Growing profits ... one cob at a time
This is the second part in a two-part series.
PRINCETON — “I don’t think this is any time to sit back and say ‘I’ll just do what I’ve done for 30 years, and life’s going to be good,’” Steve Johnson told the farmers at Wise Guys in Princeton last week. “This is going to be a time when you’ve got to think ahead of when those opportunities exist.”
Johnson, an Iowa State University Extension Farm and Ag Business Management Specialist, spoke last week at a seminar on managing the risks of higher crop prices, co-sponsored by the Bureau County Farm Bureau and Cargill.
The traditional law of supply and demand says that as supplies go down, demand, and prices, go up.
In corn, supplies are going down, as last season’s ending stocks dropped to less than 1 billion bushels.
“Whatever we get below a billion, you see prices ratchet up,” Johnson said. “We’re heading for $3 a bushel corn.”
Higher than that, actually. Johnson said one estimate shows corn prices for this year’s crop to range from $3.10 to $3.70 per bushel, with the midpoint at $3.40.
For this year’s crop, the USDA has forecast a 150.3 bushel per acre yield, based on the 30-year trend. Based on the 10-year trend, however, Johnson said the yield should be more like 152.8 bushels per acre. If accurate, the total supply this fall will be 12.465 billion bushels.
“When’s the last time the U.S. produced a 12.5 billion bushel corn crop?” he said. “We never have. That’s a billion bushels more than any corn we’ve ever grown in the history of the U.S.”
Storage will need to be found for that billion bushels, but it won’t have to be long-term.
“We’re going to just meet the demand base,” Johnson said. “So our ending stocks literally aren’t going anywhere for the next year.”
The key issue for the increase in demand is ethanol.
The USDA releases a baseline study every February, but Johnson said the projected baseline for ethanol production has been underestimated.
“USDA is having trouble understanding the volume of corn that’s going to be needed for ethanol production,” he said. “When you have rapid plant expansion by companies like Cargill and ADM, it’s hard to know when the plants will come on line.”
The best guess now is that 3.4 billion bushels will be consumed by the ethanol plants, and Johnson said that number will go up every year for at least the next three years.
Ethanol’s not the only business demanding corn.
“If corn’s ever $3, you’re going to have tremendous interest in the livestock industry in owning that corn,” Johnson said. “People who have never bought corn in the fall will be after your corn this fall, because cash is king.”
Many producers like to hold on to some corn to maximize profits, but Johnson warned they should understand there’s a fixed cost associated with holding corn away from the market. He warned them to be careful storing wet corn, as corn can get out of condition in a hurry.
“If you decide to hold corn past April or May, hold your best corn,” he said. “Know where the good test weight corn is at harvest, the corn that dried down well, and that’s the corn you want to hold into next spring and summer. The condition of the corn when you deliver it will be more important in the future than any time in the past.”
Johnson said the coming years will offer both opportunities and risks.
“I anticipate we’re going to have high crop prices, and $4 corn and $8 beans are going to be fairly commonplace,” he said. “What’s coming after you? Expenses.”
To best market their crops, Johnson said farmers need to be aware of many factors, beginning with their cost of production and cash flow needs. Some costs going up include seed corn, which Johnson said is going up $15-$20 per bag, and cash rents, which are looking at a 5-10 percent increase both this year and next.
Johnson said farmers also need to be aware that basis will be much harder to predict than in the past, and told about a grain merchandiser he spoke with.
“He said ‘Whatever I’ve learned the last 20 years, I threw out the window,’” he said. “It’s going to be hard to look to the past to make decisions for the future.”
Preplanning, setting objectives, and having a written marketing plan and the discipline to implement it are all important as well.
“Most of you are driven by ego,” Johnson said. “You just want to be right, and you want to pick the top prices. That’s not going to happen very often.”
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