Although rising grain prices are the source of great excitement to many commodity producers, two industries could be crushed by them.
Livestock production — Market analyst Richard Brock said during the Mid-South Farm and Gin Show that as herds liquidate due to high feed costs, Midwest sow prices have dropped from 44 cents a pound two months ago to 15 cents. The herds that are liquidating are independently-owned units of 1,000-1,300 sows. “We're seeing them drop like flies. It is ugly.”
Independent grain elevators unable to keep up with margin calls — “If this keeps going, we may not have any left,” said Brock, who notes that a bank recently sent a letter to a third of its independent grain elevators denying additional lines of credit. The elevators' “net worth is negative with the spread on the basis, and banks are having to draw a line in the sand somewhere. The elevators have to liquidate positions.”
An example of this predicament might be a mid-sized elevator in Arkansas with 2 million bushels of bean inventory. The market has rallied $5 beyond what they thought it was going.
“They're long the cash and short the futures which is taking an additional $10 million line of credit (for margin calls) that they had never planned. As the market goes up, you could wait until the basis narrows, but the basis has widened because of the volatility. It's also a self-fulfilling prophecy. The elevators have to sell their cash and buy their futures back, which makes the basis go even wider.
“And as long as this market stays up, my theory is that basis isn't coming back, particularly in the South. There is too much grain competing for a small amount of storage space. And there is no shortage of any of these grains right now. We have a perceived shortage for next year.
“Markets are un-Christian. They will crush you,” Brock said. “They will go after the weakest sector. The possible loss of the independent elevators is a crisis situation. I don't like the rural environment if all we have is the major national grain companies to sell to and no independents to sell to. That's not good for any of us.
“We'd be a lot better off if we could take $2 off the price of beans and buck off the price of corn and let the rest of agriculture survive. If we crush the livestock industry and we crush the independent grain companies, three years from now, it's going to come back and bite all of us big time.”