A nonprofit publication of the Kentucky Center for Public Service Journalism

The high grain prices seen in 2012 are likely
to stick around through 2013, expert says

By Tim Thornberry
KyForward correspondent

It was a year of records in 2012 when it comes to agriculture; some good, some not so good.

The good news was the projected breaking of the $5 billion mark in Kentucky agriculture cash receipts. More good news, at least for grain growers, came as prices neared or topped record levels.

The bad news, of course, was all this happened through a record drought leaving corn growers with about half of their expected yields in a year that saw corn prices rise above the $8 per bushel level.

(KyForward file photo)

As farmers anticipate the 2013 crop, many are wondering what and how much to grow based on the figures from last year. Will it last or will the market see some sort of adjustment?

Brian Luftman, a former commodities trader and current president/founder of American Farm Investors, said he thinks prices will remain strong based on a number of reasons.

“The 2012 drought sent all grain futures to near-record highs. As seen with gasoline and energy prices, when natural disasters create rapid increase in prices, the higher levels tend to become the new default price,” he said. “The 2013 grain future prices are currently trading 10 percent higher than the year prior.”

Luftman, added that the increase may be attributed to carried-over shortages from the dismal corn crop of 2012. However, annual increases of 10 percent or more in grain prices have been a trend since 2005.

“The world population is growing, high-protein diets are increasing worldwide, renewable energy sources (ethanol) are becoming more popular, and most importantly, the global money supply continues to grow,” he said. “All of these factors lead me to believe grain prices will remain strong. Eight dollar corn prices from last summer are not the new normal, but if current market conditions continue, it won’t be long before $8 is the new default corn price.”

Luftman emphasized that the common denominator between all globally traded products is a rapid increase in the money supply from the government.

“Regardless of what the government says about inflation, everything we spend our money on each month be it energy, gasoline, food, building materials; all the staples, those things have doubled since 2008. That year was when everything changed, when rapid money increases became the new normal,” he said.

That money injection was a result of the housing and banking crises and the near collapse of many big corporations.

“The beginning of all that money was the bailout money,” noted Luftman. “Now a lot of that was paid back but we went from the bailout money to quantitative easing. I call it money printing.”

Since February of 2009, more than $777 billion has been paid out as part of the American Recovery and Reinvestment Act either through tax benefits, contracts, grants and loans or entitlements, according to information from Recovery.com, the government’s official tracking web site for those funds.

Increased costs on everything

Indeed, 2008 and 2009 actions and reactions created change in the economy in a big way. In 2008 oil hit record prices sparking an increase in gas prices. It also happened to be the year the stock market suffered some of its worst losses in history, signaling the beginning of the worst recession the country has seen since the Great Depression. If you were a corn grower, the climb in price began as it hit $6 per bushel.

As input costs for farmers have increased, these higher grain prices will likely have to become the new “norm” in order to make any profit. And it has been less than five years ago that corn was being traded at $4 a bushel, a number, producers say means losing money if realized today.

Luftman said the price of gasoline is a good indicator of how new trends are set. He said if a gallon of gas were to drop below $3 per gallon most people would be shocked yet pleased. But, less than 10 years ago if you had told them gas would be over $3 per gallon, they would not have believed it.

By the end of 2006, gas prices were in the $2.20’s range but in 2004, the price per gallon was still under $2.

While gas prices figure strongly into input costs for farmers, so do land prices, especially for those who rent, and many do.

Land prices have risen along with everything else, but Luftman points out that the cost of renting has not kept up with the cost of buying. He said since 2008, the cost of buying land has risen more than 85 percent while rent increase percentages are almost half of that.

With that said, in 2011 the price of renting land jumped nearly 16 percent, so as the saying goes, it ain’t cheap. But Luftman said investing in farmland is still a good investment.

“Land prices have gone up over the last three years and there are a lot of factors for that. I think the main reason is many people can make money owning land and it is profitable to own grain land,” he said. “Regardless of what else goes on in the economy, we are always going to raise corn, wheat and soybeans and people see that stability.”

Even with higher rent prices, Luftman said many farmers would rather invest their profits in things such as equipment and more employees so they can make more money.

As far as what 2013 will bring, no one can predict with any certainty what prices will do in any given time period. Luftman said he does not expect to see huge declines in the grain markets but that anything can happen especially if the country sinks into another recession and the stock market plummets as it did in 2008.

“If there is anything that could cause us to see $4 or $5 corn again, it would be a rapid decline in the stock market,” he said.

You might also be interested in reading Tim Thornberry: Even in touch economic times, Kentucky agriculture scores a record year and Kentucky’s 2012 farm cash receipts on track to break $5 billion, UK ag economists say.

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