Agricultural Commodities and The Farm Economy

Takeaways from Conference Call with Dr. Michael Swanson

• The market price for corn may not adequately incorporate any potential demand destruction from reduced ethanol usage or flagging export demand. According to Dr. Swanson, ethanol consumption could decline about 300 million bushels from the current WASDE estimate due to lower gasoline usage, and high dollar price corn along with a strong dollar could dampen export demand.

• In 2011, corn prices peaked at roughly $7.80 per bushel in September, then moderated through the balance of 2011 and ended the year at $6.50 per bushel, or down almost 20% from peak levels. According to Dr. Swanson, peak pricing levels arrived earlier this year due to earlier corn plantings and an earlier, weather-related deterioration in the crop conditions. Dr. Swanson added that once the extent of the damage to the corn crop is known, prices are “certainly going to retreat.”

• There is plenty of land outside the United States that could be used for agricultural purposes. The USDA forecasts that, in the 2012 season, farmers in the United States will harvest 55.5 million hectares of land and yield 6.8 metric tons per hectare, while farmers outside the United States will harvest 443.3 million hectares of land and yield just 3.2 metric tons per hectare. According to Dr. Swanson, an intense push is under way in other parts of the world to use better genetics, better crop chemicals and better equipment to maximize yield. If these initiatives raise the global yield to 4.5 metric tons per hectare, the incremental output would nearly equal twice the annual production of the United States.

• Population growth and GDP growth in and of themselves are not sufficient to drive up commodity prices. From 1950 to 1988, the global population doubled, yet corn prices moved sideways throughout this period. In addition, even though global GDP doubles roughly every two decades, until recently, corn prices have remained relatively stable (1973–2007).

• Companies with agricultural commodity exposure are exiting the hedging business, to limit commodity price risk and to focus more on core businesses (i.e., manufacturing or processing). According to Dr. Swanson, these companies are simply passing through the volatility to end-users, rather than trying to predict or profit from it.