The monthly average U.S. farm prices, but the same pattern holds for most markets. Prices summarize the supply and demand fundamentals. Wheat peaked first in 2008, and has fallen most, with record large global stocks to end 2011/12, wheat prices have been supported by corn prices. Corn prices have supported soybean prices as well during 2011/12 as the soybean-to-corn price ratio favors planting corn for most U.S. producers.
Expected returns per acre favor corn. Winter wheat seedings have expanded Less prevented plantings are expected in 2012, especially in the Northern Plains
U.S. farm prices include forward contracting, so in a year like 2012/13, a $5/bushel corn price implies cash market prices significantly below $5 for much of the year. Production problems in South America and demand from China keep soybean prices from falling nearly as much as corn and wheat.
There are myriads of factors driving the 2012 outlook for grains and oilseeds supply and demand across more than 100 countries, but these half dozen are crucial.
Corn has been the key market supporting prices in 2011/12, and while global corn production and use are projected virtually balanced, high prices did not immediately boost production and increase global stocks.
The United States is the world’s largest corn producer, consumer, and exporter. So world prices are largely determined in the U.S. market. Corn yields have fallen below trend for the last two years.
Global corn area has responded to high prices.
Argentina, the world’s number two corn exporter has increased area for the last two years, but below trend yields have caused production to decline.
Decades ago Kruschev forced farmers in the USSR to plant huge areas to corn and it was a fiasco as yield failed. Now Ukraine and Russia are having record corn crops and Ukraine is projected to match Argentina as the world’s number two corn exporter.
What corn yield should be expected in 2012? Seed breeders tell us that with advanced technologies future yield growth will exceed historical rates. Others, looking at the last two years and concerned with climate change, think future growth will be slower than past trends. USDA is staying with the historical trend. However, because 2011/12 weather was so exceptional, this year’s yield outlook is based on the 1990/91 to 2010/11 trend. Trend yields are the result of “normally adverse” weather, with favorable weather generating above trend yields, and unfavorable weather producing below trend. The 164 bushel/acre projection does not assume favorable weather.
Without a subsidy for blending ethanol, and with increased competition for ethanol exports in the future, the 10 percent “blend wall” will limit ethanol use until e-15 or e-85 expands. In recent years expanding ethanol use has been a key driver supporting corn prices, but in 2012/13 that demand is expected to soften.
Ethanol is selling at an increasing discount to gasoline, but increased use is limited by the 10 percent “blend wall”.
Large ethanol stocks are weighing on prices.
Negative spot market returns are expected to slow production in the near term.
Projected U.S. gas use keeps falling, leaving ethanol fighting to expand its share of a shrinking, not expanding market. Five years ago the gas market was expected to grow smoothly. Just a year ago a return to growth was expected, but now fewer miles driven and increased miles per gallon combine to limit consumption prospects.
China’s soybean imports are projected to exceed 60 percent of world trade in 2011/12. Corn imports are much smaller but still make China projected to be the world’s sixth largest importer of corn, matching the EU.
The shift in China from feeding hogs backyard slop to a corn/soy ration explains some of the faster growth in feed use of corn and soymeal compared to meat production. However, the disconnect between meat production and apparent feed use of corn and soymeal creates uncertainty about future growth corn and soybean imports.
When U.S. prices landed in China are below China’s internal corn prices, imports have occurred. State owned enterprises importing for reserves may not be subject to the 13 percent VAT, but private importers are subject to VAT and all importers pay a 1 percent tariff. Declining U.S. corn prices could encourage China’s imports if corn prices in China remain high.
Soybean crops in Southern Brazil and Argentina have been hurt dry high temperatures and below normal rainfall associated with La Nina in the Pacific, frustrating the production response to high prices. The reduced soybean crops in South America during 2012 are expected to result in less competition for U.S. soybean exports during the first part of marketing year 2012/13, limiting price declines for U.S. soybeans.
In recent decades soybeans have captured most of the expansion in crop land in Brazil, partly because of less risk of yield loses. However, in recent years second-crop corn has expanded along with soybeans in Mato Grosso, the key state for cropland area expansion in Brazil. High transport costs from Mato Grosso to domestic meat producers and ports for export limit returns to farmers. Corn and wheat receive some government transport subsidies, but soybeans do not. Clearly, high prices encourage area expansion, while lower prices are a brake. The relative rates of growth of China’s imports and South America’s crop area expansion will be a key determinant of crop prices in the future.
Since 2007/08,when tight global wheat supplies caused prices to peak in early 2008, wheat production has generally exceeded use. Wheat stocks have increased, and wheat prices have moved to become competitive with feed grains in many parts of the world. Global feed and residual use of wheat is projected to reach a record 131 million tons in 2011/12, accellerating consumption growth.
Since 2007/08 the growth in wheat ending stocks has been widespread, putting downward pressure on prices. However, wheat prices, supported by corn prices have maintained profitable returns to wheat in most countries, so in areas suitable for wheat, but not corn or soybeans, wheat area has expanded.
The variability of Russia’s wheat yields is about twice as big as for the United States. As world importers become more dependant on countries like Russia, their yield variability may be a key to prices. This fall and winter Ukraine has suffered from poor emergence and winter-kill. However, wheat area planted has or is expected to increase in 2012/13 in most countries.
These factors are listed from short-run to longer-run.
Usda grains oilseeds outlook-2012
USDA Grains & Oilseeds Outlook Agricultural Outlook Forum 2012 Edward W. Allen U.S. Department of Agriculture Economic Research Service 202-694-5288 [email_address]
U.S. Producer Prices Are High Corn Source: NASS, USDA
More Acres Going to Corn and Wheat in 2012 280 276
Corn Price To Slip More Than Soy Corn Source: NASS, USDA
Key Drivers of USDA Projections <ul><li>Expanding U.S. and world area and production </li></ul><ul><li>U.S. corn yield recovers after 2 years below trend </li></ul><ul><li>U.S. corn use for ethanol declines slightly </li></ul><ul><li>China’s import demand uncertain. </li></ul><ul><li>South America’s 2011/12 problems support U.S. 2012/13 demand prospects. </li></ul><ul><li>Record World wheat supplies overhang the market. </li></ul>Economic Research Service
World Corn Production and Consumption Source: USDA
U.S. Corn Area Up, Yields Fall For 2 Years Source: NASS, USDA
Key Developments To Watch <ul><li>Soybean and corn crops currently growing in South America, </li></ul><ul><li>Prices and weather ahead of U.S. spring planting, </li></ul><ul><li>China’s soybean and corn import growth, </li></ul><ul><li>Gas prices, gasoline consumption, and ethanol margins, </li></ul><ul><li>Global macro-economic growth, </li></ul><ul><li>U.S. dollar. </li></ul>Economic Research Service