Friday, August 26, 2011
Polish Your Crystal Ball And Deposit Your Profits
It has been frustrating for many farmers to either suffer or hear about rivers flooding vast acreage of corn and beans, and then not have the USDA reflect the lost acres in its crop acreage reports. (Grumble, grumble). Whether the flooding was in Missouri, along the Mississippi, or in Iowa, along the Missouri River, the loss of crops was something important to neighboring farmers, who thought the USDA should take notice. Whether or not USDA has blended the loss into their acreage estimates, the Food and Agricultural Policy Research Institute at the University of Missouri, did take notice.
FAPRI released a new long term projection of crop supply and demand through the 2016-2017 marketing year. The FAPRI economists begin by saying, “Droughts, floods and changing economic conditions have created tight supplies in many agricultural markets, resulting in record prices for several commodities.” FAPRI joined USDA in acknowledging the poor planting conditions, and noted, “Wet conditions and flooding delayed, or in some cases prevented, the planting of many acres in the Corn Belt and Northern Plains. Continuing drought in the Southern Plains and hot and dry conditions in many other regions have limited yield prospects. The expectation of reduced 2011 crop production has been a major factor behind significant increases in prices for corn and other major crops.”
The economists say the short crops have resulted in higher feed prices with financial pressure on livestock producers through the rest of the year. They say that has slowed livestock production and meat consumption, and while it is particularly tough on poultry operations, there has been a lesser impact on pork and beef, because of the great overseas demand which has helped undergird prices.
FAPRI’s five year projection uses some basic economic assumptions, which includes US economic growth below 3%, unemployment over 8%, inflation subdued, and slowly rising interest rates. Also the price of oil is assumed to be over $100 in 2012, and rising in subsequent years. All of the current farm and biofuel policies are expected to remain in place and that Farm Bill provisions would be continued, along with the 2012 renewal of the Renewable Fuels Standard. And with all of those facts and assumptions, what happens to commodities?
1) Wheat plantings decline from 59 million to 54 million acres, but with yield slowly rising, the supply remains at 2.9 billion bu. Exports remain above 1 billion bu. and ending stocks stay below 700 million. Farm prices generally stay in the $6 range with net returns about $150+ per acre.
2) Corn acreage remains in the 90 million acre range, with the yield climbing above 170 bu. Supply rises above 15 bil. bu. by 2015 and ending stocks are at a comfortable 1 bil. bu. level with demand paralleling supply. Feed demand remains above 5.1 bil. bu., and ethanol demand increases to 5.7 bil. bu. by 2016. Market prices settle into the $5 range with net returns after variable costs between $500 and $550 per acre.
3) Soybean acreage climbs into the 78 million range with yield exceeding 46 bu. Production is a health 3.5 bil. bu. with total use about the same, keeping carryout around 200 mil. bu. Farm prices remain well into the $12 range, with net returns staying above $400 per acre after variable expenses. The soybean/corn ratio generally stays above 2.3. Meal prices remain above $300 per ton, and oil prices nudging 60¢ per pound.
4) Cattle numbers climb above 92 million head by 2016 with the calf crop above 36 million. Cattle on feed float around 14 million. Beef exports push into the 2.5 bil. pound range, keeping steer prices between $110 and $120 per cwt. Net returns for cow-calf operators peak at $126 per head in 2013, and fall to $57 per head in 2016.
5) The pig crop grows from 115 million this year to nearly 124 million in 2016, with slaughter numbers above 115 million. Pork exports climb from 5 bil. pounds this year to nearly 5.9 billion in 2016. Litter rates climb to 10.54 and net feeding returns remain positive by small margins through 2016.
Summary:
Agriculture remains in a positive profitability and growth trend over the next 5 years according to FAPRI projections. While national economic growth remains in the doldrums, commodity prices and demand remain strong, in part from overseas demand.
Posted by Stu Ellis on 08/26 at 12:20 AM | Permalink
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Posted by: Jib at August 27, 2011 10:10AM
Tightest (Down Right “Muffin Top” Tightness) for Coarse Grains in 2012-13 (crop planted next spring)
World coarse grain demand could be very strong in 2012-13. Planted corn acres in the US may have to be some degree larger than 2007’s 93.5 million acres (a record high). This is based on USDA’s August numbers; declining US production could increase the number acres needed. The world may look for 2.5 billion bushels of US corn to import to meet their demand. Domestically, we may feed more than 200 million bushels of wheat in 2012-13. Should we loss 2.7 million planted acres in the drought stricken hard red winter wheat areas (planted this fall for the 2012-13 wheat marketing year), wheat exports could be limited to under 1 billion bushels. World production of wheat should be fairly well positioned to meet demand. (A 50% / 50% chance of meeting needs, this is a lot better than coarse grains chances.) Acres for corn might be available from soybeans. Should South America plant around 48.6 million hectors to soybeans, we might “get by” with 73 million planted soybean acres. There should be enough room to plant the needed corn and bean acres. The market will need to work on the allocation between corn and soybeans.
Demand could decline from above projection with high prices and worldwide economic problems. The world’s equity markets are very polarized on future growth. (The amplitude of the price swings has been incredible. Should the no/negative growth folks become the most fortuitous, “things” could be quit ugly. Because all out calamities are rare events, we severely discount their potential for occurrence and impact. I am not sure how one becomes prepared for these rare events, in the unlikely event that it occurs, but it seems we are walking on the edge.) Economic growth, more than likely, will be needed for this high priced environment to continue. After we work through the pricing of this year’s production, the outside markets could point the direction of commodities.
This year’s supply tightness appears be with us, if demand holds, into the coming year. The amount of corn substitution appears to have limits and demand destruction will occur. The market may provide good pricing opportunities for the 2012-13 growing year but the tightness will not be solved in one year without a major economic downturn, government intervention (like “turning off” ethanol) and/or an exceptional 2012-13 corn crop on record acres.
Jib aka Gibberish
Ps Muffin Top is the bulge that occurs at the top of a pair of pants when their tightness pushes the human contents up and out, above the waist band. I hear it is quite appealing in some parts of the World