In the last three months I've been speaking to farmers at commodity meetings throughout the nation.
It's interesting to meet with corn and soybean growers as well as the customers on the other side ” the end users. This is a list of five questions and some of my comments from those meetings.
When will grain prices rally? This consistent question indicates that producers have a lot of unsold grain on hand, and most have taken the LDP.
Several indicated they would need the money by this spring. Most are in the fear stage, but panic has not hit yet. A 5-10¢ rally in corn and 15-20¢ up in soybeans will buy a lot of grain.
Will the proposed USDA budget cuts impact the payments we get on 2005 crops? I would guess not, but that's a difficult question that no one ” not even a speaker from a commodity group based in Washington, D.C. ” can answer. But his suggestion to be careful entering into any long-term land contracts is a hint that this is the first step in cutting payments and benefits in the next farm bill.
Will land prices move higher? Farmers have mixed feelings about the huge up-tick in land prices and rents this winter. It helps the balance sheet, but makes it more difficult for young farmers to get into farming and keeps raising landlords' expectations.
The 1031 tax exchange program is definitely not popular with those who farm for a living. It's difficult to forecast that prices will keep moving higher when interest rates keep moving up, new-crop futures are down to the loan level and the administration is planning to cut farm program payments.
However, unless you're in an area that has had two years of poor crops in a row, it's doubtful that land prices will drop much in the foreseeable future. Land values are strong, but farmers are overall in an excellent equity position.
Can livestock farming stay this profitable? Farmers who aren't able to expand their crop farms are looking at getting into hog, dairy or beef production. It's difficult to forecast a third year of profitable hog and beef farming. However, if you get in with enough equity and the right kind of production contracts, it can work. It's definitely less risky than buying land.
Am I the only one having a tough time making my cash flow work for the 2005 crop?
This was a back-of-the-room question that came up after almost every meeting with young farmers who really crunched their numbers.
“If I use realistic yields, higher input costs and today's new-crop futures, it doesn't work,” was the comment from a young farmer in Northwest Iowa.
The fact that so many farmers came up with the same question shows that you're not alone.
I didn't have a good answer to this question, just a long-term observation that ag prices and profitability are cyclical and the most profitable farmers are the ones who work to increase efficiency each year and do the best job of controlling input costs and marketing their crops. Odds are they'll find a way to make a profit on the 2005 crop sometime between now and the summer of 2006.
What To Do Now?
As you read this we are coming out of the winter doldrums. This is when prices usually turn around.
The trade's attention will switch from the huge supplies to potential weather and planting problems. If you are still holding all of last year's crop, you really have to look at your approach to marketing.
That said, we're entering the critical 20-week time period for making cash and new-crop sales. For cash corn and soybeans you need to sell ” make sure you're getting at least 5% sold each week. If prices post an impressive rally, make a 10% sale that week. If this plan results in you getting sold out by mid-May, get started on new crop. Keep in mind that with all the old-crop grain that farmers are holding that has been LDP'd, a real shipwreck is possible by August or September if U.S. corn and soybean farmers grow a trend line or better crop in 2005.
Alan Kluis is executive vice president of Northstar Commodity Investment Co. If you have marketing questions or want information, write: Northstar, 1000 Piper Jaffray Plaza, 444 Cedar St., St. Paul, MN 55101; call: 800-345-7692 or e-mail: email@example.com.