Kub's Den


By Elaine Kub
DTN Contributing Analyst

There are some perfectly rational reasons to feel bullish about the long-term prospects of the corn and soybean markets (see: DTN Grains Analyst Todd Hultman's column this week, "The Time Bomb Ticks") but on a 100-degree day, I guess I'm just feeling too droopy and pessimistic to believe them. Instead, I'm sitting here contemplating the prospect of selling my remaining unhedged corn bushels at a projected harvest price of $2.70 (I farm in a black hole for shipping and basis ... and the oligopolistic local co-ops know they have us captive).

So like an actor in a melodrama who asks, right before a storm erupts, "How much worse could it get?" I find myself sitting here contemplating how much lower the new-crop prices could conceivably fall.

We know there is no natural lower boundary at the cost of production; that's been demonstrated already. The futures market and the cash market have crashed right through previously projected breakeven levels, whether they were $3.67 for corn in Missouri or Ohio, or $10.67 for soybeans in Iowa, or $3.57 for corn in South Dakota, or $9.65 for soybeans in Nebraska. Profits are not being offered at this time.

But how much worse could it potentially get? A return to LDP rates? The way the new-crop markets are behaving, it's already likely that some farmers with high levels of crop insurance are likely to receive revenue-based payments. (See: DTN Executive Editor Marcia Zarley Taylor's July 26 article "No Yield Loss Necessary.")

Let's look outside the current paradigm of U.S. governmental farm policy to REALLY explore worst case -- I mean WORST CASE -- scenarios. Let's not only say that there is no LDP program or crop insurance; let's go as far as to say that, from this point forward, our government spends decades being actively antagonistic against farming. For the remainder of our careers or for future generations, how unprofitable could the occupation theoretically get?

It's already happening. No, not here, but yes: now. In Venezuela in the summer of 2016, the government has fixed the price of beef, for instance, at 250 bolivares per kilogram. That means grocery customers, backed up by soldiers of the National Guard, are allowed to come into a butcher shop and buy whatever beef is available, at an equivalent of $11.36 per pound. That may sound like a lot, from a grocery shopper's perspective, but in a cash-strapped, oil-dependent country where people are desperate to be allowed to buy calories in any form, it's a price that hordes of people are willing to pay.

However. As a farmer, as a producer of food, I'm more interested in the experience of the butcher in that Venezuelan scenario. Those Venezuelans soldiers are apparently unhappy when reporters bring cameras or notebooks into the grocery stores and butcher shops and bakeries these days, but multiple sources have found the food sellers are being forced to sell their goods at prices much below the cost of production ... under a threat of force. One butcher told the Financial Times he paid 3,000 bolivares per kilogram ($136 per pound) for that beef he was being forced to sell at $11 per pound.

What Venezuelan food sellers are experiencing right now -- that's the second-worst Worst Case Scenario, right above outright conscription and theft by the army.

The prices may sound extreme, but consider that Venezuela is now a country where even employed, educated people are going hungry because they are only permitted to wait in a 12-hour line once a week to visit a grocery store and buy a very limited quality of very limited goods.

For the butchers, the scale of unprofitability in that Venezuelan beef market is astonishing. It would be like a U.S. corn farmer, this fall, taking corn that cost $3.94 per bushel in production costs and selling it for only $0.32 per bushel. Incidentally, $3.94 per bushel is the average 2016 estimate of production costs from seven Midwestern land-grant universities' Extension services, prior to this year's growing season. That price level is also a full dollar above Tuesday's average new-crop corn bid around the country, as collected by the DTN Market Tracker.

Venezuela's current food shortages are not only a consequence of the near-bankrupt government in an oil-dependent country virtually shutting its borders to free trade; they are also the result of decades of neglect in the agriculture sector. It's a country that's roughly twice the size of California, with 6.7 million acres of arable land and 45 million acres of agricultural pasture, so why doesn't it grow enough of its own beef and flour to keep the urban population fed? Why is there no thriving black market of rural farmers bringing their chickens and cattle and grain into town to sell at hundreds of dollars a pound? Well -- and this is just anecdotal wisdom from my friends -- the entire country, in its federally strong socialist wisdom, has spent decades centrally planning for its workers to focus only on oil production, pulling people and expertise and motivation and investment away from the agricultural countryside.

That sort of thing happens more frequently than you might think. In northern Uganda alongside the border of unstable South Sudan, the government's Extension service is desperate to convince rural people to even bother planting corn seed or any other crop. In Nigeria, which has also for decades focused the country's efforts on oil production rather than food production, there isn't a strong enough Extension service or enough home-grown expertise to know how to fight a tomato moth that has destroyed one of their staple crops.

There is an obvious flaw in Venezuela's food-by-force scheme. Why should the butcher continue to bother finding beef and processing it and selling it at a loss with the proverbial gun to his head? Why shouldn't he just board up his shop and leave the country -- emigrate to Colombia or Mexico -- if he is able?

Eventually, if grain prices in the United States remain unprofitable for too many years in a row, farmers here will be faced with the same no-go decision. Even for the most secure, cash-rich farmer with no lender breathing down his neck, at some point farming for a loss would become too expensive to be a hobby or a charity. They would close up shop; their equipment would fall out of condition; they would no longer hire employees and years later, no one in this country would know how to grow food and we'd be importing it from ... somewhere ... and standing in line to buy it in near-empty grocery stores under the watch of the National Guard.

Well, probably not this year anyway, and hopefully not in our lifetimes. I can't confidently predict what the average cash price levels will ultimately be for the 2016 corn and soybean crops, but I feel fairly sure they will be above $0.32 per bushel. That is a small measure of comfort, but it is also a call to safeguard the economic motivation of farmers. When the free market adequately reimburses the industry, all is well, but when it doesn't, long-term food security is something for all governments to care about.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.