The Dramatic Downturn in crop prices raises this question: Does agriculture face the same crisis as the general economy, or are recent market declines only a temporary setback?
Even as crop prices have faltered, forecasters say that the market forces that have buoyed corn, soybean and wheat prices the past two years remain strong for the long term. But in the short term, unless crop prices recover, many farmers could face break-even budgets, at best, as they prepare for 2009, especially on high-priced rented ground.
“Given what some people are paying for rent, if prices fall much further, some people could be in trouble,” says Patrick Westhoff, co-director of the Food and Agricultural Policy Institute (FAPRI) at the University of Missouri.
“We are really close to dropping below breakeven on 2009 corn [at $4.60/bu., December futures contract] and soybeans [at $9.50/bu. for November 2009],” adds Gary Schnitkey, an ag economist at the University of Illinois. “Right now, I could build a case for the market going down, or going back up,” Schnitkey said in October. “There is that much uncertainty right now. I would be surprised if prices are at these levels next year. But I don't know which direction they will move.”
Price outlooks whipsawed
Commodity price outlooks whipsawed as 2008 progressed. Short- and long-term price projections first shifted to the high side as forecasters factored in rapidly escalating market prices they didn't expect earlier in the year. Now they've moved to the low side, as the bottom dropped out of the market this fall. Given the price volatility this fall, many market forecasters aren't willing to predict where prices will land.
To illustrate: FAPRI's January outlook report projected corn prices in the $4.00/bu. range from 2008 through the following decade. Soybean prices were pegged to average about $10 for the next 10 years. Wheat was forecast to average about $5.50/bu. for 2008-2009, then hold at about $5.25 on average through 2018.
By mid-summer, it was clear that those prices, which were based on oil at the $80 mark, had clearly undershot the market. So in August, after oil had moved to $120/barrel, FAPRI issued revised estimates that added $1.00 to $1.50/bu. to average prices for all three commodities through the next decade.
Within weeks, those projections were out the window as commodity markets went into a free fall.
“Our projections are based on assumptions,” says Westhoff of FAPRI. “The smart thinking was wrong” — at least when it came to anticipating the depth of the international credit crisis and forecasting its dramatic impact on agricultural commodity prices.”
Bullish times ahead?
Although the short-term outlook appears to be lousy, better times are likely to return, assuming that supply and demand fundamentals remain relevant. But the question is, when will they return?
“With apologies to Elvis, right now the fundamentals have left the building,” says Michael Whitehead, vice president with the food and agribusiness research advisory group at Rabobank, a large international ag lender. “Currently, the market is in a state of extreme volatility — absolute volatility not based on fundamentals. Fundamentals will start becoming clearer again in 2009.”
Sooner or later, the fundamentals that drive commodity markets long term will begin to take hold on markets. And those fundamentals remain relatively positive, Whitehead says.
“The long-term trend for food and feed demand is very positive,” he says. “Other parts of the world won't have the reduced growth we are expecting. Big export clients like China are still expecting 9% growth in their economy. That is not unhealthy growth. It is reason for optimism.”
Adds Westhoff: “Certainly, the euphoria we saw a few months ago isn't there, but by no means do I want to paint a doom-and-gloom picture [for the long term].”
However, he says, strengthening of the dollar against other world currencies and a possible worldwide recession are likely to reduce exports, resulting in commodity prices that are lower than those projected in August.
Crude oil prices also are a factor in the corn market because of the linkage between oil and ethanol. “At current [oil] prices [$80 range] on up, you would expect corn prices to move [upward] in tandem with petroleum,” Westhoff says.
When the market will settle down and begin reflecting supply and demand fundamentals is anybody's guess. “If you think I have a crystal ball, I don't,” Westhoff says.
Assuming recent harvest 2009 prices for corn and soybeans (corn at $4.60/bu., soybeans at $9.50/bu.), margins will be tight to nonexistent for some growers. That's especially true if price increases for key inputs turn out as projected.
Prior to the financial meltdown, Schnitkey projected that production costs, excluding land, to plant an acre of corn in 2009 would be up $181 to $569/acre. That's a whopping 47% increase from 2008. Soybean costs were projected to be up a more sedate 35%, from $239 to $324/acre.
“There could be some moderation in cost increases, but I don't expect much,” he says.
He advises growers to delay setting cash rental prices if possible. A variable cash lease formula that sets the price once markets settle down is one option. “Share rent would make some sense right now, too,” he adds.
If recent fall 2009 prices hold, cash rents could fall in some areas, he says. That's especially true for lower productivity farmland. “There is not much difference in non-land production costs between high- and low-productivity land,” he says. “But you have less revenue base with lower-quality land, so there is much more of a squeeze.”
Even if 2009 profit margins are thin, farmers in general are in a relatively good financial position to hold on for better times, Westhoff notes. “One thing that is a good sign versus the 1970s and 1980s is that average debt-to-asset ratios are as low or lower than they have been for a long time,” he says. “Even if there were a downturn, we wouldn't have lots and lots of bankruptcies.”