Drowning In a Sea of Corn

This summer has been next to wonderful out here in the Dakotas.  We have had only a handful of days over 90 degrees, abundant moisture, and cool evenings.  It has been this way throughout most of the Midwest.  It has been nearly perfect if you are a corn plant.  The weather has expectations of a corn crop so large that we may see piles of grain after the harvest across the Midwest.  The US Agriculture Department projected the production will exceed 14 billion bushels, more than last year’s historic harvest.

The excess supply will cause a drop in corn prices.  Indeed prices have fallen 13% this year and were down 40% last year.  Corn, which was near $8 in late 2012 is now down to $3.66/bushel on the September futures.  A new record crop could push prices even lower. 

The price declines result in winners and losers.  Winners will be livestock producers.  Farm animals are the biggest consumers of US corn, eating around 34% of the supply.  The plunge in prices has increased the profits for beef, pork and poultry.  Growers will add more corn to their fed mixes in lieu of other ingredients like hay or alfalfa.  But the increased demand will be tempered.  The nation’s livestock herd is at its lowest level in 60 years.  The porcine epidemic diarrhea virus has cut the nation’s hog supply by 5% of 3 million animals from last year.  The chicken flock is roughly the same.  The USDA expects corn fed to animals will only increase a measly 1% in the year starting September 1 since there are fewer livestock mouths to feed.

Another third of the US corn crop goes to make ethanol.  Additional consumption of ethanol is held up by the so called “blend wall”.  Most vehicles can’t handle gasoline that is more than 10% ethanol and the US gasoline supply is already nearly at that level.  So any increases in ethanol consumption will come from increased demand from additional driving.  There is a trend to look at more fuel efficient cars, which will decrease fuel demand.  The US Department of Energy expects fuel demand to increase slightly in 2014, then decline in 2015.

The next demand for US corn is exports.  While some countries have increased US corn demand like Peru and Columbia, others like China, one of the largest buyers have stopped.  China has rejected US shipments because the genetically modified strains of corn have not been approved to sell in China.  Shipments of corn to China fell 86% in the first six months of 2014 from their levels a year ago. 

A surplus of ears in the bin will probably create a “corn hangover” with other grains such as wheat or soybeans.  As more people go to the lower priced corn, they will go away from other grains, thus decreasing their demand and lowering prices.

This depression in grain prices will result in lower revenues for farmers.  Many planters who leveraged up their farm based on the high prices that hit in 2011-12 may be in a situation where debt service requirements will be hard to meet.  The lesson here is to be wary of when prices are high and seem like they will never come down in the commodity realm. 

We will see several loans to grain farmers come into stress this year and next.  As an agriculture lender, it is important to not leverage up your farm client based on today’s prices with the assumption that those prices will continue forever.  When prices turn, revenues may not be sufficient to support all operating costs and debt service.  Today, we are seeing record prices for cattle and hogs.  Though it seems that there is quite a bit of room for the bull rally to continue with these commodities, and they may will, it is still important to provide conservative lending structures and also to encourage producers to retire more debt in good times so they can make it through the lean ones.