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Fall Crop Outlook
Earlier this month, the U.S. Department of Agriculture released projections for the 2008 corn and soybean crops. These estimates were eagerly anticipated as they provided an updated snapshot of agricultural production, Chad Hart writes in the October Iowa Farm Outlook.
Given the late planting, the flooding earlier this summer, and the relatively cool summer, there has been a great deal of concern about this year’s crop production. The September estimates show that the U.S. is still on pace to produce the 2nd largest corn and 4th largest soybean crops in the country’s history. But there are signs of weakness in these estimates. The projected corn and soybean yields were lowered from August estimates. Both crops are still behind normal in progressing to maturity. And while recent weather has been favorable for crop development, there are concerns that it’s “too little, too late.” Frost is also a concern given the crops’ late development, but given that harvest has begun in isolated spots around the state, that concern is fading.
The USDA projections include demand estimates, which show demand for both crops easing a bit over the next marketing year. For corn, ethanol usage will continue to increase, while corn exports fall slightly and feed demand is projected to back off by over 10%. Overall, corn demand is expected to fall by 175 million bushels. For soybeans, domestic crushing demand is expected to be 30 million bushels less, while exports are projected to fall by 155 million bushels. However, the end result for both crops is a tighter stock situation. Coming out of the 2008 marketing year, we are projected to have just over 1 billion bushels of corn and 135 million bushels of soybeans. These levels are well below historical averages. With the projected low stocks, USDA estimates higher season-average prices for both corn and soybeans. For the 2007 marketing year, corn averaged $4.20 per bushel, while soybeans averaged $10.15. For the 2008 marketing year, those prices increase to $5.50 for corn and $12.35 for soybeans.
Worldwide, the stock situation is not nearly as tight. In the rest of the world, corn production has increased 1.25 billion bushels since 2006, while corn usage has only increased 1.12 billion bushels. USDA has projected total foreign corn stocks at the end of the 2008 marketing year of 3.3 billion bushels, 400 million bushels more than there was at the end of the 2006 marketing year. Corn production is projected to increase by at least 100 million bushels in the European Union, the former Soviet republics, and China. For soybeans, the rest of the world’s production has kept pace with usage and stocks are roughly in line with 2006 levels, 1.7 billion bushels. Argentina, Brazil, and China are all expected to increase production by at least 50 million bushels each.
Demand Factors
Beyond the weather concerns for the 2008 crops, there are several other factors influencing the crop outlook for 2009. One of the largest is the continued expansion of biofuels. Crude oil prices have come down over the past couple of months, but are still historically high. Higher energy prices have spurred biofuel expansion. Also, 2009 will mark the second year under the enhanced Renewable Fuels Standard (RFS), passed in the 2007 Energy Act. The RFS outlines the availability of renewable fuels in the U.S. from now until 2022. For 2009, 10.5 billion gallons of renewable fuels are required. And that number increases to over 12 billion gallons in 2010. For corn-based ethanol to fill its part of the RFS, it will take approximately 3.6 billion bushels of corn from the 2008 crop and 4.1 billion bushels from the 2009 crop. Figure 1 shows estimated gross margins for ethanol production. As the graph shows, ethanol margins have been somewhat steady over the last few months, given the larger swings in ethanol and corn prices. But the lower level of ethanol margins we are seeing today is projected to remain throughout 2009. There have been few plant construction start-ups recently, as the ethanol industry’s growth has been based on the finishing of plants started during in late 2006 and early 2007.
Figure 1. Historical Ethanol Gross Margins
Biodiesel requirements will support soybean oil demand, as the RFS calls for 500 million gallons of biodiesel. Figure 2 displays ratios of Iowa prices for biodiesel and soybean oil, the main feedstock for Iowa biodiesel. Biodiesel margins have been quite tight for some time, but relative prices have improved for the industry, especially over the past two months. Soybean oil prices are now below where they were in Jan. 2007, while biodiesel prices are holding at a slight premium. The export market for biodiesel has been vital to the industry. Through July, exports of biodiesel and related products were up over 100% from last year.
Figure 2. Iowa Soybean Oil and Biodiesel Price Ratios (Jan. 4, 2008 = 1)
Another major factor looking forward is the relative strength or weakness of the U.S. dollar versus foreign currencies. Over the past couple of years, the dollar has weakened versus several of the world’s major currencies. And that weakness has helped promote U.S. exports, especially agricultural exports. For the 2007 crops, export demand was very strong even with very high commodity prices. USDA is projecting slightly lower exports for corn and soybeans over the next year, and the dollar has attempted to rally this summer. Currency futures currently show the dollar holding its own to slightly rising against many other currencies. Figure 3 shows the futures outlook for the dollar versus several currencies.
Livestock feed demand is projected to weaken and the adjustments in the livestock industry to higher feed costs continue. Hog farrowing is projected to be down from 3 to 5% over the next six months. Broiler eggs and chick placements are down 4 to 8%. Cattle feedlot placements in August were down 3% from last year. USDA projects corn feeding will fall by 14% for the 2008/09 marketing year.
Agricultural input costs will also influence producer decisions for 2009. Since the beginning of 2007, fertilizer and fuel costs have more than doubled. And these cost increases are likely to hold for the 2009 crops. Crop margins will be tighter as farm costs start to catch up with crop prices. With the continuing surge in input costs, producers will need to protect against falling crop prices. Forward contracting, the use of futures and options, and crop insurance are among several approaches producers can use to protect themselves. Also, the competition of acreage this spring should lead to some pricing opportunities.
Figure 3. Exchange Rate Ratios (Jan. 2007 = 1)
Many of the story lines from the past few years will continue for corn and soybeans. Both crops face tight stock situations and will have a strong competition for acreage in 2009. Biofuels continue to grow in importance and the livestock industry is in a period of adjustment to the higher crop prices. Higher energy prices have supported the biofuel development and higher crop prices, but there are concerns about the general economy both here in the U.S. and worldwide, which may weigh down on the market. Market volatility will remain high, as the link to the energy markets continues to develop and more market players (hedgers, speculators, fund traders, etc.) participate in trades. Given current factors, my outlook is for 2009 crop prices to be the neighborhood of 2008 prices, around $5.50 for corn and $12.25 for soybeans.
October 2008
