Corn and soybean producers hung on tight this past year during an unusually wild ride in the agricultural commodity markets.
“Farming is high risk. We’re basically gamblers,” Clark Grannes, a corn and soybean farmer from southern Minnesota, said. “There’s some things we can control, but marketing is the one thing that’s hard to control.”
From the lowest closing corn price seen in August to the highest closing price in December, corn producers saw just over a $1.50 increase in five months, raising the price by almost 50%. Beans rose over $4.80 in eight months, this increased their value by over 50%.
Although not all farmers were able to reap the benefit of these higher prices due to selling their grain at an earlier time, the gains that they were able to receive in 2020 were much needed to help replenish their cash reserves.
Dan Koster has been in agriculture lending for 35 years at Minnwest Bank in Redwood Falls, Minnesota. He said that in four of the last five years, two-thirds of the farmers that he works with have shown losses in their earned net worth, forcing them to live off of the equity of their farm without contributing any money toward it.
The cash flow projection made last spring for a 2,100-acre farm, based on the lower commodity prices, indicated that a farm of that size would be expected to produce a $53,000 loss on their 2020 crop, explained Koster. When looking at the same sized farm with current market prices, they’re now projected to gain $210,000 in earned net worth.
Although the increase in price looks to be beneficial to those outside the ag industry, many don’t realize the negative impact farms will have from it.
Notably, farmers have already seen a spike in the price of land.
“A piece of land that was selling at $6,500 per acre last spring is now being sold for $1,000 to $1,500 more per acre,” Koster said.
Many have wondered what caused these unprecedented increases in prices, especially during harvest and into the winter season, when prices are normally fairly stagnant.
Nicole Klein, an ag marketing and prices professor at SDSU, said supply and demand greatly impact the commodity markets. In 2020, some of the main supply and demand factors included the Derecho storm that swept through Iowa in August, taking out hundreds of thousands of acres of corn and leading to a substantial decrease in the expected supply. This led to an increase in the price of corn by over 30 cents from the day the storm occurred until the end of the month.
On the demand side, ethanol use picked up this summer as COVID-19 restrictions eased and as export sales of corn and soybeans to China rose, both leading to an increase in demand. These factors all came together to cause commodity prices to increase, even during an irregular time in the cycle, said Klein.
Much like the stock market, breaking news and rumors cause the price of a commodity to rise and drop multiple times throughout the day, sometimes in large amounts and others just slightly. Grannes emphasized the reactivity of the market to breaking news information.
“We can have one news story about SARS for example, or some [other] disease in livestock, where all of a sudden the demand is going down and then just like that, the markets can drop the limit,” he said.
As a farmer, the volatility of the markets makes it hard to know when it’s the best time to sell grain, because you never know what type of news, good or bad, is going to come out tomorrow.
Scott Dubbelde has been the general manager of Farmers Cooperative Elevator Co. of Hanley Falls, Minnesota for the last 28 years. He said his strategy is to “just go for base hits. In the long run, you’re not going to hit the home run, but you’re not going to strike out either.”
Corn and soybean farmer Perry Oftedahl thinks that you should sell grain like you’re playing baseball. If you get singles and doubles and get on base all the time, you’re going to be in the game. But, if you try to hit a home run, two-thirds of the time you’ll end up striking out.
“So if you try to get the top of the market, you might get lucky once in a while, but you also might strike out and miss a good price,” Oftedahl said.
There were many times this fall that corn and soybean producers felt they had to get the base hit and take the price that they felt was good at the time. These prices were the highest they had seen in a couple of years, and they had no idea that prices would continue to climb as winter came along.
Oftedahl said that as he saw prices climb, he was disappointed because he didn’t have any grain left to sell, but he still knew that he was making money and had to be happy with what he got.
Grannes, who has been farming for 33 years, agreed that he started selling his grain too early because he didn’t want to miss out on the “good” or “decent” prices, leaving him with little left to sell as prices reached their 2020 highs in late December.
“You can farm your whole life and you will never have one year that you said ‘Man, I really marketed right this year,’” Grannes said.
Unlike other careers, the income that you earn while farming one year will never be the same as the next. Those who work a 9 to 5 job expect to receive the same paycheck every week for working their 40 hours. But in farming, you don’t have that guarantee. Instead, your income is in the hands of the ever-changing market and what prices you decide to sell at.
When asked how he would describe the risk that farmers take each year to those who are not involved in the agricultural industry, Dubbelde said, “When was the last time they had to pay to earn a living?”
He was alluding to the fact that in many years, farmers are at great risk of producing a loss. When prices are low, they have to take what they can get and often strive to simply break even, hoping to earn enough to cover their input expenses for the year while having nothing left to put in their own pockets.
“The big picture is that we’re living in the best place in the world, raising kids out here and being our own boss. I mean, we really shouldn’t complain,” Grannes said.
Koster feels that 2021 will be a hopeful year for corn and soybean farmers as they continue to take advantage of the higher commodity prices and build up their financial standing after the deficits faced in recent years.
Although Klein believes that until the economy is allowed to reopen completely in the latter portion of 2021, the unease of the commodity markets will likely continue as we wait for many unknown factors to be resolved.