Ag News

Special Report: Drowning in grain – How Big Ag sowed seeds of a profit-slashing glut

Read the Reuters story by Rod Nickel here.

Paul Gregoire, an Agronomic Research Specialist with Monsanto, examines corn on Monsanto’s research farm near Carman, Manitoba, Canada August 3, 2017. Picture taken August 3, 2017. To match Special Report GRAINS-SUPPLY/ REUTERS/Zachary Prong

 

CARMAN, Manitoba (Reuters) – On Canada’s fertile Prairies, dominated by the yellows and golds of canola and wheat, summers are too short to grow corn on a major scale.

But Monsanto Co (MON.N) is working to develop what it hopes will be North America’s fastest-maturing corn, allowing farmers to grow more in Western Canada and other inhospitable climates, such as Ukraine.

The seed and chemical giant projects that western Canadian corn plantings could multiply 20 times to 10 million acres by 2025 – adding some 1.1 billion bushels, or nearly 3 percent to current global production.

The question, amid historically high supplies and low grain prices, is whether the world really needs more corn.

A global grains glut is now in its fourth year, with supplies bloated by favorable weather, increasingly high-tech farm practices and tougher plant breeds.

The bin-busting harvests of cheap corn, wheat and soybeans are undermining the business models of the world’s largest agriculture firms and the farmers who use their products and services. Some analysts say the firms have effectively innovated their way into a stubbornly oversupplied market.

Never has the world produced so much more food than can be consumed in one season. World ending stocks of total grains – the leftover supplies before a new harvest – have climbed for four straight years and are poised to reach a record 638 million tonnes in 2016/17, according to USDA data.

Farmers and agriculture firms could once count on periodic bouts of crop-destroying weather to tame gluts and drive up prices. But genetically modified crops that repel plant-chewing insects, withstand lethal chemicals and mature faster have made the trend toward oversupply more resistant to traditional boom-and-bust agrarian cycles, experts say.

Another key factor: China – the world’s second-biggest corn grower – adopted stockpiling policies a decade ago when crop supplies ran thin, resulting in greater production than the world needs.

“I think the norm is where we are now,” said Bryan Agbabian, director of agriculture equities at Allianz Global Investors.

Allianz investors seem to agree: The value of two agriculture equity funds that Agbabian manages fell to $300 million this year from $800 million in 2011 as crop prices slid, he said.

Abundant supplies have helped lower food prices across the world, but the benefit to consumers and impoverished nations is muted by several factors, including problems with corruption and distribution of food in developing regions, said Sylvain Charlebois, professor of food distribution and policy at Canada’s Dalhousie University.

The bumper harvests may actually harm poor communities more than they benefit their residents in food savings because lower prices depress farm incomes in the same areas, said John Baffes, a senior economist at the World Bank.

Even as farmers reap bountiful harvests, U.S. net farm incomes this year will total $63.4 billion – about half of their earnings in 2013, according to a U.S. Department of Agriculture forecast.

Lower incomes mean farmers cannot spend as much on seed, fertilizer and machinery, extending their pain to firms across the agriculture sector.

Potash Corp of Saskatchewan (POT.TO), the world’s biggest fertilizer company by capacity, closed its newest potash mine last year, eliminating more than 400 jobs, and has seen its U.S.-listed shares fall by nearly half since the beginning of 2015. The drop erased $14 billion in value, and left Potash seeking to merge with rival Agrium Inc (AGU.TO).

With profits under pressure, seed and chemical companies are scrambling to consolidate.

Monsanto’s annual profit in 2016 was its smallest in six years. It agreed last year to combine with Bayer AG (BAYGn.DE), which would create the world’s largest integrated pesticide and seed company if the deal closes next year.

Grain handler Bunge Ltd (BG.N) said this summer it would cut costs, and left the door open to selling itself after posting a 34 percent drop in quarterly earnings.

Bunge CEO Soren Schroder sought to reassure investors in May by saying all that was needed to trim supplies was one bad stretch of weather in the U.S. Midwest.

But the glut pervades many major farming regions, making it unlikely that drought or floods in one region could wipe out the mounting global surplus. Even with dry conditions in North America, Europe and Australia, the U.S. Department of Agriculture forecasts that this year will bring the second-biggest global corn, wheat and soybean harvests ever.

Bunge’s Schroder made his comment about bad weather less than three weeks before confirming an informal merger approach from commodities giant Glencore Plc (GLEN.L).

“When prices tanked, farmers were no longer willing to pay more” for seed and chemicals, said Jonas Oxgaard, analyst at investment management firm Bernstein. “The mergers are absolutely driven by oversupply because their growth is gone.”

Monsanto spokeswoman Trish Jordan said the company believes demand growth still justifies corn expansion, and she disputed the notion that crop science advances are backfiring on agricultural technology firms.

Monsanto rival DowDuPont Inc (DWDP.N) is making the same bet and currently sells the shortest-season field corn in North America, maturing in 70 days, spokesman Ali Aziz said.

Success in the lab and the field, however, has contributed to oversupply and may continue to sustain it, said Oxgaard, the Bernstein analyst.

“It’s somewhat the seed companies’ fault – they keep breeding better and better seeds every year,” he said.

DARWIN, SEX AND CORN

Charles Darwin helped plant the seeds of the grain glut. The biologist and evolution theorist showed in the late 1800s that cross-fertilization of plants – in which sex cells are fused between crop varieties of the same species – creates a more vigorous breed than those that are self-fertilized.

His work and others’ influenced successive generations of crop scientists and led to the development of hybrid corn, said Stephen Moose, a professor specializing in crop genetics at University of Illinois.

U.S. farmers started planting the first significant acres of hybrid corn in the 1930s, and by 1950 it made up nearly all the corn seeded in the United States.

Yields exploded. Farmers who reaped 20.5 bushels of corn per acre in 1930 harvested an average of 38.2 bushels in 1950, according to the U.S. Department of Agriculture.

Further hybrid breeding breakthroughs generated corn with leaves that grow more erect, allowing farmers to sow it more densely without starving plants of sunlight. Yields first topped 100 bushels per acre in 1978.

After conventional breeding breakthroughs became harder to find, corn gained new vigor through the 1990s with genetic modification.

In 1996, U.S. regulators approved corn that was genetically engineered to produce bug-killing proteins, accomplished by inserting a bacterium hostile to the corn borer insect into the plant genome.

Before the end of the 1990s, corn able to resist weed-killing chemical glufosinate or Monsanto’s glyphosate hit the market.

Those modified varieties and others that followed proved pivotal in generating the abundant corn crops that have since become commonplace, Moose said.

“In the seed industry, it stimulated a whole other round of investment,” Moose said.

In the 20 years since GMO corn reached U.S. farms, yields jumped another 37 percent to a record 174.6 bushels per acre last year.

Some experts believe the expansion of corn yields may soon hit a ceiling. The crop may be nearing the natural limit of its production potential, and crop yields will likely plateau in the next decade, based on how plants convert light to food and their ability to recover from heat, said Ken Cassman, agronomy professor at University of Nebraska-Lincoln.

Technology has also provided better defenses against pests.

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