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Views and opinions: Farm bankruptcies, rural economy more of a factor

The state of the rural economy is becoming much more of a topic in the market. We are now hearing more comparisons between the current state of the economy and that of the 1980s.

While there are some similarities, there are also some notable differences. The greatest difference is interest rates and how land values are still high, which is helping some farmers keep their money together. This is being countered by the fact that costs are much higher now than in the 1980s, especially equipment.

A real worry with this situation is the number of Chapter 12 bankruptcies that are being filed. This is a type of bankruptcy mainly designed for a small-scale farmer; in 2015 there were a reported 360 filed, and by 2018 that had risen to 500.

What worries farmers the most is that at present, few commodities cash-flow. This means that a farmer is facing a negative return before the crop is even planted.

Trade continues to monitor the flooding that impacted the Midwest and what it could mean for this year’s acres. Historically it is difficult to find an accurate trend of flooding and planted acres.

When flooding hit Nebraska in 1993, planted acreage was down 2 percent from 1992. When flooding again came to the state in 2011, planted acres were up from 2010. What is more of an impact on planted acres is how long the water stands in fields and how long it takes to clean up afterward.

We are approaching the time when plantings tend to be more of a market factor. This is because many regions are now at or past the insurance date where crops will receive coverage. Until this point, any plantings do not receive this.

As a result, the market tends to carry more weather-related risk premium now than up to this point. History also shows us that even with some delays, no major acreage shifting takes place until we get into May.

Corn futures have been pressured recently from a lack of demand. Argentine corn production is up 7 million metric tons from last year, and that is where many importers have been going for needs.

Brazilian officials are predicting a 23 percent increase to the safrinha crop, which will add to global competition for the United States. This has been a dark cloud over the corn complex for the past several weeks, and kept our corn exports 3 percent behind the year-ago pace.

Data from the International Grains Council indicates this lack of demand may be short-lived. The IGC is predicting a drawdown in world corn reserves of 23 million metric tons in the 2019/20 marketing year as demand keeps rising. This is on top of a 44 million metric-ton decrease in the 2018/19 year.

Given this, buyers will only be able to bypass the United States for a short period of time. Even with lower global demand, domestic corn usage has a favorable outlook.

Cattle on feed across the United States currently totals 11.8 million head. This is roughly a 1 percent increase from last year. Cattle placements are on the rise, and were up 2.2 percent in the latest cattle report. We are also seeing lower marketing, meaning cattle are being held longer. The combination of all of these factors is a higher feed grain demand forecast.

Demand on soybeans is not as promising, neither domestically nor globally. Crush data shows us that cumulative soybean processing in the United States is likely to fall 100 million bushels below trade expectations. The current export totals indicate a yearly number that is roughly 250 million bushels under projections. If correct, these will easily push old-crop ending stocks above 1 billion bushels at the end of the marketing year.

The greatest concern when it comes to soybean demand is with China. African swine fever, or ASF, continues to devastate hog production there. A reported 41 percent of China’s hog herd has been lost to the disease, and this number is likely to rise.

Other countries are also combating the disease, mainly Vietnam and Japan. The real worry with this is if the disease could spread to the United States and devastate our export market.

An underlying factor that trade keeps going back to is this year’s projected plantings. At the end of March, the USDA projected this year’s acreage at 92.79 million for corn, 84.6 million for soybeans, and 47 million for wheat. These compare to last year’s 89.1 million on corn, 89.2 million for soybeans, and 47.8 million of wheat.

Trade doubts these numbers, as the data were collected prior to the floods that have undoubtedly changed intended acres in the Midwest. Current economics do not favor a higher acreage number for corn, either.

Another questionable number when it comes to acreage is the 4.6 million reduction to total plantings. While some acres have undoubtedly been lost to urban sprawl, a number that large seems unlikely, especially with acres exiting conservation reserve programs.

 

Karl Setzer is Director of Risk Management for Citizens Elevator in Charlotte, Mich. His market commentary can be found on Twitter by @ksetzergrains and online at www.citizenselevator.com

The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources are believed to be accurate.

4/11/2019