American farmers have figured out how to produce crops.
That's the message we're hearing as grain prices slip on expectations of high yields this fall.
"I don't think $4.50 corn is a short term blip," says Bill York, CEO at AgriBank, one of the largest banks within the national Farm Credit System with more than $80 billion in total assets. "Six or seven dollar corn is not what I would call sustainable."
York made the comments during this week's Ag Media Summit held in Buffalo, NY, as a lack of a weather threat during pollination sent futures toward harvest lows. The industry is predicting 157.7 bu. corn yields, although there's still backside weather risk as the crop season winds down.
"This crop is a little late so if we have unseasonably cold weather you will see reduction in production," York notes. We may also see more late-planted corn acres harvested for silage.
"Absent something unusual, we may be coming to a newer normal," he adds. "No one can predict the future, but I don't think our customers are planning to depend on $6 corn and $15 beans. A lot of variables in the market this year could make those numbers considerably lower."
York expects exports and steady ethanol demand will keep prices from free-fall, but demand has been weakened by a U.S. livestock sector still struggling to bounce back from 2012's drought.
"We've seen the livestock industry scale back and it will take a while to have them get re-established, especially with cattle," he says.
The good news
Thanks to several profitable years, many farmers have built equity and are in good financial shape -- well preserved for a market correction. And corn prices that start with a 'four,' along with bean prices in the tens will brighten the outlook for livestock growers struggling with high feed costs.
Farm exports, especially to China, have fueled recent profits and will continue to drive demand growth for meat, corn and soybeans. How demand changes depends in part on the growth of China's middle class.
"That's what drives growth for U.S. agriculture," York says.
Farmers have really improved financially in the last 10 years, he adds. Many have built equity and working capital; those who own land have seen balance sheets grow dramatically. Many farmers have upgraded to more efficient, newer equipment.
"All those things are favorable and hence we have the best credit quality we've ever had," says York. "But we know that won't last forever."
Short term he advises those with real estate debt to lock in long-term low interest rates. Some higher cash rents may not pencil out for 2014 if grain prices remain where they are this winter. With rising costs of inputs – including rent – farmers need to have a sharper understanding of their production and funding costs, as well as production risk.
"One thing very positive for us as a lender during last year's drought is that 85% of our crop producers had crop insurance," says York. "The more variables you can lock in, whether that's a balanced marketing plan, long term interest rates for long term assets, and just putting together a business plan that has flexibility to work through adversity, that will keep them on the farm."