Elevated Grain Prices and Farm Income Seem Likely to Hold Through Mid-2022
The dramatic increase in corn, soy and other grain & commodity prices driven by a massive increase in Chinese purchases since late summer/fall of 2020 seems likely to hold for most of those crops through at planting 2022. Why? Barring a crash in exports or record acres and yields for both corn and soybeans, it will take at least two crop cycles to rebuild US inventories for those two crops, and when stressed, they provide the price and income floor other row crops and hay must compete against for acres.
Soy supplies are particularly tight. As of the March 2021 USDA WASDE report, the projected stocks to use ratio for the 20/21 crop (produced in 2020 and marketed through harvest 2021) is a very tight 2.6%, the tightest since the current record low carryover 13/14 crop ended at 2.6% and saw futures price exceed $17/bushel. This is in contrast to the previous few years that saw sub $10/bushel prices andthe ratio range from 5% to as high as 22.9%.
As can be seen in the chart below, price response curve becomes very steep when supplies drop below 5-7%.
15 Year History of Soy Stocks to Use Ration vs. Crop Year Average Farmgate Price
So what will it take to get inventories up to a level to bring prices to the sub $10 range of the last few years? Let’s start with the current balance sheet and figures for the now finalized 19/20 crop and the estimates for the current 20/21 crop:
And now the estimate for the forthcoming 21/22 crop from USDA’s February 2021 Outlook Report:
Note that a record matching 90 million acres, which would be a 6.9 million acre or 8.3% increase from last year and the trend yield of 50.8 bushels per acre, in other words, a normal year, would only get us to a 3.2% stocks/use assuming demand stayed about steady. So what yield would we need to go with record matching acreage to get to 7% carryover?
A record yield of 53.3 bushels per acre, which exceeds the previous record set in 2016 of 51.9 by 2.7%. That is not an impossible number to hit but it would require something close to a perfect growing season in a year in which we will have planted a lot of lower productivity ground to soy that without the high price would otherwise have been planted to something else.
And this will affect row crops grown all over the US, even in the western US where very few acres of soybeans are grown. How?
Soybeans and corn are by far the dominant crops in the US, competing with each other every year for acreage with prices that are well correlated with one another. Since 2015, the US has grown more acreage of soy or corn individually than the next ten largest row crops combined, including wheat of all types, sorghum, barley, cotton, peanuts, barley, rye, potatoes, and sugar beets. Meanwhile, corn, which maintains a price west of the Rockies $.50 to a $1 or more higher than it does in Iowa competes with all specialty row crops grown there; it (corn) is the baseline, the lowest common denominator. High priced soy competing with corn for acreage in the Midwest and the Delta regions impacts corn prices and the crops corn competes with everywhere else.
And corn supplies are tight as well, as is reflected in current futures prices trading at their highest levels since 2012.
Although February USDA estimates imply a stocks to use ratio of 10.3%, the current futures price seems to imply traders believe USDA is thus far too low on its export figures and assume a much lower stocks ratio to use of around 7.9% for the current crop.
Additionally, if this crop’s stocks to use is closer to the trade industry figure of 7.9% followed by USDA’s February 2021 Outlook Report estimated corn acres of 92 million and a trend corn yield of 177 bushels per acre would actually tighten the stocks to use ratio for next year to 5.3%. Assuming those acreage and usage figures, the average corn yield this year would have to be nearly 182 bushels per acre just stay even with the current 7.9%, a figure that exceeds the 2017 record of 176.6 by 5.4 or 3.1%.
There are a few scenarios that could increase those carryover ratios and push prices lower. Most obviously prices could continue to increase near term and both further ration demand of the 2020 crop and drive even more acres to corn & soy. Corn could also maintain the 7.9% stocks to use with 94.4 million acres or possibly hit 10% with 96.4 million acres, both within the 2012 record of 97.3 million acres.
Or, if we have so much as a drought scare this summer, we could see record prices across the board. But it seems most likely higher commodity prices of some level are here to stay through the 2022 planting season.
Here are a few takeaways of what this means for landowners:
Higher commodity prices are supportive of farm income and thus cash rents. Although sustained higher prices give landowners leverage in lease negotiations, we must be careful that rates are realistic for the long-term financial health of long-term operators.
We need to be on guard against would be tenants attempting to bid up short term lease rates to maximize acreage expansion and take advantage of elevated prices. This type of tenant might offer relatively high rates in the near term, but often “mine” the soil and not replace removed nutrients or abuse the land & infrastructure in other ways, and then are gone or go broke when prices cycle lower.
Higher crop values and a perception of long term tight commodity supplies will be supportive of continued or increased land value appreciation. Expect renewed interest in farmland investment from institutions, funds, and high net worth individuals similar to that of ten years ago.
Volatility and chaos in markets always present opportunities. For farmland this could be dispersal of underperforming ground or stranded assets and identification of value farms which would benefit from infrastructure and/or management improvements or are strategically located long-term.