Ag Nightmare Could Result In "Corn Mountain" As Prices Collapse

Tyler Durden's Photo
by Tyler Durden
Thursday, May 14, 2020 - 05:30 AM

In early January, President Trump told his followers at a campaign rally in Toledo, Ohio, that the "economy is booming," and farmers should "go buy larger tractors" ahead of the trade deal that was signed mid-month. Farmers bought those tractors, extra seed, and fertilizer, gearing up for the "greatest year ever," as trade with China was supposed to ramp up. 

In a cruel twist for farmers, a diplomatic spat between Washington DC and Beijing has unfolded in recent weeks as the US-China trade deal is at risk of falling apart. Beijing wants the Trump administration to renegotiate the deal due to the external demand for agricultural products that have collapsed from the pandemic. President Trump has responded by saying there's no appetite for negotiations as it now appears China will have trouble upholding its end of purchase agreements. 

This is turning out to be a significant problem for US farmers who bought those new tractors and planted way too much seed this year. Farmers, already battered by the president's trade war last year, collapsing income, and plunging spot prices, could be left absolutely devastated this year with overplanting. 

Reuters said corn farmers are set to face steep losses this year as spot prices tumble to the lowest in a decade, and the planting season is the second-largest since the Great Depression. 

Several issues plague farmers this year: China not upholding its end of the trade deal, the collapse of the biofuel market, and deflationary pressures from a global economy tumbling into depression

Rich Guebert, 68, a farmer near Ellis Grove, Illinois, said, "We thought there was light at the end of the tunnel," while referring to the prospects of the trade deal. Then he said, "corona came in and reared its ugly head."

Corn contracts teeter on the verge of a bear market as a "mountain of corn" will likely drag on prices and lead to continued turmoil for farmers in rural America. 

Without China upholding its end of the trade deal and or weather events like last year's flooding -- spot prices are expected to plunge even further. This would likely suggest the Trump administration would need to supply additional farm bailouts to rural America. 


"We can't raise corn at that price," said Roger Hadley, a farmer in Woodburn, Indiana. "All farmers raising corn will be in the red."

Purdue University estimates that Hadley and other farmers like him in Woodburn, expend about $606 per acre to plant corn. At current spot rates of around $3 per bushel, these farmers would need to yield 202 bushels per acre to break even, which would surpass the county's 2014 record of 185.8. This means all farmers in the area will likely lose money on every acre planted. 

Ted Seifried, the chief ag strategist for Zaner Group in Chicago, said many farmers would see spot prices sub $3 per bushel by harvest, a level that has not been seen since the last financial crisis. 

The USDA reported Monday that corn is being planted at the fastest pace in years. 

A Reuters poll outlined that domestic corn stocks could rise to 2.224 billion bushels by Septemeber 1. That would be up 132 million bushels from USDA's April outlook report. The poll said the nation's corn stockpile would increase to 3.389 billion bushels by September 2021. If that happened, it would be the most significant domestic corn supply since 1988 and fourth-largest ever. 

A perfect storm of factors could leave the US with a mountain of corn by the end of this year's harvest and through next year. This is just more evidence that farmers will experience several years of more pain. 

* * *

Despite piss-poor corn fundamentals, Bloomberg outlines how a technical bounce could be in the cards: 

The last time corn was this out of favor it took about a month to surge more than 30%. And it could happen again. It all depends on ethanol, which accounts for about 40% of U.S. corn production. If consumption of gasoline blended with ethanol ticks up, near-record short positions in the fuel additive offer potential upside momentum in the event of a squeeze.

Ethanol prices have jumped 25% since April 1, as producers have cut production by more than 45%. Over 70 plants have been idled and another 70 have reduced their output, according to the Renewable Fuels Association. There’s also upward price pressure on byproducts of ethanol production. For example, distiller dried grains, a protein-rich feed for cattle, are above their three-year average and the ratio to cash corn prices is the highest since July 2016.

Of course, there are caveats. A weak Brazilian real makes ethanol exports from there more competitive on international markets. Another bumper crop of U.S. corn with little storage space available could push prices below $3.00 a bushel. And if job losses continue to curb gasoline demand, ethanol will suffer as well.