I t is the start of a new year and that means it is time to consider what this new thing called 2014 will bring.
When teaching something new, I instruct students always to work from what they know to what they don’t know. It is always interesting to see someone discover that they know far more than they think they do. In fact, quite often, they actually know the answer. They just did not realize they did.
So what does problem solving have to do with my 2014 farm outlook? It turns out that it has everything to do with it. What follows is based on what is current public knowledge.
What we know feed
Beginning in the late 2000s, Congress decided that making fuel for vehicles out of corn was a good idea. To make sure this decision was implemented, Congress placed in the law fixed production goals and penalties, multiple tax incentives, subsidies and more. What did not enter the conversation was where the billions of bushels of corn would come from. From the beginning, every analyst knew that the price of corn would have to rise.
The end result of turning more than 5 billion bushels of corn each year into fuel, plus a dry summer, was more than $7 corn and similarly high prices for soybeans. Pennsylvania farms that feed corn and soybeans did a bit better than most, because they raise most of their feed.
Well, farmers worldwide did what they do best: they increased production. Corn prices are currently in the $4 range with predictions of $3 corn ahead. The outlook for soybean prices, however, is a bit different. Demand for soybeans in China/Asia is working to keep prices high. While worldwide production is on the rise, it is not outpacing demand. So while corn prices are down and are expected to stay down, not so for soybeans.
What we know crop expenses
Crop expenses are important in Pennsylvania. Pennsylvania farmers tend to raise the majority of what they need. This makes cropping input costs a key expenditure. Over the past five or six years, I have read multiple articles on the cost escalation of sprays and fertilizer. Why were they on the rise? Most attributed it to supply and demand. Suppliers imported only so much (remember that EPA and other agencies have driven fertilizer production off shore), so they must charge what they can. Manufacturers even formed cartels to assure maximum pricing. Farmers wanted in on the $7 corn, so they paid whatever was demanded.
But the days are over for paying whatever is demanded. Corn at $4 will result in every grower shopping for the lowest possible prices. Some will even cut back on acreage. The cartels have also begun to break up, as the members look to keep their plants and mines working at the highest levels possible, even if it means lowering prices.
What we know fuel
This brings us to fuel costs. If you want lower fuel costs, you have to love fracking. Nothing in the past 20 years has done more to bring down fuel costs than fracking. Also, the worldwide economy is weak and weak economies burn less fuel. Given the expected increase in U.S. oil production in 2014 and the generally weak global economy, fuel prices in 2014 should trend lower.
What we know the dollar
The U.S. dollar has been weak for years, and nothing is in view that would point to that changing. A weak dollar is great news for exports. For example, about 15 percent of total dairy production is exported. That is a lot of production! If this went away tomorrow, a $6 reduction in the mailbox milk price of milk would not surprise me. This clearly displays the importance of the weak dollar to all of agriculture.
What we know China
Food in China is one of the truly interesting stories of the past decade. Here is a country with billions of people, and constantly there are stories of tainted food, babies consuming bad formula, vegetables washed in polluted water and more. This has resulted in the Chinese craving U.S. agricultural products.
What we know world food demand
As China/Asia grow their middle class, the demand for a more western-style diet has risen. The overall “food pie” has grown bigger and bigger. A quick look at worldwide agriculture shows that many previously important agricultural areas are tapped out. Take New Zealand’s importance in dairy for example. They are an island and can support only a finite number of cows. So as demand for dairy products grows and their output remains about the same, they become a lesser percentage of total dairy. They are less important.
Other areas of the world have different problems (in Europe, for example, it is environmentalists). This opens the world to what farmers in the U.S. produce.
What we know beef prices
Beef prices are up. And all indications are that beef prices are perhaps as much as two years away from decline. Everything I read tells me that the nation’s beef herd is not growing, and that will keep prices high.
So what is the bottom line?
The cyclical nature of farm commodity prices is alive and well in 2014. Crops have had a great run the past few years, and are now in decline. Animal production suffered due to high costs during this same period and should experience recovery in 2014.
All this creates a learning opportunity, that being: high prices cause low prices and poor profitability causes high profitability. Everything in agriculture moves based on supply and demand on a worldwide basis. This means that when times are good, it is time to retire debt and accumulate cash reserves. And when times are not so good, it is time to draw on cash reserves and look more closely at budgets. Management is important in the good times and not just the bad times.
Editor’s Note: Michael Evanish is the manager of MSC Business Services, a member service of the Pennsylvania Farm Bureau. For more information, call 717-731- 3517.