Corn producers endured two summers of historically high prices due to a combination of excess speculative liquidity, inflation-hedging flows into commodity ETFs and futures markets, unfavorable weather conditions and global political tensions. But the party came to an abrupt end as this week spot corn prices fell below $4 for the first time since 2020, and in some cases below production costs.
Farming is an expensive business; Most require business loans to operate. The loans are needed for equipment such as tractors, fertilizers, leases or purchases and labour. This week, the cost of credit for farmers was nearly 10%.
The mix of low commodity prices and high interest rates is the worst-case scenario for producers, but the painful combination is also setting the stage for a self-correcting market. The financial bottlenecks will probably lead to a lower supply in the coming season and thus to higher prices. In this environment, there are supply concerns as low prices and high capital costs counteract the incentive for aggressive corn cultivation. This is a recipe for a stable market unless demand plummets.
Low prices and high interest rates are also forcing producers to adopt sound money and risk management; Unfortunately, the $7 corn and bearish volatility have likely created bad habits. The next year or two will not be as forgiving and will likely be about survival of the fittest, much like 2020 in the oil field. Accordingly, this will likely result in less money being allocated for equipment purchases and operating budgets becoming tighter. In addition, producers should focus on hedging price risk.
I didn’t grow up on a farm, but I did grow up in an oil field and I saw the impact high prices have on budget discipline. High commodity prices are a green light for lax spending. It also creates an environment in which mistakes are easily forgiven, leading to inefficient business conduct. Unfortunately, the bad habits formed in good times negatively impact commodity producers in times of low prices.
We saw an extreme case of this in 2020 when the price of oil fell below zero and several small operators were forced out of business. There was a long time when small oil producers could not get credit, certainly not at a high interest rate of 10%. We can all see how low prices and the lack of affordable financing have affected the price of oil. The rise from $20 to $90 a barrel came before Russia invaded Ukraine; that was just the icing on the cake.
We may see something similar, but on a smaller scale, in corn. We cannot rule out a capitulation sell-off with prices at $4.40 or $4.50 as we head into the off-season of harvest. Still, the unfavorable environment for producers is likely to set the stage for higher prices in 2024. Still, we doubt we’ll see a grain rally of 2021 quality. Still, corn below $5.00 is probably too cheap for the environment. A weekly continuous chart of corn futures shows a similarly benign outlook.
I had a conversation on this subject with Scott Shellady on Wednesday’s episode of Cow Guy Close on RFD-TV; A snippet of the show can be found here.
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