Who Wins vs Loses with Changing Commodity Prices?
This past year has brought a lot of change, but who would have anticipated what has happened to corn, soybean, and other commodity prices. Looking at the 30 year price trends for corn and soybeans, the market is now at $6.00 per bushel of corn and $575 per metric ton of soybeans. These are prices not seen in the commodity markets since 2013.
Over the past six to seven years, corn producers were worried about achieving costs to produce of $3.50 or $3.75 per bushel and are now looking at the ability to lock in $6.00 per bushel corn. Lenders dealing with borrowers who were unable to meet debt service obligations a year ago, are now looking at producers with the potential for a near record performance year.
What does this mean?
Let’s examine the impact of these commodity changes on a few different agribusiness sectors.
Agronomy: Agronomy businesses were feeling negative impacts as a result of producers needing to keep costs low, and as a result of the prevent plant acreages. Now with the increase in commodity prices, producers are able to spend more money, and buy more agronomy products, to produce more commodities. This should have a positive impact on sales in the fertilizer and crop management service providers businesses.
Dairy Farming: Increased feed prices are not good for a dairy farmer’s financial performance. Couple that with the decrease in milk prices since the high reached in November 2020, and dairy farmers are experiencing stress.
Corn prices and milk prices never seem to work together to help dairy farmers for the long term. Early 2013 saw milk price increases and corn price decreases, but that relationship is the anomaly.
Crop Producers: After years of focusing on reducing break even points, the commodity growers are finally in a position to post solid earnings, as long as they maintain their discipline over costs and asset acquisitions.
Food Processors and Manufacturers: Whether you are a small commercial bakery or a large cereal producer, input costs are moving around and impacting performance for food processors and manufacturers. There will be more emphasis on hedging strategies and contracts with growers to ensure a steady supply of inputs at a cost that still allows processors to produce profitable operations.
Landowners and Investors: Landowners will be seeing the opportunity to increase rents again, or renegotiate rent adjustments provided during the lean commodity pricing years.
What does this mean?
The discipline lower commodity prices created in producers needs to be maintained. Volatility in commodity prices continues to be a risk factor. Increasing production costs without hedging at least a portion of the crop is risky. The desire to replace fixed assets or buy more property needs to be tempered by the performance risk and the producer’s leverage. Resisting the urge to buy more will be important.
Companies that rely on a steady supply of agricultural products at an identified price will need to consider their supply chain management, including offering creative contract terms. Hedging of inputs against contract prices for product will need to be considered. Manufacturers or processors that have not already put in pricing tied to commodity prices may need to consider that option with their customers now.
The agribusiness sector is more accustomed to swings in prices that many other sectors. The disciplines learned during lean times on either end of the profitability equation need to be maintained.