What is in this article?:
- Corn, soybean producers should plan for reduced profit margins
- Keep in touch with lender
• Although yields were reduced due to spotty rainfall, many farmers in Virginia are anticipating record income levels due to the high grain prices.
• The management of profits generated during periods of high prices will impact the long-term viability of the business.
Corn and soybean prices reached all time highs during the summer of 2012 caused by the devastating drought in the Midwest.
Although yields were reduced due to spotty rainfall, many farmers in Virginia are anticipating record income levels due to the high grain prices.
The management of profits generated during periods of high prices will impact the long-term viability of the business.
There is the old adage “the cure for high prices is high prices.” This means that during periods of high prices producers will increase production to cash in on the high prices. The increased production will result in additional products sold in the world market place which will reduce demand for the products and depress prices for producers.
In times of high prices, it becomes profitable for producers to plant crops on marginal cropland which further increases harvested bushels. Consequently, the potential for larger supplies of corn and soybeans available in the market place will place downward pressure on prices and profit margins, if 2013 is a normal year.
Jonah Bowles, Senior Agricultural Market Analyst at Virginia Farm Bureau, identified (at least) five bull markets since 1970.
The average drop in price following a bull market was 45 percent. If the current trend came to an end at the existing market price, a 45 percent fall would extend down to $4.67 for December corn.
A similar analysis was done with soybeans, which showed similar market reactions, but dissimilar years for some of the trends.
Another factor with the boom/bust analysis is the duration of time for the rise and fall. Most of the bull markets lasted 2-3 years, but all of the subsequent low prices, for corn and soybeans, occurred within one year of the top.
The decisions that producers make during periods of high profits margins can impact the long-term profitability and viability of their businesses.
Grain producers should start to take steps to position their businesses and personal finances to weather the future decline in profit margins.