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One Certainty in Today’s Market – Uncertainty

The corn and soybean market has changed greatly in the past six to eight months. Supply chain issues resulting from COVID-19 were so profound last fall, producers couldn’t be certain of fertilizer supplies for the 2022 growing season. Many farmers who purchased fertilizer in the fall had to take delivery and pay upfront, forcing them to lock in their crop mix early. This significantly impacted cash flows for 2021 and 2022, and left producers vulnerable to downside risks for inputs and commodity prices – especially at a time when commodity prices were at or below breakeven and the spring crop insurance price hadn’t been established.

As 2021 harvest wrapped up, the market knew domestic demand for corn and soybeans was at or near record highs, but the magnitude of drought in South America hadn’t fully been realized and the Russia and Ukraine war wasn’t even a thought.

Today, the corn and soybean market is fully entrenched in global events, with the war in Eastern Europe threatening Ukraine’s corn crop and consecutive years of drought impacting crop production in South America. On top of that, supply chains remain a challenge for producers, inflation has risen to levels not seen since 1981, and interest costs are bound to rise as the Federal Reserve becomes more hawkish on curbing inflation. All this during the first quarter of 2022 -- without even mentioning market reaction to our own domestic weather situation in which dry conditions pose challenges in the Western Corn Belt and wet conditions in the Eastern Corn Belt.

Even with all the events occurring and influencing the market today, the laws of supply and demand have not been repealed. History tells us that supply-side economics tend to correct themselves more quickly than demand-side economics. At some point, South America will have a normal crop. At some point, the war between Russia and Ukraine will end. And, at some point, supply chains will regain pre-COVID flow. While we can’t predict the duration of these black swan-type events, supply-side issues often lead to high price environments, which incentivize higher production.

There’s an old saying in the commodity market: The cure for high prices is high prices. Commodity prices are projected to remain relatively strong through marketing year 2022/23. But four outside expert forecasters used by Frontier Farm Credit show “bearish” intent to corn and soybeans during some period over the next three to five years.

The run-up in corn and soybean futures seen earlier this year allowed for marketing and crop insurance to manage 2022 crop profitability, while also helping offset some of last fall’s inflationary costs. Additionally, from the standpoint of market upside, this run-up also could provide opportunities for the 2023 crop, or at the very least give producers something to start thinking about and planning for. Although many analysts talk about risk towards the downside, there also is risk for not observing or acknowledging opportunities that present themselves on the upside.

The next sections outline the price forecasts from the public and private sources that help inform Frontier Farm Credit on the direction of the agricultural economy. Each is supported by a more detailed report on corn and soybean supplies, usage and general market trends that your Frontier Farm Credit financial team can discuss with you. The information isn’t intended to be prescriptive but rather provide insights to help inform decisions.

Also included are five steps producers can take today to prepare for 2023 and beyond.

Price Forecasts

  • Corn: Frontier Farm Credit uses four outside expert sources, both private and public, for forecasting and market insights. The aggregate of the four baselines average 1.8% annual growth in supply over the next five years and 0.08% in total use.
    Corn Year-over-Year Total Supply vs. Total Use 2011-12 - 2026-27P Frontier

  • Soybeans: Over the next five years, the aggregate of the four baselines average 2.1% annual growth in supply versus 1.6% in total use.
    Soybeans Year-over-Year Total Supply vs. Total Use 2011-12 - 2026-27P

  • Corn and soybean prices are expected to remain relatively strong next marketing year, 2022/23. Five-year projections are wide-ranging but trend lower, starting in marketing year 2023/24.

  • The projected change in average farm prices for corn and soybean is:

    Commodity

    April WASDE (2021/22)

    End of 5-year projection Range (2026/27)

    Corn

    $5.80 per bu.

    $3.65 - $4.41 per bu.

    Soybeans

    $13.25 per bu.

    $9.10 - $13.25 per bu.

 

Five Actionable Items

Producers need to be prepared for the eventual imbalance caused by a decrease in commodity prices that will likely precede a drop in input costs and cash rent. The commodity cycle of the last decade provides some lessons to guide next steps:

  1. Spend time planning for 2023 and beyond. Start with an honest evaluation of your input costs as well as costs tied to equipment, land and overhead (including family living).
  2. Build out projection scenarios of your revenue and expenses for a single production year (2022, 2023, etc.). Identify each cost and revenue item in total dollars and dollars per acre.
  3. Separate expenses that could change annually based on commodity prices and crop rotation (crop inputs, fuel, cash rent, etc.) from those that remain static regardless of prices (land and equipment payments, family living expenses, insurance, etc.).
  4. Use your initial projection to test the sensitivity of your operation to a single change as well as multiple changes to your cash flow in future years (e.g., decreases in commodity prices and changes in input costs). Consider how you could lower the uncertainty in the budget and what would trigger you to act (e.g., forward pricing, locking in input prices, etc.).
  5. Assess your break-evens under multiple scenarios and assess potential working capital needs to cover losses for one or multiple years.

Understanding your break-evens under a variety of scenarios will enhance your decision-making related to expanding or changing your operation, whether through additional rented acres, equipment or real estate purchases. It is imperative to closely manage the components of your cost structure that don’t change year to year (i.e., machinery debt payments, long-term leases on equipment or land, and debt service on real estate and improvements).

Payments that may be affordable today can quickly become burdensome when margins return to normal levels.

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Frontier Farm Credit serves farmers, ranchers, agribusinesses and rural residents in eastern Kansas. For inquiries outside this geography, use the Farm Credit Association Locator  to contact your local office.