Bumper crop tumbling corn, soybean prices

Another bumper crop is driving corn and soybean prices ever lower, potentially shorting Iowa farmers of nearly $2 billion in revenue and leading to a third consecutive  year of income losses.

Some experts worry that corn prices at Iowa elevators, already below $3 a bushel, could plummet to $2.30 to $2.50 a bushel, levels that most farmers in the state haven't seen in a decade.

“We’re at all-time record yields, but with $3 corn, it doesn’t cover break-even costs,” said Brad Moeckly, an Elkhart corn and soybean grower who also raises pigs.

“It’s a very, very stressful time in agriculture, just trying to make ends meet."

Soybeans, trading at about $9 a bushel in Iowa, could tumble a dollar or more, said Chad Hart, an Iowa State University agricultural economist.

New projections from the U.S. Department of Agriculture on Friday show that farmers will harvest record corn and soybean crops. The agency said that average corn prices nationally could fall as low as $2.85 a bushel and soybeans could drop to $8.35.

The ripple effect

Low commodity prices have rippled through the Iowa and U.S. economy, helping drive massive corporate mergers such as Dow-DuPont, layoffs at farm equipment manufacturers and lower farmland prices.

Deere & Co., for example, has cut about 2,000 workers since the start of the agriculture downturn, including layoffs at Ankeny and Waterloo, manufacturing homes for big tractors, sprayers and cotton pickers. Deere said in May that it expects farm machinery sales in the U.S. and Canada to fall as much as 20 percent this year.

Deere has laid off about 1,000 workers over nearly two years in Waterloo.

"It's been really hard on our members who have lost their jobs," said Tom Ralston, president of the United Auto Workers Local 838.

Union members still working at the plants have fewer hours, Ralston said.

"We had been on such a great run for so long. Everybody expected a slowdown, but nothing quite like this," Ralston said.

The deepening downturn is weakening farm credit conditions in Iowa, Illinois, Wisconsin, Indiana and Michigan, as farmers struggle to pay loans.

Farmers had "major or severe problems" repaying 4 percent of the district's ag loans, according to a recent Chicago Federal Reserve report.

"It’s much, much weaker than it was a year ago," said Kurt Herbrechtsmeyer, CEO of First Security Bank & Trust in Charles City. "Some farmers are entering their third season of a tough go. You can only dig so deep."

Herbrechtsmeyer and other farm lenders have restructured debt and extended loan repayments, asked for additional collateral, and sought federal loan program guarantees for some higher-risk customers. Some lenders have cut financing.

​It's difficult "to tell people that we’re not going to finance them next year," Herbrechtsmeyer said. "We did a fair amount of that last year … and there will be a few more this year."

Holding on to a harvest

The adage in farming is that the cure for low prices is low prices, meaning that low prices will spur demand that will once again drive prices higher.

"The lows will be determined by how well we tuck this crop away from the market — and how much demand bubbles up and improves these price levels," said Don Roose, founder of U.S. Commodities, a West Des Moines grain and livestock investment firm.

Corn still lies under white-tarped piles at some Iowa country elevators. Nationally, 1.7 billion bushels remain in bins.

But even as those stockpiles remain, another bumper crop approaches.

U.S. corn growers are expected to harvest a record 15.2 billion bushels, based on USDA estimates Friday. Soybean production will hit a record 4.06 billion bushels.

Iowa is expected to harvest a record corn crop this fall and the state's second-largest soybean crop.

"It will spur increased livestock production. It will spur exports," said Dave Miller, director of research and commodity services at the Iowa Farm Bureau Federation.

Another factor is the strong U.S. dollar, which has hurt American exports, especially agricultural products — from corn and soybeans to pork, beef, tractors and combines, Miller said.

"We feel the low prices, but it doesn’t feel like low prices to the buyers," he said. "Three-dollar corn in the U.S. in 2016 feels like $4.50 corn in Japan, or it feels like $5 corn in parts of China or Europe because of the exchange rates."

Lower prices make U.S. corn and soybeans more competitive in international markets, said Mark Heckman, president of the Iowa Corn Promotion Board.

Heckman, who farms with his family near Muscatine, said corn demand has steadily increased, in part because of growing demand from ethanol, which set a record production rate the first six months of the year.

The federal government mandates how much renewable fuel will be blended into the U.S. fuel supply, a standard that has garnered growing opposition in recent years, in particular from oil producers.

The Iowa Corn Growers Association reports that demand for the grain climbed about 25 percent from 2005 to 2015.

"We have a pretty tight storage situation," Roose said, "but we also have this great chugging demand that clears out those big supplies."

Playing a market rally

Iowa and U.S. farmers had a window that offered an opportunity to lock in profits, or at least meet their cost of production, in May and June. Corn prices climbed to more than $4 a bushel and soybeans to over $10 a bushel.

Weather worries drove the mini-rally.

“We had no idea whether we’d have a great crop or go through a drought,” said Moeckly, the Elkhart farmer.

Miller, who also farms in southern Iowa, said dry weather prompted him to sell only about one-third of his crop.

Timely rains have helped crops in southern Iowa and elsewhere in the state. Eighty-three percent of Iowa's corn and 82 percent of soybeans are in good to excellent condition.

Steve Bruere, president of Peoples Co., a Clive-based land broker and farm management company, said catching that rally likely will mean the difference between gains and losses this year.

"The coffee shop talk is that there are more who didn’t sell than did," he said.

Miller worries that "half to two-thirds of the crop could be very vulnerable to market declines."

With lower prices, corn losses could hit $175 an acre, and soybean losses would be about $75 an acre, ISU's Hart wrote recently.

Crop insurance gives farmers a cushion. About 90 percent of U.S. corn growers and 96 percent of soybean growers protect their crops through the federal revenue insurance program.

"Some will have the ability to hold onto their grain and see a rally," Bruere said. But, he added, "I don't know what's going to make the market rally at this point."

Auctioning off equipment

Farmers are seeing some relief in expenses, which a recent report showed dropped nearly 9 percent last year from a 29-year high set in 2014.

And the Chicago Federal Reserve said rental prices for Iowa farmland fell 10 percent this year. In the spring, landowners and managers said farmers were dumping contracts they felt were too high.

But Hart and others expect more belt tightening.

Jason Smith, a broker and auctioneer at DreamDirt, a Mondamin auction and real estate company, sees more and more farm equipment coming to auctions.

"It's a market that’s already saturated with equipment," Smith said.

Prices are about 30 to 40 percent lower than in 2012, when commodity prices hit a record high, he said.

Some farmers are downsizing, trying to free up cash to weather the downturn. Others are retiring.

"They're ready to let someone else take that risk," Herbrechtsmeyer said.

Miller said no farm sector is doing well right now, although livestock producers will be helped by lower corn and soybean prices.

"There’s no real bright spots in Iowa agriculture," Miller said, adding that hog, dairy and cow-cattle producers are likely breaking even or posting slim gains. "Cattle feedlots are still having difficulty, coming off a very negative set of conditions."

Some Iowa farmers will seek bankruptcy protection, Hart said, especially if the downturn continues.

So far, Smith said he has seen few distressed sales like those that marked the 1980s, when families' land and machinery were auctioned off. Iowa and other Midwestern states also saw banks close.

"There are definitely some nervous people out there," Smith said.

Economy strong despite ag downturn

Lenders learned lessons from the farm crisis, Herbrechtsmeyer said.

Three decades ago, farmland purchases were highly leveraged at a time when interest rates skyrocketed. These days, lenders require large down payments, and interest rates are expected to remain near historic lows.

Although farmland values have fallen, the decline has been slow so far. Iowa farmland prices were 6 percent lower in July compared with a year earlier, according to the Chicago Federal Reserve report last week.

Iowa's economy is different, too, than it was 30 years ago, said David Swenson, an Iowa State University economist.

"We have more people earning their livelihoods in a range of industries that are less affected by ag or manufacturing recession cycles," he said. "That's given us more stability."

Still, the farm weakness is showing up in Iowa manufacturing, which had 7,700 fewer jobs in June compared with a year earlier. About one-third of the losses are tied to farm and construction equipment production, Swenson said.

Even so, Iowa's economy overall remains strong, adding 21,200 jobs over a year earlier, Swenson said. Iowa has seen strong growth in construction, health care, finance and insurance employment.

Ralston, the UAW Local 838 president, said workers and residents know that the lingering farm downturn is different from the farm crisis, which hit Waterloo hard. Deere cut half its workforce, and Rath, a meatpacking company, closed.

"It was such a terrible time in Waterloo, it's built into the psyche of the town," he said. "We rationally know it's not the '80s. But subconsciously, that fear hangs around."