The highly anticipated release of USDA’s crop production and ending stocks reports last Friday created a somewhat negative tone in corn and soybean markets. Despite the slightly bearish tilt, prices for both commodities closed higher on Friday. The pending phase one trade agreement and South American production prospects look to set the tone for prices over the near term. - Todd Hubbs, ILLINOIS Extension
by Todd Hubbs, University of Illinois
link to original farmdocDaily article
Corn production for the U.S. in 2019 came in at 13.69 billion bushels, up 31 million bushels from the previous forecast on higher national average yields. Average corn yield of 168 bushels per acre is one bushel higher than the previous forecast. The harvested acreage estimate of 81.5 million acres is down from the November forecast of 81.8 million acres. Current production estimates for corn show eight percent of the crop still in the field and open the estimate to possible revision in the future.
December 1 corn stocks came in at 11.39 billion bushels. The estimate is 122 million bushels below trade expectations and indicates a total disappearance of 4.53 billion bushels in the first quarter of the marketing year. The USDA’s revision of the September 1 corn stocks higher by 107 million bushels along with greater production indicates a massive feed and residual use component in the first quarter.
At 5.525 billion bushels, the WASDE forecast for corn feed use and residual moved up by 250 million bushels from the previous forecast for the 2019–20 marketing year. Despite the significant boost in consumption from feed and residual, projected ending stocks fell only 18 million bushels from the previous forecast. Consumption projection for categories other than feed and residual fell 95 million bushels. While the corn use for ethanol forecast stayed steady at 5.375 billion bushels, the forecast for other industrial purposes decreased by 20 million bushels to 1.395 billion bushels. The forecast for corn exports dropped 75 million bushels to 1.775 billion bushels due to the continuation of weak export numbers through the first four months of the marketing year. The pending trade deal with China holds the promise for change in some of the consumption totals.
The phase one trade deal due to be signed sometime this week still lacks specificity. While the administration continues to tout agricultural export increases near $16 billion over 2017 totals of $24 billion, very little confirmation from the Chinese side has come forth thus far. The Chinese indicated that they would not exceed their global quota on corn imports for any individual country in 2020. The quota for corn stands at 7.2 million metric tons (near 283 million bushels). Through November of 2019, Census data indicates China imported 12.3 million bushels of corn from the U.S. during the calendar year. There remains plenty of room for increased Chinese imports of U.S. corn and corn-related products in 2020 despite the quota. Details surrounding the trade deal matter and look to help shape price prospects for corn over the next few months.
Foreign production projections for corn in the 2019–20 marketing year moved up slightly due to an increase in the European Union and Russian production. Brazil’s corn production forecast stayed at 3.98 billion bushels. Concerns about production losses for first crop corn in southern Brazil due to dry conditions continue to evolve. Strong domestic corn prices in Brazil point to producers planting the safrinha crop even if planting is later than ideal in many areas. Argentinian production forecasts stayed at 1.97 billion bushels. The forecast for Argentina and Brazil corn exports sit at 2.73 billion bushels, 335 million bushels lower than last marketing year. Given the current forecast for South American exports, the evolution of crop conditions in the region, particularly on the Brazilian safrinha crop, hold important implications for corn exports during the coming year.
Soybean production for the U.S. in 2019 totaled 3.558 billion bushels, up 8 million bushels from the previous forecast on higher national average yields. The national average soybean yield of 47.4 bushels per acre is 0.5 bushels higher than the previous forecast. The harvested acreage estimate of 75 million acres is down from the prior forecast of 75.6 million acres. Current production estimates for soybeans indicate two percent of the crop remains in the field. December 1 soybean stocks came in at 3.252 billion bushels, 66 million bushels above trade expectations.
The WASDE report maintained consumption and ending stock projections at the same levels seen in the last forecast. The crush forecast stayed at 2.105 billion bushels, reflecting the pace of soybean crush in the first quarter of the marketing year. Soybean export forecast levels of 1.775 billion bushels remained steady and mirrored the current pace of exports without the possible trade deal impacts. Unlike corn, soybeans do not face a quota scenario in China. A trade deal with specificity on soybean exports could provide support for prices.
A Brazilian crop at 4.519 billion bushels portends tough competition in world markets for U.S. exports. The Argentinian soybean production forecast stayed steady at 1.95 billion bushels. Forecasts for Brazil and Argentina soybean exports are set at 3.09 billion bushels over the marketing year, up 15 million bushels from last marketing year’s estimate. Increased U.S. soybean exports to China under the trade deal may see strong substitution buying of South American soybeans by other major buyers that may limit U.S. exports upside potential despite a trade agreement.
Additional discussion and graphs associated with this article available here.
The number of hogs being raised in the U.S. has been going up since mid–2014. However, it isn’t necessarily because profits are great.
The last Hogs and Pigs report released by USDA, back in December, was a record-setter at 77 million 338 thousand. That’s three-percent more than year ago. The expansion comes despite unprofitable margins and uncertainties related to trade issues says Jason Franken of Western Illinois University. The fact is there will be more hogs going to market from January to May. One of the reasons, Franken says, is that the litter size has grown on average and is now over 11 piglets per sow, “The continuation of the upward trend in pigs per litter, combined with reported farrowing intentions suggests more hogs going to market in 2020.”
Winter farrowing intentions are up 1 percent from actual farrowings last year and 5% from two years ago. The spring farrowing intentions are also up slightly from last year and up 3 percent from 2 years back.
All of these numbers point to a somewhat higher supply of hogs and pork in 2020 thinks Franken. And, he says, with higher production, one might expect lower prices, but there are additional items to consider on the demand side. For instance, we’re eating more pork per person. Last year’s mark at 52.7 pounds each is the highest number since 1981. Exports are good, too, even to China, “On the world market, all eyes are on Asia, and China in particular, due to their production losses from African Swine Fever. Although held back by China’s retaliatory duties, U.S. pork exports to China increased throughout 2019. In September and October, China surpassed Japan to become our second largest foreign customer after Mexico.”
USDA, by-the-way, is forecasting U.S. pork exports in the first three quarters of 2020 to be 21%, 7.5%, and 8.8% greater than the corresponding quarters from last year. Taking all of this into account, WIU’s Jason Franken says hog prices should be profitable throughout much of 2020, even though they have been below the cost of production in recent weeks, as they often are seasonally at this time of year.
The agricultural sector is caught up in a storm of change. Political and economic forces have been squeezing trade on the global front and U.S. farmers have been leaning into the winds. We take up a few of these topics in this edition of the WILLAg Newsletter.
Trade with China
Profile of USTR Lighthizer
USDA Ag Outlook Forum
Corn Acreage in 2019
Expected Corn vs Soybean Returns
2018 Ethanol Plant Losses
We’ll also explore these topics, marketing prospects, the price of farmland, and the weather during our March 5 All Day Ag Outlook. Hopefully, you can join us at the Beef House in Covington, Indiana. The cost is just $30 and includes Beef House coffee and rolls in the morning and Beef House lunch at the noon hour.
Tickets are available online or by calling 800–898–1065.
Hope to See You There!
Todd E. Gleason, Farm Broadcaster
University of Illinois Extension | WILLAg.org
Trade with China Friday the Chinese trade delegation gathered in the Oval Office with President Trump. A letter from President Xi was read out loud. It urged a continued push toward a final trade deal. The only firm detail to come out of the week’s worth of talks in Washington was a commitment to purchase 10mmt of soybeans. USDA issued an official release on the announcement. It did not include a timeline for the purchases. CNBC reported the Chinese had offered to guarantee purchases of $1.2 trillion dollars of U.S. goods. Again, there was no timeline issued and this point has not been confirmed by any other outlet, the White House, or the Chinese.
During the week the trade discussions in Washington, D.C. pointed to five MOU’s. These Memorandums of Understanding included one on agriculture and were how U.S. Trade Representative Robert Lighthizer had decided to break down the issues in order to tackle them; agriculture, non-tariff barriers, services, technology transfer & intellectual property.
President Trump during the Oval Office meeting Friday pushed aside the MOU’s. He interrupted Trade Representative Lighthizer in front of the Chinese. Lighthizer was trying to explain how the MOUs would build the foundation of a trade deal. Mr. Trump stopped him and said, “I disagree. I think that a memorandum of understanding is not a contract to the extent that we want.” Lighthizer agreed that the term MOU would not be used again.
The important point in this exchange is likely not the MOU discussion. The President interrupted and corrected his lead trade negotiator in front of the Chinese delegation. Clearly, if a trade deal is to be struck it can only be done one-on-one between Presidents Trump and Xi. They may meet next month at Mar-A-Lago.
Mr. Trump has long focused on closing the trade gap with China. The other issues have not been of very much importance to him although he does mention China stealing and intellectual property rights. A trade deal with China is one of the President’s campaign promises. The dazzling $1.2 trillion number CNBC reported might be very enticing to a man who has had a habit of fulfilling his campaign promises.
If it is completed in this fashion, without enforcement mechanisms or real intellectual property rights protections, then as President Trump has said recently Democrats won’t go along. Republicans are likely to stay mum as the deal sets idle in Congress and simply becomes a presidential election year rallying cry. Presidents negotiate trade deals. Congress approves them.
Profile of USTR Lighthizer
NPR profiled Trade Representative Lighthizer this week. Please take six minutes to listen. It’ll be worth your while to know a whole lot more about the man leading the trade negotiations with China.
USDA Ag Outlook Forum This week USDA put on its 95th Annual Agricultural Outlook Forum. It provides some initial numbers the trade uses to project the 2019 growing season into the markets until official USDA reports are issued. The first supply and demand report for the 2019/20 growing season will be issued in May. The March 29 Prospective Plantings report will provide survey results of what farmers think their acreage mix will look like this year. Here you will find some of the powerpoint slides U.S.D.A. Chief Economist Robert Johansson presented in the opening session and the full supply and demand tables presented Friday morning.
You may watch the full opening session of the 2019 USDA Agricultural Outlook Forum. It took place in Washington, D.C. February 21 and 22.
The number of acres of corn planted this spring will be a key factor in determining where the price of corn goes. University of Illinois Agricultural Economist Todd Hubbs took up the issue in this week’s farmdocDaily article.
He starts with a historical graph. It shows the principal crop acres in the United States and how those have changed since 1997. Both corn and soybean acreage have increased. Combined they’re up about 10 percent over the past two decades.
Illinois’ Todd Hubbs uses that history to help put the number or corn and soybeans acres into perspective, “When we look at the harvest month corn to soybean futures price ratio this year it has been about 2.37. There is a definite signal in this graph from about 2006 to 2018 that if you are above 2.4 in that ratio, there will be less corn acreage. If you are below 2.3 there will be more corn acreage. We are, today, sitting right in between those. We’ve seen problems with field work in large parts of the corn belt. We’ve seen fertilizer and other input costs go up on corn. So, the idea that we are going to see a massive increase in corn acreage could happen, but under the current price structure we might not see the kind of corn acreage we think we are going to see.”
Hubbs says he used the 2019–20 futures prices to forward calculate a seasons average cash price for new crop corn. His calculation points to $3.81 per bushel. He then figured a stocks to use ratio that would fit that number, “I think an 11% stocks to use ratio in 2019–2020 would give us $3.81. If consumption is constant at 14.8 billion bushels from this marketing year to the next, that would put corn acreage around 91.7 million at a national trend line yield of 174.6 bushels to the acre.”
Finally, Hubbs says there isn’t a lot of weather premium priced into new crop corn futures. He also says there isn’t much of premium built in for a possible trade deal with China. Hubbs thinks that may be just as bullish for corn as it is for soybeans. Right now he thinks the 2.37 soybean/corn ratio feels high if the expectation is for a substantial increase in corn acreage.
Two factors have changed between the planning periods in 2018 and 2019. First, expected soybeans prices are lower in 2019 as compared to 2018. A reasonable way of forming expectations of cash prices at harvest is to use current bid prices for fall delivery of grain. In 2018, fall delivery prices for soybeans in the month of February averaged about $9.80 in East-Central Illinois. In 2019, fall delivery prices are roughly $.75 per bushel less at $9.05 (see Table 1). At the same time, fall delivery prices for corn are roughly the same at $3.70 per bushel. An $.75 decline in soybean price reduces expected soybean returns by $45 per acre given a soybean yield of 60 bushels per acre ($45 = .75 lower price x 60 bushels yield).
Second, costs have increased, with a primary contributor being increases in nitrogen fertilizer prices. Throughout much of 2018, anhydrous ammonia prices were in the low $500 per ton range (see Table 2). So far in 2019, anhydrous ammonia prices have averaged $607 per ton in January and $613 in February (see Table 2). Fall applications of nitrogen were limited in 2018 due to wet soil conditions, leading many farmers to have to price nitrogen in 2019. These farmers likely will pay around $100 per ton more for anhydrous ammonia in 2019 as compared to 2018. If 220 pounds of anhydrous ammonia are applied per acre, leading to an application of 180 pounds of elemental N (180 = 220 pounds x .82 N analysis of anhydrous ammonia), nitrogen fertilizer costs would increase in 2019 over 2018 levels by $11 per acre ($100 price increase per ton x 220 pounds of anhydrous ammonia per acre / 2000 pounds per ton).
The decrease in soybean price increases the relative profitability of corn. The increase in nitrogen fertilizer price decreases the relative profitability of corn, partially offsetting the impacts if the soybean price increase.
2019 Corn and Soybean Budgets
Table 3 shows 2019 corn and soybean budgets for high-productivity farmland in central Illinois (see farmdoc for 2019 Crop Budgets). These budgets incorporate price and cost changes between 2018 and 2019. Two notes about these budgets:
Yields are 213 bushels per acre for corn-after-corn and 63 bushels per acre for soybeans-after-corn. These are trend yields. In recent years, yields in Illinois have been above trend. Corn yields averaged 20 bushels above trend from 2014 to 2018 (farmdoc daily, January 3, 2018) while soybean yields have averaged 6.5 bushels above trend (farmdoc daily, December 11, 2018).
Prices used in budgets are $3.60 per bushel for corn and $8.50 per bushel for soybeans. The corn price is near fall delivery bids while the budgeted soybean price is about $.55 per bushel below the fall delivery bid. The lower budgeted soybean price reflects a general pessimism about soybean prices resulting from expected large supplies relative to demand (see farmdoc daily, January 28, 2019). This lower soybean price will decrease soybean profitability relative to corn, suggesting more of a shift to corn than a higher soybean price.
Operator and land returns are $188 per acre for corn and $180 per acre for soybeans, suggesting that corn will be more profitable than soybeans. However, this difference in profitability does not suggest a large shift in acres to corn. Most farms in central Illinois have a corn-soybean rotation, necessitating a move to corn-after-corn to grow more corn. Corn-after-corn returns are projected at $137 per acre, which are less than the $180 per acre soybean-after-corn return. These lower corn-after-corn returns suggest maintaining a corn-soybean rotation.
Other Budget Values Operator and land returns shown in Table 3 were recalculated for two different scenarios. First, a $9.00 soybean price was used to calculate soybean returns. The $9.00 price is close to fall bids. Given that corn prices do not change, operator and land returns for corn remain the same as those shown in Table 3:
corn-after-soybeans: $188 per acre, and
corn-after-corn: $137 per acre,
while soybean returns increase to:
soybeans-after-corn: $211 per acre, and
soybeans-after-two-years-corn: $229 per acre.
As would be expected, this price scenario increases soybean profitability relative to corn. Current forward bids do not suggest a shift to corn from a profitability standpoint.
The second scenario maintains the corn and soybean prices at $3.60 and $8.50, respectively, but increases corn yields by 20 bushels per acre and soybean yields by 6 bushels per acre. This scenario reflects a situation where budgets are more optimistic than trend yields due to high yields in recent years. In this case, operator and land returns are:
corn-after-soybeans (233 bushels per acre): $260 per acre
corn-after-corn (223 bushels per acre): $209 per acre
soybeans-after-corn (69 bushels per acre): $231 per acre
soybeans-after-two-years-corn (71 bushels per acre):$248 per acre
Higher yields increase returns and also increase the relative profitability of corn. However, corn-after-scorn is less profitable than soybeans-after-corn. These projections do not suggest that growing more corn would be more profitable than maintaining soybean acres given that both crops have above trend yields at 2013–2018 levels.
Summary and Conclusions
Current fall delivery prices do not suggest that switching to more corn away from soybeans will result in higher profitability on high-productivity farmland in central Illinois. Due to high relatively corn yields, central Illinois is one of the most profitable areas to grow corn relative to soybeans, If central Illinois budgets do not suggest a switch to corn, budgets in less productive areas likely will not suggest a shift from soybeans to corn.
University of Illinois Agricultural Economist and noted ethanol industry specialist Scott Irwin wrote an article detailing the financial losses the industry experienced last year. Use the link above to read the full article. Here’s the paragraph Irwin penned on the potential implications for ethanol going forward.
“The ethanol industry in 2018 experienced its first losing year since 2012, thereby ending a run of five consecutive years of positive returns. The estimated loss for a representative Iowa ethanol plant in 2018 was -$2.2 million. While large, the 2018 loss was still far less than the -$6.7 million loss in 2012. The evidence points to overproduction as the driving force behind the low prices and financial losses experienced by ethanol producers during 2018. The fortunes of the U.S. ethanol industry are unlikely to improve until production and use are better balanced. This will require shuttering some production capacity, additional demand, or some combination of the two. The most optimistic scenario is additional demand for U.S. ethanol exports as part of a trade deal with China.” - Scott Irwin, University of Illinois
Q How confident are you that it will be finished by March 1? Or are you considering extending that deadline?
THE PRESIDENT: Well, they are very complex talks. They’re going very well. We’re asking for everything that anybody has ever even suggested. These are not just, you know, “let’s sell corn or let’s do this.” It’s going to be selling corn but a lot of it – a lot more than anyone thought possible. And I think the talks are going very well – with China, you’re referring to?
THE PRESIDENT: And the talks are going very well.
Our group just came back and now they’re coming here. I can’t tell you exactly about timing, but the date is not a magical date. A lot of things can happen.
The real question will be: Will we raise the tariffs? Because they automatically kick in to 25 percent as of – on $200 billion worth of goods that they send. So I know that China would like not for that to happen. So I think they’re trying to move fast so that doesn’t happen. But it’s – we’ll see what happens.
I can only say that the talks with China on trade have gone very, very well. In the meantime, our economy is very strong. We’re doing well.
I don’t know if you noticed, but deficits seem to be coming down. And last month it was reported, and everybody was surprised, but I wasn’t surprised. We’re taking in a lot of money coming into our Treasury from tariffs and various things, including the steel dumping. And our steel companies are doing really well. Aluminum companies also. So we’re very happy about that.
I think that it’s – they’ll be coming very shortly. They’re going to have very detailed discussions on subjects that have never really been even discussed by people that sat in this chair and they should have been. Very important subjects. And I think we’re doing very well. Okay?
The President has been tweeting about agriculture. He says the potential deal with China will result in “massive” export increases for farm commodities. Most have taken this to mean, at a minimum, that the flow of soybeans will be increased. University of Illinois agricultural economist Todd Hubbs has been pondering the implications and the deal.
Todd Hubbs specializes is row crop commodity marketing at the University of Illinois. You may read his thoughts on marketing soybeans in today’s (this week’s) post to the farmdocDaily website.
President Trump has asked the Secretary of Agriculture to protect U.S. farmers from the trade dispute with China. However, there aren’t many options for Sonny Perdue.
Last week Sonny Perdue was on the road for his second RV tour of farm country. His first tour was last summer. That’s when he told producers he would be their salesman to the world. Now he’s being asked to be their protector in the face of trade restrictions, some in place others proposed, as President Trump sets about rectifying what he sees as unfair trade with China. However, Perdue isn’t saying what he’ll do for farmers and there may be a good reason that’s the case says University of Illnois Ag Policy Specialist Jonathan Coppess, “There are not a lot options for the Secretary when it comes to the covered commodities.”
Typically USDA lawyers will explain there is flexibility in the original CCC charter act and the general powers to improve prices. Yet, because Congress has stepped in and directed spending for commodities via programs like ARC and PLC, the Secretary’s administrative powers are limited.
Most of the heavy lifting to protect farmers from any trade war blowback then, says Coppess, would need to be done by congress.
The first week of April has been tumultuous for American agriculture. Todd Gleason talks with Jonathan Coppess about how the Trump Administration has been handling trade with China, the NAFTA negotiations, and biofuels.
Recent data on the soybean export pace indicates stronger weekly sales. This offers hope for meeting the USDA marketing year export projection. The size of the 2018 crop in South America and the competitiveness of U.S. export prices, says University of Illinois Agricultural Economist Todd Hubbs, remain essential to determining U.S. export possibilities for the remainder of the marketing year.
ILLINOIS Ag Economist Todd Hubbs discusses the potential for U.S. soybean exports to meet USDA’s stated marketing year goal with Todd Gleason.
Up Next… U.S. soybean exports need to continue to build on the strength seen in the 2016–17 marketing year. The ability to exceed the current USDA export projections in 2017–18 is a possibility, but it is heavily dependent on South American production and the continued growth in demand from importers. Todd Gleason has more from the University of Illinois…
One out of every four bushels of soybeans harvested by U.S. farmers last fall, if the trend continues, will be shipped to China.
Two University of Illinois agricultural economists have measured the footprint of Chinese demand for soybeans. John Newton, along with Todd Kuethe (keeth-ee), say this one nation takes 13 bushels from every acre of soybeans produced in the United States.
Quote Summary - The Chinese are bringing in more than a billion bushels of soybeans a year from the United States. That’s more than the states of Illinois and Iowa produced combined. Their total needs from around the world amount to more than 60 million acres. Twenty-one million of those come from the U.S. This is more soybean acres than can be found in Illinois, Iowa, and Michigan. The Chinese have a very large footprint in the U.S. soybean market.
Large today, but twenty years ago China imported just 18 million bushels of soybeans from the United States, or 2 percent of U.S. soybean exports. Demand from this one nation grew from that meager amount to more than a billion bushels, 65 percent of the exports, because of double digit growth in its economy. This growth has slowed, and for some it is now a caution sign…but not for John Newton, yet.
Quote Summary - The world bank is projecting the Chinese economy is going to grow at about 6.9 to 7.4 percent through 2017. This is greater than the United States. Their economy is still growing at a significant rate. They have just plateaued some in recent years. So, you look at the growth rate in the Chinese economy as one indicator. Another indicator is crushing margins in China. Part of the reason they’ve increased their consumption of U.S. soybeans is because they’ve increased crushing capacity in mainland China. So long as their crushing margins are favorable it is still possible to bring U.S. soybeans to China and crush them.
These projections support China maintaining soybean consumption at or above current levels.