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What are the implications of the US corn crash for Australian farmers ?

Mick Keogh - Tuesday, July 28, 2015

The US corn belt stretches across about 1,500 miles of the mid west of the USA, from Ohio in the east almost to Colorado in the west, and is a powerhouse of agricultural production with soils and climate that leaves any Australian farmers green with envy. For much of the past decade, the corn belt has generated enormous wealth and corn farmers have enjoyed an extended period of high profitability, but all that now seems to have come to an abrupt halt.

The US corn belt through Illinois looks an absolute picture at the moment, with roads lined with eight foot high corn crops just coming into ear, and the expectations building of a large harvest despite a very wet growing season over the past two months. The anticipation of a big harvest in 2015, on top of a very large harvest in 2014 would normally make corn farmers happy, but that is far from the case at the moment, and there is a growing sense of nervousness among farmers and agricultural service industries about what the future holds for the corn belt.

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The reason that farmers and their service industries are becoming decidedly nervous is that the combination of repeat record harvests and the continuing appreciation of the $US against most major currencies has resulted in a precipitous fall in the price of corn, which in turn is projected to result in a similarly large fall in farm incomes across the corn belt. The following two graphs neatly sum up the current market situation.

 

The corn price graph highlights that commencing in 2006, US corn prices started on a strong upward trajectory on the back of the US Renewable Fuels mandate and growing demand for feed grains by Asian nations and China in particular. This was interrupted briefly by the Global Financial Crisis in 2008-09, but prices subsequently recovered  and reached almost $US 8 per bushel in late 2012. However, corn prices crashed heavily in 2013 and 2014 as large harvests in the US and elsewhere increased global corn stocks, and projections emerged of yet another very large harvest in 2015.

The result has been a very dramatic decline in farm income, as the following graph recently produced by the University of Illinois shows.

From average farm incomes in excess of $US 200,000 for much of the period from 2006 to 2013, current year projections have crashed to just $US 15,000 per farm, a level not seen since 1998. This would obviously have very serious implications for US corn growers if these projections are realised. It would mean that the high levels of investment in new machinery that has occurred over the past three years in the corn belt will come to a grinding halt, and there may in fact be growing financial defaults on machinery and more general farm financial commitments. It will also add downward pressure to land prices, and service providers and input suppliers are likely to see their income levels decrease. It may even mean that the US Government again triggers direct price support payments for US farmers.

For Australian farmers, there are a number of possible implications. The low corn price coupled with large stocks is likely to mean that cattle feeding budgets become much more positive, and the long anticipated US cattle herd rebuilding phase will be accelerated, with implications for Australian beef prices in the medium term. It is also likely to mean that global feed grain prices will stay lower, affecting the price of some Australian grain and fodder exports. It could also mean that US and Canadian pork production could increase, leading to extra import pressure on Australian pork producers. 

Fortunately, Australia is not a major exporter of feed grains meaning the direct impact on Australian farmers will be limited in the near future, although the large corn supplies and lower prices will have a dampening effect on all grain export markets, given there is some substitution across the different grain markets. Australian farmers are also extremely fortunate that the $A has depreciated from a high of $US 1.10 to around $US 0.70 at present, with this benefit flowing reasonably quickly through to farmers in higher export and domestic prices. Australia's major food retailers are also probably learning a little about the reality of global markets at present, as they face export competition for dwindling supplies of beef and sheepmeats.

One of the longer term implications of these developments is that the rash of projections of imminent global food insecurity are now starting to look a little alarmist in the face of rising global supplies and continuing productivity growth in some developing and developed nations (although not in Australia). 

Anyone taking comfort in these projections of global food shortages as an reason that Australian farmers no longer need to pursue productivity and competitiveness in order to maintain profitability might need to reconsider their hubris in the face of the developments now unfolding in the US corn belt.

 
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