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.
markets and weather for the farming world | Todd Gleason, Farm Broadcaster
There are three points University of Illinois agricultural economist Todd Hubbs says farmers need to remember about soybeans this year; acreage, stocks, and price.
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.
A University of Illinois Animal Sciences alum has been elected president of the Illinois Pork Producers Association.
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.
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.
Ethanol production in the United States ended the year on a record-setting note. It could mean an even bigger number for the corn-based fuel in 2017.
The U.S. ethanol industry ended 2016 on a high note. Ethanol production for the week ending Dec. 30 set a new ethanol production record with an average of 1.043 million barrels per day. The March futures price for corn moved higher last week to close at $3.58 in large part due to strength in the ethanol sector. Ethanol production and exports returned strong numbers over the first quarter of the marketing year. Currently, the World Agricultural Supply and Demand Estimates report forecast for corn consumption for ethanol production is 5.3 billion bushels. According to University of Illinois agricultural economist Todd Hubbs, when taking into account an increase in projected gasoline consumption in 2017 and robust ethanol export levels, the ability to surpass this projection is a strong possibility.
“Domestic ethanol consumption in 2017 will be influenced by domestic gasoline consumption, due to the ethanol blending requirement and the biofuels volume requirement associated with the Renewable Fuels Standard,” Hubbs says. “The EPA final rulemaking for the Renewable Fuels Standard for 2017 was released on Nov. 23 and is discussed in greater detail in the farmdoc daily article posted Nov. 30. In brief, the renewable fuels volume requirement is set at 19.28 billion gallons for 2017, which is up from the 18.11 billion gallons required in 2016.
“The conventional ethanol requirement is set at 15 billion gallons for 2017, 500 million gallons larger than 2016 and equal to the statutory requirement level,” Hubbs says. “If the gasoline consumption forecast used by the EPA is correct, the E10 blend wall will be 14.36 billion gallons in 2017. The EPA believes an ethanol supply of 14.56 billion gallons is reasonably attainable in 2017. Within the 14.56 billion gallons, E15 and E85 blends are expected to be 107 and 204 million gallons respectively. The ability to attain the E15 and E85 blend levels remains to be seen, but the increase in ethanol requirements provides support for greater corn usage in 2017.”
U.S. retail gasoline prices averaged $2.14 per gallon in 2016, which is 12 percent less than the price experienced in 2015 and is the lowest price since 2004. The December Energy Information Agency Short Term Energy Outlook projected an increase in gasoline prices for 2017 to $2.30 per gallon. Despite the projection of higher gasoline prices, gasoline consumption is forecast at 143.60 billion gallons in 2017, which is up from the 142.72 billion gallons consumed in 2016. Ethanol production is forecast to be 1 million barrels per day.
“If the EIA projection is correct, approximately 15.3 billion gallons of ethanol will be produced in 2017,” Hubbs says. “When considering the robust ethanol export trade currently in process, the U.S. ethanol industry is expected to produce a record level of ethanol in 2017.”
Ethanol export numbers are available from U.S. Census trade data for 2016 through November. U.S. exports of ethanol thus far are at 948 million gallons, which is up almost 27 percent from the similar period in 2015.
According to Hubbs, for 2016, the prospect of ethanol exports exceeding 1 billion gallons is not unreasonable.
Canada, China, and Brazil imported approximately 67 percent of the ethanol shipped from the U.S. through November. “The increase in ethanol exports is driven largely by increased volumes sent to China and Brazil,” Hubbs says. “China imported 179 million gallons through November, which far exceeds the 73.8 million gallons imported during the entirety of 2015. Brazil imported 224 million gallons through November, which is almost double from 2015. As we progress into 2017, the increases are expected to persist in Brazil because high sugar prices are expected to decrease ethanol production as mills allocate cane for sugar production in 2017. There is concern that China could raise ethanol tariffs and reduce ethanol imports in 2017 due to a possible trade dispute with the new administration.”
Hubbs says the implications for corn consumption during the 2016–17 marketing year can be seen in the USDA Grain Crushing and Co-Product Production report released on Jan. 3. Grain crushing for fuel alcohol is available through November. For the first three months of the marketing year, 1.34 billion bushels of corn has been processed for ethanol. This is up 3.2 percent from 2015 processing numbers.
“If corn used for ethanol production maintains this pace, 5.37 billion bushels will be processed in the marketing year,” Hubbs says. “Using EIA weekly ethanol production numbers, December ethanol production averaged over 1 million barrels per day. These production levels place corn use for ethanol production in a range of 455 to 460 million bushels for the month if corn use maintains the pace of the three previous months. With a conservative estimate of corn crush in December, total corn consumption for ethanol production through the first third of the marketing year would be above the current WASDE projection.
“Lower corn prices, strong ethanol exports, and greater blending requirements combine to make 2017 appear to be a strong year for corn consumption in ethanol production,” Hubbs concludes. “If the U.S. ethanol industry produced over 1 million barrels per day for the entire year, the ability to blend at requirement levels under an expanded gasoline consumption scenario and meet potential export market demand bodes well for corn use in the sector for 2017.”
The soybean crop in Brazil looks to be mostly in good condition, however, as you’ll hear in this interview by Todd Gleason some areas are under performing.
Kory Melby, Brazilian Ag Consulting Service - Goiania, Brazil
Jeff Brawn, Animal Biology - University of Illinois College of ACES NRES
The future of the red-capped manakin and other tropical birds in Panama looks bleak. A University of Illinois research project spanning more than three decades and simulating another five decades analyzes how changes in rainfall will affect bird populations. The results show that for 19 of the 20 species included in the study, there may be significantly fewer birds if conditions become dryer.
The last USDA Hogs and Pigs report issued in December estimated this year’s supply of pork will be larger than most analysts expect. Todd Gleason has more on how that will happen.
U.S. pork producers, in the last quarter of 2016 set a pigs per litter record,10.63. For the whole of the year, the new annual record is 10.5 pigs per litter. Every sow is having more pigs. Given these numbers, the industry will increase pork output by about three percent this year says Purdue University Extension Agricultural Economist Chris Hurt.
Quote Summary - And that will be to 25.7 billion pounds. This represents a 12 percent increase since 2014 when PED reduced production and contributed to record high hog prices. Pork production will rise by two percent in the first-half of 2017 and by about four percent in the last-half.
What does this mean for the price of hogs? With three percent higher production one might expect annual prices to be lower, however there are additional items to consider
First, retail prices did drop in 2016, but there is opportunity for those prices to come down more. Lower retail prices will stimulate the quantity of pork that consumers purchase. Secondly, USDA expects exports to expand by five percent which will move more of the increased production to foreign customers. Finally, with the addition of new processing capacity, the farm-to-wholesale margins are expected to drop. Lower margins at the processing stage may contribute to stronger bids to hog producers.
Live hog prices are expected to be about $48 in 2017, $2 higher than in 2016. Chris Hurt predicts prices will average $45 in the first quarter, the very-low $50s in the second and the third quarters, and then drop to $43 in the final quarter of 2017. A range of $2 higher or lower would be reasonable for price projections. He expects costs of production are expected to be around $50 on a live weight basis in both 2016 and 2017 based on current feed price expectations.
This means the industry operated at an estimated loss of about $12 per head in 2016 and is expected to have losses that average about $6 per head in 2017. Losses in the first quarter of 2017 are expected to be about $13 dollars per head. Modest profits may return in the second and third quarters. Then with a return to the largest losses of the year in the final quarter maybe around $18 per head.
Because the 2017 outlook is for weak returns the Purdue number cruncher says it is important hog farmers keep further expansion to a minimum. This will be difficult with new processing capacity coming in 2017 as those plants will want to stimulate some added production to fill their lines.
Christmas just isn’t Christmas without a real Christmas tree. The following are a few hints to help you select that perfect tree whether you purchase it from a neighborhood lot or a Christmas tree farm.
Quote Summary - Get-by year, but better than it could have been without the high yields. Most farmers will maintain equity, but may see some working capital declines. The declines will be more pronounced on farms working a higher percentage of cash rented land. It is better than 2015, but still not up to sustainable levels for the long-run. We need to see higher returns, particularly for corn prices in the future.There are a series of graphics detailing 2016 central Illinois row crop farm gross income on the farmdocdaily website.