2017 Corn Prospects | an interview with Todd Hubbs

sources
FarmDocDaily Article
Congressional Budge Office (CBO) Projections
USDA Long-Term Projections, February 2017

by Todd Hubbs, Grain Markets Specialist - University of Illinois

The time of year to develop corn balance sheet projections for the upcoming crop year is upon us. As we approach the halfway point of the 2016–17 marketing year, decision making regarding planting and new crop marketing get determined. The expectations for corn in the 2017 crop year put forth in this analysis show lower production leading to decreased ending stocks in 2017–18. The magnitude of reduced ending stocks provides important implications for corn prices moving through 2017–18.

Current market consensus projects farmers to plant fewer corn acres in 2017 than the 94 million acres planted in 2016. As discussed previously, numerous factors point toward greater soybean acreage and lower corn acreage in 2017. These include lower winter wheat seedings, a lower cost of production for soybeans, and the current perceived price advantage for soybeans over corn. Congressional Budget Office (CBO) projections for baseline farm programs released last month set planted acreage at 91.5 million acres. Current USDA long-term baseline projections to 2026 have 2017 planted acreage for corn at 90.0 million acres. A reduction of 3.5 million acres from 2016, which places planted acreage at 91.5 million acres, is used in this analysis. Planted acreage at 91.5 million acres would lead to around 83.2 million acres harvested for grain in 2017.

Yield expectations typically use trend yield analysis to generate yield projections for the next crop year. National average corn yield came in above trend for the last three growing seasons and culminated in an estimated 174.6 bushels per acre in 2016. CBO projections place 2017 corn yield at 170 bushels per acre. USDA long-term baseline projections set 2017 yield at 170.8 bushels per acre. We find a linear trend of actual U.S. corn average yields from 1960 forward to be the best fit. The trend explains 89 percent of the annual variation in corn yields from 1960–2016. Weather conditions, as one would expect, impact yields. Bad weather reduces yield by more than good weather increases yield. Since this is the case, trend estimations can understate yield expectations in an average weather year. The trend estimate for 2017 is 166.8 bushels per acre. By adjusting the trend estimation for weather influences, we generate a national corn yield expectation of 169 bushels to use in this analysis. At this yield level, the 2017 crop projection is 14.1 billion bushels. By including the current projections for ending stocks by the USDA of 2.32 billion bushels with 50 million bushels of imported corn, the 2017 corn supply comes in at 16.4 billion bushels. The 2017 corn supply estimate is approximately 509 million bushels less than the current marketing year supply estimation.

2017–18 marketing year expectations for consumption exceed projected production, which leads to a lower level of ending stocks by the end of the marketing year. The size of the decline is important for determining price as we move through the next marketing year. Exports, ethanol production, feed and residual, and other domestic uses determine the consumption of corn. U.S. corn exports vary considerably from year to year. In the last decade, corn exports ranged from a low of 730 million bushels in the 2012–13 marketing year to 2.44 billion bushels in 2007–08. Corn exports will be influenced by trade policy, world corn production, economic growth, and exchange rates. Current 2016–17 marketing year corn export projections sit at 2.225 billion bushels, which were helped by lower corn production in South America in 2016. Current corn production projections for Brazil (3.41 billion bushels) and Argentina (1.44 billion bushels) are up 29 percent and 26 percent respectively in 2017. World production projections come in 8 percent higher for 2017. While U.S. corn exports will continue to be strong, 2017–18 projections reduce corn exports in this analysis to 1.95 billion bushels on larger foreign corn production.

Corn used for ethanol production will be impacted by EPA rulemaking related to implementing RFS mandates, gasoline consumption, and ethanol exports. An expectation of increased fuel ethanol requirements and slight increases in gasoline consumption with a positive ethanol trade balance provide support to the continued increase in corn used for ethanol. Corn used for ethanol expectations increase to 5.4 billion bushels in the 2017–18 marketing year. Other domestic uses for corn do not vary significantly from year to year. With a slight increase, other domestic use expectations provide 1.45 billion bushels of corn use.

The pace of corn consumption for feed likely will continue to show strength in the 2017–18 marketing year. Livestock production growth in many sectors provides support for corn feed use during this marketing year. Despite strong livestock production, several factors may limit corn feed use moving forward. The increase in ethanol production increases distiller’s grain availability. Increased availability of feed grains across the board may suppress some corn feed use. Residual use of corn could be reduced if the 2017 crop is smaller than the 2016 level. Feed and residual use might be near 5.5 billion bushels.

Current expectations for corn consumption in the 2017–18 marketing year are 14.3 billion bushels. Ending stocks would be 2.131 billion bushels, which is 189 million bushels lower than the current 2016–17 marketing year projections. Based on the analysis of corn production and consumption expectations, season average market price comes in at the $3.65 - $3.75 range for the 2017–18 marketing year.

Casting a Data Science Company | an interview with Robb Fraley

Monsanto used to be a chemical company that made herbicides. It then transitioned to a genetic-traits company that produced seeds. Now, as it is set to merge with Bayer, the Chief Technology Officer for Monsanto looks to be casting the St. Louis based agricultural giant into the data-science world of Apple and Samsung. Todd Gleason has this interview with Robb Fraley from the 2017 Illinois Soybean Summit in Peoria.

2017 Projected Incomes on Illinois Grain Farms



Net incomes for Illinois grain farms are projected to be lower this year than last. If this University of Illinois estimate holds, writes agricultural economist Gary Schnitkey on the farmdocdaily website, the weakening financial position of farms in the state will worsen. The last half decade has really changed the financial picture for farmers says Schnitkey, “So we had high incomes from 2010 to 2012 and every year since 2012 we’ve been on a downward trend through 2015. This is when we hit a $500 per farm average net income on Illinois grain farms enrolled in FBFM. This is very low and the lowest through the entire period we’ve examined. Obviously this is not enough to maintain the financial position of farms.”

Schnitkey evaluated FBFM net income records going back to 1996. FBFM stands for Farm Business Farm Management and is a record keeping service for farmers. The service has not yet summarized net incomes for 2016. However it is projecting a substantial rebound.



It appears net income for grain farms in the service will average somewhere between forty and fifty-thousand dollars. There are three primary reasons for this says Schnitkey, “What lead to it was higher than trend line yields. USDA estimates the statewide corn yield at 197 bushels per acre. Just three bushels off the record yield set in 2014 of 200 bushels. Soybean yields averaged 59 bushels. It is a record setting yield. Both of those record setting yields lead to higher incomes in 2016 along with very good ARC County payments.”

Those are two of the three factors leading to a better 2016. The high yields and sizable ARC County payments - that’s the farm safety net from Washington D.C. - aren’t likely to be repeated this season. The third factor very well could be repeated. It is lower input costs including cash rents and fertilizer. It won’t be enough thinks Schnitkey.
Quote Summary - For 2017 we used trend yields and commodity prices of $3.80 for corn and $9.90 for soybeans that resulted in lower incomes for the year. Probably something in the $20,000 range per farm.
Schnitkey cautions it is very early in the season, and that at this same time last year 2016 was projected to be a very, very bad year. It rebounded. It is also important to note that while higher than 2015 incomes, the projected 2016 incomes do not result in the building of financial reserves on most Illinois farms. Schnitkey believes most farms will continue to see the erosion of working capital, potentially leading to the need to refinance outstanding operating loan balances.

2017 Soybean Prospects

farmdocdaily article

Farmers around the nation are expected to plant more soybeans than usual this spring. There are many reasons this might be the case, but only one price outcome if things on the planet remain the same.

2017 Soybean Prospects | an interview with Todd Hubbs

There are three points University of Illinois agricultural economist Todd Hubbs says farmers need to remember about soybeans this year; acreage, stocks, and price.

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Doors Open
9:00am eastern / 8:00am central
    
Beef House Rolls & Coffee Available

Opening Remarks
9:25am eastern / 8:25am central
    Todd E. Gleason, University of Illinois Extension

Weather Outlook
9:30am eastern / 8:30am central
    Eric Snodgrass, Agrible - Champaign, Illinois

Special Guest for the Day
     Todd Hubbs, Agricultural Economist - University of Illinois

Cash Grain Panel
10:15am eastern / 9:15am central
    
Matt Bennett, Bennett Consulting - Windsor, Illinois
    Aaron Curtis, MIDCO - Bloomington, Illinois
    Brian Stark, The Andersons - Champaign, Illinois
    Chuck Shelby, Risk Management Commodities - Lafayette, Indiana

Break (30 min)

Soybean Panel
11:30am eastern / 10:30am central
    Ellen Dearden, AgReview - Morton, Illinois
    Bill Gentry, Risk Management Commodities - Lafayette, Indiana
    Pete Manhart, Bates Commodities - Normal, Illinois
    Bill Mayer, Strategic Farm Marketing - Champaign, Illinois

Lunch and Trade Show
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Beef House Lunch

Farm Policy, Trade, & the Farm Bill
Gardner Agriculture Policy Program
1:15pm eastern / 12:15pm central
    Jonathan Coppess, Agricultural Policy Specialist - University of Illinois
    Gary Schnitkey, Farm Management & Crop Insurance - University of Illinois
    Nick Paulson, Agricultural Finance & Policy Assessment - University of Illinois

Corn Panel
2:15pm eastern / 1:15pm central
    Curt Kimmel, Bates Commodities - Normal, Illinois
    Wayne Nelson, L&M Commodities - New Market, Indiana
    Mike Zuzolo, Global Commodity Analytics & Consulting - Atchison, Kansas
    Dan Zwicker, Zwicker Consulting - Waco, Texas

Consider Using ARP for Soybeans

farmdoc daily source article

It seems likely the price of soybeans at harvest this fall could be much lower than it is now. The options a farmer might consider because of this potential is choosing a different crop insurance plan.

Federal crop insurance comes in two basic revenue protection forms, R-P and A-R-P. R-P stands for Revenue Protection and A-R-P stands for Area Risk Protection. The difference between the two says University of Illinois Agricultural Economist Gary Schnitkey is simple enough to understand.

Gary Schnitkey - RP is what most people buy, Revenue Protection. It is a farm level product and makes payments based on what happens to farm yields. ARP is a county level product. So, it makes payments on what happens to county wide yields, county revenue, but it is the county yield that is entered into the equation rather the farm yield (as is the case) for RP.

It is the available coverage level under the ARP federal crop insurance option that put Schnitkey’s mind to work when he was considering how farmers should use the risk management program this season.

Gary Schnitkey - The reason why I think farmers should consider it is because they have a 90% coverage level in ARP versus only 85% on ARP. This year, you know, we are probably looking at some more downside risk on soybeans and a 90% guarantee would cover more of that price risk.

Moving up to a 90% coverage level increases the price below which crop insurance payments occur. Given a $10.20 projected February price and a 90% coverage level, harvest prices below $9.18 a bushel for soybeans in November ($10.20 x .90) would generate payments, given that the harvest yield equals the guarantee yield. The $9.18 price compares to an $8.67 break-even price at an 85% RP coverage level, and an $8.16 break-even at an 80% coverage level.

There are some caveats when switching from RP to ARP.

ARP does not have prevented planting or replant payments while RP does. The coverage on ARP begins when the crop is planted. Because ARP uses county yields in its calculations, a farm may not receive a payment if the farm has a poor yield and the county does not. The relative premiums on RP and ARP vary across counties. Not all counties will have a 90% ARP premium that is lower than the 85% RP policies.

Finally, here’s an important note about the crop insurance guarantee from Gary Schnitkey. The CME Group soybean contract for November 2017 delivery currently is trading around $10.20 per bushel. A $10.20 per bushel projected price would be $1.35 higher than last year’s projected price of $8.85 per bushel. In and of itself, a higher projected price will offer additional revenue protection on soybeans without the need to consider the merits of RP versus ARP.

UofI Alum Propst Elected IPPA President

A University of Illinois Animal Sciences alum has been elected president of the Illinois Pork Producers Association.

New Fertility Products for the Hog Industry

Martin Gleason poses with sow and litter (circa 1944).
Farmers raising pigs around the planet are always looking for ways to improve the productivity of their breeding herds.

University of Illinois Extension Swine Specialist Rob Knox explains PCAI, post cervical artificial insemination.

Corn Consumption Update

A University of Illinois agricultural economist has been thinking about the supply and demand for corn in the United States and elsewhere.

U.S. farmers harvested more than fifteen billion bushels of corn last fall. That’s a very, very big crop. It is expected there will be more than the usual amount leftover from it by the time the next crop comes in. Todd Hubbs has been thinking a lot about that and how the corn crop is used. He says exports have been strong. Factually 69% of what USDA thinks will be shipped out, has either been shipped or booked, already. And, we’re not even half-way into the marketing year.

Todd Hubbs - So, meeting that 2.25 billion bushels USDA projected for exports looks feasible right now, but we do have the South American crop coming on to compete. So far exports look strong. I am a little concerned about some of the policy issues surrounding our export market, but at this point it is a wait-and-see scenario in my mind.

Exports are the smallest primary component of corn consumption at a projected two-and-a-quarter billion bushels. Next up is ethanol at five-billion-three-hundred-twenty-five million. Those numbers suggest this sector is booming.

Ethanol production has hit record levels of over a million barrels per day for the last two months. However, over the last couple of weeks ethanol stocks have started to build. This means the ethanol margins are starting to deteriorate. Hubbs says production could slow, but maintains the consumption pace for ethanol will be pretty strong in the near-term.

The last and largest segment of corn consumption to explore is feed usage. USDA in January estimated five-point-six billion bushels of corn would be fed to livestock. It is a really hard number to calculate says U of I’s Todd Hubbs.

Hubbs - You never know how much corn is being consumed as we move through the marketing year. Still, livestock numbers are up almost across the board. The hog herd is up. Broiler placements and egg settings are up one to two percent a week. So, when we look at the livestock sector there is a lot of livestock production going on. Having said that, the initial number USDA projected at the beginning of the marketing year has been reduced by 50 million bushels.

Some of that is because of competition to use the corn in the ethanol industry and some because of substitution. There is more available sorghum to feed and it can be cheaper than corn. In the near term Todd Hubbs says the consumption pattern should keep the price of corn in Chicago mostly in its current trading range. That’s somewhere between $3.40 and $3.70 per bushel.

Assessing Argentina Soybean Yield Risks



by Todd Hubbs, Scott Irwin, and Darrel Good
source article

We recently began a series of articles to evaluate the history of corn and soybean yields and deviations from trend yield in Brazil and Argentina. The objective of the yield analysis is to provide a basis for forming expectations about the likely yields of the 2017 crops. The first six articles focused on the alternative sources of historical yield estimates, the selection of the appropriate series to use in the analysis for both corn and soybeans, the selection of the best-fitting trend model for each commodity and country, trend yield deviations in each country for corn, and trend yield deviations in Brazil for soybeans (farmdoc daily, November 2, 2016; November 9, 2016; November 16, 2016; December 14, 2016; December 15, 2016; and January 12, 2016). Today’s article examines soybean yield trend estimates and trend deviations for the Argentinian soybean crop. Since Argentina is the world’s third largest producer of soybeans and is the largest exporter of soybean meal and oil, yield and production prospects have important price implications.

Background

We begin by providing some perspective on regional soybean production in Argentina. The production map of Argentina from the USDA/FAS gives a visual sense of the concentration. The top three soybean production provinces consist of Buenos Aires, Cordoba, and Santa Fe. Table 1 presents soybean production by country from 1971 through 2016 and gives an indication of overall growth in soybean production in the world, and Argentina in particular. Soybean production in Argentina grew rapidly in the early 2000’s with a significant jump in 2001. Figure 1 presents the soybean acreage for Brazil and Argentina provided by USDA/FAS estimates from 1978–2016. Both nations exhibited large growth in soybean acreage over the sample period with Argentinian acreage leveling off at the end of the period. Current estimates place Argentina soybean acreage at 48.1 million acres this year.





Figure 2 presents the annual soybean yields in Argentina for the period 1978 through 2016. As previously discussed in the farmdoc daily article of November 16, 2016, we chose a linear trend to fit the soybean yield data for Argentina. Note that these yield estimates are provided by the USDA’s Foreign Agricultural Service (FAS) and are based on past trends, expert opinion, industry intelligence, and AgMin, the Argentinian Ministry of Agriculture, estimates. Yields have obviously trended higher over time. The linear trend indicates annual average yield increases 0.37 bushels for Argentina. A linear trend explains about 49 percent of the annual variation in actual yields in Argentina. The historical soybean yields in Argentina show large variation around the trend with an extended period of above trend yields from 1998–2003. The linear trend since 1978 explains a much smaller percentage of yield variation than is the case for the U.S. (81 percent) and Brazil (79 percent).



Historical Deviations

Historical deviations for Argentine soybean yields for the period 1978 - 2016 are shown in Figure 3. Over the 39-year period, the average soybean yield in Argentina was above trend in 22 years and below trend in 17 years. The largest deviation below trend was 9.79 bushels per acre in 2009. The largest positive deviation from trend was 5.80 bushels per acre in 1998. The average positive deviation was 2.66 bushels while the average negative deviation was –3.44 bushels. The deviation from trend is asymmetric with more years of positive trend deviation and larger magnitudes associated with negative trend deviations. This differs substantially from soybean trend deviations for Brazil. Since 2012, Argentinian soybean yields demonstrate a wide variation around trend with significant yield loss in 2012 and a large positive deviation in 2015. Based on the historical trend deviations, the unconditional probability of a negative deviation is 43.6 percent. If a negative deviation occurs, the unconditional probability of a negative deviation of greater than two bushels is 65 percent, and there is a 29 percent probability of a greater than four-bushel deviation. The probability of a negative yield deviation greater than two (four) bushels, then, is 28 (13) percent. Based on the historical trend deviations, the unconditional probability of a positive deviation of greater than two bushels is 59 percent, and there is a 23 percent probability of a greater than four-bushel deviation. The probability of a positive yield deviation greater than two (four) bushels, then, is 33 (13) percent.



Implications

An examination of the national average soybean yields in Argentina for the period 1978 through 2016 reveals an upward yield trend with substantial annual variation. The estimated linear yield trend points to a 2017 average soybean yield of 42.2 bushels per acre, 1.10 bushels below the 2016 average. Based on the projections of harvested acreage in the USDA’s January 12, 2017 World Agricultural Production report, yield at trend value for Argentina points to a 2017 crop of 2.03 billion bushels, 57 million bushels (2.73 percent) smaller than the 2016 crop. Using estimates of the historical yield trend deviations, we estimate there is an unconditional probability of 62 percent of a two bushel trend deviation. A trend yield deviation of two bushels per acre would add or subtract approximately 96 million bushels to our projection of Argentina’s 2017 production.

The USDA projects the 2017 Argentinian yield at 43.57 bushels per acre (1.37 bushels above the trend value) and production at 2.094 billion bushels, 7 million bushels larger than the 2016 crop. The USDA estimated production level for Argentine soybeans is 64 million bushels larger than implied by a trend yield. Recent reports in Argentina indicate severe flooding in many growing regions with the potential to reduce production by 100–150 million bushels. If the production reduction materializes in Argentina, 2017 will produce yields well below trend estimates. In the next article, we will examine the impact of La Nina events on Brazilian and Argentinian soybean and corn production.

Iowa Court Decision on Field Tiles | an interview with Jonathan Coppess

The Iowa Supreme Court has ruled drainage districts in the state cannot be sued for the cleanup of nitrates in drinking water. Justice Thomas Waterman authored the majority opinion, writing that policy deciding who pays for nitrate removal is the jurisdiction of Iowa lawmakers. This was a win for the drainage districts says University of Illinois Agricultural Policy Specialist Jonathan Coppess. However, he says the Clean Water Act implications of the suit, about whether or not field tiles are point sources that can be regulated, remains to be addressed.

“So the big question under the Clean Water Act, as I understand it, is the Des Moines Water Works is claiming that the agricultural stormwater exemption under the Clean Water Act does not apply to drainage districts. In this case, because once it comes through the pipes it becomes a point source.” –Jonathan Coppess, Agricultural Policy Specialist - University of Illinois

Again, the decision in the Iowa courts is that only lawmakers in the state can determine who pays for the cleanup of nitrates from drainage districts. It did not address issues related to whether or not field tiles should be subject to regulation under the Clean Water Act.