Thursday, June 18, 2015

SAIB: Set-Aside In Bag...

I have a close friend who also happens to be the best farmer I know. I leech him for information and more importantly, real-life results. God knows what he gets out of our relationship.

Anyhoo, we were talking about seed prices and something he said casually began to rattle around in the back of my head. "I planted a conventional hybrid this year as a test. My calculations how it could yield 27 bushels less than a triple stack and be as profitable."


The reasons we all know: about half the seed price ($330 - 170). Have to use at least half-rate residual herbicide on RR corn now. Some of you may be adding insecticide in addition to Bt. Meanwhile we haven't seen a corn borer around here is a decade or two.

OK - there is the cost angle. Now ponder our marketing problem. Even with modest production issues - the window for which is slowly slipping away - we could harvest an ample crop. Prices could be much more dismal and with old-time surpluses, very sluggish to rally. After all, we can only keep the '14 crop off the market for so long.

I am pretty bearish on new demand. The bloom is off ethanol, China, and meat. Thanks to our dang economy not tanking, the dollar just won't wilt. And ethanol was THE source of new demand for $7 corn. That's a whole 'nother post, but I find it hard to build a credible rising demand case to match our output increases.

If we head north of a 2B bu. carryover, subsidized crop insurance and a decreasing ARC payment will not satisfy many producers who believe in political solutions to economic problems. Murmurings of production controls, i.e. set asides, or other pay-me-not-to-plant schemes will be thrown out as solutions to the ag crisis.  But maybe there is a method at hand to tackle this using simple Adam Smith economic tools.

I call it Set-Aside-In-Bag.  Basically let's all take a page from my friend and arbitrage the price distortion between trait costs and benefits. Plant conventional corn, and make the same money with lower yields by saving on costs. In the process, we lower US production.

Price erosion has two effects in this scenario.

  1. It expands the yield differential breakeven between conventional and traited seed.
  2. It collapses margins.
Now suppose, in response, more farmers do like my friend. Yeah - I know there isn't nearly enough conventional seed now to plant major portion of the crop, but even at say 10% there would be some effect on the overall yield, reducing US production and possibly nudging prices up. Besides, after a year of selling out conventional numbers, some companies will break ranks and decide they can make good money without licensing their profit to Monsanto, et. al. Seed companies recognize the need for lower seed production costs in the era of $3-something corn. New genetics could pour into conventional numbers as well as traited.

I know, lots of things could go differently than I am describing. Let's look at some.

A. Seed companies lower traited seed prices to reduce the cost penalty. OK - that's not a bad thing. In fact, it's what were are griping about.

B. The yield differential turns out to be less or even non-existent due to the uselessness of defense traits in the absence of weed/insect pressure. US production doesn't  decrease much, keeping prices low. With much lower costs, this is a clear win for SAIB

C. Prices jump up with lower production. Traited corn would still have to overcome a now much clearer cost/benefit threshold. If the economics reverse, and we can afford what seed companies think traits are worth, that's exactly what producers are wishing for now. I think the introduction of a choice  would radically lower pricing power for seed companies after conventional competition. Advantage: SAIB.

The Bottom Line: Lower costs never seem to hurt.

Meanwhile, the decrease in BT and RR traits might prolong the the usefulness of those for another decade as a wider variety of protection methods are used. Resistance would likely slow. The growing confluence of green-snap susceptibility (which seems to be more problematic in new traited hybrids, IMHO) and more violent storms via climate change would be alleviated with sturdier genetics and lower populations.

I admit, I have strung together a daisy-chain of what-if ideas. None are terrible unrealistic, and they can link up in different ways with pretty much similar conclusions. At any rate, I've learned that my friend does something like this, its good to pay attention.


Anonymous said...

We planted 100% non-gmo corn in 2014 and again this year. 2014 yields exceeded our county average by 27 bu/a. The seed was/is current genetics. I doubt if we will go back.

Anonymous said...

I don't know why these conclusions aren't more obvious. Farmers seem to be suckers as a group for producing bushels which are "break even" at best.

Anonymous said...

Need to see real side by side results. Our real field comparisons have yielded more than 1-1 returns.

John Phipps said...

Anon 3:

You lost me. Are you saying the extra cost of traits yielded more returns?

Anonymous said...

All sounds right. I have one thing to add. Producing 13 to 14 billion bushels of corn consistently is a lot to ask. Mother nature has to cooperate with the technology. I don't see her doing that as "reliably" as she did back in the 8 billion bushel days. I think there is a high probability of continuation of the roller coaster ride we have been on the last 7 or 8 years. Continued volatility until the plug gets pulled on demand.