Higher Crop Income Boosts U.S. Farm Outlook, as Energy Crunch Poses Ongoing Concerns

Crop Profits

Bloomberg writers Michael Hirtzer and Kim Chipman reported this week that, “It turns out that 2021 was a pretty good year to be an American farmer.

“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.”

The energy crisis in China has impacted portions of its food sector, such as commodity processing.

Rising fertilizer prices, stemming in part from the global energy disruptions, have also stoked concerns about agricultural production costs and food inflation.

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.”

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.

“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.”

Also this week, Financial Times writers Naomi Rovnick, Nicholas Megaw, Tommy Stubbington and Justin Jacobs reported that, “The price of US crude oil hit a fresh seven-year high on Monday on fears that fuel demand was recovering faster from last year’s economic slowdown than producers could bring supply to the market.”