Gloom, Doom, Zoom, Boom?
With so many variables, it’s difficult to get a handle on 2012.
February 13, 2012
There is no shortage of doom and gloom news about the general economy. U.S. unemployment remains at 9%, as it has for the last two years. From the beginning of May through the end of September this year, the Dow Jones Industrial Average lost about 2,000 points, wiping out $3 trillion in wealth.
While the ag sector is certainly not immune to the woes of the general economy, the financial health of agriculture has rarely been better. Down on the farm we are currently in a period of historically strong commodity prices for all crops and the global demand for food, fuel and fiber has never been greater. Historically high commodity prices along with record low interest rates have in turn contributed to rising farmland values and strong farm loan performance.
However, in the midst of all the “how will we feed (and clothe) the planet” euphoria, producers must remain vigilant in managing price risk and monitoring production costs. Both extreme weather conditions and rising input costs can strain profit margins even in this time of historically high commodity prices. As witnessed since 2008, when grain prices rise, so does the cost of many key inputs, such as fertilizer, fuel and even cash land rents. As grain prices have increased for most of the past year, the retail cost per ton of urea has increased 36 % for potash, 31% for liquid nitrogen, and DAP for 11%. Compared to one year ago, farm diesel prices are also up about 30%. Cash rent increases of roughly 10% per year have been seen in the Mid-South since 2008. Further rent increases of 10% to 15% are expected in 2012.
Bottom line: Even in this period of strong crop prices it’s not all great news for production agriculture. In the weeks ahead there will be plenty of discussion on farm program cuts and modifications. And, as already eluded to, 2012 production costs are likely to be higher.
Prior to the upcoming crop loan renewal season, devote some time to updating crop budgets. This will once again be a critical exercise in making both 2012 planting and marketing decisions. Recall the test of 2008 which was followed by the lesson of integrating crop marketing with production cost-management. Along with a 2012 hedging strategy, every effort should be made to identify and lock in prices for major production inputs. These typically include seed, chemicals, fuel and fertilizer.
As it has become customary in recent years, all major row crops will be begging for your acreage next spring. Following a massive sell-off in September, 2012 corn and soybean futures have retraced some of their losses. U.S. ending stocks for both crops remain historically tight. The current USDA ending stocks estimate for corn (866 million bushels) equates to just 25 days of usage; for soybeans (160 million bushels) about 19 days. With September 2012 corn futures currently trading in the range of $6.20 to $6.40, and next November soybeans holding between $12 and $12.60, both offer profitable choices.
As for cotton, the value of competing crops will no doubt influence new crop prices into the spring of 2012. However, it does appear today that cotton’s fundamentals will confine 2012 prices to a lower range than that seen for the 2011 crop. At the time of this writing, it is certainly possible that the USDA could make further cuts to U.S. and world 2011/12 cotton production. However, with a slowing Chinese economy and 9% of the U.S. workforce unemployed (not to mention 15% of the U.S. population is now on food stamps) it appears that an offsetting weak demand scenario lies ahead.
Weather has certainly been at the forefront of any cotton discussion this year, from the excessive flooding in the Mississippi Delta that delayed planting, to the historic drought in Texas that could claim 3.9 million acres. Despite Texas suffering through its driest annual period on record from October 2010 to September 2011, the cotton futures market seemed little concerned as 2011 world cotton production surged over 9 million bales or 8% higher than the previous year. The high cotton prices seen in early 2011 resulted in significant acreage increases in the key cotton producers India, China and Pakistan. Production is expected to increase in these three countries alone a combined 6.3 million bales over last year. A global production increase combined with indications that year-over-year world cotton consumption will be flat has offset this year’s U.S. weather-related losses.
With 2011/12 foreign cotton production now expected to increase over 10 million bales, USDA continues to reduce U.S. export demand. In May, the U.S. export projection for the 2011 crop was 13.5 million bales. The current estimate is 2 million bales below that number. The weakening demand outlook reinforces the bearish bias the cotton market has decidedly taken since early June this year. Generally there is one key fundamental factor that drives a commodities’ price direction over the long term. In cotton, that factor is ending stocks. The forecast for large year-to-year supply increases of 1.3 million bales in the U.S. and nearly 10 million bales on the world balance sheet will continue to limit the upside for 2012 cotton prices.