. So, we’re seeing some strength rebuilding on the feed side. Can that continue?”
When you look at prices over the last five years, “what you see are four record-high prices. We’ve had an incredible run in the crop markets, especially in corn.”
There are very strong prices for soybeans, as well.
“There has been very strong demand for soybeans over the last five years. (That has been) led by international demand through exports. Even in 2013, we still see exports are holding fairly strong in the face of today’s high prices…
“One key thing to remember: we’re not out of the drought yet. We’re not done feeling the effects of the weather system that hit us over the past couple of years. Those things continue to influence our markets.”
Cotton is another crop that has given up a fair amount of land over the last decade, said Hart. “It’s actually has started to rebound from that. But I worry, looking at 2013, that we could see some pull-down again.
“We got down to about nine million acres (of cotton) about five years ago. It popped back up to about 14 million acres in 2011 but we pulled about two million out (in 2012). That market continues to be under some stress as you look at maintaining acreage.”
Probably the biggest issue for cotton is the global competition and China, the biggest buyer.
“The cotton market is definitely dependent on what’s going on in China. One of the things with China is they’re sitting on a tremendous amount of cotton in storage, right now. That’s overhanging the market and has pressured prices significantly downward from where they were a year to 18 months ago.”
Read the latest on Chinese cotton here .
Currently, “the USDA is saying the average farm price is about 20 cents off last year’s average. And it will likely remain down going forward. So, we haven’t seen the cotton industry enjoy the pricing structure we’ve seen in some of the other crops. In fact, when looking at what we went through this year, the drought definitely impacted corn, soybean and wheat prices. But cotton (prices) didn’t really get the bump from the drought.”
When looking at the world corn market, “the United States is still the major player when you talk about corn production. In a good year, we produce a third of world’s corn. Even in a bad year, like 2012, we still produce a quarter of the world’s corn…
“No other place can produce corn like we can. Only one country comes close: China. China devotes about as much area to corn as the United States does. But their yields are significantly less and their production techniques are limiting how much their production can grow.”
When the world needs corn, “they’ll continue to turn to us. But right now, given the high prices, they’ll explore alternatives. They’ll look at South America, at other places. … Ukraine’s production is almost as big as Argentina’s. Ukraine is definitely looking to move into corn and soybean production because they’ve seen the profits the United States has experienced in the last couple of years.
“We will see more global competition as we move forward.”
While declining to prognosticate where prices will go in 2013, Hart said, “When I look at prices on the board, I’ll fall back on … ‘If you have a profitable price be willing to take advantage of it.’ Price protect where you can. Risk protect where you can.”
Hart was asked to what extent high corn price in recent years have spurred higher production in South America, Ukraine and other places?
“When you look at world corn production, I’ll say that the high corn prices have stimulated a strong response from the rest of the world.
“I traveled to the Ukraine last October. Typically, I like to think of the Ukraine like North Dakota. Mainly it’s been a wheat area throughout its history. Now, they’re talking a lot more about corn and soybeans … because of the high prices we’ve seen for the past five years.”
At the same time, Hart wouldn’t say that’s “necessarily shutting down” export opportunities. “As you look at corn demand worldwide, it continues to grow. … The world population will approach nine billion by 2050. We continue to see demand for our products build as populations and incomes grow. We need all hands on deck to fill that demand.
“While we’re the biggest corn producer in the world, we can’t produce all the world needs. I’d argue that in 2050 we’ll need places like the Ukraine, like Brazil, Argentina and Canada producing food and feed grains.”
The United States continues to be the low-cost provider, Hart reminded. “We have the best soils for producing many of these crops. We have a transportation structure in place to move those crops. Those are advantages we’ll continue to maintain going forward.”
Hart also addressed skyrocketing land values. Does he think when grain prices decrease there will be a corresponding decrease in cash rent and land values?
“When you look at Iowa land values, we’ve hit a record. We’re nearly at $8,300 per acre on average. Our highest land sale was $21,900 per acre and we’ve seen a tremendous increase in land values over the past five years.
“That’s directly related to (crop) prices. … Farmers are reinvesting in their business, buying land, utilizing the profits gotten from crops.
“If and when – and I’ll argue it’s when – crop prices pull back down, you’ll see land values and cash rents work down. But it will be a delayed response…
“Are we in a bubble? No. There are fundamental reasons why we’ve seen an increase in land values.
“Will we overshoot where the markets should be? Yes! We do that in every agricultural market.”
What does Hart believe will happen if Congress doesn’t support crop insurance subsidies at current levels?
“As you look at farm policy now – with a one-year extension of the current farm bill – we’ve seen proposals for what the next farm bill will look like. The version out of the Senate contained a provision that said we’ll likely see cuts in subsidies for crop insurance, especially for higher income farms.
“The reason is crop insurance sort of represents the last fairly large pot of funds that are within the ‘production agricultural support system’ we have. Under the proposals we’ve got, direct payments have been removed. Counter-cyclical payments have been removed. We’ve basically taken out everything but crop insurance. So, I think there will be an attempt by some to start to reduce even those supports for deficit reduction…
“Crop insurance is an incredibly successful program. ... It represents the largest safety net for producers today.”