Economists used to say the cure for low prices was low prices. But that hasn't stopped scores of long-term forecasters from predicting that commodities will be stuck in a price purgatory for at least another four years, barring an epic weather disaster someplace.
Recall that USDA announced in August that 2015 crop and livestock incomes would run less than half of 2013 levels. This year growers should register the steepest single-year decline in revenue since 1983, USDA said.
Speaking at an American Agricultural Economics Association meeting in Louisville last week, FAPRI Director Pat Westhoff described what could stretch into a six-year recession in crop prices. Both 2013 and 2014 were loss years for many corn growers, but FAPRI expects season-average corn prices to slide to $3.68 for the 2015-crop (another negative year for growers); average $3.72 in 2016; $3.96 in 2017 and $4.09 in 2018. Likewise, soybeans will tumble to an average of $9.22 this crop, and not bounce back above $10 until 2018, when they should average about $10.31. Wheat prices are projected to slide to $5.10/bu. for 2015/16, as U.S. stocks rise to the highest levels since 2010.
[For more details on FAPRI's latest outlook, go to http://www.fapri.missouri.edu/…]
"There's nothing exciting happening on demand, unless there's a supply shortage someplace," Westhoff said. With normal weather, prices for the major commodities will be well below their 2010-2012 peak, he added. (Of course, he admits there's a lot more variability in prices than forecasts suggest: Every year there's about a 10% chance that corn prices will be $5 and an equal chance of $3 or less, given various price and yield combinations. The chance that corn prices would hit their 2012 highs was only 1 out of 250, however, so don't get too hopeful.)
The upshot is that farm lenders have been bracing for a reset in commodity prices and farm profitability for several years. After all, agriculture is a cyclical industry stressed Louisville-based Farm Credit Mid-America CEO Bill Johnson and Chief Credit Officer Steve Allard in an interview with DTN.
Their association serves 100,000 customers over a four-state region in the hard-hit eastern Corn Belt. The good news is that 2015 yields are better than expected though, especially on soybeans, they said. That won't erase losses but will lift growers closer to breakeven for 2015. But with rents, seed and fertilizer stuck at pre-recession levels, the year ahead could be even more challenging than 2015, they added.
Farm Credit Mid-America is counseling its borrowers to understand costs and understand how long they can survive on their reserves of working capital, should prices hover below cost of production for several more years. They've been proactive in encouraging growers to lock in fixed rate mortgages near record lows. About 60% of their land portfolio has fixed rates for at least five years or longer; they even offer fixed rate operating loans for those who want to avoid a rate hike after the Federal Reserve acts to raise interest rates. They're also encouraging maximum levels of crop insurance, to prevent draining working capital in the event of a yield loss.
"We've been saying to do what you can to take one more risk off the table," Johnson said.
Loan officers will be working closely with customers right after harvest, he added. It's not too late to restructure some debt. Interest rates remain at their lowest levels in the last 200 years and land values have remained relatively stable so far.
"The next few years are more about surviving than thriving," Johnson added."Every ag economist we hear is cautious about low prices for some years to come. People need to look at their long-term production capacity and long-term average staying power."
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