Hancock Farmland Investor

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1 Hancock Farmland Investor First Quarter USDA Prospective Plantings Report: Potential Impact on the U.S. Farm Economy Higher expected corn plantings in 2016/17 are projected to boost corn production to a new record. The increase in acreage is expected to place additional downward pressure on corn prices in 2016/17. In its March 31 Prospective Plantings report, the USDA surprised many analysts by projecting corn acreage to increase 6% over the 2015/16 crop year despite poor economics and low prices for corn over the past year. Key report highlights included (Chart 1): Corn planted acreage up 6% from 2015/16 to 93.6 million acres; Soybean planted acreage down 0.5% from 2015/16 to 82.2 million acres; and Wheat planted acreage down 9% from 2015/16 to 49.6 million acres. Chart 1: U.S. Corn, Soybean and Wheat Planted Areas (Million acres) Source: USDA NASS The estimates from the Prospective Plantings report will be felt most in the corn market where higher production will put more downward pressure on corn prices. In the soybean market, the reduction in planted acreage coupled with strong domestic crush and export demand is expected to lead to a reduction in ending stocks, allowing an increase in prices. Despite a projected reduction in wheat planted area and an increase in export demand, high beginning inventories are expected to create a drag on wheat prices. The net result of these shifts in production are declining cash receipts and farm incomes especially in the Western Corn Belt and the Southwestern portions of the U.S. Corn The USDA projects corn planted acreage to increase by 6% (5.6 million acres) to 93.6 million acres. Seventy-three percent of the increase in corn area is expected to take place in three regions (the Midwest, Delta states and Southwest) where farmers are expected to shift acreage from wheat and soybeans to corn. Assuming corn planted acreage of 93.6 million acres, corn harvested acreage of 85.9 million acres, and a trend line yield of 168 bushels per acre (USDA May 2016 WASDE), the U.S. is forecast to produce a record 14.4 billion bushels of corn in the 2016/17 crop season. This projected production will be 829 million bushels greater than the 2015/16 crop year. The projected record production level for 2016/17 comes on the heels of three consecutive strong corn production years globally (Figure 1, page 3). The increase in global and U.S. corn production, along with an appreciating USD has led to increased competition in export markets. As a result, U.S. corn exports have decreased while corn exports from Argentina, Brazil and the Black Sea Region have increased (Figure 4, page 4). In Argentina, corn production has responded to the Macri government s decision to devalue the Argentine peso and eliminate export taxes on grains. Corn production in Brazil this year is expected to be the second highest on record. The weak Brazilian currency relative to the strong U.S. dollar has made exports more profitable. The Black Sea (Russia and Ukraine) region is expected to produce its third largest crop on record. Black Sea corn is extremely competitive into the EU, the Middle East and North Africa due to its transportation advantage. In China, increased domestic corn production over the last few years, combined with rising imports has led to rising corn stocks. The Chinese government is considering releasing stocks into the market to lower domestic (Continued on page 2) Hancock Agricultural Investment Group First Quarter 2016

2 2016 USDA Prospective Plantings Report: Potential Impact on the U.S. Farm Economy (Continued from page 1) corn prices, creating another hurdle for U.S. corn exports this year. decrease in the Western Corn Belt is due to farmers shifting acreage from soybeans to corn. The USDA projects U.S. corn exports to increase by 175 million bushels from a disappointing 2015/16 export year (USDA May 2016 WASDE), but foreign competition creates significant downward risk to this export projection. The USDA projects corn used in domestic feeding operations in the U.S. to increase by 300 million bushels due to the projected lower price of corn, while corn used in ethanol production is projected to increase by 61 million bushels. Overall, domestic demand for U.S. corn is projected to increase by 360 million bushels in 2016/17 and export demand is projected to increase by 175 million bushels (USDA May 2016 WASDE). According to the USDA May 2016 WASDE report, soybean production is projected to decline by 129 million bushels and demand is projected to increase by 175 million bushels, with a 35 million bushel increase in crush and 145 million bushel increase in exports. These gains will be offsetting a 5 million bushel decrease in feed and residual use. The net result are soybean ending inventories declining by a projected 95 million bushels from 2015/16, and the stocks-to-use ratio to fall, supporting higher on-farm soybean prices (Chart 3). Chart 3: U.S. Soybean On-Farm Price ($/bushel) vs. Stocks-to-Use Ratio The projected increase in combined domestic and export demand will not be sufficient to offset the projected increase in U.S. corn production. Foreign competition creates significant downward risk to the USDA export projections. Larger ending inventories and a higher stocks-to-use ratio for U.S. corn will put significant downward pressure on U.S. corn prices (Chart 2). Chart 2: U.S. Corn On-Farm Price ($/bushel) vs. Stocks-to-Use Ratio Sources: USDA WASDE; HNRG Research Wheat Sources: USDA WASDE; HNRG Research Soybeans The USDA projects soybean planted acreage to decline by 500,000 acres (0.6%) in the 2016/17 crop year to 82.2 million acres. Soybean production is projected to decline in the Southeast and Western Corn Belt regions by 384,000 acres and 350,000 acres respectively, but increase in the Delta by 120,000 acres, and the Eastern Corn Belt regions by 240,000 acres. The decrease in the Southeast region is largely due to farmers shifting acreage from soybeans to corn and cotton, while the Hancock Agricultural Investment Group Wheat planted acreage is expected to decline 9% in 2016/17 from 54.6 million acres in 2015/16 to 49.6 million acres in 2016/17. Harvested wheat acreage is expected to decline from 47.1 million acres to 42.8 million acres (USDA May 2016 WASDE). Wheat acr eage in the Southwest r egion is expected to decline by 2 million acres, while in the Western Corn Belt, wheat acreage is expected to decline by 1.7 million acres. The primary reason for the decline in wheat acreage are the dampening prospects of the export market. U.S. wheat exports declined from almost 1.2 billion bushels in 2013/14 to 780 million bushels in 2015/16 due to increased export competition from Canada, Australia, the EU, and especially the Black Sea Region. Along with declining U.S. wheat exports, the amount of wheat consumed in U.S. animal feed has decreased. Wheat competes First Quarter 2016 (Continued on page 6) 2

3 Quarterly Corn Production Estimates, Major Producers Figure 1. Global corn production is expected to increase in 2016 due to higher production levels in the U.S., Argentina, and South Africa. U.S. corn production is projected at 367 MMT, a 6% increase from last year, as acreage planted to corn is projected to grow by 5.6 million acres. Brazil s 2016 corn crop is projected to be the second largest crop on record at 82 MMT, a slight increase from last year. Argentina s 2016 projected production of 34 MMT represents a 26% increase from last year s production. South African 2016 corn production is projected to increase by 100% to 13 MMT. China s corn production in 2016 is projected at 218 MMT, a slight decrease from Sources: USDA WASDE. Note: 2015 data are estimates and 2016 data are projections, updates are made on a corn marketing year basis. Quarterly Soybean Production Estimates, Major Producers Figure 2. Global soybean production is forecast to increase 3% in 2016 due to increased production in Brazil. Brazil s 2016 projected soybean production of 103 MMT represents Brazil s largest production on record, a result of increased acreage planted to soybeans and slightly better yields. Argentine production is projected to increase to 57 MMT in 2016 as farmer s shift production to corn and wheat as the elimination of export taxes is projected to benefit corn more than soybeans and soybean products. U.S. soybean production is projected to fall slightly to 103 MMT due to a shift in planted acres from soybeans to corn, especially in the Midwest. Sources: USDA WASDE. Note: 2015 data are estimates and 2016 data are projections updates are made on a soybean marketing year basis. Quarterly Exchange Rates Between USD and Agricultural Currencies (Indexed to 1 at 2006: Q1) Figure 3. The USD depreciated against most foreign currencies in Q However, the dollar s depreciation was not significant enough to eliminate the gains the USD has made against most competitive agricultural country currencies year-overyear. When comparing the strength of the USD to competitive currencies between Q and Q1 2015: The Brazilian real depreciated 11% against the USD; The Russian ruble depreciated 16% against the USD; The Canadian dollar depreciated 2% against the USD; The Argentine peso depreciated 65% against the USD, largely due to the Macri government devaluing the peso in December of last year. The Australian dollar was the only currency of the major agricultural competitors to appreciate against the USD from Q and Q1 2016, rising by 1%. Sources: Macrobond, HNRG Research Hancock Agricultural Investment Group First Quarter

4 Four Quarter Moving Average Corn Exports, Major Producers Figure 4. The strong USD and increased competition from Argentina and Brazil have dampened U.S. corn export volumes. Brazil s and Argentina s four quarter moving average volume of corn exports increased by 20% for each country since last quarter, while the U.S. four quarter moving average volume is relatively unchanged from last quarter. Year-over-year, Q four quarter moving average corn export volumes from Argentina increased 17%, increased 70% from Brazil and 11% from the U.S. Sources: Argentinian Ministry of Agroindustry, Aliceweb, USDA, HNRG Research Quarterly export data is a four quarter moving average Four Quarter Moving Average Soybean Exports, Major Producers Figure 5. Argentina s and Brazil s four quarter moving average soybean exports increased by 15% and 8% respectively from Q4 2014, while the four quarter moving average soybean exports from the U.S. increased marginally. Year-over-year, Argentina s four quarter moving average volume of soybean exports increased by 54%, boosted by the elimination of export taxes and the devalution of the peso. Brazil s soybean exports year-over-year increased by 36%, where as soybean exports from the U.S. over the same time period were flat. Sources: Argentinian Ministry of Agroindustry, Aliceweb, USDA, HNRG Research Quarterly export data is a four quarter moving average Quarterly Corn and Soybean China Imports Figure 6. Chinese imports of corn and soybeans totaled 18 MMT in Q1 2016, a 3% increase over Q China s soybean imports typically peak in quarters 2, 3 and 4 due to product availability. Chinese soybean imports are projected to reach record levels in 2016 as domestic production cannot meet increasing demand from the domestic livestock and poultry sectors and vegetable oil consumption. Chinese corn imports decreased by 47% against Q Corn imports are forecast to decline in 2016 in anticipation of a release of a portion of China s grain inventories into the domestic market. Source: China General Administration of Customs Hancock Agricultural Investment Group First Quarter

5 Quarterly U.S. Row Crop Prices ($USD per bu) Figure 7. Corn, soybean and wheat prices fell in Q compared to the prior quarter. Increasing inventories and a sluggish export environment dragged on prices. Year-over-year, Q corn prices declined by 6%, wheat prices fell by 22% and soybean prices dropped by 14%. Source: USDA NASS, Prices reported as received by buyer Annual U.S. Average Grower Tree Nut Prices ($USD per lb) Figure 8. The U.S. is a major producer of tree nuts, accounting for approximately 83% of the world s almonds, 28% of the world s walnuts and 40% of the world s pistachios. Prices for almonds and walnuts are estimated to have fallen substantially in 2015, an estimated 23% and 21% respectively, while pistachio prices rose slightly. Driving the decline in almond prices has been the strong USD and a retreat from the high price of almonds in 2014, which caused many buyers to wait for price declines before reentering the market. Walnut prices were affected by weak exports, a large crop, and carry-over stocks in The 2015 pistachio crop declined dramatically from 2014, yet, as a result of weak export demand, prices only rose slightly. Sources: USDA NASS, Prices reported as received by buyer, Nichols Farms, BLS, HNRG Research tree nut prices are an estimate, official prices to be reported by the USDA in July 2016 NCREIF Row Crops Total Return (percent per year) and USDA Row Crops Cash Receipts (y/o/y percent change) Figure 9. Row crop cash receipts are projected to decline for the fourth consecutive year in 2016 as declining corn and wheat prices offset a slight increase in soybean prices. Row crop cash receipts are forecast to fall by 1.1% in 2016 to $159 billion. NCREIF s Q row crop total return of 1.6% was 61 bps higher than NCREIFs Q row crop total return and 34 bps higher than Q NCREIF row crop total return. NCREIF row crop total returns are expected to feel downward pressure from the projected decline in USDA row crop cash receipts in Sources: USDA ERS, NCREIF Farmland Index 2015 USDA row crop cash receipts are an estimate, 2016 USDA row crop receipts are a forecast Hancock Agricultural Investment Group First Quarter

6 2016 USDA Prospective Plantings Report: Potential Impact on the U.S. Farm Economy (Continued from page 2) Chart 4: U.S. Wheat On-Farm Price ($/bushel) vs. Stocks-to-Use Ratio 2013/14 to $4.90 per bushel in 2015/16) (Chart 4). Due to these factors, farmers are expected to shift five million acres of wheat to alternative crops, primarily corn, in 2016/17. Sources: USDA WASDE; HNRG Research directly with corn in animal feed rations as a source of carbohydrates. Domestic consumption of wheat for milling purposes has trended higher, but at a very moderate rate, similar to the rate of growth of the U.S. population. The net result of these factors are wheat stocks increasing from 717 million bushels in 2013/14 to 752 million bushels in 2015/16 and the stocks-to-use ratio is projected to increase from 24% in 2013/14 to 50% in 2015/16. The HNRG Research Team Court Washburn Managing Director and Chief Investment Officer cwashburn@hnrg.com Keith Balter Director of Economic Research kbalter@hnrg.com Bill Devens Senior Agricultural Economist bdevens@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@hnrg.com Elizabeth Shestakova Economic Research Analyst eshestakova@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment advisor and wholly owned subsidiary of Manulife Financial Corporation. Hancock Natural Resource Group, Inc. increase in wheat stocks has led to a significant decline in on-farm wheat prices (from $6.87 per bushel in NOTES: Figure 1. Corn production is charted on a calendar year basis and updated on a marketing year basis. The corn marketing year is from September to August for the US, from May to April for South Africa, and from October to September for China. The corn marketing year is from March to February in Argentina and Brazil. Corn Production data and forecasts are updated on a monthly basis by the USDA World Agricultural Supply and Demand Estimates Report (WASDE). Figure 2. Soybean production is charted on a calendar year basis and updated on a marketing year basis. The soybean marketing year is from September to August for the U.S., from February to January for Brazil and for April to March for Argentina. Soybean Production data and forecasts are updated on a monthly basis by the USDA World Agricultural Supply and Demand Estimates Report (WASDE). Figure 3. Exchanges rates are updated on a daily basis by Macrobond Financial AB. Figure 4. Argentina s agricultural exports are published on a monthly basis by the Argentinian Ministry of Agroindustry. Brazil export data is published on a monthly basis by Aliceweb. U.S. exports are published on a monthly basis by the U.S. Census Bureau. Export data is reported on a 4 quarter moving average to adjust for seasonality. Figure 5. Argentina s agricultural exports are published on a monthly basis by the Argentinian Ministry of Agroindustry. Brazil export data is published on a monthly basis by Aliceweb. U.S. exports are published on a monthly basis by the U.S. Census Bureau. Export data is reported on a 4 quarter moving average to adjust for seasonality. The decrease in wheat acreage will have a significant impact on U.S. wheat supply. Wheat production in the U.S. is projected to decline by 54 million bushels in 2016/17, while imports (mostly from Canada) are projected to increase by 10 million bushels. Although demand for wheat is forecast to increase by 131 million bushels (mainly due to increased exports), overall ending stocks are expected to increase by 51 million bushels due to the high carryover inventories from the 2015/16 crop year. The projected net result is a continued decline in prices in the 2016/2017 crop year. Key Takeaways from the March 31 USDA Prospective Plantings Report The decrease in projected 2016/17 corn and wheat prices will more than offset the slight increase in projected soybean prices, leading to another year of lower cash receipts and declining farm income in the row crop sector. The decrease in row crop prices will have the largest impact on farm incomes in the Western Corn Belt and Southwest regions of the country, the regions that grow the largest volumes of corn and wheat. Increases in foreign corn and wheat production along with the strong USD are likely to lead to more competition in the export market, increasing the downside risk for corn and wheat. Prospective Plantings. March 31, USDA. ISSN: X. World Agricultural Supply and Demand Estimates (WASDE). May 10, USDA. ISSN: Figure 6. China s soybean and corn imports are published on a monthly basis by the China General Administration of Customs. Figure 7. Row Crop Prices are published on a monthly basis by the USDA National Agricultural Statistics Service (USDA NASS). Figure 8. Permanent Crop Prices are published on a annual basis by the USDA National Agricultural Statistics Service (USDA NASS). Walnuts price estimates for the current year are calculated by using the percent annual changes for the crop year in the Producer Price Index for walnuts, published by the Bureau of Labor Statistics on a monthly basis. Annual estimates for pistachios are calculated by using the percent annual changes for the crop year in the prices published in the Market Reports from Nichols Farms. Almond price estimates for the current year are calculated by using the percent annual changes for the crop year in the prices from HNRG sources. Figure 9. USDA Cash Crop Receipts data is published three times a year in February, August and November by the USDA s Department of Agriculture Economic Research Service. The U.S. level calendar-year forecast is first published in February. The August release converts the previous year s forecast to estimates and the November release updates the current year forecast. NCREIF Farmland Total Return data is published on a quarterly basis. NCREIF quarterly total row crops return are aggregated to form the total return for the year. The total return as seen on the bar chart may not equal the annual total return as reported by NCREIF, because the NCREIF annual return is calculated by multiplying instead of adding quarterly returns together." References to expected investment performance in this newsletter are based on historical information and are based on managements projections. Potential for profit as well as for loss exists. Hancock Agricultural Investment Group First Quarter