*Andy Vance is an agricultural journalist, commentator and entrepreneur who most recently led the broadcast team at Agri Broadcast Network and is an active member of the National Association of Farm Broadcasting. Vance grew up on a farm in Hillsboro, Ohio, and raises registered Shorthorn cattle and breeding stock. Vance's web site, "The Angle," is andyvance.com. He can be contacted at [email protected]
EARLIER this year, I spoke with CGB Enterprises chief executive officer Kevin Adams about commodity markets and U.S. agriculture's long-term potential for selling grain abroad, and we shared a good chuckle debating whose crystal ball is better.
Sometimes, it feels like grain and livestock marketing is either fortunetelling or shooting craps, but it is ultimately one of the chief responsibilities of successful farmers or ranchers.
Farm markets have displayed seemingly unprecedented strength in recent years, so I decided to ask a few experts: Just how sustainable are these markets?
Adams said no matter if prices can be sustained at current levels, "I would caution farmers out there not to bank on these price levels as they make investment decisions on land or equipment."
On the so-called "new normal" some foresee with $5/bu. corn, Adams is skeptical, at best, saying, "I'm a believer in black swan events. Something will occur that no one expects; it happens, and when it does, the markets take a tumble."
That's reason enough to be "cautiously optimistic" about current pricing in the corn and soybean markets.
"We all need to be prepared and very cautious about these high prices," Adams told me.
On the other side of the proverbial coin, Ohio State University agricultural economist Matt Roberts has a slightly different take on the action.
"When we look around the world, we still see strong feed demand, especially in China, both for soybean meal and corn," Roberts said. "As we all know, we've seen large droughts last year adversely affecting former Soviet production. We've seen wetness in Argentina. We've seen a lot of flooding in Australia that's going to marginally affect both of those crops.
"So, we've seen both a reduction of supply and an increase in demand driven by oil, and the question about what's sustainable -- or, 'Is this a bubble?' -- really boils down to those two drivers," Roberts said.
In a webinar on cropland values last week, Purdue University farm economist Chris Hurt summed up the situation: "What is driving the demand for more of our crops? First, the demand of China for U.S. soybeans, and second, the demand increases for corn to go to ethanol."
Hurt explained that in 2005, China's demand for U.S. soybeans required just more than 8 million acres of production, and Purdue projects that amount to be 20 million acres for 2010. "That's a 12 million-acre increase in the amount of beans required just to go to China," he said.
Also, it took just more than 7 million acres of corn to satisfy domestic demand for ethanol in 2005, and now, the need is up to 21 million acres, Hurt said.
"Surprisingly, on an (acreage) basis, these are almost exactly parallel increases in the demand for acres to produce these crops," Hurt said. "In fact, when you put those two together -- beans for Chinese export and more acres needed for ethanol production -- those are 25 million more acres."
An additional 25 million acres of demand definitely moved the needle.
While the academics seemed confident that higher prices are here to stay, the economists definitely agreed with Adams on one key issue concerning U.S. agriculture: "Volatility is going to stay with us -- I'm convinced of that," Adams said. "There's a direct connection now between energy demands and corn and soybeans because of the use for biofuels and ethanol, and we're not going to lose that connection because those industries are viable and are necessary in our total energy picture."
Black swan events aside, Roberts said the market will eventually find its equilibrium.
Bottom line: The markets of 2010 were fascinating, exciting, frustrating or hair-raising, depending on your position and commodity. Truthfully, I could make that claim most years. At the level of investment we're discussing in modern agriculture, however, we can't afford to treat marketing the same way we did 50 years ago any more than we can use the same hybrids we did 50 years ago.