I have written 140 articles for The Corn and Soybean Digest over 14 years. I've also traded commodities and worked with farmers in marketing crops for over 30 years. The past 10 months have been the most interesting, and challenging, that I've ever seen. And it's likely to stay that way for the next several years.
This is a list of five positive factors that have changed the commodity markets in the last 14 years and have created huge profit opportunities in farming:
Growth in global demand (see chart).
Biotech crops. The ability to get great yields with lower herbicide costs has added to the bottom line.
Ethanol. Early investors have had a phenomenal return on their stock over the last 10-12 years. All corn farmers now have the opportunity to sell $4 corn out for four years. In the western Corn Belt it has been a great combination of higher futures and improved basis.
Technology. With low-cost cell phones, inexpensive computers, GPS and auto-steer, farmers are more efficient than ever. Plus, you can stay in touch with producers throughout the world.
Commodity Funds. With the bull markets in commodity prices since 1999, commodity funds have been huge buyers ? and sellers ? in global commodity markets. The funds are usually trend-following-momentum traders who buy on rallies and sell when prices break. That method of trading creates a lot of volatility with prices making higher highs and lower lows. This creates great marketing opportunities for disciplined marketers.
What will stay the same? Well-managed farms that use current technology will stay profitable and earn 20-40% more bottom-line profits than less-efficient farmers who wait to use the latest technologies available.
Challenges To Come
This is a partial list of some of the challenges I see facing farmers in the next 14 years:
Some ethanol plants have not been built because they could not find or buy enough water; others have the expense of piping in the water from miles away. Farmers in Colorado and California are competing with suburban and industrial companies for limited water supplies. Over time the water wars will evolve into an economic and political challenge for all farmers.
- Higher land prices and higher cash rents
I thought it would take 2-3 years for $4 corn to get bid into land prices and rents, but it only took 2-3 months. Many producers who sold too much too early for 2-4 years ahead will have limited or non-existent profits. All producers will see less profit as higher input costs squeeze margins.
Finding enough help and qualified help is a challenge now and will likely get worse over time. It takes someone you trust and with the right training to drive the more complicated computerized tractors and combines. The more technology you use, the more highly qualified help you need to have.
- Reduced clout in Washington
With the next redistricting to determine how many legislators each state sends to Washington, D.C., more of them will be from the South and West. Central Corn Belt states will not have the influence they've had over the last 10-20 years.
- Transfer of assets to the next generation
As land values soar, it's more difficult to get a farm transferred to the next generation in a way that is fair to all involved. With fewer and larger farms, this gets more difficult every year.
Alan Kluis is the president of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at [email protected] or call toll free 888-345-2855.