A Corn Boom Starts to Wilt

MARK PETERS And JESSE NEWMAN OAKLEY, Ill.—The boom in corn prices that helped propel the U.S. farm economy is fading amid expectations for a record-high harvest. Jesse Newman/The Wall Street Journal Farmer David Brown says producers will start bargaining for lower rent. Prices are down more than 40% from last year’s all-time highs, to their lowest point in nearly three years. The decline is bringing relief to meat producers and other food companies hurt by steep costs for animal feed and other ingredients made from corn. Lower corn prices also could curb supermarket prices for beef. But the slide is bad news for farmers who saw their incomes surge to the highest levels since the early 1970s, adjusted for inflation, while farmland values ballooned so much that some analysts worried about a bubble. Lower corn prices will squeeze profit margins, farmers who rent land for their crops might struggle to make money, and sales of tractors and other farm supplies likely will suffer. Corn is the largest U.S. crop, grown on more than 400,000 farms. The total area harvested for the grain is as big as New Mexico. On Friday, corn traded in the futures market for slightly more than $4.65 a bushel, down from $8.31 a bushel last August. Prices for soybeans, the U.S.’s second-biggest crop, are down more than 20% from a year ago. Many analysts predict even sharper declines. Goldman Sachs Group Inc. last week lowered its 12-month price forecast to $4.25 a bushel. If prices stumble that far and stay there, it would “put a serious crunch in the margins,” says T.J. Shambaugh, whose family has grown corn here for more than 150 years. The 53-year-old Mr. Shambaugh expects his 2,000-acre farm to yield about 200 bushels an acre this year, up from 85 bushels last year. He sold half of his expected crop for more than $5 a bushel earlier this year. “For 2013, we’re gonna be OK. 2014 and 2015 might be a different story,” he says. Corn prices hovered at less than $2.50 a bushel for most of the past decade. Prices surged in 2008 because of flooding and growing demand by the ethanol industry. The recession knocked prices back down, but they rebounded even more strongly, fueled by foreign markets such as China and a drought that crimped supplies. Prices largely have stayed above $6 a bushel in the past two years. The Department of Agriculture has projected this year’s U.S. corn harvest, which starts next month, to haul in about 14 billion bushels, up from 10.8 billion bushels last year and 12.4 billion bushels in 2011. Officials are expected to increase the estimate slightly in a monthly crop report due Monday. Some of the bumper crop might be threatened by frost damage before it can be harvested. And farmers could decide to plant less corn in the future if profit margins shrink too far. That would reduce the corn supply and help prop up prices. For now, farmers need a boost in demand, which has been weak. U.S. corn exports have fallen to levels not seen in decades as competition from South America and elsewhere increases. And runaway growth in U.S. ethanol production is easing as the corn-based fuel supplement hits limits on how much can be blended into gasoline. “We’re returning to a more normal scenario following a period of really abnormally high prices,” says Darrel Good, an agricultural economist at the University of Illinois. “Everyone kind of acknowledged on the way up these prices were not sustainable, but for producers they were pretty easy to get used to.” Tyson Foods Inc. earlier this month said it expects feed costs in its chicken business to decline by $500 million in the coming fiscal year. Milk producer Dean Foods Co. also expects lower feed costs. Archer Daniels Midland Co., the grain-handling giant, said it expects to benefit from having more corn and soybeans to store and process. “This is a recharge that is just essential for ADM,” Craig Huss, the Decatur, Ill., company’s chief risk officer, told investors Tuesday. It isn’t clear how much consumers will benefit from lower corn prices. Burrito chain Chipotle Mexican Grill Inc. said it was no longer considering a price increase that it had said might be needed to compensate for pricier ingredients. A closely watched index of world food prices dropped for the third straight month in July, helped by declining corn prices. Still, USDA economist Richard Volpe said supermarkets use lower prices as leverage to rebuild margins battered in recent years by higher costs and tougher competition. Cropland values in the Midwest already are losing steam after a surge of nearly 80% in the past four years to an average of $6,980 an acre. The latest appraisals done by farm lender Farm Credit Services of America show that land-value gains slowed in the first six months of the year. Purdue University forecasts a decline in land values in parts of Indiana in the second half of 2013. Farm-debt levels remain low on average, so few lenders or analysts are worried that further declines in corn prices could spark a devastating collapse in cropland values like the one that hit the U.S. housing market. Still, farmers who rely heavily on rented land, and borrowed to start or expand operations during the corn-boom years, could struggle. “Will landlords be willing to retrace their rents as corn prices go down?” asked David Brown, standing beneath a canopy of towering corn stalks on his 4,000 acre farm near Decatur, Ill. The 60-year-old farmer, who rents 60% of his land, says producers will start bargaining with landowners for lower rent if commodity costs keep falling. “It used to be that marketing corn was your toughest job. Now negotiating rent is as demanding as selling your product.” Lower corn prices will help beef producers who suffered as last year’s drought dried up pastures and drove feed prices higher. The yearlong corn-price slide and recent rains already have brought relief to many cattle farmers. “Going from $7 or $8 corn to $5 corn, that’s going to help quite a bit,” says Brian Price, manager of Brookover Feed Yard in Garden City, Kan., where cattle are fattened before slaughter. A steady corn supply “should keep the price at a level we can live with.” Taylor Scott International

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