(Bloomberg) — Rising food prices have been one of the key drivers of this year’s inflation woes as farmers across America face surging costs for fertilizer and fuel while also grappling with lingering supply-chain issues and labor shortages.
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Brian Duncan, operator of a family farm and vice president of the Illinois Farm Bureau, joined this week’s “What Goes Up” podcast to talk about the market for agricultural commodities and offer his perspective on the economy as he plans next year’s crops. In addition to hogs, his farm near Polo, Illinois, also produces corn, soybeans and cattle.
Below are condensed and lightly edited highlights of the conversation. Click here to listen to the full podcast, or subscribe on Apple Podcasts or wherever you listen.
Q: How do you think the average hog farmer is doing this year?
A: For the most part, the hogs have made enough money this year to pay the feed bill, which when you look at the price of corn and soybeans, that’s really saying something. Now, myself, I’m in a different position than a lot of hog producers, in which I grow all my corn that I need to feed my hog operation. So I’m in essence buying it from myself. There’s a benefit to that. That’s kind of hedging a risk. But I would say in general, a lot of hog producers I know implement risk-management strategies, and when they can see a margin that allows them to buy corn and soybean meal and hedge hogs at a price that allows them margins, they will take all three positions. And so the market has offered those opportunities this year. In general, it has been a pretty good year for the hog side of the business.
Q: Can you talk about how it’s much more difficult for farmers to pass on costs?
A: It’s impossible for farmers to set their price, at least in a commodity-type market. Now, if you’re a specialty grower or have a direct-to-consumer market, then you’ve got some options. But most of us grow bulk commodities. And we are at the whim of the marketplace — and that marketplace has two aspects to it. So it’s got the futures price — you can look on the Board of Trade and see the prices that the board is offering on different commodities. But then the next part of that is the local price, which involves basis. And basis is the discount plus the futures price that the local market is willing to pay. And usually it’s a discount because usually there’s transportation involved. But in times of shortage, some local markets will actually pay over the Board of Trade.
Usually marketing is a two-step process. I will do a hedge on the board, and then I will look for opportunities to capture a good basis as well. And so it’s all a matter of timing, knowing market dynamics and looking for those opportunities. So selling for a farmer is generally a two-step process on the grain side, at least. Hogs, there is a basis element to it. And hogs get really complicated. Hogs do not have a way to deliver. If I sold a contract on the Mercantile Exchange, there’s no way I can deliver that contract of hogs anywhere. So it does what’s called cash settled, and it means it has to settle out with the cash market. But the basis is still very real in that aspect as well.
Q: Is it safe to say that it doesn’t quite seem like inflation is cooling off from your perspective, given all the input costs?
A: That’s correct. I do not see our prices coming down anytime soon. And I know farmers are concerned that again, being price takers, we do worry. We know that commodities tend to cycle. The commodities that we sell — the corn, the soybeans, the pork, the beef, the milk — could go down because of global supply. Remember how base-fossil-fuel-dependent agriculture is, both on the fuel side and on the fertilizer side. I don’t see a solution to, let’s just say, natural gas. I do not see Europe not coming here and buying a lot of natural gas. I don’t see anything short of regime change in Russia changing the realities of the gas supply for Europe. And if Europe needs to shop for gas here, that is going to drive the cost of fertilizer up. Period. And I don’t see that changing anytime soon.
Q: Can you talk about your crop this year and, in particular, your corn crop, considering that the US is set to have its smallest corn crop in three years?
A: I feel very fortunate this year. We have been the beneficiaries of very timely rainfall in northwest Illinois. We have been very dry the last two years. But this year, the good Lord smiled on us. We were horribly dry in June and I thought our crop was deteriorating before my eyes. And then the last Saturday in June, out of nowhere, we got an inch of rain. And then it’s just been raining pretty regularly since then. And then like three weeks ago, we had two three-and-a-half-inch rains in two days. And then last week, a five-inch rain, which, that’s getting a little silly. But the point being, we have had plenty of moisture and our good soils, part of the world that I’m from in northwest Illinois, we don’t irrigate. We rely on Mother Nature for rain. And we’ve been very blessed this year. I think we, in my part of the world, are going to have a phenomenal crop.
Now there’s other parts of the state, I don’t have to drive very far, that the rains have been fickle. They may drop three quarters of an inch in one area, then go two miles (3.2 kilometers) away and they didn’t get anything. And so there are parts, especially as you go west in Iowa, Nebraska, they’ve been dry — plain and simple, dry. And that’s where the reduction in yield is that you’re seeing in the news.
That’s just part of the conversation. Click here to listen to the rest.
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Source: finance.yahoo.com