IFES 2017: Crop and Livestock Price Prospects for 2018

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by Todd Hubbs, Commodity Markets Specialist - University of Illinois

CROPS

Crop prices will remain below the high levels seen in the early part of this decade due to large global inventories. Global economic growth continues to build on the momentum seen over the last year. Growth in China and emerging market in Asia is projected to remain strong throughout 2018. The prospects of improved growth support commodity demand, but the significant changes to trade policy could mitigate some of this demand growth in export markets. Lower prices are expected to continue in 2018 barring a shortfall in one of the major production regions. The following price outlook analysis assumes a good 2018 growing season.

Corn prices continue to struggle with large crops and five consecutive years of growth in ending stocks. Domestic corn demand continues to see moderate growth in corn used for ethanol which has been supported by record levels of ethanol exports. Growth in livestock production and low corn prices provide support for increased feed usage during the 2017–18 marketing year. The potential for greater than 5.5 billion bushels in feed and residual use would be the largest amount since 2007–08. Corn exports currently lag the pace of last marketing year’s 2.29 billion bushels and are projected at 1.95 billion bushels by the end of the current year. Planted acreage of corn is expected to increase slightly in 2018 to 90.8 million acres. Assuming a trend yield near 172.3 bushels would result in a 2018 crop near 14.4 billion bushels. A projected total use of 14.5 billion bushels would result in the 2018–19 marketing year ending stocks near 2.44 billion bushels, a slight decrease from 2017–18 projections. Prices are expected to average near $3.30 during the current year and near $3.40 during the 2018–19 marketing year if production develops as expected.

Soybean prices remain strong relative to corn and wheat prices. U.S. soybean ending stocks continue a five-year pattern of growth with 2016–17 ending stocks ending at 301 million bushels. The lower than initially projected ending stocks benefited from very strong export numbers driven by continued growth in exports to China. Soybean exports are projected to exceed 2.2 billion bushels during this marketing year, up from last marketing year’s 2.174 billion bushels. Expanded soybean acreage and a 49.5 bushel yield for the 2017 crop are expected to increase 2017–18 marketing year ending stocks to 480 million bushels. Planted acreage of soybeans is expected to increase moderately to 90.6 million acres in 2018 due to the low prices of corn and wheat and the lower cost of producing soybeans relative to corn. A yield near 48.5 bushels would result in a 2018 crop about 52 million bushels smaller than the 2017 crop. With total use projected at 4.32 billion bushels, a further increase in U.S. stocks is expected by the end of the 2017–18 marketing year. Prices are expected to average near $9.20 during the current year and near $8.80 during the 2018–19 marketing year if world production develops as expected.

U.S. wheat acreage is expected to continue declining. Planted acreage decreased to 46.01 million acres in 2017. U.S. wheat production decreased by 508 million bushels in 2017 with average yield down by 6.3 bushels per acre. Soft red winter wheat production decreased to 202 million acres on 230,000 fewer acres nationally. Soft red winter wheat production is down 49 percent from 2010–2017 in Illinois. During the same period, wheat acreage in Illinois declined by 450,000 acres. World wheat production in 2017–18 is expected to decline slightly from the record levels of 2016–17. Foreign wheat production is expected to increase for the fifth consecutive year. U.S. stocks of wheat in all classes are projected to decline to 935 million bushels after hitting 1.18 billion bushels in 2016–17. U.S. soft red winter wheat ending stocks are expected to grow by 7 million bushels in 2017–18. The average price received for the 2017 crop is expected to be near $4.60. The Illinois price at harvest is expected to be near $4.75.

LIVESTOCK

Livestock markets continue to respond to the growing demand for meat globally and lower feed costs. Prices in the livestock sector look to level out after declining from the highs seen in 2014 and the subsequent supply response. Production levels are expected to increase in 2018.

U.S. beef production is expected to increase 4.6 percent in 2018 on higher levels of feedlot placements in last half of 2017 and the beginning of 2018. Beef production is forecast at 27.6 billion pounds in 2018, up 1.2 billion pounds over 2017. Beef export markets continue to exemplify U.S. competitiveness in foreign markets. Exports are projected at 2.97 billion pounds, up from 2.85 billion in 2017. Recent strength in export markets has been driven by strong demand from Japan. Domestic per capita beef consumption is projected to increase in 2018 to 59.2 pounds, up 1.9 pounds from 2017. Strong demand in 2017 moved cattle through feedlots at a rapid pace. Fed cattle prices look to move lower in the first half of 2018 on large supplies. Fed cattle prices average near $122 in 2017 but look to average near $117 in 2018. Feeder steer prices averaged $145 in 2017 and are projected to be around $142 in 2018.

U.S. pork production is projected to increase in 2018 to 26.9 billion pounds, up 1.2 billion pounds from 2017. Delays in hog slaughter levels in the fourth quarter of 2017 are projected to push first quarter pork production in 2018 up 4.7 percent of 2017 levels. Pork exports in 2018 are expected to increase from the 5.6 billion pounds exported in 2017 to 5.9 billion pounds. While increased exports to Mexico helped to support the export pace thus far in 2017, lower export levels to Japan and China is currently a drag on pork exports. Domestic pork supplies in 2018 are forecast at 52.1 pounds per capita, up from 50.4 in 2017. The average hog price is expected to decrease to $45.00 in 2018, down from $49.01 in 2017

What Is Up with Soybean Yields

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by Scott Irwin, Agricultural Economist - University of Illinois

Soybean yields in the U.S. have been very high the last four years. The U.S. average yield set new records in a stair-step fashion each year between 2014 and 2016. The 2016 yield reached the remarkable level of 52.1 bushels. While not a record, the 2017 yield (based on the November 1 USDA estimate) was 49.5 bushels, the second largest ever. On top of the high U.S. average yields are the numerous reports of field-level yields in the 70s, 80s, and even a few in the 90s.





The high soybean yields of recent years have sparked a debate about what is driving the exceptional yields. In thinking about this debate it is important to understand that there are only three possible sources of soybean yield gain. The first is weather during the growing season. The second is genetic improvement in soybean varieties. The third is a management, which encompasses all aspects of the soybean production process. Genetic improvement and management sometimes go hand-in-hand so that one requires the other.

It is a not an easy task to disentangle the complex and sometimes interacting impacts of weather, genetics, and management on soybean yields. One approach is to use a crop weather regression model to estimate the separate impacts of weather and technology on soybean yield, where technology is the combined impact of genetic improvement and management. I estimated this type of model for U.S. average soybean yields over 1970–2017. A linear time trend was used to represent technological change and summer precipitation and temperature variables were used to represent growing season weather. The modeling results showed that U.S. average soybean yields in 2014, 2015, and 2017 could be explained by a continuation of the linear improvement in technology and good growing season weather. The exception was 2016, when yield was substantially higher than what could be predicted based on a linear technology trend and good weather. It is not clear from this exercise whether we should view the 2016 yield like a 100-year flood or a permanent jump in soybean yield potential.

Agronomic data can be helpful in further disentangling genetic improvement from other sources of soybean yield gain. One recent study collected seed for over 150 soybean varieties released from the 1920s through the 2000s. Using randomized trials from across the country in 2010 and 2011, the study estimated “pure” genetic improvement in soybean yields. The results indicated a linear progression of soybean genetic yield gain from 1970 through 2008. This indicates that the historical pattern of soybean genetic gains in yield have been steady and marked jumps in the rate of improvement are rare. Soybean variety test results from the Department of Crop Sciences at the
University of Illinois provide relevant data through 2017. The yield of conventional soybean varieties relative to the older Williams variety shows no change of trend in recent years. Overall, there is little evidence to date that soybean genetics have been improving at a faster rate in recent years.

If we dig into the soybean yield data for the U.S. state-by-state an interesting pattern emerges that points to important changes in management practices. In general, soybean trend yields in the Southeastern U.S. have been growing at a much faster rate than in other growing regions. This non-linear trend appears to be related to a number of management practices, which can be roughly described as having the purpose of replicating Midwestern growing conditions. This includes planting much earlier in the past, planting earlier maturing indeterminate varieties, including corn in the crop rotation to increase organic matter in the soil, and using raised bed production systems. These management practices have allowed soybean yields in the Southeast to largely catch up with those in the rest of the country.

In sum, the data indicate that the biggest factor explaining high soybean yields in recent years is simply exceptionally good growing season weather. Improved management practices, particular in the Southeastern U.S., have also certainly contributed. A jump in the rate of genetic improvement in soybeans was not likely a big contributor to the surge in soybean yields.

U.S. Crop Acreage Still Moving to Soybean

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Todd Gleason reports on the move away from wheat and towards soybeans.

Corn is king in the United States. Soybean has been on a swift move upward. And wheat acreage has been on the decline for about 40 years. About half-way through those 4 decades two important things happened. Congress passed the 1996 farm bill - often called Freedom to Farm because it eliminated the last vestiges of supply controls for program crops and Monsanto introduced Round-Up Ready soybeans, that was 1995. The latter made it a whole lot easier to raise beans and the former, says University of Illinois Agricultural Economist Gary Schnitkey, let farmers react to the market.



From 1996 to 2012 U.S. farmers increased soybean acreage by 20 percent, corn acreage was up a bit more, but not much, and wheat acreage plummeted 36 percent. Schnitkey says much of the change can be explained by just looking at the relative profitability of the crops. Corn and soybeans are more profitable than wheat. Most would likely say the reason wheat acreage has declined in the U.S. is because of the ethanol build-out. It is, but it’s also not says Schnitkey, "You can attribute that to a number of factors. Probably the bigger one is that corn has increased its yields at a pace relatively faster than wheat. This has caused the relative profitability of corn to be higher than wheat and corn has taken over the feed grain market.

This has caused the relative profitability of corn to be higher than wheat and corn has taken over the feed grain market.

Wheat is/was the primary feed grain for much of the world. In the United States corn is fed to livestock and used to make ethanol. It is best managed when rotated with other crops, the most profitable of which is soybean.

This past year U.S. farmers planted about 90 million acres of corn and 90 million acres of soybeans. It is a new trend, says the University of Illinois ag economist, driven by continued strong export growth for soybean. The United States is projected to export over 50 percent of the soybean crop this marketing year.

Soybean acreage has substantially gained on corn acreage since 2012. While last year the acreage planted was equal, U.S. farmers actually harvested about 6 million more of the soybean acres than they did of corn. So, by harvested acreage soybeans are the number one crop in the United States and it’s not that first time that has happened. The soybean was king in 2015 as well.

2017 Year End Tax Planning Ideas

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by Dwight Raab, Illinois FBFM

With the recent passage of the Tax Cuts and Jobs Act (Congress passed on 12/20; President signed on 12/22) there are significant changes to the deductible amount of state income, property tax and real estate tax used in calculating itemized deductions beginning in tax year 2018. Under the new law, beginning in 2018, there is a $10,000 maximum combined limit of state income, property and real estate tax that may be deducted when itemizing deductions on IRS Form 1040, Schedule A. For 2017, there is no limit on the amount of these expenses. Thus, there are two tax planning opportunities with the potential to allow taxpayers to maximize the amount of these deductions if they take action prior to December 31, 2017. These two planning opportunities are available only to those using Form 1040, Schedule A to itemize certain deductions on their individual income tax return.

The first planning opportunity involves the advance payment of property and real estate tax on the taxpayers' personal residence or other personal use property prior to December 31, 2017. This advances payment of these taxes that would normally be paid in 2018 into 2017 and then itemizing them on IRS Form 1040, Schedule A. Please check with your local county treasurer or collector to make certain that they will accept such an advance payment of real estate tax. To make a distinction between personal real estate tax and business real estate tax - this IRS Form 1040 Schedule A limit on the maximum amount of deduction does not apply to property or real estate tax paid in the operation of a business. Those taxes continue to be deducted on Schedule F or Schedule C and are not subject to the $10,000 limit for years after 2017.

The second planning opportunity involves paying any 2017 state income tax due by December 31, 2017 for personal income tax returns due in April 2018. For example, if a taxpayer is making quarterly estimated payments of State of Illinois income tax, the fourth quarter payment is due January 15, 2018. If that amount is paid by December 31, 2017 then that amount can be deducted on the 2017 tax return, since the liability is related to the 2017 return. This includes farmers making a 4th quarter state income tax payment - making that estimate payment prior to December 31 allows for a 2017 deduction and avoids the 2018 Schedule A limit. Care must be taken to not prepay any 2018 state income tax liabilities, as any prepayment of a 2018 state income tax is not allowed to be deducted on the 2017 return. That payment would be treated as being paid on January 1, 2018 and would then be subject to the $10,000 limit. Taxpayers should use the 2017 state estimate vouchers to make these payments.

This is a 'one-time' potential strategy to put in place prior to the $10,000 limit on state income, personal and real estate tax is put in place and don't forget that the standard deduction increases markedly beginning in 2018 which will make it more difficult to itemize deductions on Schedule A of IRS Form 1040.

Before utilizing either of these strategies taxpayers should consult their tax advisor. Not all taxpayers will benefit from advancing the payment of these taxes into 2017. This would especially apply to taxpayers subject to the alternative minimum tax as there may be no tax benefit on the 2017 return by making these payments in December.