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Projected 2015 Net Incomes on Grain Farms

by Gary Schnitkey, Extension Agricultural Economist - University of Illinois

Average 2015 net income for grain farms in Illinois is projected at around $15,000 per farm, down considerably from the 2014 average of slightly above $100,000 per farm (see Figure 1). Furthermore, the 2015 net income will be below incomes in 2010 through 2012 which were above $200,000 per farm. This decline in incomes raises questions.

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What do incomes in Figure 1 represent?

Historical values in Figure 1 are average net farm incomes of grain farms enrolled in Illinois Farm Business Farm Management (FBFM). These farms are located throughout Illinois and represent a variety of farm sizes, tenure relationships, and debt positions. Farms have increased in size over time. In 2014, average farm size was close to 1,500 acres, but the sample included many smaller farms and may larger farms. There were a relatively large number of farms of over 5,000 acres.

How was the 2015 net farm income projected?

Commodity prices, yields, input costs, and cash rents were projected for 2015. More detail on these projections are contained in the 2015 budgets which are summarized in the July 7th FarmDoc daily article. Key items impacting projections are:
  • Commodity prices are $4.20 per bushel for corn and $10.00 per bushel for soybeans.
  • Yields are presumed to be near trend line levels.
  • Non-land costs are projected to declines slightly from 2014 levels.
  • Cash rents are projected to decrease slightly from 2014 levels.
Can 2015 net incomes vary from projections?

Of course. Differences in prices and yields from those used in projections will change incomes. For example, corn price could easily be $.50 per bushel different from the $4.20 price used in projections. With higher prices or higher yields, 2015 net incomes could be above $50,000. However, it is difficult to build a case where 2015 incomes are not considerably lower than 2014 incomes.

Why are 2015 net incomes projected so much lower than 2014 net incomes?

The projected 2015 commodity prices ($4.20 for corn and $10.05 for soybean) are above commodity prices received for 2014 crop (likely $3.70 for corn and $9.75 for soybeans). Given higher prices, why then are projected 2015 incomes lower than 2014 net incomes? Two reasons:
  • Trend line yields are used in 2015 projections. Much of Illinois had above average yields in 2014, contributing to higher net incomes.
  • Marketing gains contributed a large amount to 2014 incomes. Grain produced in 2013 was valued at a lower price on the end-of-year 2013 income than it was sold in 2014. More detail is provided in the May 27th FarmDoc daily article.
Why is projected 2015 net income lower than averages between 2000 through 2005?

From 2000 to 2005, net incomes on Illinois grain farms averaged $57,500, higher than incomes projected in 2015. When making 2015 projections, a $4.20 corn price and $10.00 soybean price are used. These 2015 projected prices are significantly above prices from 2000 to 2005 when prices received by Illinois farmers averaged $2.18 for corn and $5.69 for soybeans. Given higher prices, revenue is projected higher in 2015 than from 2000–2015. However, costs are projected much higher as well. For example, non-land costs for corn have increased 224% from $256 per acre average from 2000–05 to $578 per acre in 2015. Cash rents have increased 205% from $139 per acre to a projected $286 per acre. These cost increases are the primary factor offsetting higher commodity prices, leading to lower projected incomes in 2015.

Will lower incomes signal financial stress?

These lower incomes suggest the need for continuing financial adjustments. More on the financial strength and need for adjustments will be covered in the July 28th FarmDocDaily article.

Soybean Supply & Demand Tug of War

FarmDocDaily Article by Darrel Good, University of Illinois

It looks like this year’s U.S. soybean crop may be a bit smaller than expected, but at the same time it appears there is a corresponding drop in need.

Although “need” might be a pretty strong term.

U of I ag economist Darrel Good has put the price tug of war related to supply and demand into context as positives and negatives. Here’s a list of items supporting a higher price for soybeans.

First, on the supply side, the smaller than expected June 1 USDA stocks estimate. It resulted in the agency lowering the projection of this year’s ending stocks (what’s going to be leftover when we get to the fall) to 255 million bushels. That’s 75 million bushels less than the month earlier and 220 million bushels less than what USDA thought might be left when the first projections started coming out last year.

Second on the list is the June 30 USDA Acreage report. It predicts harvested acreage of soybeans this year will be about 700,000 acres more than projected based on the planting intentions reported in March. However, there is a general consensus that not all of the intended acreage was actually planted due to extremely wet conditions in Missouri, Illinois, Indiana, and Ohio. In addition, flood damage may result in more than the usual amount of abandonment of acreage that did get planted. So while the acreage number is the largest on record right now, it is expected that will drop.

Thirdly, those same wet conditions should result in a lower average U.S. soybean yield. Something below the projection of 46 bushels per acre in the July 10 WASDE report.

In short, the 2015 crop is expected to be smaller than the current USDA projection of 3.885 billion bushels, but expectations are in a pretty wide range. USDA will release the first survey based production forecast in the Crop Production report August 12. That report will reflect the results of the re-survey of soybean planted and harvested acreage in Missouri, Kansas, and Arkansas.

Fourth, consumption of old crop soybeans remains strong and on track to reach record levels. This goes for domestic usage, called the crush, and the export market. Unshipped sales of 94 million bushels as of July 9 were sufficient to supply the necessary shipments to meet the export goal.

This brings us to the concerns, or the negatives, Darrel Good puts on the ledger.

The concern about soybean demand centers on potential export demand for the 2015 crop. USDA puts it 50 million bushels smaller than this year, but on-the-other-hand, this year is a record high.

Still sales for next year are dismal. They only represent 14 percent of the projection. Over the past three years, at this time, sales have been at least twice that big, and as much as three times. And, the number one destination is the cause. Sales to China, by far the largest customer for U.S. soybeans, stood at only 89.5 million bushels as of July 9. Sales to unknown destinations, which likely include China, totaled 120 million bushels. In the previous three years, combined sales to China and unknown destinations averaged 457 million bushels, compared to only 209.5 million bushels this year.

It is possible, says Darrel Good, that the slow pace of new crop export sales so far this year reflects a shift away from the recent seasonal pattern of export sales back to the pattern that prevailed during the period from 2006 through 2010. During those five years, new crop export sales as of about July 9 accounted for an average of only 14 percent of marketing year exports.

So, those are the positives and the negatives of the soybean market as detailed by Darrel Good on the Farm Doc Daily website.

Prevent Plant Soybean Acres in the United States

Rain from Missouri to Ohio has kept farmers from planting part of this year’s soybean crop, but nobody knows for sure - yet - just how many acres have been idled.

USDA has a term for land farmers planned to, but failed to sow because of the weather. It is “prevent plant”. This year rain has prevented farmers throughout the Midwest from planting some acres of soybeans. USDA has one figure already, but it is surveying farmers in Kansas, Missouri, and Arkansas to see if it needs to be updated. The figure is not for prevent plant, but rather for planted acreage. This year that is expected to be a record high 85.1 million acres. But there has been a lot of rain and the number will probably change. Gary Schnitkey wanted to know if history could act as a guide to how many acres might eventually not be planted to soybean.

Quote Summary - Just to give you a feel, from 1996 through 2014 on average there were 759 thousand prevented plant acres for soybeans in the U.S. There were four years when this number topped a million acres. The highest was 2013 at 1.69 million acres

The other three years in which prevent plant exceeded one million acres for soybean include 2001, 2010, and 2011.

Quote Summary - The common thing in all those years was either North Dakota, South Dakota, or Minnesota or some combination of the three having a large number of prevent plant soybean acres. Following those three it was Minnesota. The rank order is South Dakota, North Dakota, Minnesota, and then Missouri. These are typically the states you look at for large numbers of soybean acres going to prevent plant.

The Dakota’s and Minnesota are not the problem this year. It leaves, mostly, Missouri. And, historically, the highest number of soybean prevent plant acres in this one state is only 200,000.

Quote Summary - We are looking at something larger than that. The largest we’ve ever seen in the United States for a single is 450 thousand. So if we see something over half-a-million acres in Missouri, which we could well see, that would be record setting and a million would be way out there.

USDA will update the soybean acreage figures for Missouri, Kansas, and Arkansas August 12th along with the release of the Crop Production report and the monthly supply and demand tables.

Wheat Consumption Tracks USA Eating Habits

The following chart and commentary are posted to a USDA ERS website. Essentially it tracks how many pounds of wheat flour the average U.S. citizen has consumed per year since 1964. The ERS commentary on the reasons for the increase in consumption through the mid-1990's and sudden drop near the turn of the century reflect the eating habits of a couple generations of Americans. 

Wheat consumption stable among U.S. consumers in recent years.

Per capita wheat flour consumption has been relatively stable in recent years, and is estimated in 2014 at 135 pounds per person, unchanged from 2013 but down 3 pounds from the recent peak in 2007. The 2014 estimate is down 11 pounds from the 2000 level when flour use started dropping sharply, partially due to increased consumer interest in low-carbohydrate diets. From the turn of the 20th century until about 1970, U.S. per capita wheat use generally declined, as strenuous physical labor became less common and diets became more diversified. However, from the early 1970s until the late 1990s, wheat consumption trended upward, reflecting growth in the foodservice industry and away-from-home eating, greater use and availability of prepared foods for home consumption, and promotion by industry organizations of the benefits of wheat flour and pasta product consumption. During this time, the domestic wheat market expanded on both rising per capita food use and a growing U.S. population.  Relatively stable per capita flour use in more recent years means that expansion of the domestic market for U.S. wheat is largely limited to the growth of the U.S. population. This chart is based on the April 2015 Wheat Outlook report.

Still Uncertainty About New Crop Corn

The rain fall throughout the corn belt has built a great deal of uncertainty around the size of this year’s corn crop as predicted by the United States Department of Agriculture says University of Illinois Ag Economist Darrel Good. He thinks the amount of this “uncertainty” is more than usually the case.

Crescent City, Illinois corn field July 15, 2015
USDA released projections for the 2015–16 corn marketing year July 10th. The next update is due August 12th. The new crop corn marketing-year ending stocks of corn are currently expected to be 172 million bushels smaller, and the average farm price is expected to be $0.25 higher, than projected a month earlier. Those are the numbers in question. Both are related to the size of this year’s crop, and the ILLINOIS agricultural economist has some thoughts on the “unknowns” as it relates to risk and price.
Quote Summary - In years with substantial production uncertainty, prices tend to be above the subsequent marketing year average during the growing season, offering producers the opportunity to forward price a portion of the crop. That pattern seems to be unfolding this year. New crop corn prices are currently above both the spring price for crop revenue insurance and above the upper end of the range of the USDA’s marketing year average price projection. Still, prices could trade in a relatively wide range over the next 10 weeks. Pricing decisions remain difficult for producers, particularly for those with substantial production uncertainty.
This price risk for corn, says Darrel Good can be mitigated with a combination of incremental sales at higher prices and options-strategies that provide a floor above the crop revenue price of $4.15 for December futures.

The Consequences of a Foot of Rain in June

The rainfall in May and June has put the corn crop in a difficult position this growing season. Late in June the corn crop in eastern Illinois north of Interstate 74 was under water. It looked bad, really bad. Oh there was some of it that looked pretty good, but not much. Things across the border in Indiana aren’t much better, and neither, apparently, is a large part of Missouri and southern Illinois. The crop has just gotten way to much water says University of Illinois Extension Agronomist Emerson Nafziger.

Quote Summary - This is one of those times when the consequences of having a foot of rain in June is not something we would want to ever have and this year it is going to have a serious affect on the crop.

There are two primary concerns related to corn. The moisture is a great haven for the development of disease. The other concern, and this may be more important moving through July and August, is that the root system of the crop hasn’t had any need to develop…not just the roots of the corn under water, but of the whole corn crop from Missouri to Ohio.

The closer we get to pollination the slower this root regrowth is and the less potential there is to recover a healthy root system on this crop say Nafziger,

This could come back to hurt the crop later in the season because it won’t be very resilient during periods of dry weather. A crop in the first week of August cannot grow its root system deeper. It does not have that capability.

If the system has been damaged, even if there is nitrogen and water left deep in the soil, it may not be able to access it and produce higher yields. There in lies a new concern for the water logged corn crop. It looks now as if there may be a change in the weather pattern. Mike Tannura of tStorm Weather in Chicago has been talking about this on the radio.

Quote Summary - A hot area of upper level high pressure is going to drive the U.S. weather pattern over the next couple of weeks and probably beyond that. It’s location is key. Right now we think it will center somewhere near Nebraska / Kansas and on to the west, which would just keep things warm, but not too warm. Any deviation in that system would lead to dramatic changes in weather forecast over the next few weeks.

So, too much rain has stressed the corn crop from Missouri to Ohio. It’s about to pollinate, and then begin grain fill. Even if the weather only turns hot, it could be a compounding problem.

Higher Feed Costs Could Mean Pork Industry Losses

Weather damaged corn and soybean fields are also harmful to hog producers. Todd Gleason has more on the reason why.



Rising feed prices mean higher production costs for the pork industry. Recent higher corn and soybean meal prices have increased anticipated hog costs by about $10 per head says a Purdue University Extension ag economist. These higher feed costs shift the pork industry outlook from one of modest profits to losses says Chris Hurt of about $6 per head over the coming 12 months.

Rising feed costs is a new concern for producers. December 2015 corn futures, as an example, rose from about $3.80 on June 24 to about $4.30 on July 6. This increases the cost of hog production by around $2.25 per live hundredweight. In a similar time period, meal futures have risen about $40 PER ton, which increases cost by about $1.25 per live hundredweight. So, recent increases in corn and soybean meal prices have increased costs by about $3.50 per live hundredweight, or by nearly $10 per hog.

Weather is a primary driver of feed prices right now so no one knows if feed costs will get much higher or more moderate from here.

In June it costs about $50 to produce a hundred pounds of pork says Chris Hurt. With current higher feed prices, costs are expected to be closer to $53.50 for the last-half of 2015 and the first-half of 2016. He cautions, of course, that feed prices can change considerably depending on weather for the rest of the growing season. Right now it means pork producers will likely breakeven this quarter, and lose about $18 a head on those hogs marketed in October, November and December.

Hog prices averaged about $48 in the first quarter of this year, with an estimated loss of $11 per head. Second quarter prices were near $56, for an estimated profit of $14 per head. Third quarter prices are expected to average about $53 per hundredweight, which is near breakeven. The final quarter this year is expected to see prices drop to near $47 with losses estimated at $18 per head.

For all of 2015, losses are expected to average about $4 per head. Recent feed price increases are the primary reason the 2015 outlook has shifted toward expected losses. What is the outlook for 2016? Hog prices are expected to be around $47 per live hundredweight in the first quarter of 2016 and rise seasonally to $54 in the second quarter. Given current corn and meal prices, this would mean an estimated loss of about $17 per head in the first quarter and a profit of $10 per head in the second quarter.

Here’s how Chris Hurt puts all this data in perspective.
  • First, he says pork producers and their allied industries are to be commended for dealing with the PED virus in late–2013 and 2014.
  • Secondly, the industry is to be saluted for only modestly expanding the breeding herd after record high profits in 2014.
  • Finally, Hurt says the higher price of feed should remind the industry to be cautious about expansion, and to follow through on intentions to reduce farrowings this summer and fall.

Farmers Overwhelmingly Choose ARC County

Original Article

The U.S. Department of Agriculture, Farm Service Agency (USDA, FSA) recently released enrollment data on commodity program choices made under the 2014 Farm Bill. This article summarizes how farmers split program acres between Agricultural Risk Coverage - County Option (ARC-CO), ARC - Individual Option (ARC-IC), and Price Loss Coverage (PLC). Overall, ARC-CO was the overwhelming choice. ARC-CO was elected on 76% of program acres. PLC was next with 23% of acres, followed by ARC-IC with less than 1% of acres. There were differences in program choices across crops, as discussed below.

Program Choices

Farmers choose ARC-CO for 97% of soybean base acres and 94% for corn base acres (see Figure 1). Analysis indicated that expected payment from ARC-CO were larger than from PLC for both corn and soybeans (see farmdoc daily January 27, 2015 for more detail), suggesting high use of ARC-CO. However, the fact that ARC-CO accounted for over 90% of program acres for both corn and soybeans is astonishing. The large share suggests:

  • Farmers did not split decisions between ARC-CO and PLC. One strategy was to choose ARC-CO on some farms and PLC on other farms, splitting protection between a revenue program whose guarantee will change over time and a target price program with a fixed reference price. Most farmers did not follow the strategy of splitting choices.

  • Farmers raising corn and soybeans placed little value on having the option to purchase Supplemental Coverage Option (SCO). SCO is a county-level crop insurance program that rides on top of individual plans. SCO is only available if PLC was chosen.

  • When making decisions, the default was PLC. Farmers had to make an active decision to sign up for ARC-CO. Most farmers raising corn and soybeans made an active decision to choose ARC-CO.

  • The large percentages suggest that farmers raising corn and soybeans were comfortable with revenue-based programs. Some questioned this because ACRE - a revenue program available in the 2008 Farm Bill that preceded ARC-CO - was chosen by few farmers. The decision to use ARC-CO also mirrors crop insurance decisions made by corn and soybean farmers, where farmers overwhelmingly choose to use revenue insurances.


    On corn, farmers used ACRE on 8.1% of base acres in 2013. Hence, revenue program use on corn increased from 8.1% in 2013 up to 94% after 2014 program choices. There are a number of reasons that could have caused this change:

  • To enroll in ACRE, an individual had to give up 20% of direct payments and loan rates were reduced by 30%. Since direct payments were eliminate and loan rates were the same no matter the choice in the 2014 Farm Bill, this tradeoff did not exist for ARC-CO.

  • ACRE was more complicated than ARC-CO, especially as ACRE required two triggers to be met before a farmer could receive payments. Farmers had to provide yields to FSA when enrolling in ACRE. This was not the case for ARC-CO.

  • Given the elimination of direct payments and the choices posed in the 2014 Farm Bill, farmers likely gave the choices more consideration in 2014.

  • Price expectations were different in 2014 than when ACRE decisions were made. There also are expectations for larger up front ARC-CO payments.

At the other end of the spectrum, near 100% of peanut and long grain rice base acres were enrolled in PLC (see Figure 1). These large percentages are not a surprise as studies suggested that PLC would make larger payments than ARC-CO for these crops (see farmdoc daily January 27, 2015 for more detail). Reference prices for these crops are well above market-level prices, leading peanuts and rice farmers to overwhelmingly choose PLC.

Perhaps the surprise in rice is the fact that ARC-CO was elected for a relatively high percentage of acres for Japonica rice. ARC-CO was selected on 34% of acres, ARC-IC was selected on 4%, and PLC for 62%. Note that yield and price dynamics are different for japonica rice than for long grain prices and Japonica’s reference price was set at 115% of the long and medium grain reference price. Also, all Japonica rice base acres are located in California, and the drought situation may be playing a role in program choice.

Wheat choices were split relatively evenly between ARC and PLC (see Figure 1). ARC-CO was used on 56% of base cases, ARC-IC on 2%, and PLC on 42%. Studies of expected payments suggested that ARC-CO and PLC were near one another, potentially leading to the relatively even split.

ARC-IC was used on the fewest program acres. Crops having the most use of ARC-IC include large chickpeas (11% of base acres), small chickpeas (9%), lentils (7%), dry peas (6%), mustard (6%), temperate japonica rice (4%), barley (4%), and safflower (3%). There is a geographical dimension to where these crops are raised, with most of the states being located in the northwest. Oregon had the highest share of base acres enrolled in ARC-IC, with 12% of base acres enrolled in ARC-IC. Oregon was followed by Montana (9%), Washington (4%), Idaho (4%), Wyoming (2%), Minnesota (2%), South Dakota (2%), North Dakota (1%), and Colorado (1%).

Geographic Distribution

Overall there was a geographical pattern to program choice, as would be indicated by signup by crop. Figure 2 shows states giving percentages of base acres enrolled in PLC. In general, PLC was used more in states in the south and west. Highest PLC use occurred in Arizona (95% of program acres), New Mexico (87%), Texas (84%), and Utah (82%). PLC use in Corn-Belt states were small. For example, PLC was used on 2% of program acres in Iowa, 3% in Illinois, and 2% in Indiana.


Summary

To a large extent, program choices followed predictions made prior to sign-up. Two facts, however, stand out. First, ARC-CO was the overwhelming program choice across program crops, particularly on corn and soybean acres. This suggests that farmers will use revenue-based programs, particularly those of relatively straight-forward design. The second was the relatively small use of ARC-IC. While ARC-IC has the desirable feature that it protects farm yields, ARC-IC also is a more complicated program relative to ARC-CO and PLC, combining all crops when determining payments and requiring farmers to report yields to be FSA. These complications may result in its unpopularity.

Perspective for the Soybean Market

We’ll know a lot more about where the price of soybeans is headed at the end of this month. Still, it is useful to understand how price arrived where it is today.

Last fall USDA projected there would be about 475 million bushels of soybeans leftover by the close of the marketing year. That’s this fall. The agency has trimmed that number back over time. This month the target is 330 million bushels.

Usage has been really strong and it is important to remember says University of Illinois Ag Economist Darrel Good, but it did not change the balance sheet very much in this one month. Over time it has, however, been really supportive to the price of soybeans - keeping them above $9 a bushel on the board. Demand has held the bottom end of the market.

Supply, in the coming marketing year on-the-other-hand, is the problem at hand. The June 30th Acreage report is supposed to help clarify this matter. The spring rains, especially in Kansas and Missouri, may cause that not to happen says Good.

Quote Summary - The June acreage report will be interesting this year, for those two states and maybe more, because it will in fact still reflect some intentions for those acres not planted at survey time. How will producers report those intentions? Are they still planning to plant all the soybean acres if it dries out? Or have they already made a decision to abandon and go to prevent plant? So, even after the June number is released, uncertainty about acreage will remain. It will make the August and September FSA Prevent Plant acreage reports an important way to tweak the June number.

A tweak of three to five million acres of prevent plant for soybeans, thinks Darrel Good, would be enough to change the balance, shifting the overwhelming supply of soybeans that so far appears to be coming - consequently now pegged at 475 million bushels just like last year - to something far more supportive of price.

EPA’s RFS Puts Biodiesel in the Drivers Seat

The nation could be running on a lot more biodiesel in future. The latest U.S. EPA proposal would firmly set a path to create a second biofuels industry in the United States.



The United States Environmental Protection Agency, by the authority of congress, sets mandates - within some congressional parameters - for the amount of renewable energy the nation should consume. Part of this energy plan has allowed U.S. farmers to build and deploy corn based ethanol as a gasoline additive. Phase two, as set out by congress and proposed by EPA in May, may do the same thing for biodiesel made from oilseeds says University of Illinois ag economist Scott Irwin, "If one takes the EPA policy as given and projects for the remaining life of the RFS through 2022, essentially going forward biodiesel is in the driver’s seat rather than corn based ethanol."

Biodiesel is made mostly from vegetable. Essentially the same cooking oils found on store shelves… mostly this oil is pressed from the soybean. The new proposed rules, which again follow the direction of congress to make the United States less dependent on foreign oil for its energy supply, would push U.S. vegetable oil crushing capacity to its limit.
U.S. EIA estimates current production capacity for biodiesel in the United States is around two-point-three-billion gallons. There is a good chance by 2016 or 2017 demand would surpass that number. 
Maybe or maybe not depending on how much soybean oil crushing capacity currently idled can be brought back online and or how much biodiesel can be imported to meet the mandate. Either way it is clear more biodiesel made from soybeans, and some other crops, is now coming into play. The big difference may be that there is already an existing infrastructure to handle most of the increase. The ethanol industry had to be built and deployed. Farmers took on that burden. The oilseed crushing industry already exists and simply needs to be targeted.

Why USDA Lowered the Corn for Ethanol Number

This week (June 10th) USDA lowered its estimate of how many bushels of corn would be used to make ethanol. It surprised the market. However, there is an explanation.

Once a month the United States Department of Agriculture releases a report predicting how corn will be used in several different categories; how much will be fed to livestock, how much will be exported, and how much will be used to make the gasoline additive ethanol. This month it dropped the number of bushels of corn to make ethanol by 25 million. It’s still a big number at 5.175 billion bushels, but the trade didn’t like it. University of Illinois ag economist Darrel Good says it may mean less than the surprise it gave the trade. This, he says, is because the number is calculated in a new way.

Quote Summary - USDA sited its new Grain Crushings and Co-Products Production survey instituted last fall. It shows the number of bushels of corn being consumed to produce ethanol isn’t as large as previously forecast. This suggests the efficiency of ethanol production has in fact increased. So, there is a situation where ethanol production is up four-percent year-over-year, but USDA is only projecting a one-percent increase in corn use. This is because of the new survey data.

Consequently, the new data caused USDA to raise the estimated number of bushels leftover from this market year to go up by 25 million bushels. The increase did not surprise the marketplace. It was looking for a 25 million bushel increase. It just didn’t come from the place it thought it would says Darrel Good.

Quote Summary - They were looking for a lower feed and residual number, not a lower ethanol number.

The trade had dialed in a lower feed and residual category number based on bird flu, the number of turkeys and chickens euthanized because of avian influenza, and therefore no longer consuming corn. This may still show up in the end of the month Grain Stocks report. Even then, it may not be clear thinks Good. Historically, the numbers in the June Grain Stocks report have been noisy.

Quote Summary - It is pretty noisy. The June report in recent years has had some big surprises. We just never know the direction of the surprise. The market needs to be aware of that. The market, at this juncture, seems to be thinking the feed demand is a little weaker than what USDA has projected.

This year USDA has a better corn for ethanol number than in the past, though it doesn’t quite fit with trade perception. They’ll need to adjust. The June Grain Stocks report isn’t likely to help. The feed and residual category, which the trade expects to be smaller, is just an educated guess and includes a big buffer - the residual part of the name.

Crop Insurance Loss Performance in 2014


Last year federal crop insurance performed really well. This means it covered losses in the way it was designed to do the job. Over time crop insurance is meant to even out the ups and downs in annual income experienced by commodity farmers.


It does this by paying out one dollar for every dollar of premium a farmer pays in to the system to purchase the insurance. The farmer can expect there will be many years when a payment is not made, but when the income from crops drop, a crop insurance payment will help alleviate the gap. Here’s another explanation from University of Illinois Extension Ag Economist Gary Schnitkey.
Quote Summary - The crop insurance program was designed to have a loss ration of about one. The loss ratio equals payments-made divided by premium-paid. Over time the federal crop insurance program is supposed to pay out roughly the same amount it collects in premium. A loss ratio of one is about the target. A loss ratio of less than one means payments were less than the premium collected and if the payments made are more than the premium paid, then the loss ratio is greater than one.
Last year, for all covered crops harvested in 2014, the loss ratio was point-nine. This is slightly above the annual yearly average of the last decade. The long run average is point-eight-two.
Quote Summary - Overall you would say 2014 was an average year. The high happened in 2012. That year the loss ratio was one-point-six-two. The low year is point-five-three which happened in 2007.
The 2014 loss ratio for corn was one-point-zero-five. Wheat losses nearly topped that chart at one-point-one-three. Rice had a bad income year. Its loss ratio was one-point-four-nine. By contrast the soybean loss ratio was just point-five-four.


Last year Gary Schnitkey says the data shows most of the corn belt state payments were made in Iowa and Minnesota. Many of the counties in the northern two-thirds of Iowa and in Minnesota had loss ratios above two. Losses in those parts of the country were quite high.


The reason is because we had price declines on both corn and soybeans and those areas last year were not as good as the rest of the corn belt. The remainder of the corn belt had very low loss ratios. The loss ratios were below one in Illinois, Indiana, Ohio, Missouri, and the Dakota’s.

Link to Original Article

Pork Industry Continues to Adjust from PED

The price of hogs is on the rebound. It appears to be the economic remnants of a widespread disease outbreak in 2014.

The pork industry continues to adjust from the supply shock created by the PED virus last year. Live hog prices peaked in the summer of 2014 as Porcine Epidemic Virus losses mounted and then fell into the late winter of this season. Looking back it seems prices overshot on the high side due to PED, thinks Purdue University Ag Economist Chris Hurt, and then undershot early this year as market supplies were restored. He says the third phase of this cycle now seems to be the recent recovery in prices - up from the $45 low made in March.

Quote Summary - Now, they have recovered to the low $60s. The low prices in March were clearly related to 14 percent higher production for that month compared to year previous levels and market concerns that pork supplies were going to remain higher by ten percent or more into the spring.

The recent recovery in hog prices, apparently, is related to the fact supplies have not been that high. April pork production was up eight percent. May was about six percent higher. Both are in alignment with the last inventory count from USDA. If those inventory counts continue to hold, then second quarter pork production will be up by six percent, the third quarter up by seven percent, and the final quarter of the year up only four percent says Chris Hurt. He says not only are fewer hogs coming to market, but that they weigh less, too.

Quote Summary - I would guess we’ll average one percent lower weights for most of the rest of this year.

Fewer hogs at lower weights are causing a mid year bump in prices. Live hog prices in the first quarter of the year were $48.47 according to USDA. Prices are expected to average near $58 in the second and third quarters. Hurt thinks it will drop to about $51 in the last quarter of the year, and decline to the high$40 level for the first quarter of 2016. These numbers mean hog producers will make money this year, but lose money starting in 2016 unless the price of corn stays on the bottom of its trading range.

The next important benchmark for the pork industry is USDA’s June Hogs and Pigs report due the 26th. It will show how the industry has grown or contracted since March.

Quote Summary - Producers reported in the March update that they intended to reduce this summer’s farrowings by two percent. This was a surprise given the generally profitable industry since mid–2013. If farrowings should actually expand, this would increase pork production early next year and keep a bearish cast over the industry to start 2016.

If you’d like to learn more about the livestock sector, in particular the pork industry, from Chris Hurt, you may read his thoughts on the Farm Doc Daily website.

Reducing Illinois Cash Rents Imperative

An ag economist on the University of Illinois campus is continuing his calls for farmers and landowners to lower cash rents.

Monitoring Soybean Consumption & Production Prospects

The trade has turned its primary attention to the soybean crop being planted across the United States, but that doesn’t mean it has fully discounted last year’s harvest as market maker.



This year the United States Department of Agriculture expects about one-point-eight billion bushels of soybeans will be used within U.S. borders. This is more than last year and it appear USDA is on target with its projection. The pace of domestic crush has steadily picked up as the fiscal year has passed. University of Illinois Ag Economist Darrel Good says the pace needs to pick up a bit more to make the target.
Quote Summary - To reach the USDA projection, the crush during the last four months of the marketing year needs to exceed that of a year earlier by 7.7 percent.
The NOPA crush estimate for May is scheduled for release on June 15, and that’ll offer more insight into domestic usage. The other primary point of usage is the export market for soybeans.
Quote Summary - The USDA projects that U.S. soybean exports during the current marketing year will reach a record 1.8 billion bushels, 9.3 percent more than the previous record of last year. With about 14.6 weeks remaining in the marketing year, cumulative USDA export inspection estimates have reached 1.722 billion bushels. For the first seven months of the marketing year, export inspections tracked Census Bureau export estimates very closely. To reach 1.8 billion bushels for the year, exports during the final weeks need to total about 78 million bushels, or about 5.35 million bushels per week.
The last five weeks have seen exports above 10 million bushels each. It very likely, thinks Darrel Good, that USDA’s export projection for soybeans will be easily met. This brings him to the ending stocks figure, or the number of bushels to be leftover at the end of the fiscal year in September. That number will be calculated and it could result in an adjustment of the size of last year’s crop, and then there is this year’s crop.
Quote Summary - Until very recently, few concerns have been expressed about the 2015 soybean production season. Planting has proceeded at a pace that exceeds the previous 5-year average pace and expectations have been for acreage to exceed intentions reported in the USDA’s March Prospective Plantings report. The recent weather pattern, however, has generated a few issues. In particular, the area of extreme rainfall amounts in Texas and Oklahoma that extends into southern Kansas and parts of Arkansas have raised a few concerns about the timeliness of planting and the potential for some prevented planting. The focus is on Kansas due to the combination of the slow pace of planting (17 percent as of May 17) and the magnitude of soybean acreage (3.8 million) intended to be planted in that state.
For the U.S as a whole, there is some measurable yield loss as the percentage of the crop planted after May 30 increases. For the period from 1986 through 2014, the percentage of the crop planted after May 30 has ranged from nine percent (2012) to 66 percent (1995) and averaged 34 percent. With 45 percent of the crop reported planted as of May 17, the percentage of the crop planted after May 30 this year will not likely exceed the average of the previous 29 years due to the rapid pace of planting in northern growing areas. The impact, if any writes Darrel Good in his Weekly Outlook posted online to Farm Doc Daily, of the extreme wetness on the magnitude of planted acreage of soybeans should be revealed in the USDA’s June 30 Acreage report.

Negative Returns & Down Pressure on Cash Rents

Original Article

Todd Gleason talks with University of Illinois ag economist Gary Schnitkey about cash rents. As it stands today farmers on highly productive land in central Illinois are likely to loose about $70 for every cash rented acre planted to corn.




by Gary Schnitkey
Univeristy of Illinois

Surveys conducted by the Chicago Fed and the Illinois Society of Professional Farm Managers and Rural Appraisers indicate that 2015 cash rents have decreased between $20 and $25 per acre from 2014 levels. If these reductions occur, the majority of farmers still will have negative returns from cash rent farmland given current corn and soybean price levels. At a $3.75 per bushel corn price and a $9.50 soybean price, cash rents need to decrease from 2014 averages by around $70 per acre before farmer return is zero. Even given mid-$4.00 prices for corn, farmers will not have positive returns given cash rents at 2014 averages.

Operator and Land Returns

Table 1 shows estimates of 2015 operator and land returns. Operator and land returns represent the returns that can be split between the landowner and farmer. If operator and land returns are $300 per acre and cash rent is $250 per acre, the farmer will have a $50 per acre return. Operator and land returns are based on revenues, yields, and costs shown in the 2015 Crop Budgets and are averaged over the corn and soybean crops.


Operator and land returns are given for four different regions: Central Illinois with high-productivity farmland (Central-High), Northern Illinois (North), Central Illinois with low productivity farmland (Central-Low) and Southern (South) Illinois. In Table 1, regions are arrayed from the highest yielding on the left (Central-High) to the lowest yield region on the right (South). Operator and land returns decrease with lower yields. Even though these are Illinois specific regions, returns shown in Table 1 are generalizable to a wider geographical area.

There are five price scenarios in Table 1. The first is a $3.75 per bushel corn price and $9.50 per bushel soybean price, slightly above current bids for delivery of 2015 grain. These prices are used to determine crop revenue given the expected yields for each region. For example, the expected yields for the Central-High region are 198 bushels per acre for corn and 57 bushels for soybeans (see Table 1). Gross revenue also include ARC/PLC and crop insurance payments, both of which decrease with higher prices.

At a $3.75 corn price and a $9.50 soybean price, the operator and land return for the Central-High region is $226 per acre (see Table 1). The average cash rent in 2014 is $293 per acre, implying a farmer loss of $67 per acre ($226 operator and land return - $293 cash rent). Other regions have similar levels of loss: -$77 per acre for the North region ($188 operator and land return - $265 cash rent), -$73 in the Central-Low region ($170 operator and land return - $243 cash rent), and -$71 in the South region ($92 operator and land return - $163 cash rent). Note that $20 to $25 per acre decreases in 2015 cash rents do not lead to positive farmer returns given that cash rents started at average levels.

Longer-Run Price Levels

Current price levels may be below long-run prices. Previous analyses (farmdoc daily, February 27, 2013) suggest that longer run prices may be around $4.60 per bushel for corn and $10.60 for soybeans. Obviously these higher prices will result in higher operator and land returns, as is illustrated in Table 1. Take the $4.50 corn price and $11.00 soybean price. These prices give $298 per acre of operator and land return in the Central-High region. Note that the $298 operator and land return is near the 2014 cash rent of $293 per acre. At this price level, the operator and land returns for all regions are near the average 2014 cash rent levels. The nearness suggests that cash rents would need to decline if long-run prices are in the $4.50 per bushel range for corn and $11.00 per bushel range for soybeans. In the past several years, increases in cash rents likely overshot levels supported by long-run prices.

Note that the above analysis is based on non-land costs remaining at current levels of roughly $600 per acre for corn and $370 per acre for soybeans. These cost levels are at historically high levels (farmdoc daily, March 29, 2011). Decreases in fertilizer, seed, and chemical costs could reduce the need for decreases in cash rents.

Setting 2016 Cash Rents

Table 1 can be used to gain a feel for the relative size of downward pressures placed on cash rents in 2016. Given that costs do not change, operator and land returns shown in Table 1 will be accurate for 2016.

Expected 2016 commodity prices during the fall of 2015 will have a bearing on pressures place on cash rents. If corn and soybean prices respectively remain near $3.75 and $9.50 per bushel, cash rents will need to decrease by around $70 per acre from 2014 average levels before farmer returns are near zero. Obviously larger decreases would be needed before farmer returns become positive. Pressures will be reduced with higher price expectations. Take the price scenario having respective corn and soybeans prices of $4.25 and $10.50 per bushel. Under this scenario, rents would have to be decreased by $19 to $37 per acre, depending on region, from 2014 average levels to have farmer returns at $0 per acre. For farmers to have positive expected returns without cash rent of non-land costs, corn and soybean prices respectively need to be in the high-$4.00 and mid-$11.00 range.

Summary

Given current price levels, avenge cash rents levels need to decrease by over $70 per acre for farmers to have returns near zero. Continued pressures on cash rents will occur in 2016 unless significant increases in prices occur from their current levels. Unless non-land costs decrease, prices must be in the high $4.00 range before downward pressures are not placed on average cash rents.

Central & Northern IL Black Cutworm by Memorial Day

The black cutworm may do damage in central and northern Illinois corn fields over the Memorial Day weekend. Farmers should begin scouting soon because not all Bt corn hybrids offer adequate protection.

University of Illinois entomologist are estimating, based on black cutworm moth flights, that farmers might find the overnight work of the moth’s larval stage offspring beginning in late May. The larvae can cut a corn plant off. Farmers should scout for early feeding damage this week and next says University of Illinois Extension Entomologist Mike Gray.

Quote Summary - Growers should look for early signs of black cutworm activity. There will be small pin hole sized areas on leaves. These have been removed by very small caterpillars in the one to three instar stage. Once the caterpillars reach the fourth larval instar stage they can begin to cut plants.

Based on some heat unit calculations U of I entomologists project cutting dates will begin in Ford County (May 24), Mercer County (May 25), Lee County (May 31), Whiteside County (June 1), and Henry County (June 3) Illinois. Plants in the one to four leaf stage are most susceptible to cutting. It is important to note that not all Bt corn hybrids adequately protect against the black cutworm.

Marketing Advice from Darrel Good

Now that USDA has released its first official look at the balance sheet for new crop corn and soybeans, farmers are under the gun to make some marketing decisions. The easy ones are related to what’s left to sell from last year.

This week USDA estimated the average cash price farmers will receive for the coming corn crop will be fifteen cents less than last year at $3.50 a bushel. It makes the decision to sell what’s left from last year’s crop pretty easy thinks University of Illinois Ag Economist Darrel Good.

Quote Summary - I think you just give it up, meter it out, and let it go.

Pretty much the same advice goes for old crop soybean sales.

Quote Summary - There is no opportunity at this juncture, beyond a summer weather problem, for prices to recover.

Sell old crop corn and soybeans at your discretion, but probably sooner rather than later. However, Darrel Good is much more cautious as it relates to new crop sales.

Quote Summary - Prices are low enough, certainly below the crop insurance price, and I’d bide my time on new crop corn.

He’d do pretty much the same for soybeans.

Quote Summary - Probably in the same category. You are seeing prices right down at the $9.00 level for harvest delivery, about what USDA expects for the year ahead. There is probably no urgency to get aggressive at these levels.

Again, that’s sell the old crop and stand to the sidelines on the new crop. You may read Darrel Good’s thoughts on the commodity markets each Monday afternoon on the Farm Doc Daily website.

USDA WASE May 2015 Numbers



University of Illinois Ag Economist John Newton discusses the May 2015 World Agricultural Supply and Demand Estimate report numbers for new and old crop corn and soybeans.

First Day First Field

USDA describes Pat Whalen as a new and beginning farmer. I think he's just having fun planting his first farm field ever.