Long winter ahead

The bottom is in the process of being made in the grain markets but bottoms take a long time, says Richard Brock.

By Richard Brock

The feed industry and agriculture in general is a very cyclical business. Good times don’t last forever and fortunately neither do the bad. Looking back over the last 12 months there have been many changes in commodity prices. The most negative is the drop in soybean prices which have roughly gone from $13.00 per bushel to $9.70 in the last 12 months. Corn from $4.70 to $4.40, but much lower in between.

On the bright side the livestock industry, dairy and poultry have done well. Lean hogs have gone from roughly $70 to $84, cattle from $170 to $192 and milk from $16 to $19. Fortunately, there have been some very bright spots. On the darker side consider some of the following changes:

Farm equipment industry. Large layoffs and the shutting down of many manufacturing lines at the large companies. The secondary market is likely to hurt the worst. Nothing good happens when sales drop by 70%. This has resulted in many mergers and acquisitions and the cutting of many employees that will never come back. Farmers bargaining power for buying equipment drops when large ownership groups acquire other dealerships in some cases up to 44.

Grain farmers are being very financially challenged. If they missed the move down over the last 18 months in grain prices the challenges are significant. Many producers are going to have to borrow against equity and land and with interest rates at 8% or higher, cash flows will continue to worsen. As this is written it would appear the government is going to come in with an assistance program that may pay corn producers as much as $100 per acre and soybean producers $30 to $40 per acre. This will at least help keep some farmers in business that may not have made it but it’s not a long-term solution.

Processing margins are tightening in the feed industry. When prices get low as they are now there are not as many opportunities to make money. All one must do is look on the New York Stock Exchange at some of the larger feed companies and see the trend in their stock prices in the last year to get a flavor for what’s going on.

The retail ag industry in chemicals and fertilizer businesses will continue to contract. As grain producers continue in consolidation, marketing to those producers will continue to change as well.

Bank consolidation will continue in rural America. I wrote about this extensively a year ago in this magazine and now with Trump coming into office regulations will soften and many banks who have yet to recover from the sharp increase in interest rates reflecting open losses on their balance sheets will be absorbed by larger banks with positive balance sheets.

Cycles Will Go OnThe graph below shows the long-term economic cycle that we believe exists for corn and soybean producers. The bottom is in the process of being made but bottoms take a long time. As the old saying goes, the market will give corn and soybean producers five minutes to sell the top and five months to sell the bottom. The U.S. has lost a large share of the grain export business. This month the Brazilian real hit a 22 year low versus the U.S. dollar. That makes Brazil soybeans and corn much cheaper than ours on the world market. Genetics also continue to improve and thus not only are U.S. farmers seeing higher yields but so are Brazilian farmers and farmers around the world. Once a market gets in this rut it is very difficult to get out. The market needs a significant disaster in production in some other country. Doesn’t appear to be on the horizon in Brazil this coming year. In the last cycle that witnessed corn prices peaking in 2012 the turnaround came in 2020—eight years later. The cycles are getting shorter. This one peaked in 2022. Could it bottom in 2026-27? We think the odds are reasonably good. Merry Christmas and Happy Holidays to everyone.

Richard Brock is Chairman of Brock Holding Company which is comprised of Brock Associates, an agricultural marketing advisory service and publisher of The Brock Report, established in 1980 and Brock Investor Services (futures and options brokers).