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Wheat and More….or less

If you're a crop farmer looking for good news in USDA'srecently released 10-year outlook, you are simply out of luck. If you're a corngrower, you'd better get used to low prices. For the 2013-2014 crop, USDAprojects a corn price of $4.50/bu. However, prices continue to decline andwon't bottom out until the 2015 crop when prices hit $3.30/bu.

Dan Basse with AgResource in Chicago says that price wouldassume a harvest low of under $3/bu. "During this timeframe, US planted cornacreage will drop from 97 million acres to 88 million in 2017 which would allowprices to recover to a season average of $4.10 by 2022. In short, we're lookingat an 8-year period of US farmgate prices below $4/bu.!"  he says.

With corn carryover climbing to almost  3 billion bushels in some of these years,prices will clearly suffer.

USDA also projects a continuing drop in wheat acreage-atrend which started in the early '80s. And with prices hitting bottom at $4.30by 2015, there's no incentive to grow wheat. We planted 56 million acres ofwheat for the 2013-2014 crop, but by 2023, we'll plant only 52 million acres.Finally, 8 to 10 years from now, wheat will make it back above $5/bu. Also overthis time frame, our share of the world wheat market will continue to shrinkbecause of rising imports and increased global competition.

As expected, the sharp drop in corn and wheat prices, forinstance, lead to sharp drops in net farm income-starting this year. However,the decline in net farm income continues and gets even worse between 2014 and2023.

Basse says US farmers will see nothing to cheer about in theBaseline Report. "Farm profitability will be severely compressed in futureyears without adverse weather."

To make matters worse, the report, which came out on Feb.13, is already  out of date.  The report was written late last year andearly this year-and with no new Farm Bill on the horizon, the authors had toassume the old farm bill would be continued. Well,  we have a new farm bill-and in thatlegislation, there are no more direct payments. And, guys, this is really goingto hurt.

Time will tell if replacement programs including a newversion of the old target price concept will make up for these short falls.While the wheat target price is set at $5.50, you're paid on 85% of your baseacres so it's actually only $4.67/bu. For sure, with much lower grain prices, all payments as well asinsurance coverage will go down sharply.

With a continuation of the old farm bill, it was projectedwe'd see a sharp increase in payments especially in years 2015, 2016 and 2017-when grain prices are the lowestand when we'd need that source of income the worst. These are the years we needto look out for.

Basse   goes on to saythat if we were to have two normal growing seasons in a row, spot CBOT cornfutures could drop to $2.50 to $2.75 for harvest lows. "We cannot rule out sub$3 spot CBOT corn by late summer or early fall of 2015. The market has toreduce US major crop planted acreage with lower prices. " Basse says.

USDA agrees. Outside of 9 million acres of corn simplyvanishing, another 4 million acres of wheat will also disappear. Where willthose acres go? USDA says some will go back into CRP. Currently at 26 millionacres, CRP is expected to swing back up to 32 million acres over the comingyears.

Further, Basse says while it's quite profitable to make cornethanol, the problem isn't the profitability, but the blend wall which EPA andAgResource calculate to be about 13 billion gallons-and still dropping.  "US ethanol is virtually capped at about 5billion bushels no matter how profitable US ethanol is. Our ethanol industry isnow mature."

We'll also see a slight increase in soybean acres and maybethe same with minor crops like canola. We could also see more wheat grazed out.And why not? The only good news out there is for people in the livestockindustry. If you're losing money on wheat and making money on cattle, graze itout.

And believe you me, our friends in the cattle industry havepaid their dues. I talked with a feedlot manager recently and he said he wentan entire 18 months with not a single pen making money.  But that is changing-and fast. The beef-cornratio jumps from 18 this year to over double that for the rest of the 10yearsin the USDA projections. These low corn prices are what those guys have beenpraying for. But what's more is that the prices for beef, pork and poultry areall going up at the same time that cost of production is going down. In theliterature, this is referred to as a positive profit margin…..times two.

So at the end of the day, what does this mean? For the cropspeople out there, I am reminded of the old Chinese curse: May you live ininteresting times. I have a feeling we're getting ready to find out what thatmeans.

 

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