Editorial: Will high prices cure high prices again?

It’s always good to be able to write a “prices are awesome” column.

Despite a recent pullback, corn and soybean prices are well into profitability territory and have touched near the highs of 2012, when the Chicago Board of Trade corn price briefly went over $8, before falling to half that a year later. While it hasn’t hit $8 yet, it has been well over $7.

However, there are significant implications for farmers when crop prices rise relatively rapidly.

What do you do with more available cash? There’s equipment to be upgraded to increase efficiency. There’s always more land by which to be tempted. 

However, I’ve been through a few price jumps over my career now. The extra cash doesn’t last all that long due to a couple of reasons. The unpredictability of commodity markets means that you don’t know when the price of crops will drop quickly again. 

The phrase that high prices are the cure for high prices holds some truth. End markets will reach a limit to which they can pass on price increases and that leads to an attempt to find cheaper sources of a product, or in the crops world, the price will rise so that buyers of a certain crop can “buy acres”, which will inevitably lead to a decline in prices if successful in increasing production. 

Input costs often jump quickly after crop prices increase and it’s the time period between the price run up and the inevitable rise in input prices where farmers can make the most money. 

Farmers are price takers and so are at the mercy of suppliers who raise prices to get some of the increased funds flowing into the crop world. 

That’s an overly simplistic interpretation of what happens, as suppliers are also pushed by increases in their own prices during commodities rallies. They just have the ability to pass some of those costs onto farmers.

Luckily for farmers, the sale of the 2020 crop was at a time before the more recent escalation of input prices and a nice reward for their work.

There’s some evidence of irrational exuberance in farm country. There’s been a lot of extra activity in online farm equipment auctions and prices for equipment are way up. I’ve had a few jaw dropping moments lately looking at the price of equipment, especially certain tractor lines and planters.

Managing risk through forward pricing can be as important to business stability when the price is up as when it is down. Take profits when it makes sense and manage downside risk of price decline, although I know it’s highly tempting to wait for the highest prices. 

The proviso on celebrating good crop prices is that a rapid rise in crops means a rapid rise in feed costs for livestock farmers. 

Cattle prices have struggled their way back, getting closer to the five-year average after a steep drop in early 2020 due to pandemic-related plant closures across North America.

They certainly aren’t at the almost double the price of early 2020 that corn and soybeans have hit.

Hog farmers have seen a nice run up in price over the past year, however, although not to the levels of corn and soybeans. Milk prices don’t react quickly to input changes, although they will eventually.

When you’re celebrating the increase in crop prices, keep your livestock farming neighbours in mind.

Commodity prices are awesome when they go up, but they also will go down.

I don’t know what will burst this bubble, but it will likely have something to do with Chinese demand, which has been driving North American prices. African swine fever is fundamentally changing the way hogs are produced in China and the evolution isn’t finished yet. A move to larger farms drove an unsurprising increase in demand for protein meals, especially soybean meal, but now there’s concern in China about over-reliance on imports. We’ll see where it lands, but I expect there will be demand from China for a while yet.

When pricing reaches new plateaus there’s always talk of new normals. Will the price of a commodity trade within a new higher range? No one knows and that’s why managing price risk is important.

Source: Farmtario.com