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Wednesday, February 29, 2012

USDA’s Outlook For Crop Prices In 2012


You have spent $500 per acre to put in a corn crop and $300 per acre to plant soybeans.  Your cash rent may be upwards of $400 per acre, and you paid all of that hoping yields would be phenomenal and prices would set records because of demand.  You are hoping crop revenue will be another record year, because you need it to pay your operational expenses and college tuition.  The family vacation was last summer, and the 2012 trip to Branson, MO will have to be put on hold, until there are some guarantees of good income.  But, out of curiosity, what is the outlook for income from the 2012 crop? 

OK, out of curiosity did you forward contract or hedge any of your 2012 production last September when corn and soybean prices were a good $1 higher than they are now?  If not, there is not much that can be done to regain the $50-$100,000 that is no longer on the table.  So let’s work on market fundamentals that may point to future pricing opportunities.  USDA economist Ed Allen spoke last week at the annual Outlook Forum in Washington and began with the price chart which indicated the $1 dip in prices for commodities in the past 6 months.  He still said producer prices are high and that corn has supported both wheat and soybean prices as the soybean to corn price ratio favors planting corn for most US producers.  Allen said more acres will be going to corn and wheat in 2012 with expectations for 94 million acres of corn, 75 million acres of soybeans and 58 million acres of wheat.  Allen said the additional acres will come from the Northern Plains, where hundreds of thousands of acres were not planted last year because of flooding.  Based on dry soils, he said less prevented plantings are expected this year.

With USDA’s forecast of a national average corn price of $5 and soybeans of $11.50, Allen said corn prices have fallen more than soybeans, compared to 2011.  Since the calculations include all of your forward contracting, Allen said that implies cash market prices significantly below $5 for much of the year.  But he added that soybeans would be lower in price had it not been for Chinese demand and the lower Brazilian supply.  The USDA projections were based on expansion of planted acres domestically and globally in 2012, a higher corn yield, less corn being used for ethanol, production problems in South America, and record world wheat supplies as the most crucial of many other factors.

Allen said global corn production and consumption should meet each other this year, but high prices did not boost production and increase global stocks.  The economist said since the US is the world’s top producer, consumer and exporter, the US also determines world prices. And with the US having two years of below trend yield, that has helped support the price trend.  Globally, Allen said the acreage for corn production is expanding.  That is not the case in Argentina, where corn acres held steady at 3.6 million.  The lack of growth in both acreage and yield have cause overall production to decline in Argentina.  Meanwhile corn production has skyrocketed in the Ukraine from 2 up to 3.5 million acres in the past 2 years.  Helped by record crops, the Ukraine will compete with Argentina for second place in the corn exporting race.  US corn yields may be difficult to predict, based on two years of below trend yields, however Allen says seed companies are forecasting future yield growth to exceed historical rates.  He said USDA is using a 164 bushel yield, but not factoring in good or bad weather.

On the demand side of the ledger, Allen said the 10% blend wall will limit corn use for ethanol, and in fact it will decline slightly in 2012, slowing the demand for corn.  While reformulated gas prices will climb toward the highs of last July, ethanol prices will decline to levels unseen in the past 15 months.  Allen said the reason is the current 900 million gallon surplus of ethanol, stemming from high production prior to the expiration of the blender’s credit.  Consequently, net returns to ethanol producers based on spot prices are currently 14 cents per gallon below variable production costs.  Another reason for reduced demand for ethanol is the declining use of gasoline.  Five years ago, 2012 was forecast for a 148 billion gallon rate of annual use of gasoline, requiring 14.8 billion gallons of ethanol.  However, the most recent estimate of gasoline consumption is 134 billion gallons, requiring only 13.4 billion gallons of ethanol. 

Turning to soybeans, Allen said the headline is China’s imports mean soybeans will exceed 60% of world trade for the current year.  China will import 55 million tons in the current year, compared to only 5 million 12 years ago.  China has recently changed from feeding food scraps to a corn/soybean meal ration.  However, Allen says the amount of Chinese pork production does not directly relate to its use of those feeds and that creates uncertainty for the future.  Regarding corn, Chinese prices for its domestic corn are higher than US corn prices which can be imported.  He says that remains the case even with the application of tariffs and value-added taxes, and that encourages more imports.  But back to beans, Allen said the focus has been on production problems in Brazil and Argentina due to La Nina.  He says the reduced South American crops will result in less competition for US soybean exports, during the first part of the 2012-13 marketing year, and that will limit price declines for US beans a year from now.  In Brazil, Allen says recent years have seen increased double cropping with corn behind soybeans, particularly in Mato Grosso.  However, the distance from Mato Grosso terminals to livestock production and export ports are eating into profits for farmers.  While Brazil subsidizes corn and wheat, soybeans are not subsidized, and prices will determine whether production areas are expanded; and those prices are a function of the growth in Chinese demand.

Shifting to wheat, the USDA economist predicted that global new crop production would be slightly above consumption.  Tight global stocks in 2007-08 caused increased production, and lower wheat prices have shift it to a feed grain in many parts of the world.  Feed use is expected to reach a record of 131 million tons in the current marketing year and Allen says that will accelerate the growth of consumption. World stocks of wheat are at record levels, with US stocks growing to levels unseen in the past 10 years.  Such high levels of stocks have pressured prices, but Allen says, “Wheat prices, supported by corn prices have maintained profitable returns to wheat in most countries, so in areas suitable for wheat, but not corn or soybeans, the wheat area has expanded.”  Russian wheat producers have become aggressive exporters, but are troubled by highly variable yields.  Allen says Russian wheat yield variability is twice that of the US.  And he observes that, “As world importers become more dependent on countries like Russia, their yield variability may be a key to prices.”

Allen says farmers should watch some key developments that will have an impact on the market, beginning with short term issues and extending to longer term dynamics:
• Soybean and corn crops currently growing in South America,
• Prices and weather ahead of U.S. spring planting, 
• China’s soybean and corn import growth,
• Gas prices, gasoline consumption, and ethanol margins,
• Global macro-economic growth,
• U.S. dollar.

Many dynamics are currently afoot in US commodity markets, combining to make price predictions more complex than usual.  Among those are US acreage, South American crop production, US yields and stocks, slowing use of corn by ethanol refiners, demand by China for crops from both North and South America, and the global wheat market that is now dominated by livestock feed demand.

Posted by Stu Ellis on 02/29 at 12:36 AM | Permalink


What is USDA's track record for their forecasts? Tom: At the end of each USDA report, there will be a couple pages that explain their process and outline their track record. Some folks will easily understand the process and the results. Many of the market analysts keep track that will indicate a certain report might overestimate corn 7 of 17 years or underestimate beans in 10 of the past 18 years, for example. But check the USDA stats at the end of each report. ~Stu

Posted by: Tom Butzow at March 1, 2012 6:06AM

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