“After struggling through extreme weather, a trade war and tepid demand in recent years, things started to turn around this season as Chinese buying roared back. What’s more, crops proved resilient against bouts of dryness that hit some parts of the Midwest, and analysts surveyed by Bloomberg expect the U.S. Department of Agriculture to lift its estimates for domestic corn and soybean stockpiles in a key report due Tuesday.”
The Bloomberg article noted that, “Bumper production on the heels of record corn demand from China means farmers are finally reaping profits from what they’re growing and not having to rely as much on government subsidies, like those distributed by the Trump administration during the trade war.”
Nonetheless, Hirtzer and Chipman stated that,
Still, it’s unclear how long the good times will last.
“Energy and fertilizer costs are going up, signaling thinner margins ahead. And meanwhile, corn and soybean prices are both down about 25% from this year’s peak in May.”
Energy Crunch- Background
Washington Post writer Will Englund reported on the front page of Monday’s paper that, “Energy is so hard to come by right now that some provinces in China are rationing electricity, Europeans are paying sky-high prices for liquefied natural gas, power plants in India are on the verge of running out of coal, and the average price of a gallon of regular gasoline in the United States stood at $3.25 on Friday — up from $1.72 in April.”
The Post article noted that, “The economic recovery from the pandemic recession lies behind the crisis, coming after a year of retrenchment in coal, oil and gas extraction. Other factors include an unusually cold winter in Europe that drained reserves, a series of hurricanes that forced shutdowns of Gulf oil refineries, a turn for the worse in relations between China and Australia that led Beijing to stop importing coal from Down Under, and a protracted calm spell over the North Sea that has sharply curtailed the output of electricity-generating wind turbines.”
Mr. Englund explained that, “The energy crisis first emerged in China, the world’s top manufacturer, as global demand for its products suddenly and unexpectedly shot upward this year. Coal stocks were low, and an unofficial Chinese ban on Australian lignite meant they couldn’t quickly be replenished. Power companies turned to the spot market for liquefied natural gas (LNG) instead, and its price soared.
“In Asia, the spot price, measured in a million British thermal units, went from less than $5 in September 2020 to more than $56 this October.
“As a result, curbs on power consumption have been implemented across two-thirds of China, disrupting factory production and daily life.”
And on Monday, Financial Times writers Hudson Lockett and Primrose Riordan reported that, “Chinese coal futures rose to record levels as floods shut dozens of mines and displaced more than 100,000 people, throttling the country’s main source of the fuel for electricity and compounding a global energy crisis.”
CHINA ENERGY CRUNCH: Coal prices in China have surged to a fresh all-time high, up today ~10% to RMB 1,750 per tonne due to flooding in Shanxi, the country’s top coal-producing region. But in the physical market for prompt delivery it's much worse, trading > RMB 2,000 per tonne.
Meanwhile, in a separate FT article this week, David Sheppard explained that, “The world’s oil consumption remains relatively stable throughout the year with only small fluctuations between the seasons. [Natural] gas demand, however, is far stronger each winter owing to its role in domestic heating.
“While there is a baseload of gas demand all year from electricity generation and industry, such as fertiliser and steel producers, the winter peaks can be far higher across the northern hemisphere. About 40 per cent of total gas consumption in the UK goes directly to heating homes, largely condensed into a period of five-six months.
EUROPEAN ENERGY CRUNCH: More and more evidence is emerging of industrial consumers shutting down in Europe due to high electricity and gas prices. The latest: Spanish steel maker Sidenor plans to stop production 20 days from now until Dec 31 (that's equal to ~30% of the time).
“The industry manages these cycles in various ways. The chief one is storage — pumping gas underground during the low-demand summer months that can then be called on when the weather turns cold. The other is access to swing supplies that can rise or reduce as needed. One of the big problems the UK and Europe faces, however, is that the main sources of these supplies are not working as they once did, creating the conditions for more volatile gas prices.”
Keith Good is the social media manager for the farmdoc project at the University of Illinois. He has previously worked for the USDA’s National Agricultural Statistics Service, and compiled the daily FarmPolicy.com News Summary from 2003-2015. He is a graduate of Purdue University (M.S.- Agricultural Economics), and Southern Illinois University School of Law.
In an update from the Federal Reserve Bank of Kansas City earlier this month ("Larger Livestock Loans Boost Farm Lending"), Nathan Kauffman and Ty Kreitman stated that, "Demand for livestock loans grew in the third quarter, boosting agricultural lending activity at…
Bloomberg writers Kim Chipman and Elizabeth Elkin reported late last week that, "Skyrocketing fertilizer prices could lead U.S. corn profits to drop by about a quarter next year, potentially motivating farmers to shift millions of acres into less cost-intensive soybeans."
On Wednesday, the Federal Reserve Board released its October 2021 Beige Book update, a summary of commentary on current economic conditions by Federal Reserve District. The report included several observations pertaining to the U.S. agricultural economy.