Crops Marketing and Management Update

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1 Crops Marketing and Management Update Department of Agricultural Economics Princeton REC Dr. Todd D. Davis Assistant Extension Professor -- Crop Economics Marketing & Management Vol (7) July 25, 2016 Topics in this Month s Update: 1. July 12 th WASDE Update: USDA Continues to Project Stronger Corn and Soybean Exports 2. June 30 th Acreage Report: Farmers Surprise Market with 2016 Corn Area 3. Corn and Soybean Progress and Condition Comparing 2016 to Previous Years 4. Price Risk Management Alternatives for 2016 Corn and Soybeans 5. Crop Moisture, Temperature Maps and Weather Outlook 6. Potential August 2016 Corn and Soybean Balance Sheets 7. Using the October CFC Price Indices to Forecast Potential Harvest-Time Corn and Soybean Prices 8. How Do I Get on the Distribution List to Receive this Newsletter? Topic 1. July 12 th WASDE Update: USDA Continues to Project Stronger Corn and Soybean Exports The July report is sometimes over-shadowed by the June 30 th Acreage report and the anticipation of the first production estimates based on farmer and field surveys in August. The bottom line of the July WASDE for corn and soybeans is the late marketing-year surge in old-crop corn and soybean exports is projected to continue into the marketing-year and provide better than expected demand until South America is able to re-enter the corn and soybean export markets in early Table 1. U.S. Corn Supply and Use Change from Estimated Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks 821 1,232 1,731 1, Production 13,829 14,216 13,601 14, Imports Total Supply 14,686 15,479 15,392 16, Feed and Residual 5,040 5,323 5,200 5, Food, Seed & Industrial 6,493 6,560 6,592 6, Ethanol and by-products 5,124 5,200 5,225 5, Exports 1,920 1,864 1,900 2, Total Use 13,454 13,748 13,692 14, Ending Stocks 1,232 1,731 1,701 2, Stocks/Use 9.2% 12.6% 12.4% 14.7% +2.2% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $4.46 $3.70 $3.65 $3.40 -$0.25 Source:July 2016 WASDE - USDA: WAOB. The July report made minor adjustments to the old-crop use projections. Feed use was reduced by 50 million bushels and FSI by 18 million bushels (with 25 million of that from reduced ethanol grind). An increase in projected exports of 75 million bushels offset the reductions and increased old crop use by a net 7 million bushels. This translates to ending stocks at billion bushels for corn. For the new crop, the report increased planted and harvested corn area by 500 and 700 thousand acres, respectively, from the June report. The increase in harvested area added 100 million bushels to the 2016 corn crop from the previous estimate. The 2016 corn supply is projected at billion bushels which is 889 million bushels larger than the 2015 corn supply. 1

2 Unfortunately, use is not projected to keep pace with the increase in supply. The July report increased export use by 100 million bushels to 2.05 billion bushels. This offset cuts to feed and FSI use of 50 million and 20 million, respectively. The net effect is a 30 million bushel increase in use. The July report increased ending stocks to billion bushels which, if realized, would be a 14.7% stocks-use ratio or about a 54 day supply of corn available on September 1, The US marketing-year average (MYA) farm price was reduced $0.10/bushel from the June report to $3.40/bushel. Analysts were expecting the ending stocks at billion bushels so the report was supportive. The greatest support for the corn market may be the USDA s reduction of the Brazilian corn crop by 10% which will help US corn exports until Brazil is back in the market in early The July report trimmed old-crop soybean supplies by 5 million bushels due to reduced imports. On the use side, USDA increased old-crop soybean exports by 35 million bushels and reduced residual by 22 million bushels for a net increase in use of 14 million. The net effect on old-crop soybean ending stocks is a 20 million bushel reduction to 350 million bushels or about a 34 day supply of soybeans available on September 1, Table 2. U.S. Soybean Supply and Use Change from Estimated Projected Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 3,358 3,927 3,929 3, Imports Total Supply 3,570 4,052 4,145 4, Crushings 1,734 1,873 1,890 1, Exports 1,638 1,843 1,795 1, Seed Residual Total Use 3,478 3,862 3,794 3, Ending Stocks Stocks/Use 2.6% 4.9% 9.2% 7.3% -1.9% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $13.00 $10.10 $9.05 $9.50 +$0.45 Source:July 2016 WASDE - USDA: WAOB. The July report increased new crop planted and harvested area by 1.5 and 1.6 million acres, respectively. This translates to an increase in production of 80 million bushels for a projected 2016 crop of 3.88 billion bushels. USDA increased projected use by 30 million bushels with a 10 million bushel increase in crush and 20 million bushel increase in exports. The 2016 soybean supply is projected to increase by 115 million bushels with use projected to increase by 176 million bushels. Ending stocks are currently projected at 290 million bushels which is 60 million bushels less than the level. This increase in stocks would equate to a 27 day supply of soybeans in the bins on September 1, As stocks are projected to tighten, the US MYA price is projected at $9.50/bushel which, if realized, would be $0.45/bushel higher than the MYA price. Table 3. U.S. Wheat Supply and Use Change from Estimated Projected Planted Acres (million) Harvested Acres (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 2,135 2,026 2,052 2, Imports Total Supply 3,026 2,766 2,919 3, Food Seed Feed and Residual Exports 1, Total Use 2,436 2,014 1,937 2, Ending Stocks , Stocks/Use 24.2% 37.3% 50.6% 49.0% -1.7% Days of Stocks U.S. Marketing-Year Average Price ($/bu) $6.87 $5.99 $4.89 $3.80 -$1.09 Source:July 2016 WASDE - USDA: WAOB. The July report increased wheat planted and harvested area by 1.2 and 1.3 million acres, respectively. The 2016 yield was also increased 2.7 bushels/acre from the June report to 51.3 bushels/acre. The increase in harvested area and yield added 184 million bushels to the projected wheat crop. With an increase in beginning stocks and greater production, the 2016 wheat supply is projected at 3.36 billion bushels. This is an increase of 443 million bushels over the supply. Use is projected to increase 320 million bushels over the total use. The largest increase is in feed and residual which at 300 million bushels reflects the quantity of low protein wheat available to compete against corn as a feedstuff. 2

3 Wheat exports are projected at 925 million which would 148 million bushels more than the 2015 exports, if realized. Wheat exports are projected to reverse the downward trajectory but are still 251 million bushels less than the amount exported in Wheat ending stocks are projected at 1.1 billion bushels which is a 49% stocks-use ratio. If realized, the US would have a 179 day supply of wheat in the bins on June 1, This level of stocks is pushing prices lower with the US MYA price projected at $3.80/bushel. If realized, this would be a $1.09/bushel decline from the MYA price. Topic 2. June 30 th Acreage Report: Farmers Surprise Market with 2016 Corn Area The June 30 th Acreage report surprised analysts who expected the sharp increase in the November soybean futures contract after the March 30 th Prospective Plantings report to buy acres away from corn. The big surprise is that farmers planted 6.15 million more corn acres in 2016 than last year. The pre-report survey of analysts expected corn acreage at million. The 2016 planted area at million acres is the third largest since Where did the large increase in planted acres occur? The Midwest states increased corn area by 3.85 million acres over However, the two largest increases occurred in North Dakota (750 thousand) and Kansas (650 thousand). The I-States increased corn area by 500 thousand acres and 150 thousand acres in Iowa and Indiana, respectively. This increase in corn acres outside of the core Corn Belt states could cap the country s yield potential as the trend yields in North Dakota and Kansas are significantly lower than in Iowa or Illinois. Table 4. Potential Corn, Soybean, Wheat and Cotton Acres for 2016 with Change from 2015 Acres (Thousands). Corn (1,000 Acres) Soybeans (1,000 Acres) Wheat (1,000 Acres) Cotton (1,000 Acres) Change from Change from Change from Change from Illinois 11, , Indiana 5, , Iowa 14, , Kansas 4, , , Michigan 2, , Minnesota 8, , , Missouri 3, ,550 1, Nebraska 9, , , North Dakota 3, , , Ohio 3, , South Dakota 5, , , Wisconsin 4, , Midwest Total 77,650 3,850 67,800 1,690 24,229-1, Alabama Arkansas , Florida Georgia , Kentucky 1, , Louisiana , Mississippi , North Carolina 1, , Oklahoma , South Carolina Tennessee , Texas 2, , , Virginia South Total 10,120 1,755 14, ,700-1,805 9,312 1,245 West Total 2, , East Total 3, , United States 94,148 6,149 83,688 1,038 50,816-3,828 10,023 1,443 Source: 2016 Acreage report. June 30, In the South, Texas and Arkansas increased corn area by 300 and 290 thousand acres, respectively, over The Delta states of Louisiana and Mississippi increased corn acres by 230 and 210 thousand acres each. Kentucky farmers planted 100 thousand more corn acres in 2016 than last year. The US increased soybean area by million acres over 2015 to a record 83.7 million acres. The largest increase in soybean acreage was in Missouri which reflects the massive flooding that occurred in 2015 which curbed area. The I-States Illinois and Indiana increased soybean area by 100 and 150 thousand acres, respectively. However, Iowa reduced soybean area by 150 thousand acres from The increase in soybean area is also occurring outside of the core production areas which could limit yield potential for the crop. Of the 1.69 million acre increase in soybean area in the Midwest, only 250 thousand is in Illinois and Indiana. The South has mostly reduced soybean area except for modest increase in Oklahoma (55 thousand) and Texas (40 thousand). The productive Southern states of Mississippi, Louisiana and North Carolina planted 250, 180, and 190 thousand fewer soybean acres in The Midwest reduced wheat area by 1.6 million acres and the South by 1.8 million acres with total 2016 US wheat planted area at 50.8 million acres. In the Midwest, wheat acreage dropped by 700 thousand in Kansas; 602 thousand in South Dakota, 250 thousand in North Dakota and 210 thousand acres in Nebraska. Prominent winter wheat states Texas and Oklahoma reduced wheat planted area by 800 thousand and 300 thousand acres, 3

4 respectively, from In the West, Montana and Colorado planted 240 thousand and 150 thousand acres, respectively, less than The market has been signaling for fewer wheat acres but the above trend winter wheat yield will mute any benefit of the reduced planted area. Topic 3. Corn and Soybean Progress and Condition Comparing 2016 to Previous Years About 96% of the US corn crop, on average, emerged by June 12 th which was ahead of last year s pace and the five-year average rate of emergence. Kentucky, at 88% emerged, was about 6% behind last year and 4% behind the five-year average rate of emergence. Several of the Corn Belt states were ahead or at the long-term rate of emergence signaling limited production problems with the corn crop. Table 5. Corn Silking Progress in 2016 compared to 2015 and Average June July July July July 24-Jul 24-Jul State Avg. Colorado 1% 5% 7% 16% 28% 38% 38% Illinois 4% 22% 53% 77% 90% 85% 86% Indiana 5% 11% 24% 50% 78% 66% 74% Iowa 6% 29% 67% 87% 75% 69% Kansas 17% 34% 47% 63% 86% 75% 76% Kentucky 18% 45% 62% 75% 85% 83% 75% Michigan 1% 3% 22% 54% 54% 56% Minnesota 16% 51% 86% 72% 61% Missouri 20% 57% 81% 92% 97% 80% 84% Nebraska 1% 10% 29% 55% 82% 77% 76% North Carolina 56% 84% 89% 93% 96% 94% 97% North Dakota 13% 15% 17% 25% 45% 43% 42% Ohio 2% 7% 31% 58% 60% 62% Pennsylvania 1% 11% 31% 57% 70% 65% South Dakota 2% 19% 37% 67% 63% 51% Tennessee 24% 55% 81% 91% 94% 92% 93% Texas 46% 53% 67% 74% 92% 81% 88% Wisconsin 4% 33% 64% 49% 44% US (18-State 6% 15% 32% 56% 79% 71% 70% Average) Source: USDA-NASS: Crop Progress Reports for listed dates. As of July 24 th, 79% of the US corn crop has reached the silking phase of production which is ahead of both the 2015 pace and the previous five year s rate. The I-States were ahead of the 2015 rate and the five-year average. Only Pennsylvania and Ohio were running behind the average rate of silking (Table 5). As of July 24 th, 13% of the US corn crop has entered the dough stage with Iowa, Indiana, Missouri and Kentucky running ahead of 2015 and the previous five-year average. Illinois, Ohio, and Pennsylvania are progressing at a slower rate than last year and the average. The July 24 th crop progress report has 76% of the US soybean crop at the blooming stage which is ahead of last year and the previous five-year average (Table 6). Kentucky s progress is slightly behind last year but is not a major concern. The I-States are all running ahead of last year and the five-year average. No major production problems seem to be impacting the 2016 soybean crop. Table 6. Soybean Blooming Progress in 2016 compared to 2015 and Average June July July July July 24-Jul 24-Jul State Arkansas 49% 63% 73% 84% 91% 79% 72% Illinois 7% 18% 39% 60% 76% 67% 71% Indiana 4% 17% 38% 56% 70% 64% 67% Iowa 5% 20% 40% 66% 83% 73% 73% Kansas 8% 20% 38% 56% 43% 50% Kentucky 1% 6% 18% 31% 47% 50% 48% Louisiana 62% 74% 81% 89% 95% 90% 90% Michigan 1% 9% 21% 43% 67% 71% 67% Minnesota 1% 18% 48% 72% 90% 86% 70% Mississippi 43% 57% 66% 77% 83% 83% 86% Missouri 6% 14% 28% 43% 58% 30% 46% Nebraska 8% 10% 28% 54% 75% 72% 75% North Carolina 1% 13% 25% 32% 46% 44% 39% North Dakota 19% 37% 50% 67% 81% 82% 72% Ohio 1% 14% 25% 49% 70% 62% 62% South Dakota 5% 26% 52% 65% 82% 66% 72% Tennessee 6% 15% 35% 55% 73% 57% 56% Wisconsin 6% 24% 45% 70% 86% 62% 56% US (18-State 9% 22% 40% 59% 76% 67% 66% Average) Source: USDA-NASS: Crop Progress Reports for listed dates. Table 7. Soybean Setting Pods Progress in 2016 compared to 2015 and Average July July July 24-Jul 24-Jul State Arkansas 44% 57% 70% 51% 47% Illinois 7% 15% 33% 27% 27% Indiana 2% 19% 35% 31% 28% Iowa 6% 20% 44% 31% 27% Kansas 1% 5% 17% 13% 11% Kentucky 8% 18% 22% 21% Louisiana 54% 68% 80% 80% 78% Michigan 1% 8% 20% 21% 20% Minnesota 3% 12% 39% 37% 24% Mississippi 32% 50% 65% 59% 60% Missouri 2% 10% 21% 8% 11% Nebraska 1% 19% 28% 28% North Carolina 2% 14% 23% 20% 16% North Dakota 6% 19% 36% 43% 31% Ohio 8% 19% 22% 17% South Dakota 5% 17% 42% 23% 21% Tennessee 10% 28% 40% 31% 29% Wisconsin 5% 23% 44% 23% 15% US (18-State 7% 18% 35% 29% 26% Average) Source: USDA-NASS: Crop Progress Reports for listed dates. Similarly, the July 24 th crop progress report suggests limited production problems with respect to setting pods with 35% of the US crop at that phase (Table 7). The I-States are all ahead of the previous and five-year average rate. Only Nebraska, at 19% pod setting, is significantly behind previous years progress. Kentucky reports 18% of the crop setting pods as of July 24 th which is 4% and 3% behind the 2015 and five-year average rates, respectively (Table 7). 4

5 Crop Condition Index (500 = Perfect Crop) May 5-Jun 12-Jun 19-Jun 26-Jun 3-Jul 10-Jul Avg 17-Jul 24-Jul 31-Jul Figure 1. US Corn Crop Condition Index for 2016 with Comparison to the 2015 and the Average. The condition index is calculated as: 100*%Very Poor + 200*%Poor + 300*%Fair + 400*%Good + 500*%Excellent based on NASS s Weekly Crop Condition Survey. The larger index number represents the better condition of the crop. 7-Aug 14-Aug 21-Aug 28-Aug 4-Sep 11-Sep 18-Sep 25-Sep 2-Oct 9-Oct As of June 24 th, 76% of the US corn crop was rated good or excellent. This is better than both 2015 and the 5-year average. The crop condition index has the US crop rated about the best in the 31-year history of this report. About 73% of the Kentucky soybean crop is rated good or excellent which is lower than both the 2014 and 2015 crops to date. The 2016 crop condition index (Figure 1) is better than the 2015 corn crop and the average condition. While the crop condition index is not 100% perfect in predicting the US average yield, it is about 67% accurate in predicting yields. If the crop condition is maintained at the current index, the US corn yield is predicted to be 170 bushels/acre. That may be a little optimistic given the expansion in planted area is around the heart of the Corn Belt that has lower yield potential than in Iowa or Illinois. Still, an above trend-line yield ought to be expected baring any late-season production issues. Similarly, the 2016 soybean crop condition index (Figure 2) is better than the 2015 crop condition and the average crop condition. Part of the improved condition in 2016 is that last year s soybean crop was marred by massive flooding in Missouri, Illinois and Indiana. The improved condition this year puts the crop condition closer to the best condition on record which is represented by the top of the gray area. The soybean crop condition index has weak yield predictive power. However, this anecdotal evidence suggests that the US soybean yield could be larger than last year s yield. Crop Condition Index (500 = Perfect Crop) Jun 19-Jun 26-Jun 3-Jul 10-Jul 17-Jul Avg 24-Jul 31-Jul 7-Aug Figure 2. US Soybean Crop Condition Index for 2016 with Comparison to the 2015 and the Average. The condition index is calculated as: 100*%Very Poor + 200*%Poor + 300*%Fair + 400*%Good + 500*%Excellent based on NASS s Weekly Crop Condition Survey. The larger index number represents the better condition of the crop. 14-Aug 21-Aug 28-Aug 4-Sep 11-Sep 18-Sep 25-Sep 2-Oct 9-Oct As of June 24 th, 71% of the US soybean crop was rated good or excellent. This is about better than 2015 and the 5-year average. The crop condition index has the US crop rated much better than the average of the 31-year history of this report. About 70% of the Kentucky soybean crop is rated good or excellent which is lower than the 2014 and 2015 crops to date. 5

6 Topic 4. Price Risk Management Alternatives for 2016 Corn and Soybeans The week of July 18 may be remembered as the week where the December 2016 corn contract fell $0.215 from Monday to Friday. The December 2016 corn contract closed at $3.40 ¾ on Thursday, July 21, which was the lowest close for the life of the contract that rolled onto the board on December 14, The Western Kentucky cash price followed the futures market in near lock-step with the average price on July 22 at $3.41 per bushel. The best pre-harvest pricing opportunity to date was on June 17 with an average October cash-forward contract (CFC) bid of $4.32 per bushel (Table 8). Table 8. Cash Corn Bids for October Delivery - Select Markets in Kentucky May May May May Jun Jun Jun Jun Jul Jul Jul Jul Jul Jul Livermore (Perdue) $3.63 $3.68 $3.82 $3.98 $4.04 $4.15 $4.33 $3.78 $3.51 $3.47 $3.44 $3.53 $3.35 $3.32 Sebree (Tyson) $3.89 $4.03 $4.07 $4.23 $4.24 $4.36 $3.99 $3.71 $3.67 $3.63 $3.68 $3.49 $3.47 Pembroke $3.75 $3.88 $3.90 $4.04 $4.10 $4.21 $4.39 $4.29 $4.02 $3.98 $3.93 $3.98 $3.79 $3.77 Eddyville $3.63 $3.76 $3.78 $3.94 $4.00 $4.11 $4.29 $3.74 $3.47 $3.47 $3.44 $3.48 $3.29 $3.30 Henderson $3.67 $3.81 $3.85 $3.99 $4.04 $4.16 $4.34 $3.81 $3.55 $3.51 $3.46 $3.53 $3.37 $3.34 Owensboro $3.67 $3.80 $3.85 $3.99 $4.05 $4.16 $4.34 $3.79 $3.53 $3.48 $3.49 $3.60 $3.36 $3.34 Mayfield $3.75 $3.64 $3.66 $3.79 $4.21 $3.84 $3.57 $3.52 $3.48 $3.53 $3.34 $3.32 Average $3.71 $3.80 $3.85 $3.99 $4.08 $4.19 $4.32 $3.89 $3.62 $3.59 $3.55 $3.62 $3.43 $3.41 Source: DTN Cash Bids for Select Dates Listed Above. Cash Price ($/Bushel) $4.80 $4.60 $4.40 $4.20 $4.00 $3.80 $3.60 $3.40 $3.20 $3.00 $2.80 Cash CFC Put TVC + Rent $2.90 $3.10 $3.30 $3.50 $3.70 $3.90 $4.10 $4.30 $4.50 Futures Price ($/Bushel) Figure 3. Comparison of Price Risk Management Strategies for 2016 Corn. Figure 3 compares risk management alternatives of using a cash forward contract at $3.41 which is $0.41 below the budgeted per bushel total variable cash costs plus cash rent break-even price (black line at $3.82). A just-out-of-the-money put with a $3.40 strike price costs $0.18 (blue line). Assuming a -$0.10 harvest basis, an expected price floor can be established at $3.12 which is $0.70 below break-even. When the DEC corn futures is above $3.69, the value of the put is greater than the CFC. The Do-Nothing strategy (red line) shows that at current price levels, risk management is available to limit loss. The November soybean contract fell $0.78 from Monday, July 18, to Friday, July 22. The contract closed at $9.88 ¼ on July 22 which is the lowest closing price since April 22, The Western Kentucky average October CFC bid of $9.78 was the lowest since April 25 (Table 9). The best pricing opportunity to date was an average of $11.50 on June 10 th. The normal seasonality is for the October CFC to decline into harvest. Managers should consider their break-even prices and consider how risk management can fit into their marketing plan especially to avoid selling off of the combine for any production in excess of storage capacity. Table 9. Cash Soybean Bids for October Delivery - Select Markets in Kentucky May May May May Jun Jun Jun Jun Jul Jul Jul Jul Jul Jul Livermore (Perdue) $10.00 $10.37 $10.26 $10.35 $11.26 $10.61 $11.23 $10.43 $10.42 $10.51 $9.94 $9.74 Pembroke $9.92 $10.25 $10.20 $10.26 $10.55 $11.33 $11.18 Eddyville $10.07 $10.39 $10.34 $10.44 $10.73 $11.51 $11.36 $10.66 $11.25 $10.48 $10.47 $10.56 $9.99 $9.78 Henderson $10.12 $10.41 $10.40 $10.47 $10.76 $11.56 $11.42 $10.76 $11.36 $10.56 $10.56 $10.65 $10.09 $9.87 Owensboro $10.12 $10.45 $10.39 $10.47 $10.76 $11.60 $11.43 $10.76 $11.36 $10.58 $10.57 $10.66 $10.09 $9.88 Hopkinsville (Elevator) $9.93 $10.22 $10.18 $10.25 $11.22 $10.58 $11.12 $10.32 $10.39 $9.82 $9.64 Average $10.03 $10.35 $10.30 $10.37 $10.70 $11.50 $11.31 $10.67 $11.26 $10.47 $10.51 $10.55 $9.99 $9.78 Source: DTN Cash Bids for Select Dates Listed Above. 6

7 Cash Price ($/Bushel) $14.00 $13.00 $12.00 $11.00 $10.00 $9.00 $8.00 $7.00 Cash CFC Put TVC + Rent $9.00 $9.50 $10.00 $10.50 $11.00 $11.50 $12.00 $12.50 $13.00 Futures Price ($/Bushel) Figure 4. Comparison of Price Risk Management Strategies for 2016 Soybeans. Figure 4 compares pre-harvest risk management alternatives for soybeans. A CFC at $9.78 would fully cover the budgeted per bushel total cash variable costs plus cash rent (black line at $8.50) and lock in a $1.28/bushel return. A justout-of-the-money put option with a $9.80 strike price costs $0.46 (blue line). Assuming a -$0.10 harvest basis, an expected price floor can be established at $9.24 which is a $0.74/bushel return over the budgeted break-even price. When November soybean futures are above $10.34, the value of the put is greater than the CFC. The Do Nothing strategy (red line) shows that risk management opportunities are available to protect some revenue prior to harvest. Topic 5. Crop Moisture, Temperature Maps and Weather Outlook July and August weather can provide opportunities to price corn and soybeans prior to harvest. The following maps show the deviation from normal precipitation (left) and normal temperature (right) over the last 30 days. For the precipitation map, the green, blue and purple colors show above average amounts of precipitation. Notice that most of Western Kentucky is shaded purple and pink reflecting receiving 6 to 10 inches above normal precipitation. Most of Iowa, Illinois and Southern Minnesota received normal amounts of precipitation to 4 inches more than average precipitation. Temperatures have also been normal to cooler than normal over most of Iowa, Southern Minnesota and Northern Illinois which reduces stress during pollination. Kentucky has been normal to 4 degrees hotter than normal over the last month. The forecast for August s precipitation (left) and temperature (right) released July 21 has removed some potential weather premium in the corn and soybean market. Iowa, Southern Minnesota, Western Illinois and the Plains are projected to have above normal precipitation which adjusts the market s anticipation of a La Nina event forming in late summer that would curb yields. Similarly, most of the Corn Belt is projected with the lowest probabilities of warmer than normal weather. The extremely hot weather is forecasted for the Plains states and the 7

8 Deep South. If the weather forecasts are accurate, the potential of a late summer weather rally is reduced and the futures harvest contract prices tend to erode lower into harvest. Topic 6. Potential August 2016 Corn and Soybean Balance Sheets The August WASDE provides the first farmer and field surveys of the 2016 corn and soybean crops. The production estimates are fairly crude in August but become more accurate by the October or November reports. Managers should start thinking about how the potential crop size will impact the corn and soybean balance sheet and price potential for both crops for the marketing-years. Table 10 provides potential corn balance sheets for three different production levels. The supply/demand information from the July WASDE is provided for comparison. Table 10. Potential U.S. Corn Balance Sheet for August WASDE DAVIS Projections Trend Trend JULY WASDE +2.5 bu TREND - 15 bu Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks 1,701 2,081 2,081 2,081 Production 14,540 14,939 14,722 13,423 Imports Total Supply 16,281 17,060 16,843 15,544 Feed and Residual 5,500 5,500 5,500 5,500 Food, Seed & Industrial 6,650 6,650 6,650 6,650 Ethanol and by-products 5,275 5,275 5,275 5,275 Exports 2,050 2,050 2,050 2,050 Total Use 14,200 14,200 14,200 14,200 Ending Stocks 2,081 2,860 2,643 1,344 Stocks/Use 14.7% 20.1% 18.6% 9.5% U.S. Marketing-Year Average Price ($/bu) $3.40 $3.08 $3.17 $3.80 Range ($/bu) $ $3.70 $ $3.60 $ $3.68 $ $4.25 The crop condition reports suggest a US average yield of 170 bushels/acre is a definite possibility. If achieved, the US corn crop would be a record billion bushels with a record large corn supply of billion bushels. Adopting USDA s use projections from the July WASDE, the ending stocks could grow to 2.64 billion bushels which would be the largest stocks level since The US average farm price would be $3.17/bushel with a range of $2.65 to $3.68 per bushel (Table 10). Since the 2016 US corn crop has a condition index better than 2015, a national average yield of bushels/acre may be possible. A yield of bushels/acre would be a new record yield with a record large crop of billion bushels (Table 10). The challenge for the corn market would be total supply in excess of 17 billion bushels. Using the demand projections from the July report, the US corn stocks would continue to grow to over 2.8 billion bushels which is a 20.1% stocks/use ratio. The corresponding US MYA price would be $3.08/bushel ranging from $2.55 to $3.60 per bushel (Table 10). 8

9 So what would it take to spur corn prices higher? Consider the scenario of a national yield of 155 bushels/acre. Clearly that is a highly unlikely outcome but is used to illustrate how much excess stocks exist in the corn market. A yield of 155 bushels/acre would correspond to a 13.4 billion bushel crop and would tighten supplies to 15.5 billion bushels (Table 10). Under this scenario, the corn stocks-use ratio might drop below 10% which is a point where prices might respond to levels higher than currently projected. Under the very unlikely scenario of a 15 bushel/acre lower yield, the US. MYA price would be $3.80/bushel with a range of $3.35 to $4.25 per bushel (Table 10). The point of the significantly lower yield is to remind managers that a major supply shock or demand shocks is needed to support higher prices. Expectations should be for lower prices in Table 11. Potential U.S. Soybean Balance Sheet for August WASDE DAVIS Projections Trend Trend JULY WASDE +2 bu Trend -2 bu Planted Area (million) Harvested Area (million) Yield (bushels/acre) Million Bushels Beginning Stocks Production 3,880 4,067 3,901 3,735 Imports Total Supply 4,260 4,387 4,221 4,055 Crushings 1,925 1,925 1,925 1,855 Exports 1,920 1,920 1,920 1,920 Seed & Residual Total Use 3,970 3,970 3,970 3,970 Ending Stocks Stocks/Use 7.3% 10.5% 6.3% 2.1% U.S. Marketing-Year Average Price ($/bu) $9.50 $8.85 $9.75 $11.70 Range ($/bu) $ $10.25 $ $9.75 $ $10.15 $ $12.35 The crop condition yield models are less accurate for soybeans than corn in July as August weather can make or break the soybean crop. Current soybean crop index conditions suggest a US average yield of 47 bushels/acre which is slightly larger than USDA s July projections (Table 11). If achieved, the US soybean crop would be over 3.9 billion bushels with total supply at 4.22 billion bushels. Using USDA s use projections from the July report, ending stocks could drop to 251 million bushels or about a 6.3% stocks-use ratio. The corresponding US MYA price would be $9.75/bushel with a range of $9.35 to $10.15 per bushel (Table 11). If the US average yield is a record 49 bushels/acre, the US soybean crop would be over 4.07 billion bushels with a supply of 4.39 billion bushels. Ending stocks could grow to 417 million bushels with a stocks-use ratio of 10.5%. The corresponding US MYA price would be $8.85/bushel with a range of $7.95 to $9.75 (Table 11). How much cushion exists in the soybean market? The answer is not much. If the US yield is 45 bushels/acre, the 2016 soybean crop would be 3.74 billion bushels with supply of billion bushels. The strong soybean use of 3.97 billion suggests that ending stocks would drop to a dangerously low level of 85 million bushels or a 2.1% stocks-use ratio. Clearly the market would not allow the stocks-use ratio to fall much below the theoretical minimum of 4%. Still, managers would benefit from higher than expected prices of $11.70 ranging from $11.05 to $12.35 per bushel (Table 11). The bottom-line is that there are limited opportunities for Mother Nature to kill the corn crop enough to spur higher prices. The soybean market is much more vulnerable to production risk that could provide higher than expected soybean prices. With South America out of the soybean export market until February 2017 and the corn export market until January 2017, US farmers are currently benefiting from exports larger than expected in the February USDA Baseline projections. Managers should keep in mind that South America could be back in the export markets in a big way in early 2017 which would narrow the marketing window for the 2016 harvested crops. Topic 7. Using the October CFC Price Indices to Forecast Potential Harvest-Time Corn and Soybean Prices The January 2016 newsletter discussed which month has historically seen the highest cash-forward-contracts (CFC) bids relative to the October harvest-time price. Using cash market data provided by the Kentucky Farm Bureau Federation, an index of the monthly average CFC price, relative to the average price in October, was used to identify the months that tend to have the highest relative price. Over the last fifteen years, the highest corn price occurred in April and the highest soybean price occurred in July. The common seasonality of both crops is that the CFC bids declined rapidly into harvest. I know that piece of information isn t shocking as any weather premium is removed from price once the market believes weather risk is minimized. Can the CFC price indices provide other information? Perhaps the seasonality over the last fifteen years can also be used to form expectations of harvest-time prices. Figure 5 shows the 2016 average corn CFC October bids 9

10 monthly average from February to July (blue line). As discussed several times before, there were limited pre-harvest pricing opportunities until the South American weather market heated up the US corn market starting in late April through June. The June average of $4.12/bushel has quickly eroded to an average of $3.52/bushel for July (as of July 22). The black line is the average change in the monthly CFC price over the last 15 years from July to October. If the CFC bids follow the average seasonality, an average CFC bid in October for Western Kentucky corn would be $3.29/bushel (Figure 5). $5.00 $4.75 $4.50 $4.25 $4.00 $3.75 $3.50 $3.25 $3.00 $2.75 $2.50 $2.25 $ CFC AVG Avg + 1 Std Dev Avg - 1 Std Dev Comparable Years $3.77 $4.12 $3.52 $4.44 $2.36 $3.29 $2.98 Feb Mar Apr May June Jul Aug (F) Sep (F) Oct (F) Figure 5. Western Kentucky CFC Index Implied 2016 Harvest Prices for Corn. The red line and green line represent the average price change plus one standard deviation and minus one standard deviation, respectively (Figure 5). Think of the red line as the price path that might occur if some bullish fundamental news occurred that pushes prices higher. Similarly, the green line is the price path that might occur if some bearish fundamental news occurred that pushes price even lower than the typical seasonality. The corresponding October price would be $2.36/bushel and $4.44/bushel for the bearish and bullish scenarios, respectively. The dashed purple line is the percent change in CFC bids for the comparable years with similar changes in the corn market s stocks-use ratio. The two years with the most similar increase in stocks-use are 2008 and Recall that 2008 corresponds to the stock market crash which decimated corn and soybean prices so I discarded that data. Using the price path for the most comparable year suggests an October price of $2.98/bushel for Western Kentucky corn (Figure 5). Figure 6 shows the 2016 average soybean CFC October bids monthly average from February to July (blue line). Figure 6 shows how the South American weather market heated up the US corn market starting in late March through June provided unexpected pre-harvest pricing opportunities. The June average of $11.09/bushel has quickly eroded to an average of $10.46/bushel for July (as of July 22). The black line is the average change in the monthly CFC price over the last 15 years from July to October. If the CFC bids follow the average seasonality, an average CFC bid in October for Western Kentucky soybeans would be $9.88/bushel (Figure 6) CFC AVG Avg + 1 Std Dev Avg - 1 Std Dev Comparable Years $13.00 $12.64 $12.50 $12.00 $11.50 $11.00 $11.09 $10.50 $10.00 $10.46 $9.88 $9.50 $8.67 $9.00 $8.63 $8.50 $8.00 $7.55 $7.50 $7.00 Feb Mar Apr May Jun Jul (F) Aug (F) Sep (F) Oct (F) Figure 6. Western Kentucky CFC Index Implied 2016 Harvest Prices for Soybeans. The red line and green line represent the average price change plus one standard deviation and minus one standard deviation for a more bullish (red) or more bearish (market), respectively (Figure 6). The corresponding October prices would be $7.55/bushel and $12.64/bushel for the bearish and bullish scenarios, respectively (Figure 6). The dashed purple line is the percent change in CFC bids for the comparable years with similar changes in the soybean market s stocks-use ratio. The three years with the most similar increase in stocksuse are 2004, 2005 and Using the average price path for the most comparable years suggests an October price of $8.63/bushel for Western Kentucky soybeans (Figure 6). 10

11 How likely is the corn market to benefit from higher than expected prices in October 2016? The balance sheet scenario analysis presented in Topic 6 suggests that a large production shock (or a large demand shock) is needed to whittle away stocks to a level that would support higher corn prices. Judging by the futures market closing prices during the week of July 18, the market is not expecting such a production shock to occur. Recall the soybean balance sheet from Topic 6 and how a national yield that is 1.7 bushels/acre lower than the July forecast could drop ending stocks to below minimum pipeline levels. Agronomists and marketing gurus alike always comment that the soybean crop is made in August. Could Mother Nature trim yields by 1.7 bushels/acre? If so, your expectations for harvest-time soybeans ought to be more bullish for soybeans if projected yields are lowered in the coming months.. Topic 8. How Do I Get on the Distribution List to Receive this Newsletter? If you would like to receive each month s newsletter by , send an to todd.davis@uky.edu and request to be added to the distribution list. The Crops Marketing and Management Update is published monthly usually after the release of the USDA: WASDE report. You can find this issue and past issue on the UK Agricultural Economics Department s website at: Todd D. Davis Assistant Extension Professor Extension Economist Crop Economics Marketing & Management Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND KENTUCKY COUNTIES, COOPERATING 11