Here are three sets of numbers that don’t add up for me:
- Prairie farmers expect to be almost as profitable in 2013-14 as they were in 2012-13.
- Farmers expect input prices to increase.
- New crop hard red spring wheat futures prices are about $1.50 per bushel lower than they were for most of July to December 2012. Canola new crop November futures are more than $1.50 per bu. lower than July 2013 canola futures.
Does that add up for you?
Here’s a way of writing out that equation: Lower crop prices + higher input costs = identical profitability.
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Hmmmm.
Of course, the situation isn’t that simple. The first two findings come out of a prairie farmer survey by Prairie Research Associates, while the crop futures prices are publicly available.
The survey numbers are amalgamations of answers from almost 1,000 farmers contacted by PRA. Forty-seven percent of farmers expect their profitability in 2013-14 to remain the same, while 25 percent expect it to increase and 25 percent to decrease.
Fifty-nine percent of young farmers expect their profitability to increase, while only 22 percent of farmers older than 55 expect to see it grow.
So how do reasonable market expectations of lower crop prices, an expectation for higher input costs and expectations of higher profitability come out of the same farmers and markets?
Perhaps some farmers had crop wrecks or large production problems last year and reasonably expect a “normal” growing season this year. Maybe some have taken over lots more land and are going to produce significantly more this year.
And maybe some are learning lots about production methods every year and assume they will benefit from their growing expertise this year.
All those factors could apply to young farmers, which is maybe why they’re so bullish about this growing season and the coming crop year.
Or maybe they’re predicting another historical bull market, similar to the one that the Midwest drought caused last summer.
I hope it’s not the latter because there aren’t too many reasons right now to be super-bullish about crop markets in the next few months.
Here’s how Jim Beusekom of Market Place Commodities of Lethbridge summed it up for me last week:
“The real question is, how far can the market fall? It’s not whether or not they’re going to fall. They’ve already gone down. But how much can they fall?”
It’s natural for farmers to be bullish in spring. After all, they are throwing tens or hundreds of thousands of dollars into the ground in the form of inputs that they hope will produce a crop that they can sell for a profit in a few months. So it’s natural and OK to expect to be profitable.
But to expect profits equal to or greater than a year in which a history-making rally made every crop high-returning? That’s odd.
We live only once, and we all didn’t start at the same time. There are farmers who lived through the glory days of the 1970s bull market in grains. There are many who lived through the 1983-2005 bear market for grains. And there are some who just got into farming in the last decade or so, during a bull market for crops.
Members of the latter group are the ones who told the survey that they are mostly expecting to make more money this year than last year.
The market might soon school them about the dangers of undue optimism.
It all depends what the bullish farmers did with their bullishness.
If they just used it to feel good while they seeded, that’s great.
But if they used it as the basis of their finance, they might be doing a lot of financial revisions in a few months, hopefully not with a red pencil.
