World needs to slash crop acres to cut grain surplus

WASHINGTON, D.C. — What will it take to drain the oceans of crop stocks that are drowning world crop prices?

And how weird is it to see world crop stocks surge so much after the drought-induced shortfalls of 2012?

“I don’t know how long it has been since we had four record years stack up back to back,” said Robert Johansson, the U.S. Department of Agriculture’s chief economist.

As well, it’s hard to tell how many months or years of “normal” world weather conditions would be needed to bring stocks down to more price-friendly levels.

Part of the problem with surging stocks of many crops has been the stubbornness of farmers around the world to cut back production. 

“You would expect to see land taken out of production,” said Johansson.

“We’re seeing that in the U.S. We’re not seeing that in South America.”

However, barring a drought or similar dramatic weather disaster in a major crop-producing region, reduced acreage is likely to be the eventual solution to the present glutted world market, Johansson said. 

U.S. farmers, stuck with a high American dollar, have already begun cutting some acres from production. A high U.S. dollar cuts crop prices compared to those in most other countries.

Crops such as wheat have been particularly hit by farmer reluctance, with this year likely to see an eight percent reduction in U.S. wheat acres, Johansson said.

Further acreage reduction is most likely to occur wherever farmers have the worst returns.

“As prices come down, where is the land going to fall out? Who is the high marginal cost producer?” said Johansson.

Some land might be removed from production in the Black Sea region, where conflict and political instability are making it physically difficult to grow crops and export them.

In Brazil, farmers might start cutting back on second-crop corn if returns are poor, Johansson said.

European farmers have experienced bad returns for wheat, so they might scale back.

Based on average weather and growing conditions, the USDA doesn’t expect a significant im-provement in crop values for years. That means there will be continued pressure to work down stocks, and none of the ways are easy or predictable.

“The way you work it out is you either get a drought or you get acreage leaving production,” said Johansson.

“Or you get something like a lot more people using biofuels.”

With a substantial increase in biofuel consumption hard to imagine today, that leaves farmers waiting for other farmers to cut acres, or for a drought to hit a crop somewhere. Until something like that happens, crop stocks will remain heavy.

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