Focus Management Group

Agriculture’s Reaction to the Trade Discussions

The recent discussions surrounding tariffs on corn, soybeans, cotton, beef and pork are increasing turmoil in the ag sector of our economy. Producers are concerned about the prices their products will achieve in the next crop year, and lenders are concerned their borrowers will be able to repay production and term debt.

With the planting season upon us, farmers are committing acreage to various crops and working to develop pricing strategies to ensure they will be able to sell their product above the estimated cost to produce. Cattle farmers are getting ready to calve their herds, and pork producers are planning for their next litters.

The tariff discussions are creating uncertainty at the time when farmers, and their lenders and investors, are spending significant dollars to produce the next crop or generation of animals.

US Corn Price Table April 2018

Using the impact on corn as an example,
the table looks at the price of corn over the
past 30 years. February 2018 prices were
in the $4.00 per bushel range.

 

 

 

Corn Price Projections April 2018

The table shows the USDA price outlook
for corn BEFORE the tariff discussions began.
This shows the forecast price per bushel for
the 2018 crop to be in the $3.30 per bushel range.

 

 

 

US Soybean Price April 2018For soybeans, the table shows that
soybean prices are currently approximately
$400.00 per metric ton.

 

 

 

 

Soybean Price ProjectionsThis table shows the price outlook
for soybeans BEFORE the tariff
discussions began.  This shows the
forecast price per metric ton for the
2018 crop to be in the $345.00
per metric ton range.

 

 

After the tariff discussions began, the price outlook for US farmers has changed depending on the product being sold to China.  According to a Purdue University study, a 2% to 5% drop in the price of soybeans is expected.  Corn prices are expected to have little change as only 1.5% of the US crop is sold into China.  These two crops make up approximately half of all US farm crop revenues. 

While these changes sound small, a 5% change in soybean prices is a $17.25 to $20.00 change down per metric ton.  A 1% change in corn prices is less than $0.05 per bushel.

A change in the price of these
crops will have a ripple effect
through other crops, and through
support industries.

 

 

 

 

The bottom line for lenders and investors in the ag sector is to manage portfolios to ensure the farmers are able to generate profits at a range of prices.  Using corn and soybeans as an example, corn prices have been at $4.00 per bushel since 2014 and soybean prices have been between $375 and $450 per metric ton.  Each year corn farmers have hoped corn prices would return to the 2010 to 2013 levels when corn peaked at over $8.00 per bushel.  At that time soybean prices peaked at almost $700 per ton.  That has not happened.  The faster crop farmers realized prices would not be returning to those 2010 to 2013 levels, and adjusted their acreage, their rental contracts, and their crop sales strategies accordingly, the faster individual farmers were able to stabilize their operations and plan their future strategy.

Lenders have experienced losses in this sector as farmers have gone through this transition.  Now lenders will once again need to evaluate their portfolios, with an eye to assessing price risk impacts.  For example, the corn farmer who is able to produce corn at $3.00 per bushel and has locked in prices for a portion of their crop represents little risk for the lender financing the 2018 crop at reasonable advance rate and estimated yield.  But, the farmer who is just achieving $3.50 per bushel of product cost, or sells on the daily market, represents a substantial risk in a period of uncertainty.  This impact is even more serious with soybean farmers, who need to anticipate a price reduction of $17.25 to $20.00 per metric ton as they plant their 2018 crop.

Barn_Cornfield_SilosPricing uncertainty will increase
as farmers react to the tariff
discussions and potentially change the
crops they plant, or their herd sizes,
which will further increase uncertainty.  

 

 

 

 

Going into the 2018 crop year, lenders will want to review their borrowers’ cost structures and pricing strategies.  At this point crop lines of credit have been approved and farmers are beginning to plant.  For lenders it will be imperative to know:

  • Hedging strategies.
  • Contract sales commitments.
  • Monthly financial reporting and borrowing base forecasting to compare costs to forecast.

Asking borrowers to report these items monthly will be a critical performance monitoring technique. 

Financial reporting on a crop year and calendar year basis will be an increasingly important need.  Profitability by field and by crop will be key pieces of information that cannot be overlooked.  Many farmers have not developed the systems to report crop year and calendar year performance, and to report profitability by field and by crop.

In short, the level of uncertainty caused by tariff discussions underscores the need for borrowers and lenders to understand the RANGE of prices at which an individual farmer is able to produce profits, and then to develop plans to decrease costs and lock in profits on a portion of the crop.

If you have any questions or would like to discuss your portfolio, please call our offices at 773-724-2982 or contact Juanita Schwartzkopf directly at 520-203-2926 or click this link Juanita Schwartzkopf.

Visit our website at www.focusmg.com or e-mail info@focusmg.com

Published April 11, 2018

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