Soaring grain prices a welcome surprise for farmers
Go into the grocery store to pick up a turkey, and you’ll find the cost is up some 30 percent from last year, according to The Food Institute. The rising cost is in large part due to soaring grain prices.
The price of meat is where we’re just beginning to see the consumer impact of a recent boom in the ag sector. Crop prices hit record highs in 2007 and 2008, and they spiked up again this fall.
After a wet summer and fears that both yields and prices might plunge, the boom has been a welcome surprise for these farmers. Many are acting now to lock in current high prices – because who knows what the volatile commodity markets will do next year.
Larry Jacobson finished harvesting his 1,600 acres of corn and soybeans in central Iowa several weeks ago. On a recent warm fall evening, he hosed down his grain truck in his driveway, washing it out after finishing his deliveries. He wore a red cap and a worn Carhartt work jacket, and he had both pliers and a cell phone strapped to his belt.
Rollercoaster ride for corn and soybeans
Like most successful grain farmers, Jacobson is savvy about the markets. He gets corn prices texted to his cell phone four times a day – and he checks it, even when he's riding in the combine:
“This fall … we were combining beans, and corn jumped up 30 cents. I sold some corn for May delivery for $5.06,” Jacobson said. “I just did it on my cell phone, right from the combine. I called my neighbor I was working for and told him what the market was, and he called in and sold some, too, that day.”
Jacobson sold most of his crop before he harvested it, locking into decent prices 18 months earlier. But when he can, he doesn’t sell all his corn in advance so that he has some left at harvest to see how prices are doing. And because of the recent price spike, Jacobson has sold corn he hasn’t even planted yet:
“When you see that big of a jump, it’s not a bad idea, if you can, to take advantage of it…it may stay there, and if it goes higher, it goes higher. But where we were at was a good profitable price,” he said.
Jacobson has played the commodities market pretty well. After an uncertain summer, grain prices skyrocketed this fall. Corn prices in October were up about 30 percent year to year.
“We started off this summer with the Russian wheat drought: less wheat, more corn demand. It started to pull prices up,” said Chad Hart, a professor of economics at Iowa State University, “That's when we also saw that corn yields were starting to head downwards -- so lower supplies, drove prices up.”
And Hart said demand from the ethanol industry has helped keep prices high. It's been ideal harvest weather: a dry fall in the Midwest helped farmers avoid paying to dry their grains, which can cost anywhere from $80 to $100 an acre.
So even though this year's corn harvests are slightly below the 2009 record yields, Hart said, many farmers have made out well.
“When we’re looking at $5 corn, when we’re looking at $11 soybeans, those are very strong prices,” said Hart. “We're starting to see more ag machinery moving around state, so that tells you that they’re taking these returns and they’re reinvesting in agriculture again.”
Mark See, territory manager of Van Wall, a farm equipment store in central Iowa, can attest to that.
“They've been a good market,” said See, despite concern this spring that yields and prices would be low. “This is a pleasant surprise in a lot of ways, that the market is as strong as it is, but there's potential for it to go back the other way. So, I mean, (we’re) optimistic, but cautious.”
See opened the door to a cavernous metal storage shed full of shiny, hulking tractors and combines. He climbed up the metal steps into the 10-foot high cabin of a used 1983 John Deere combine to show it to a prospective buyer. A farmer just traded in the green giant to upgrade to a considerably newer machine. The combine didn’t sit for long, though, before buyers came sniffing around.
Among them, a farm equipment dealer who had driven from South Dakota looking for machines. He already bought six pieces of machinery from Van Wall that day, and after peering under the hood of the 1983 John Deere 7720 combine he wanted to buy that one, too.
The rally in crop prices has brought more cash into the agriculture sector. Fertilizer and seed sales are up and farm equipment is moving. And, given the volatility of the market, some growers have already sold part of next year’s grain crop to take advantage of these prices. But for livestock producers, all this means more expensive animal feed.
Animal feed is a big part of the cost of raising livestock, so the price of grain has a much bigger impact on meat prices, than say on a box of corn flakes. In fact the cost of corn is only about 5 percent of the cost of a box of the cereal; most of the expense come in the delivery and packaging.
“Typically higher crop prices do result in higher food costs after several months,” said agriculture economist Hart. “It takes a while for the corn prices to hit livestock industry, for the livestock industry to adjust.”
And that adjustment means consumers can expect to be paying more for hamburgers and steaks in the near future.
So far, this year overall food inflation has hovered around 1 percent. But U.S. Department of Agriculture analysts forecast that in 2011 food prices will jump at the more typical rate of 2 percent to 3 percent. And some meat prices have already gone up in response to grain price fluctuations earlier this year and last year, such as that turkey you’ll likely have on your Thanksgiving table in a few weeks.