2017-02-14 4pm EDT  |  #corn #farming #Iowa #ags

It’s Valentine’s Day, but it’s far from a happy time for America’s farmers. The recent WSJ article titled “The Next American Farm Bust is Upon Us” has chronicled the dire situation:

Across the heartland, a multiyear slump in prices for corn, wheat and other farm commodities brought on by a glut of grain world-wide is pushing many farmers further into debt. Some are shutting down, raising concerns that the next few years could bring the biggest wave of farm closures since the 1980s.

The U.S. share of the global grain market is less than half what it was in the 1970s. American farmers’ incomes will drop 9% in 2017, the Agriculture Department estimates, extending the steepest slide since the Great Depression into a fourth year.

“You keep pinching and pinching and pretty soon there’s nothing left to pinch,” said Craig Scott, a fifth-generation farmer in this Western Kansas town.

From his father’s porch, the 56-year-old can see the windswept spot where his great-grandparents’ sod house stood in 1902 when they planted the first of the 1,200 acres on which his family farms alfalfa, sorghum and wheat today. Even after harvesting one of their best wheat crops ever last year, thanks to plentiful rain and a mild winter, Mr. Scott isn’t sure how long they can afford to keep farming that ground.

Costs for seeds, fertilizer and equipment climbed so high and grain prices dropped so low that he still lost more than $120 an acre. Afraid to come up short again, Mr. Scott decided last fall not to plant 170 acres of winter wheat, close to a third of the usual amount. U.S. farmers sowed the fewest acres of winter wheat this season in more than a century.

Although the past decade had seen a dramatic increase in the value of farmland (helped along with the plunge in interest rates), the increase in farmers’ net worth has lost momentum and has now started to decline.

With the decline in the value of their assets, and the poor fundamentals of the business of farming, it is no surprise that farmers are feeling all sorts of financial stress.

Farmers are trying to survive, but it is tough slugging. From the WSJ article:

“The potential for a big crisis is real,” he said. “If things stay similar to how they are now, you haven’t seen anything yet.”

In Ransom, Mr. Scott has resorted to government assistance to guarantee himself some income. He placed 170 acres in a government conservation program that pays farmers to plant fields with grass rather than crops. That seemed like his only choice after spending about $6.50 a bushel on seed, fertilizer, fuel and pesticides to grow wheat last year only to earn $2.90 a bushel. During planting season last fall, he and his 82-year-old father cut back on fertilizer and coaxed one more crop out of a 20-year-old chemical sprayer with a worn-out engine.

Bankers say many farmers are burning through savings to stay in business. They expect some to retire rather than lose more money. Young farmers without much savings are vulnerable, as are large growers who racked up debt to expand operations. Some locked into multiyear land leases at high rents.

The motor on David Radenberg’s tractor gave out last fall as he sowed wheat on his family’s 2,400 acre farm in Claflin, 90 miles east of Ransom. He didn’t have the money to fix it.

“You want to cry when you find out how much it costs,” he said. He decided to sell the tractor for $10,500 and rely on an older model. If grain prices remain weak, the farm could be next. After 30 years farming, this crop could be his last: “Do I go work at Wal-Mart as a greeter or as a parts man at the mechanics shop?”

Let’s face it, this is all bad news.

And if all of this wasn’t difficult enough, Trump’s policies do not seem to be helping at all. The rise in the US dollar since Trump’s victory makes American farmer’s product more expensive.

But that’s not all. Just when it seems like the news couldn’t get any worse, Mexico announces they are considering retaliating against Trump’s policies by boycotting American corn.

Now I happen to think this move is counter productive. All that will end up happening is Mexico will make the price of corn more expensive for its citizens. But that’s the kind of stupidity you see in trade wars. No one wins.

I don’t want to bother debating the morality of either side’s position. Our job as traders is to deal with “what is” instead of “what should be.”

But I did notice that amidst all this bearish news, corn did not decline. And in fact, if you ignore all the fundamentals, it’s tough to argue that corn is not behaving quite well.

There is every reason in the world for the price of corn to collapse, but it isn’t. And far from that, it is actually rallying.

When an asset that should be going down on bad news rallies, the market is telling you something.

I am long the ags, and even though it is difficult to pull the trigger in the midst of all this gloom, I am adding to my position.

Thanks for reading,
Kevin Muir
the MacroTourist