Marketing Outlook For January 2017

By John Berry

When I’m ready to learn about agricultural marketing one of my primary sources is the University of Illinois. This institution has what I believe to be a stellar Ag Economics department with an excellent set of researchers and teachers. Let’s review some of my notes from when I was in the audience the middle of December at one of their Extension events.

The following (except for the dairy comments) comes from Darrel Good, Scott Irwin, Todd Kuethe, and Gary Schnitkey, Department of Agricultural and Consumer Economics, University of Illinois.

Crop prices remain well below the record levels of 2008 – 2013 as U.S. and world supplies are abundant even with a shortfall in South American corn and soybean production in 2016. Commodity demand also continues to face prolonged slow economic growth across much of the world. These lower prices are expected to continue until a significant shortfall in production occurs, and/or world economic growth accelerates.

Corn prices are under pressure from four consecutive years of large U.S. crops. Some price strength for corn can be expected for the 2017 crop. Soybeans have maintained a relatively high price compared to corn and wheat even with three consecutive large U.S. crops. 2017 soybean acres are projected to increase by as much as 4 million due to the very favorable corn to soybean price ratio, and the lower costs of producing soybeans. Stocks of all wheat is projected at a 29 year high of 1.14 billion bushes for the current marketing year.

Livestock prices peaked in 2014 due to reduced red meat production resulting out of high feed costs, significant drought in cattle country, and health problems in the U.S. hog herd. Production has rebounded and prices responded down sharply. Expectations include continued increase in supplies.

After a two-year slump, global dairy prices rallied since mid-year now up significantly from historic lows. Uncertainty about the global economy and subdued demand for milk and milk products keeps the dairy sector from capitalizing on low oil and grain prices. Mid 2016, milk production from the top five global exporters was down a mere 1.3% year-over-year, the first stretch of contraction since early 2013. Meanwhile, exports from those same suppliers were up 6%. This has begun to make a dent in the surplus, but higher payout prices in recent months have improved farmer confidence and could lead production to snap back in 2017 (U.S. Dairy Export Council).

As long as corn stays below $4.00 per bushel grain producers will have relatively low enterprise net income. It is highly likely the 2016 crop will receive market prices below the $4.00 mark and unless a significant shortfall occurs with the 2017 harvest these prices will persist through the next marketing year. The profitability of soybeans is not sufficient to make up for the losses in corn revenues. For many grain producers, 2014, 2015 and again 2016 will be year of very modest, if not negative, farm net revenues. Field crop inputs are showing signs of moderating (with the exception of seeds), but have lagged price weakness.

Projected crop prices for 2017 will continue to languish on or below breakeven for most of our grain farmers. Profitability is the issue for most corn producers with revenues not covering the sum of non-land costs and cash rents. As long as this situation remains it will be difficult to generate sufficient cash flows to cover all debt repayment needs, and other cash obligations.

Fortunately, many farms are in a good to strong financial position. There is typically equity and solvency at levels that short term profitability can be addressed. However, most farms will continue to erode working capital that was built from 2006 through to 2013. Many farms are facing working capital levels similar to before this recent build up. This underlying profitability problem will need resolution to ensure future financial success.

Agricultural credit markets continue to be squeezed by the drastic reduction in farm working capital. Many farmers are using additional debt to carry out marketing and production plans, or to utilize as short term liquidity. The continued margin challenges signals increased risk for farm credit repayments. Farms can expect increasing expert scrutiny when securing new or renewed lines of credit.

A 30% drop in economic growth between 2008 and 2016 does not help grain prices. Can growth return? Ethanol production has been relatively stagnant but remains at a very high level, and does show modest gains. The recent boom in corn prices achieved an accompanying 23% increase in global corn acres. China added the largest number of corn acres to production during this period with the U.S. having the second most acres added mostly land taken out of our CRP programs. Globally good corn yields have persisted since 2013.

The influence of a recent stretch of good weather on corn yields may be under appreciated by the market. What is the probability that the current good weather will end in the near future and lift corn prices? Looking at U.S. corn yields and the net weather impacts from 1895 to 2016 suggests the last 20 years have been among the best runs of favorable crop weather in modern history for corn production. The U.S. has only had one significantly bad corn crop in the past 20 years.

I am grateful for the opportunity to learn from these folks and hope you also find some value in their insights and comments.

Source:psu.edu