How the grain glut could hurt rural economies

American farmers grew more corn and soybeans in 2014 than ever before, according to the U.S. Department of Agriculture’s latest crop production report.

The glut has pushed grain prices to a five-year low, forcing some farmers in Midwestern states to operate on much tighter profit margins than in recent history. Some will even sell their crop for less than it cost to grow.

Scott Irwin, a professor of agricultural marketing at the University of Illinois, expects tighter farm budgets to ripple through farm country.

“Farmers will be reducing their purchases of farm machinery, potentially reducing their purchases of some crop inputs,” Irwin said. “These things can hurt agribusinesses like John Deere, machinery manufacturers, seed suppliers, fertilizer dealers, etc.”

The manufacturer Deere & Co., anticipating the monster harvest and corresponding price plummet, began laying off employees in August.

Irwin said newer farmers, who are likely to have less equity, are at higher risk of defaulting on their loans during this downturn, while the majority of farmers will be able to weather the storm because many saved money during recent, more prosperous years.

Why so much?

Recent prosperity is, in part, why grain farmers are facing such low prices now.

Corn and soybean prices began to climb in 2007 to levels far above the cost of production, thanks to the biofuel mandate, growing demand for livestock, and yield improvements, which created the economic incentive for farmers to plant more. Prices climbed even higher in 2012 because of severe drought in the corn belt.

The past two years, much of the Corn Belt saw excellent weather conditions during the growing season. The USDA’s most recent estimate, which is the agency’s most informed look at the 2014 harvest, shows farmers setting new records for average corn and soybean yields per acre. On average, farmers harvested 12.9 bushels more per acre of corn in 2014 than they did the previous year, and 3.8 bushels more per acre of soybeans.

In addition, farmers in countries like Brazil have expanded their acreage of corn and soybeans.

All of this production began to outpace demand, causing prices to begin their downward trend in 2013.

What about the future?

The short-term outlook remains hazy.

Darrel Good, an agricultural economist and Irwin’s colleague at the University of Illinois, wrote in an email that the future of grain prices is debatable.

“There are differing opinions on long term price prospects. The USDAhas projected a continuation of low prices,” he wrote. “We are more optimistic.”

Irwin agrees, for two reasons.

He believes grain producers will see a growing demand for their product from the federal government’s Renewable Fuels Standard (RFS).

In addition, he believes China’s economy will benefit from the drop in crude oil prices which will allow their hunger for meat to continue to grow, boosting their demand for soybean imports used in animal feed.