Todd's Take

Should Corn Farmers Be Harshly Penalized for a Modest Surplus?

Todd Hultman
By  Todd Hultman , DTN Lead Analyst
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DTN's national index of cash corn prices fell from $4.50 a bushel at Christmas to $3.80 by Feb. 23, far below USDA's estimated production cost of $5.06 for 2023 corn. In effect, the American farmer is being punished after pulling off one of the most miraculous feats of production in a year of adverse weather. (DTN ProphetX chart)

One of the many blessings of living in the United States is that we, as a country, rarely run out of food. In fact, we're teased for having and eating too much. We make our kids feel guilty for not cleaning up their plates as if somehow, eating that last little bit helps African children. My grandparents survived the tough conditions of the 1930s Dust Bowl, but thankfully, our generation has benefited from an abundance. In many parts of the rest of the world, hunger remains a perennial threat. The United Nations Food and Agriculture Organization estimated 735 million people were undernourished in 2022, roughly 9% of the world's population.

Keep that in mind while I try to explain corn prices in early 2024. After U.S. farmers produced a record corn harvest in 2023, effectively bringing down cash corn prices from $6.60 a bushel in early April 2023 to $4.50 a bushel by early November, much of the country breathed a sigh of relief. Livestock producers that paid as much as $ a bushel or more for corn the previous winter benefited from sharply lower feed costs. Ethanol plants were rewarded with profitable margins and, indirectly, consumers of meat and ethanol at the gas pumps enjoyed lower prices than they otherwise would have had the harvest not been so successful. This is all happening at a time when inflation is holding the federal funds rate at its highest level since 2007.

The irony here is that everyone, it seems, is benefiting from having a larger corn surplus, but not the people who actually grew the corn and made the surplus possible. As the story continues in early 2024, DTN's National Corn Index reached a low of $3.80 a bushel by Feb. 23, $1.26 a bushel less than the $5.06 USDA estimates it cost producers to grow the corn in 2023.

From my perspective, the American farmer, along with help from an industry that pushes the frontiers of yield, pulled off a modern-day miracle, harvesting a record corn crop after a season that saw very little rain and runs of hot weather that would have made crops wilt in older days. For this miraculous achievement, farmers are being rewarded with a market price that says, "Not only are you not going to be paid for last year's work, there's a good chance you won't be paid this year either -- several of you should just quit farming now." USDA's most recent Ag Census shows 315,000 farms have been lost during the past 25 years.

Maybe some will take comfort that the current surplus is not as bad as the back-to-back 4-billion-bushel-plus surpluses we had in the 1980s. Farm debt levels were higher in the 1980s and so were interest rates. As usual, farmers who own their land outright and those blessed with high-yielding soils are in the best positions to survive. For everyone else, farming will likely remain a tough business for the next several years, depending largely on how new market opportunities for biofuels go.

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Let's face it, market-based incentives for farming are a mess. There is no enticement for today's farmers to respond to surplus markets with less production. The crop mix may be tweaked from year to year, but given the large investment required, acres are going to be planted in spring, regardless of how big the crop surpluses are. On a micro level, high yields are a farm's best hope for countering low prices. On a macro level, the constant push for higher yields, helped by a year of good weather, only serves to drive more farmers out of business. In today's markets, a grain surplus is a bust-inducing environment that only weather can interrupt.

It is the uncertainty of weather that brings us back to the age-old problem that policy makers have yet to solve. It is the same problem the Pharaoh tried to solve in the ancient text of Genesis when he summoned a young Hebrew named Joseph from prison to interpret his dream.

I can't claim divine inspiration, but it seems to me rule No. 1 for any country should be to avoid famine, the outcome that makes us all lose. Rule No. 2 should be to encourage a healthy level of grain surplus that does not put the people who grow our food out of business. Only then can we talk about rule No. 3, finding a way to encourage balance so that surpluses don't become burdensome. There is a sweet spot of supplies the country needs, but the current system offers no guidance for how to get there.

During the past 24 years for corn, a U.S. ending stocks-to-use ratio of 12% has been the dividing line between profitable prices for producers and unprofitable prices. The R-squared value (correlation of determination) between ending supplies and prices is 55% -- not perfect, but the best we have. In today's market terms, market prices punish farmers for producing corn ending supplies in excess of 1.75 billion bushels (bb) or 44 days of supply. USDA's estimates for ending supplies are currently 2.17 bb or 54 days of supply in 2023-24 and 2.53 bb or 63 days of supply in 2024-25. If you were Pharaoh, how much surplus would you want to have on hand?

Instead of tweaking the current system, maybe those negotiating a new farm bill should discuss finding ways for the market to stop penalizing farmers for creating modest grain surpluses that benefit us all. Ideally, incentives should encourage the outcomes you want and discourage the extremes you don't. In all of this, there needs to be a healthy respect for the risk of volatile weather.

I understand many worship at the shrine of the almighty market and think it holds the answers to all our problems. I felt the same way in my 20s; but I found a lot of questions come with gray hair. It makes me smile to know that famed investors Warren Buffet and Charlie Munger became rich by scoffing at the academic theories of an efficient market. They knew better and so should we.

The American farmer just pulled off one of the most miraculous feats of production in 2023, which made us all significantly more secure obtaining the calories and fuel we need to survive. U.S. farmers deserve a ticker tape parade and a raise, not a pay cut. As a nation of 333 million people with 80% living in urban areas, we could show a little more respect for the tiny minority of folks who grow our food. In today's market, $3.80 a bushel for corn is a warning flare for a poor food policy that deserves our attention, if only we'd start asking bigger questions. Best wishes in a tough environment.

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The comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Todd Hultman can be reached at Todd.Hultman@dtn.com

Follow him on X, formerly Twitter, @ToddHultman1

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Todd Hultman