Every day, it seems that we hear or read news reports about these “uncertain times.” But when is there ever really certainty? That’s particularly true in agriculture. Is there ever certainty that you’ll get all of your acres planted? That a field won’t get hailed or drowned out? That a blizzard won’t hit during calving season? That you’ll be able to sell your grain or livestock for a reasonable profit?
Although uncertainty has always been part of life, this pandemic has multiplied the many challenges we face and has created more anxiety.
A huge drop in gasoline consumption and demand has put the ethanol industry in turmoil, forcing production rollbacks or shutdowns at many plants. The livestock industry has been hit extremely hard, with processing plants closing, livestock prices tanking and a backup of cattle and hogs.
Agriculture is South Dakota’s No. 1 industry, a fact that many people take for granted or don’t even realize. Every component of South Dakota’s economy depends on it. As we deal with the ongoing pandemic while focusing on our jobs, our families and our health, it’s difficult to develop a clear outlook for the agriculture industry. Over the decades, there have been many tough times for farmers and ranchers, but each is unique.
How much of damage is permanent?
David Kruse, who produces The CommStock Report, says his concerns for the agriculture industry lie primarily with the livestock and ethanol industries. Ethanol price margins are bad, and he expects the recovery from the coronavirus pandemic to be slow. Reduced gasoline consumption puts a greater significance on the ethanol blend rate.
“Getting back to the pre-COVID level in gasoline demand is a tall order,” Kruse says. “I don’t know when that’s going to happen.”
One positive step for the future comes in the form of the recently announced Higher Blends Infrastructure Incentive Program, which will award up to $100 million in grants, with much of the money available to station owners who install or upgrade pumps and equipment to sell higher ethanol blends. That program is a bright spot at the federal level, where the ethanol industry has had to battle continuously with an Environmental Protection Agency that isn’t pro-ethanol.
A potential increase in ethanol exports could offset some of the lost U.S. sales; however, No. 1 customer Brazil is a coronavirus hotspot, and the low value of currency in some nations discourages purchases from the U.S.
“I guess we’ll be looking to China, and China hasn’t stepped up yet,” Kruse says.
The livestock industry also will continue to face serious challenges even after meat-processing plants reopen. With many steps being taken to protect workers, including social distancing, Kruse says those plants may be able to operate at only 80% capacity in the future, which would be an ongoing blow to livestock production. Livestock industries “will be forced to significantly downsize production relative to post-COVID-19 kill capacity,” and the prospects for a recovery in the next marketing year for feed consumption aren’t realistic.
Kruse poses this question: How much of the damage to the ethanol industry and livestock production is transitory and how much is permanent?
PLC helps corn farmers
Although the agriculture industry is taking painful hits, there are some positive things. One is the fact that farmers wisely enrolled three-fourths of their corn base acres nationally into the Price Loss Coverage (PLC) program.
The PLC provides a payment when the price of a commodity falls below a specific price. The effective reference price of corn is $3.70, which means farmers who put their corn base acres in PLC will receive a payment. Those payments are based on 85% of a farm’s base acres multiplied by that farm’s PLC program yield.
In addition, farmers will receive payments through the Commodity Credit Corporation (CCC) fund. For those reasons and others, Kruse says he doesn’t know why anyone would switch corn acres to soybean acres. On his northwest Iowa farm, Kruse said the first thing he did when the basis started to crack was hedge his corn. His projections on his farm show solid corn revenue per acre in the fall, when the price of corn could potentially be $2.50 per bushel.
For more detailed information, read Kruse’s marketing plan below.
The obstacles we face sometimes seem to be insurmountable, but we’ll tackle them to the best of our abilities. These are also the times when we need our federal government to help. This is an important time to contact members of our congressional delegation, the Trump administration, even high-ranking members of Congress from other states. Make sure agriculture’s voice is heard.
This is My Marketing Plan
By David Kruse, CommStock Investments
Here are my numbers for my projected corn revenue in my 2021/2022 marketing plan:
I have a 233 bpa approved yield on the home farm that I grew up on. 233 bpa X 85% MCPI coverage = 198 bushels X the 3.88 guaranteed price = $768 acre revenue guarantee. Given the April 25 planting date, I estimate yield potential at 240 bpa with little/no drying cost. I think that December futures could trade $2.50 this fall at harvest.
240 bpa X $2.50 = $600 acre. $768 acre guarantee minus $600 production revenue for insurance purposes would generate a $168/acre MCPI Revenue Indemnity payment.
Now let’s do some PLC math using a 180 bpa farm base yield X 75% corn base. The PLC trigger price is $3.70 and I estimate $2.50 at harvest which would be a $1.20 bushel payment. The PLC yield of 180 bpa X $1.20 X 85% = $183.60 X 75% = $137 acre PLC payment.
I have my 2020 corn 100% hedged at $3.70 basis December which at $2.50 bushel this fall would be a $1.20 bushel hedge profit X 240 bpa = $288 acre
So, I have potential for a $168/acre MCPI revenue payment…$137/acre PLC payment and $288 hedge revenue before I have sold the crop. Were I to sell with a 50-cent harvest basis, that would be 240 bpa X $2 bushel or $480 acre.
Revenue would then be $168+$137+$288+$480= $1073 acre.
Now add a Please-Vote-For-Me CCC payment from DJT.
I am not done yet. I have on-farm storage for this corn so will bin it and pick up both basis improvement and carry into 2021. I think that my final net corn revenue could be near $1200 acre. This is marketing. This is how that you make money in a bear market. Most are desperate for a bottom in the corn market. I previously shared how I got $4.03 bushel for my old crop corn with a cash sale plus hedge profits not counting the CCC and a PLC payment. That is marketing too.
$1200 acre divided by 240 bpa is $5 bushel for my new crop. The crop is not in the bin and my yield and the harvest price is unknown. Plans never work out perfectly but I have one and it doesn’t depend on a Hail-Mary turnaround in the corn market. There are things that keep me awake at night but my farm bottom line is not one of them. What if I get hail like last year? I spent $21 acre for $900/acre no-deductible hail insurance. Let it hail. Do the math. With the MCPI, PLC, CCC payments and hedge profits…getting hailed out could generate $1500/acre revenue.
This is not the Ag Depression of the 1980s because of the safety net and marketing tools that they set up for corn growers because of the 1980’s. Corn growers have one of the best safety nets in Agriculture.
Put your numbers together. You get whoever percentage revenue coverage that you paid for, you should have signed up for PLC, you will get a CCC payment and hedge rallies as China buys for Phase-one are for catch up sales.
What happens if the corn guaranteed price set next February is 2.88 instead of 3.88 like this year? I have hedged my 2022 crop in July 2022 at 3.91. The way that I looked at it is if the ethanol industry consumption is down hundreds of millions of bushels, general livestock liquidation reduces feed usage, the strong dollar gives our export competitors the edge while making our corn more expensive to our customers… while we plant plenty of acres and the April planting date gives us a trendline/plus yield…why would the price of corn be at a pre-Covid-19 price level? No one using corn is profitable. If the price of corn is a function of end-user profitability then it is still too high. I am going to keep growing corn and I can still discern a way to be profitable for two years. I think that beyond that will take care of itself. That is my marketing plan.