By Dick Hagen
THE LAND (Mankato, Minn.)
MANKATO, Minn.
Tue, May 13 2008
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U.S. agricultural commodities look strong for 2008 and for 2009, but by 2010 the commodity market could be dicey.
A potential culprit in this reversing economic outlook might be Conservation Reserve Program land converted back to crop production.
“By 2010, we could see 6 million acres out of CRP with the biggest take coming out of North Dakota and South Dakota,” said Al Kluis of Kluis Commodities, “but less CRP acres isn’t the only cause and effect coming into play. More likely is that world production of our major grain commodities will have increased to the extent that the supply-demand scenario will essentially be back in balance.”
Why will global supply of commodities surge by 2010?
Essentially because of the same factors that are spiking world agriculture today. More land coming into production, better management producing more yields and by 2010 perhaps a significant breakthrough on trait technologies giving crops both more drought and cold-weather tolerance.
Wheat futures had just set a new high of $15.53 the day Kluis spoke. He was matter of fact about the exploding wheat situation.
“We need to find 2 million more acres of hard red spring wheat and that means taking wheat prices at least $2 above soybean prices to get there. We’re talking 4 million acres less corn this year, down to about 90 million planted acres. On soybeans the trade is talking 6 million more acres for about 69 million acres soybeans."
Kluis sees significant increases in both soybeans and wheat acres without necessarily causing environmental concerns. “Our farmers are good stewards of the land. They know keeping a land productive and environmentally secure is a long-term project. Many also know that wheat following soybeans is a good crop sequence. So winter wheat next fall could be a big item across North Dakota, South Dakota and here in Minnesota as well. In the soft red wheat belt, we’ll be seeing even more double cropping soybeans into standing wheat stubble. Both these scenarios minimize environmental issues while giving producers a stronger marketing opportunity for both crops.”
Yields continue an ongoing struggle with soybeans. Averaging about 43 bushels per acre for 2007, Kluis said growers just haven’t been able to ramp up yields significantly. That continues to be a factor in soybean carryover. If 70 million acres get planted to soybeans in 2008, and the average yield stays at 42 bushels, total production would be about 2.9 billion bushels. Total usage for the 2008 crop is projected at 3 billion bushels, which tightens carryover even more.
So will Brazil become an even bigger player in the world soybean market? Perhaps yes but sugar cane, cotton, even corn are more profitable for Brazilian farmers right now. Brazil is at about 50 million acres of soybeans today. There is enough undeveloped land to jump that to 60 million acres by 2010.
Kluis doubts that it will happen that rapidly. He speaks from personal experience because he is a managing partner on a 32,000-acre corn, soybean and cotton farm in Bahia, Brazil. He told his Minnesota audience of some “last minute” changes that he and his partners have made. He said the new crop March 2008 bid for corn was tempting so they shifted about 8 percent of their Brazilian farm crop acres from soybeans to corn. That meant an increase of 2,200 more acres of corn.
“The new crop bid for delivery right off the combine in March of 2008 for non-GMO corn went over $5.50 per bushel just as we were wrapping up planting so I just kept planting corn for another couple of days,” Kluis said. His analysis simply said the cash bid for corn at $5.40 provided more bottom-line profit than the $9.50 new crop soybeans.
His advice:
• Get 30 to 40 percent hedged on your 2008 crops.
• Get 30 to 40 percent covered with puts on your 2008 crop.
• Get into a proper crop insurance program.
“Take care of these three factors and your odds for a very good year are looking good,” Kluis said.
Ethanol demand is slowing but the usage of corn for fuel continues to expand, just at a slower pace. Even though the USDA is forecasting a 51-percent bump in ethanol production this year, the trade wonders if corn for ethanol usage is being overstated. Example: November production was up only 40 percent from November 2006 production and the increase for the first quarter of this marketing year is a disappointing 36 percent.
“Ethanol the next two years will show little profit for investors. But it too will swing back into a more profitable business. It’s a young, but cyclical business tied closely to crude oil prices. And as the country’s infrastructure for distributing renewable fuels develops, so too will the market develop.”
Kluis said, “markets are strong, much stronger than anyone predicted. And you’ve got a good short-term outlook, perhaps even for the next two years. But high prices don’t do you any good unless you’re selling. And you’re now seeing 10-percent price swings, even day by day. That’s a $1.20 swing on beans; 60 cents on corn.”
His advice is to develop a marketing plan and stick with it. “A good way to start is sell 10 percent of your crop every month, and be 30 percent hedged by May. Your breakeven keeps going up. It looks to be at least $3.50 or so on corn; maybe $5.50 on beans. You’ve got to do some figuring to determine where you are. You’re going to have nearly $150 in fertilizer costs for corn, pushing $100 in seed costs; you know what’s happening to cash rent; crop insurance will likely cost more. Get all those variable costs on paper — determine your yield goal — and then figure your breakeven.
“Yes, I do believe our country is in a recession, but it hasn’t yet caught up with agriculture. Agriculture is the bright spot in the total U.S. economy right now. It’s a great time to be in the farming business. Thanks to China and India with their huge populations moving out of rural poverty into city jobs and more demands for better living, our $5 corn and $12 soybeans are happening because of what’s happening in Asia”.
And if you need long-term mortgage money, lock it in now. Rates are as good as you’re likely going to see in the future, Kluis said.
Dick Hagen writes for The Land in Mankato, Minn.
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