The Land — The folk wisdom in the grain trade that “big crops get bigger and small crops get smaller” was spelled out in the Jan. 12 U.S. Department of Agriculture report.
The report said the fall corn harvest was a record 13.151 billion bushels and the soybean crop was a record 3.361 billion bushels. The previous records were set in 2007 and 2006, respectively.
Corn yields were 165.2 bushels per acre, versus expectations for 162.5 bushels, and soybean yields were 44.0 bushels per acre, versus 43.4 bushels estimated by the trade.
The USDA raised its Brazilian soybean production estimate by 2 million metric tons to a record 65 million tons. Argentina's crop was left unchanged at 53 million tons. The USDA stated that they would resurvey the size of the corn and soybean crops in several key Midwestern states due to unharvested crops still in the field and may release revisions in the March 10 report. Until that time, these current estimates are the numbers that trade participants will use in analyzing supply and demand.
Markets tend to make big moves when the news from these reports is a surprise to the trade. One must assume that the estimates going into the report have already been factored into the price.
Clearly the trade was surprised by this report and the markets’ function is to factor the new information into the price. The collective opinion of the markets was that increased crop size was worth a decline of $0.50 in corn and $0.90 in soybeans from our recent higher prices. One must remember that value is a perception of worth.
The market’s reaction to the report clearly was a demonstration of the volatility that remains to be managed. This volatility gives the livestock, dairy and ethanol sectors the opportunity to fill some needs at considerably lower prices. This may be a short-term break in price that could prove supportive of grain producers in the long term.
The lower prices help maintain demand and could create longer term support for grain prices. Grain producers need the end-users to find some profitability in order to keep a healthy balance in the agricultural economy.
This recent volatility brings the grain producer the reminder that margin management is critical to maintaining equity on the balance sheet. As one factors the lower grain prices into the return on investment of land and inputs they can discover the power that this volatility brings to the bottom line.
Clearly it is difficult to foresee the future prices in the markets. This demonstrates the grain angle that comes from making marketing moves as a financial plan rather than a trading guess.
The coming year will give the grain producer the opportunity to manage their margins in a manner that will have a direct impact on the equity balance in family farming operations. Margin management is paramount because the investments are greater, the stakes are higher, the volatile markets and the margin of error are smaller than ever.
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Grain Angles is written by Tom Neher, AgStar Financial Services vice president of agribusiness and grain specialist from Rochester, Minn.
