Tom Hall, Senior Agronomist, Rooster Strategic Solutions
In 1972, U.S. Secretary of Agriculture Earl Butz engineered a massive sale of grain to the Soviet Union, hollowing out the grain reserve and driving prices skyward. To take advantage of the opportunities these moves presented, he urged farmers to “Plant fence row to fence row.”
Nearly 50 years later, U.S. farmers are making a similar decision, but it’s the commodity markets, not a call from the USDA, that’s spurring them on to action. According to the recently released USDA 2021 Planting Intention Reports, farmers will sow 182 million acres of corn and soybeans this year. This would be an all-time high, surpassing last year’s totals by 8 million acres.
The main driver for farmer optimism? Higher prices. One look at the chart above shows why farmers are anxious to plant more. This is an incredible turnaround from 6 months ago, when corn was languishing at $3.50 and soybeans at $8.50. Remember the Rooster 10-6-4 rule of thumb for profitability when prices for beans are above $10, wheat above $6, and corn above $4? It seems the time is ripe.
The reason for higher prices is directly tied to China. With their intention to renew and increase purchases of corn, soybeans, sorghum, and ethanol, Ag Economists are bullish that prices will remain in the profitable range into 2022. Adding to their optimism is the relative difference in commodity prices between the U.S. and China. Today, corn is selling in China in the $10-per-bushel range. So, buying corn from the U.S for $5 makes sense, even taking into account the considerable cost of transporting grain from Mississippi or Pacific Northwest terminals.
Other factors pushing China to continue buying U.S. grain include meeting trade agreements, the ongoing effort to rebuild hog herds devastated by disease, reducing strain on their internal stocks, and their preference for U.S. corn that complies with their phytosanitary standards compared to South America.
China is a dominant factor supporting recent row crop price increases. But there are other factors supporting demand into the future, including:
- The USDA lowering the size of the 2020 corn crop
- Projections of tight grain stocks before the 2021 harvest
- Revival of the US ethanol industry
- Drought conditions building the western US corn belt
The old saying that a rising tide raises all boats also applies to how row crop price gains will likely increase minor crop prices. For example, this should positively impact prices for dry beans, peas, and snap beans. Minor crop buyers will need to raise contract prices to entice farmers to set aside acres for their specialty crops.
Another impact of higher grain price is the inevitable pull upwards on prices that farmers pay for land rent, fertilizer, and other crop inputs. The chart below shows the fertilizer price curves mimic almost exactly the rise in commodity prices over the last 6 months.
We also believe that rising grain prices will have a huge impact on farmer optimism. If farmers must rely on government payments to eke out a small profit or minimize loss, farmer polling shows that optimism about the future is greatly reduced. Conversely, as prices recover, and farmers begin to build equity, farmer optimism returns. In previous upturns perhaps the most optimistic move a farmer could make was to bring home a family member that left because of tight farm finances. Let’s hope for many such homecomings in 2021.
Graphs are from Farmdoc Daily February 25 Webinar, Setting up for a Profitable 2021