Tuesday, April 12, 2016

Cheap Imports Make Corn Glut Worse

Wall Street Journal:

Even as record harvests have left the U.S. awash in corn, imports of the crucial animal feed are surging. It is happening because moves in currencies, ocean shipping fees and railroad rates have combined to produce an unexpected result: Bringing in corn from places like Brazil and Argentina can be cheaper for poultry and livestock producers in the U.S. Southeast than buying it from the Midwest....
Imports remain a very small part of the market in the U.S., the world’s largest exporter of corn. Still, the notable surge is a telling indicator of how the commodity bust and strong dollar have distorted prevailing patterns of commerce.
The U.S. Agriculture Department projected Tuesday that buyers would import 50 million bushels of the grain this season, up 56% from last season, even as U.S. bins swell with grain. U.S. buyers haven’t imported that much corn since 2012-2013, when a severe drought slashed domestic production, sending futures prices to all-time highs....
 The rise in imports follows a multiyear boom in American agriculture during which Midwestern farmers ramped up production to satisfy burgeoning demand from a growing biofuels industry at home and increasingly wealthy populations in emerging markets.
The rest of the world followed suit. Brazil, the second-largest corn exporter behind the U.S., is on track this season to harvest its second-largest corn crop on record, as is Argentina. Exporters in Argentina were offering corn at a roughly 6% discount to U.S. supplies for a period earlier this year, and Brazilian corn was cheaper than its U.S. counterpart for much of last year....
In April, it could cost about $0.80 to $1.50 a bushel to ship corn from west to east in the U.S. by rail, while per-bushel costs to ship corn from South America to the U.S. recently have ranged from about $0.35 to $0.50.
Things are going to get really, really ugly in the next few years.  We had 25 years of low prices after the last grain price boom in the Seventies.  I wouldn't be surprised if we had another very long agricultural depression.  With Brazil and Argentina growing huge crops and needing to bring in as many dollars as possible, I think we will have a really hard time getting back to the windfall prices we got used to from 2007 until the last year and a half.  A bumper crop bailed us out last year, but any more large harvests are just going to further depress prices.  I would strongly suggest avoiding agricultural land as an investment vehicle.

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