The U.S. economy remains resilient. But after recent corn and soybean prices, producers can’t help but ask, Has the next downturn in the commodity cycle started? Here we look at economic factors shaping both the broader and agricultural economies and lessons from past downturns that producers can apply to their decision-making.
Two Economies
Inflation-adjusted gross domestic product (GDP) increased 3.3% in the last quarter of 2023. Forecasts from the Atlanta Fed indicate near 3% growth for the first quarter of 2024. An annual GDP growth rate of 2% to 3% is considered relatively normal.
The labor market remains tight, with more than 1.4 job openings per unemployed person, further supporting exceptionally strong wages. In January, 353,000 jobs were created, smashing market expectations of 185,000 jobs.
All this despite the Federal Reserve’s restrictive stance on monetary policy to cool the economy and bring inflation down to 2% from 2.8% as of January. This will be a strong argument for keeping interest rates higher in the short term.
Meanwhile, news for grain producers has been less than uplifting. Nearby corn futures as of February 23 closed under $4 per bushel for the first time since November 2, 2020. Nearby soybean futures closed at their lowest since November 9, 2020. Comparisons are quickly being made, and speculation about the next downturn for corn and soybeans has begun.
History Repeating Itself?
The last price downturn began in 2014, on the heels of the 2012 drought. In the span of two marketing years, 2012/13 to 2014/15, the average farm price for corn dropped from $6.89 per bushel to $3.70 and for soybeans, from $14.40 to $10.10 per bushel. U.S. producers planted approximately 95 million acres of corn plantings for marketing year 2013/14, resulting in record production and a 41% increase in corn ending stocks. The stocks-to-use ratio jumped from 9.2% to 12.6% in an extremely low cattle inventory environment.
Today, the U.S. just came off a record corn crop planted on nearly 95 million acres. Ending stocks have increased 60% from marketing year 2022/23, the stocks-to-use ratio jumped from 9.9% to 14.9%, and cattle inventory is at its lowest level since 1951.
Even when two time periods share similarities and lessons – in this case, that supply side impacts often lead to overproduction over a short period – the outcomes can be very different.
Since 2014, harvested acres from Brazil and Argentina have increased 39% and 97%, respectively. This has led to a 46% increase in Brazilian corn production and an 85% increase in Argentinian corn production, creating a major obstacle for U.S. agriculture as it works to compete on the global market. Of particular concern is China, which is now able to import corn from Brazil and Argentina, diversifying its corn purchases and potentially relying less on U.S. corn.
Additionally, the Russia-Ukraine war continues to have short- and long-term uncertainties on the global grain market. And, of course, there are the unknowns of weather and weather markets. Any of these factors could turn commodity markets more bullish at any point and to varying degrees during the marketing year.
U.S. Dollar and Commodity Exports
The biggest difference between 2014 and today is the interest rate. As Figure 1 shows, following the 2008 recession up to 2017, interest rates were at historically low levels and below inflation. This was a period of expansionary monetary policy that resulted in a weak U.S. dollar for a prolonged period.
In 2022, the Federal Reserve began increasing interest rates to combat inflation. The rate hikes outpaced those introduced by central banks in other countries and the U.S. dollar subsequently strengthened, as much as 16% at one point. The dollar currently is 8% higher than at the start of the Fed’s rate hikes.
While a stronger U.S. dollar is attractive to global investors, it makes U.S. commodities less competitive on the global market. As Figure 2 shows, the U.S. dollar has strengthened against many top export destinations for U.S. agricultural products. Since 2021, the U.S. dollar has strengthened against the Japanese yen by 41%; the South Korean won, 21%; the euro, 12%; the Chinese yuan, 11%; and the Canadian dollar, 5%. The strengthening of the U.S. dollar will continue to weigh on U.S. agricultural export demand in 2024.
Mexico, a major consumer of U.S. pork and grain, has been the exception among top export destinations. The peso has actually strengthened against the dollar, in part because the interest rate spread between the U.S. and Mexico remains wide at 575 basis points. Mexico’s benchmark rate sits at 11.25% compared to 5.25% to 5.5% in the U.S. This gap in the spread has increased demand for peso-denominated assets and bonds.
In 2023, U.S. pork exports to Mexico were up 9.7% compared to 2022 and 24.6% compared to 2021. While 2023 was one of the most challenging years the U.S. hog industry has experienced, it would have been much worse without the robust demand seen from Mexico.
Which exchange rates matter the most varies by commodity, reflecting which countries the U.S. trades with by commodity. Figure 3 shows commodity trade-weighted exchange rates on an inflation-adjusted basis for five primary commodities in the Farm Credit Services of America (FCSAmerica) and Frontier Farm Credit territory. The blue columns reflect the federal funds rate.
A depreciation in the index signals that the U.S. industry for that commodity becomes more competitive relative to the foreign market. Take note of the period following the 2008 recession into the mid-2010s. Interest rates were historically low and the U.S. dollar was weak. The depreciation of the five commodity indexes shows that each of the five commodities’ trade weighted exchange rates was relatively competitive in the global market. You have to go back to the mid-1990s to find a time period when trade weighted exchange rate indexes were this low for corn, wheat, beef and pork. For soybeans, it was 1989.
Now look at 2022, when the Federal Reserve began its rate hikes, through today. High commodity prices, inflation and a stronger U.S. dollar have made U.S. commodities more expensive for global buyers. The indexes for all five commodities have appreciated, becoming less competitive in the global market. Soybeans have appreciated 12.5%; beef, 5.5%; pork, 5.1%; wheat, 3.5%; and corn, 2.9%.
Corn, beef and pork indexes between mid-2022 through December 2023 were the highest they have been since tracking of this data began in 1970. Several market forces, including large Brazilian corn and soybean crops, have contributed to slumping U.S. commodity exports. But the impact of a strong U.S. dollar can’t be underestimated. It hasn’t been this strong for this long since 2002 – and it will play a significant role towards the magnitude of export demand in 2024.
It is too early to say with any certainty that corn and soybeans are in a downturn; many factors have yet to play out. But if this is the start of a new commodity cycle, U.S. producers enter it with a competitive disadvantage compared to 2014, when low interest rates and a weak U.S. dollar made their commodities more attractive on the global market.
The Stage for 2024 Plantings
The 2023/24 domestic corn and soybean balance sheets tell two different stories, with soybeans fighting for 2024 acres. Corn ending stocks, at more than 2.1 billion bushels, are approximately 26% above their 10-year average; soybean ending stocks, at 315 million bushels, are 9% below the average.
The soybean-to-corn (soybean/corn) price ratio is one of several tools that can be used to measure and compare profitability between the two commodities. Higher price ratios indicate soybeans may be more profitable; lower price ratios tend to favor corn. The (new crop) price ratio is also important as spring crop insurance prices are set during the month of February.
The ratio can provide insights for corn and soybean plantings for the upcoming year. When the average first quarter (January through March) price ratio of new crop November soybean futures and December corn futures is low, corn acres tend to increase relative to soybean acres. When the ratio is high, soybean acres increase at the expense of corn.
The red dot represents the 2024 ratio and stood at 2.48 between January 1 and February 23. This suggests corn and soybean acres will be close to a 50/50 split, with producers having little reason to upend their traditional corn and soybean rotation. USDA’s projections closely align with this. USDA forecasts 91 million acres of corn and 87.5 million acres of soybean plantings.
Trend-line yields for 2024 point to 181 bushels per acre for corn and 52 bushels for soybeans – yields that, if realized, would result in large crops and a need for increased demand.
As already outlined, U.S. agriculture is unlikely to see a big uptick in exports. Feed use also presents challenges. The U.S. cattle herd is at its lowest since 1951 and the breeding hog herd is shrinking.
Ethanol demand, meanwhile, has likely plateaued, although economic factors could slow demand for gasoline and in turn, ethanol, in 2024. Even so, cautious optimism remains in the ethanol industry. Policies, such as year-round sales of E15, and inclusion of alcohol-to-jet feedstocks in the Inflation Reduction Act’s SAF Tax Credit will be critical for demand growth moving forward.
Grain in the Bin
Many producers are holding grain in storage in the hope of a price rally in the market. But given today’s interest rates, the cost to carry is higher for producers than in years past as higher interest rates have not been a factor for producers to deal with in more than a decade.
Frankly, it’s getting expensive to store corn. And ending stocks of more than 2.1 billion bushels, or 25.9% above the ten-year average, are a limiting factor for price rallies in the market.
Producers who took advantage of narrow basis over the past couple of years might see a reverse trend. While all basis is local, many factors affect basis, including domestic demand, local supplies, storage availability, transportation, and global supply and demand. For corn, domestic supplies are ample, and indications show that South America will harvest a record crop. These two factors alone are contributing to lower corn futures dropping and wider basis.
Figure 5 shows the relationship between the U.S. stocks-to-use ratio for corn and DTN’s National Corn Basis Index in the month of July, when volatility in the corn market is generally at its peak. Large domestic stocks-to-use ratios tend to widen basis levels. For the past three marketing years, producers had opportunities to receive higher prices through a narrow basis. An abundant corn crop in 2024, combined with slow demand growth, could reverse that –assuming normal conditions.
What Producers Can Do to Mitigate Risk
Producers need to be prepared for the imbalance that occurs when commodity prices decline faster than input costs and cash rents. Here, lessons from past downturns can be invaluable.
- Analyze your expenses annually, based on commodity prices and crop rotation. What can you control (e.g., crop inputs, fuel, cash rent, family expenses, etc.) and which are locked in (land and equipment payments, insurance, taxes, etc.).
- Find ways to reduce expenses without sacrificing production that could hurt your expected revenue.
- Calculate breakevens for each commodity on your operation and know them forward and backward.
- Mitigate financial risks by developing and planning for best-case and worst-case scenarios. For instance, in a best-case scenario, how will you utilize additional income? In a worse-case scenario, do you have enough working capital or liquidity to operate?
- Develop a resilient risk management plan. Is my crop insurance protection enough to pay current operating notes? Is it resilient enough to allow me to take advantage of market opportunities and price risk throughout the growing season? Is it resilient enough to mitigate my worst-case scenario that I identified in step 4?
This type of planning allows you to assess your risk tolerance and breakevens under multiple scenarios, while also identifying potential working capital needs to cover losses for one or multiple years. It also informs and enhances decision-making and protects your overall margin.
It is imperative to proactively manage the components of your cost structure that do not change year to year. Payments that were affordable when profits were good can quickly become burdensome in a tight-margin environment.
