Big Gains Ahead in Soft Commodities

We all feel the pinch of high food prices right now, but don’t blame the farmers.

They are getting hit hard. From a recent American Farm Bureau Federation analysis:

Farmers growing the nation’s major row crops will collectively lose $32 billion in 2027, up from an estimated $31 billion in 2026…

That’s a crazy statistic. The industry will lose $31 billion this year and $32 billion next year. And it’s due to record high input prices. Here’s some detail from the Purdue University Agriculture Department’s August update:

Whether an energy shock is propagating into agriculture is not settled by asking whether farm-gate prices rose alongside it. Raw commodity prices are set by supply and demand for the commodity itself, not by what it cost to produce. With the crop already in the ground and the herd already on feed, short-run supply is close to fixed, and a rise in fuel or fertilizer costs cannot be passed forward the way a processor passes along a packaging cost. It shows up instead in net returns. Falling farm prices alongside rising energy costs are therefore not evidence that the shock missed agriculture. It is evidence that agriculture must absorb it in the short run.

This is a critical piece of information. It means that farmers (like miners and oil companies) are price takers. The market doesn’t care what it cost you to get the product, it sets the price globally.

That’s why corn and wheat prices stayed low even though the cost for inputs like fuel and fertilizer soared. And we’ve seen this story before. In 2022, the industry costs hit $431 per acre of wheat. Today they stand at $428 per acre. But prices are far below the 2022 highs:

That’s a problem for farmers. They carry the price risk through the season. Some farmers will sell part of their production ahead of time (hedging).  That way they have some guaranteed return on their investment.

However, no amount of hedging can offset the massive increase in costs for farmers. And, as the authors above said, we are in a place where the crops are about to be harvested. Farmers that take a beating this year will have less capital for planting in the spring.

These high costs will also change the math on what gets planted. When fertilizer costs soar (like today) farmers often plant soybeans instead of corn. Soy doesn’t need nitrogen fertilizer, so it’s a cheaper and more profitable alternative. For example, the December 2027 corn futures are $5.30 per bushel while November 2027 soybean futures are $12.00 per bushel. That means soybeans bring in $6.70 per bushel more than corn.

That’s going to lure a lot of farmers to switch acres from corn to soybeans.

Wheat farmers face the same problem. The forecast cost for an acre of wheat just hit $428, a record high price. In the States, wheat farmers substitute different crops depending on where they farm.

There is a saying among commodity investors: “The cure for low prices is low prices.”

That is just shorthand for saying that low prices will curtail supply. When you reduce supply, and keep demand steady, prices must go up. And grains like corn and wheat underpin much of the U.S. food supply. That’s why corn and wheat prices will prove that idiom over the next 18 months. I don’t know if they will test 2022 highs, but the prices are going higher.

We don’t want to buy farmers, because they aren’t going to make any money. Instead, the best way to play the rising prices is through two simple exchange traded funds: Teucrium Wheat Fund (NYSE: WEAT) or the Teucrium Corn Fund (NYSE: CORN).

As you can see from the chart, the price of both wheat and corn rose since July. But they have a long way to go to retest the high prices from 2022. I still think that’s a possibility. The price is too low for the cost inputs. Farmers are losing a lot of money. That’s a recipe for a big win in grain prices.