By Brian NixonFor ag bankers and their clients in row-crop production regions, such as the corn-, beans- and wheat-heavy Midwest and Great Plains, a key factor to look at every harvest season is the USDA’s projected carryout.
That’s the amount of product left over after all projected usage is accounted for. A large annual carryout—excessive supply versus demand—leads to low prices until things change and the economic scales tilt in the opposite direction.
This poses a marketing challenge in the Midwest and other regions where farm producers struggle with low wheat and row crop commodity prices. By extension, ag bankers in those regions need to stay close to their customers and encourage them to manage their price risk.
One way to do that is for producers to develop and stick to a marketing plan. “There’s no question we have a lot of grain out there,” says Mark Gold, managing partner of Top Third Ag Marketing LLC. “But consider this. Every year, since 1972, the American farmer has had at least one opportunity to market grain at profitable levels. Every year. Hopefully, we’ll get another opportunity this year.”
While ag bankers cannot put themselves in a position to offer grain marketing advice to their clients, they can be a helpful resource and a steady hand in a difficult environment. “You want to be a colleague who will help them prepare,” says Gold. “We have to adapt to the reality that’s out there right now. They have to manage the risk that’s in front of them. What are you as a lender prepared to do to help your clients?”
Increasing national average yields—175 bushels per acre for corn, and in a drought year, no less—provide little reason for upward movement in prices. “What will we do in a good year?” asks Gold, who spoke at the 2017 ABA National Agricultural Bankers Conference in Milwaukee. “What happens when we hit 185 to 190?” Soybean yield averages may grow at an even faster rate.
Further compounding price pressure are world agriculture production and usage, as well as trade issues, such as the future of NAFTA and the Trans-Pacific Partnership. “You, as an ag lender, have to be prepared to encourage your producers to become better marketers,” says Gold. “You’ve got to be somewhat proactive.”
With that said, a producer’s marketing plan should not be about speculating on prices, nor should it be perceived as a game that is won or lost. “Marketing is a pathway to success,” says Gold. It’s about exploiting those opportunities when a producer can successfully lock in profits or protect downside risk.
While “no marketing guru out there knows where these markets are going,” a producer armed with a solid marketing plan is ready to act when the time is right. “A market can and will do anything it wants to,” Gold says. “The market doesn’t care about your client’s cost of production. What these markets are always trying to do—whether it’s corn, soybeans, wheat, whatever it is—is this: Every market, no matter how high it goes, is always trying to go back under the cost of production.”
That means that peaks are followed by valleys. “Every time we’ve had a major peak, where have we gone within two years?” Gold asks. “Back under the cost of production. Why does that happen? Because the market is trying to force out the inefficient producer.”