There is little doubt that 2007 will go down in history as one of the most remarkable years in U.S. agriculture. As producers gear up for a sharp increase in corn production, the transition will throw many other commodities off balance. We'll need more soybean acres. Brewers will need more malting barley acres. Where will the oats come from? How will the livestock industry adjust? How will the transportation industry adjust from trucking to trains to barges?
Transition times do create opportunities, but there will be some casualties along the way. It's human nature to make decisions this year based upon what worked wrong or right last year. In a transition period such as currently exists, what did or didn't work last year has absolutely no meaning for this year. That means many mistakes will be made — particularly in marketing.
Ironically, as the ethanol industry ramped up, too many farmers thought marketing would be easier. Fact is, it's much more difficult. Having an ethanol plant in your “backyard” creates new opportunities but it also creates market volatility. More grain has been forward contracted for fall delivery this year than ever in history. And unfortunately, the price is 80¢ to $1/bu. lower than where the market is currently trading.
By the time you get this in your mailbox, you will have seen the March 30 planting intentions report. Major adjustments are going on, and some producers' planting decisions are changing if fall fertilizer was not applied. Eight-dollar soybeans have a tendency to pull away some corn acres — particularly since nitrogen prices have nearly doubled since last fall. It will be interesting to see what the final acreage numbers are as guesses are all over the board. One thing is for sure — no matter what the acreage of corn and soybeans becomes, the market is still going to be trading weather all the way through the end of July. Yield is going to be more important than ever.
While everyone is exuberant about the opportunities presented by the ethanol industry, higher prices don't automatically result in bigger profits. Income differential this year between farmers who have controlled their costs and done a good job of marketing vs. their neighbors who haven't done so will be the biggest in history.
Think about it. High corn and soybean prices are automatically getting bid into cash rents and farmland values. Fertilizer prices have gone crazy. Machinery costs are high and farmers are going to have to buy new equipment to expand the corn acres. People will need larger planters, more storage space, larger combines and more trucks. Add it all up and the majority of profits are going to be bid out of many farming operations.
Who Are The Winners?
The biggest winners in this transition year will be landowners. How can you lose when the value of your land escalates 30-50% over a two-year time frame? The other big winners will be the producer who didn't sell aggressively early on and is able to take advantage of $4 corn and $8 soybeans, and who also was successful in buying his fertilizer and fuel needs at lower price levels.
On the other hand, there will be the neighbor who sold the majority of the '07 corn crop at $3/bu. as well as a large portion of the '08 corn crop. He wasn't able to buy fertilizer in time, and he probably also got caught up and overpaid for some high-priced cash rent. If this is the case, farmer B may not have all that profitable of a year.
As in almost every market, these are extremely fun times if you're on the right side of the trend and extremely miserable times if you're not.
Years such as this are somewhat similar to years of bad times — they separate the good managers from the “less-than-good” managers. Information is more valuable than ever, and knowing what to do with good information and how to make decisions is even more important.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.