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With planting just around the corner, Minnesota farmers are feeling particularly optimistic. They're coming off bumper crops in 2010, and the federal government is predicting record farm income for the agricultural marketing year that ends Aug. 31.
Perhaps best of all, prices for major grains are currently near highs not seen since the big commodity price run-up of 2008.
But underlying the good times are worries about grain stocks -- the reserves that serve as a cushion in times of tight supply and high demand. They're at 40-year lows for corn and soybeans, the country's two main grains.
With stocks so low, a bad crop could propel already high corn and soybean prices to heights that would hammer the livestock industry with higher feed prices and ultimately hurt consumers through higher food prices.
Bad weather that cuts crop yields could be a particular problem. "We think that commodity markets will be hypersensitive to weather developments over the next six months," Rahm said. "The [futures] markets are likely to remain very volatile."
Farmers are tending to their tractors and getting seed and fertilizer supplies in order, as March is about to give way to April and the start of a new growing season. "This is the annual cycle for farmers, to come into this time of year getting all fired up about putting in a new crop," said Greg Schwarz, who grows corn and soybeans on about 1,000 acres near Le Sueur and is president of the Minnesota Corn Growers Association.
There's extra reason for getting fired up this spring: Corn and soybean prices, as measured by May-delivery futures contracts, are respectively about 65 percent and 45 percent higher than they were a year ago.
Like many farmers, Schwarz sells part of his crop forward through the futures market, about a third to half of his soybean production.
"We are in a good position right now to lock in some good profits," he said. "That's a good feeling for most guys right now."
Farmers across the country are considerably more positive this March than they were a year ago, according to a survey by DTN/The Progressive Farmer. The study is based on farmers' attitudes toward their input costs, profit margins and household income.
One indicator that crop watchers track closely is the stocks-to-use ratio, which measures the carryover from last year's crop as a percentage of the total use of a particular commodity. The lower the ratio, the tighter the supply -- and for corn and soybeans, stock-to-use ratios are at lows not seen since 1970, Rahm said.
"There is very little margin for error," he said.
Error, of course, could come in the form of bad weather, something farmers across the United States haven't seen in a big way in quite a while.
Between 1900 and 1999, the country experienced 15 "short crops," meaning that yields were more than 10 percent below the trendline yield, said Ed Usset, a grain marketing specialist at the University of Minnesota. The last U.S. short crop occurred in 1988, though 1995 was a close call, he said.
Since 1995, U.S. crop yields haven't experienced any major shortfalls, a trend often attributed to improvements in seed genetics. But Darrel Good, an agricultural economist at the University of Illinois, argues that's not the only reason: just plain good weather has been a key driver. "We've been very fortunate on average," he said.
In a recent column on his university's Farmdoc website, Good wrote that "the risk of weather-induced shortfalls in corn production may be greater than generally perceived, suggesting that market participants and policymakers may be ill-prepared to cope with such a shortfall should it occur."
Long-term weather patterns, of course, are hard to predict. The National Weather Service's three-month outlook shows an equal chance of either above or below normal precipitation for much of the country, though the northwestern corner of Minnesota and North Dakota has an above-average precipitation outlook.
The three-month forecast calls for below-average temperatures in Minnesota and much of the Upper Midwest. With such a sodden winter, Minnesota has very wet soil conditions, said Greg Spoden, a meteorologist with the Minnesota Department of Natural Resources.
So a cool start to the growing season wouldn't be good. "We want some drying weather."
Minnesota farmers enjoyed near-perfect weather last year, but that wasn't the case throughout the nation's corn belt. So, the overall U.S. corn crop came up short of expectations, a key reason for low corn stocks this spring.
Meanwhile, demand worldwide for corn and soybeans continues growing as emerging economies improve their living standards, importing more grain for animal feed. U.S. soybean exports, for instance, are up more than 50 percent over 2000, with China a particularly voracious consumer.
Corn demand in this country is increasingly driven by the ethanol industry, which eats up about 37 percent of the U.S. corn crop. The 2009-2010 crop year marked the first time that the majority of U.S. corn production went not to livestock, but to "industrial uses," a category heavy on ethanol production, Usset said.
In March, the Department of Agriculture upped its estimate of corn used for ethanol this year by almost 8 percent. "There's been a surprisingly large use of corn for ethanol," said Good said.
Corn is king when it comes to influencing other commodity prices, and even the retail price of food. "As it has for the last two years, corn is going to set the tone for all of the commodity markets," Good said.
Commodity analysts will be closely watching a USDA report due out Thursday that estimates acreage farmers expect to plant. If the estimate for corn comes in lighter than expected, look for corn prices to jump.
In some years, planting corn is a no-brainer for many farmers. But this year, corn has stiff competition. Prices are strong for both soybeans and wheat, and cotton is selling at record price levels. "This year, all four of those commodities are very, very profitable for whoever wants to grow them," Usset said.
Mike Hughlett • 612-673-7003