Crop and Livestock Outlook

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1 Crop and Livestock Outlook By John Kruse, PhD State Specialist, Ag Business and Policy Extension Associate Professor December 7, 2018

2 Corn Outlook

3 US corn area planted is expected to increase in 2019/20 with higher corn prices and lower soybean prices. Exports are expected to remain strong in 2018/19 partially due to a poor wheat crop in the European Union and reduced corn crops in South America in 2017/18. Ethanol demand for corn remains steady but this is heavily dependent on crude oil prices and ethanol exports Corn exports are expected to encounter some headwinds in 2019/20 as production (harvested in 2020) in Argentina recovers and Brazil s corn area expands at the expense of soybeans

4 Distribution of 2017/18 US Corn Demand Percent of Total Demand US Corn Demand 16.5% 35.8% 37.9% 0.2% 9.7% Corn Used for Exports Corn Used for Feed & Resid. Corn Used for Fuel Ethanol Corn Used for Seed Corn Used for Food Purposes 34.3% 3.6% 7.2% 1.0% 1.4% Dry Milling for Ethanol Wet Milling for Ethanol Other Wet Milling Alcoholic Beverages Cereals and Other 10.3% Distillers Dried Grains Corn Gluten Meal 0.6% 2.7% 0.2% 25.6% Corn Gluten Feed Corn Germ Meal Ethanol 0.3% Food Grade Corn Oil High Fructose Corn Syrup 2.0% 1.5% 0.9% Glucose & Dextrose Starch 23.1% 2.5% 0.5% 9.9% Domestic Use Net Exports Distillers Corn Oil Feed Use 0.2% 0.2% Feed/Other Use Biomass Based Biodiesel Use 6.9% Domestic Use 3.0% Exports

5 Exports Account for 22% of Corn Demand

6 US Corn Demand Growth

7 U.S. Corn Exports By Destination in 2017/18 Canada 64 mil bu Taiwan, 95 mil bu Japan, 518 mil bu China, 12 mil bu S. Korea, 225 mil bu Vietnam, 75 mil bu Mexico, 618 mil bu Guatemala, 34 mil bu Columbia, 200 mil bu Peru, 127 mil bu Spain, 46 mil bu Saudi Arabia, 59 mil bu Morocco, 29 mil bu Egypt, 52 mil bu Costa Rica, 34 mil bu Total U.S. Corn Exports in 2017/18: billion bu. The listed countries account for 90% of U.S. corn exports. Source: USDA/ERS/FATUS March 21, 2018

8 Accumulated US Corn Exports and Outstanding Sales to All Countries (As of November 15, 2018) 3,000 2,500 Million Bushels 2,000 1,500 1, /2 9/23 10/14 11/4 11/25 12/16 1/6 1/27 2/17 3/10 3/31 4/21 5/12 6/2 6/23 7/14 8/4 8/ / / / / /19

9 Corn Supply & Use in Argentina and Brazil November 2018 The 2017/18 drought in Argentina reduced corn yields by 26% from the previous year. Brazil s corn yields were reduce 12% from the previous year. Notice the recovery projected by USDA for corn exports in 2018/19. Keep in mind that Brazil plants two corn crops and their 2018/19 corn area can change substantially depending on the economics when the safrinha crop is planted.

10 China s Historical Data Revisions 2017/18 Example For years many speculated that China s corn stocks were much higher China officially revised their corn data in October and those revision were reflected in USDA s Nov PSD Revisions were made back through As show in the table in 2017/18: Corn area revised up 20% Corn production revised up 20% Feed use revised up 12% Food, Seed, & Industrial use revised up 3% Stocks revised up 9.1% Implication: Significant Chinese corn imports unlikely for the foreseeable future.

11 World Corn Ending Stocks Large global stock levels are always a concern because they dampen upward movements in price. Although still very large compared with historical levels at least stock levels are falling.

12 Percent of Missouri corn marketed in the bottom, middle, and top 3 rd s of marketing year price distribution Bottom 1/3 Middle 1/3 Top 1/3

13 Corn December 2019 Futures

14 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Dollars Per Bushel Monthly US Corn Farm Price /19 Sep/Aug MY WASDE Range:

15 2017/18 Cash Corn MO Farm Price Seasonality One of many possibilities Strategy: Develop a marketing plan and set reasonable price targets so you are ready for the opportunities. Have an exit strategy if prices head down. Know your cost of production to make pre-planting sales, but remember the market doesn t care. Do not hold old crop beyond July. Your goal is gain 20 to 30 cents per bushel, not marketing on the day of the highest price. South American crop size speculation $4.00 Brazil Safrinha Crop Planted $3.50 $3.70 Trend corn yields in 2019 Harvest Period Price $3.48 $3.26 Ethanol Policy & or Trade Issues Dec 18 Jan 19 Feb 19 Mar 19 $3.20 March Planting Intentions Report Biggest risks: Trade & Ethanol Policy June Acreage Report Jun 19 Weather speculation stimulates some variance Jul 19 Sep/Oct 19

16 Soybean Outlook

17 US soybean planted area is currently expected to fall 4.9% in 2019/20, but it depends on the trade war. Resolution of the trade war could ease the decline in soybean area particularly because of the basis impacts it would have. South America has responded to the trade war by significantly increasing soybean area. US soybean exports are expected to be down significantly, perhaps more than WASDE is currently suggesting US soybean ending stocks project to reach record levels in 2018/19.

18 Distribution of US Soybean Demand Percent of Total Demand (2016/17) US Soybean Demand 51.6% Soybeans Used for Exports 3.3% Soybeans Used for Seed & Residual Soybeans Crushed 45.1% 36.4% 8.7% Soybean Meal Soybean Oil 9.7% 26.7% 2.4% 5.3% 1.0% Exports Feed Use Methyl Ester Biodiesel Use Food & Other Use Exports

19 US Soybean and Soybean Product Demand November 2018

20 9/2 9/23 10/14 11/4 11/25 12/16 1/6 1/27 2/17 3/10 3/31 4/21 5/12 6/2 6/23 7/14 8/4 8/25 Million Bushels Accumulated Soybean Exports and Outstanding Sales to All Countries (As of November 15, 2018) 2,500 2,000 1,500 1, / / / / /19

21 9/2 9/23 10/14 11/4 11/25 12/16 1/6 1/27 2/17 3/10 3/31 4/21 5/12 6/2 6/23 7/14 8/4 8/25 Million Bushels Accumulated US Soybean Exports to China (As of November 15, 2018) 1,600 1,400 1,200 1, / / / / /19

22 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 Million Bushels Accumulated US Soybean Exports and Outstanding Sales to Top Export Destinations (YTD as of November 15, 2018) China European Union - 27 Mexico Indonesia Japan Taiwan Bangladesh Thailand Egypt

23 China Soybean Supply & Use China s Strategy in the Trade War Import as few US soybeans as possible by sourcing from other countries. Substitute other protein meals for soybean meal. Reduce the meal inclusion rate in livestock rations. Increase domestic soybean production. Draw down ending stocks

24 Global Soybean Spot Prices October 2017 October 2018 Has China s strategy worked? They have successfully limited imports of US soybeans to under 24 million bushels. US soybean exports and outstanding sales are now 395 million bushels below last year s export levels at this time. Argentina and Brazil crushing industries are struggling because of negative crushing margins since the Chinese have bid up the price of their soybeans. Argentina has increased their export tariff on soybeans and Brazil is considering imposing a 10% export tariff on soybeans. Soybean arbitrage has been slow to happen. Some have suggest this is because Argentina and Brazil s port infrastructure is designed for exports, not imports. In addition, it also takes time to set up new trade pathways. China is getting desperate to find non-us protein meal. If price differences persist, the market will find a way to arbitrage US soybeans.

25 Trade War Impact on Soybean Basis

26 No Impact on Corn Basis

27 Soybeans in Competing Countries Supply & Use Argentine soybean yields down 27% due to drought in Brazil yields were unaffected. Argentina s because a net importer of soybeans in 2017/18 due to their drought. With the 25% Chinese tariff on US soybeans, China has attempted to source all soybeans from S. America. The resulting price wedge between US and South American soybean prices has significantly stimulated crop area response in Argentina and Brazil.

28 1990/ / / / / / / / / / / / / / / / / / / / / / / / / / / / /19 Billion Bushels World Soybean Ending Stocks

29 Percent of Missouri soybeans marketed in the bottom, middle, and top 3 rd s of marketing year price distribution

30 November 2019 Soybean Futures Source: AgWeb (CME)

31 Monthly Soybean Farm Price 2018/19 Sep/Aug MY WASDE Range:

32 2018/19 Missouri Cash Soybean Price Seasonality One of many possible scenarios Strategy: Develop a marketing plan and set reasonable price targets so you are ready for the opportunities. Have an exit strategy if prices head down. Know your cost of production to make pre-planting sales, but remember the market doesn t care. Do not hold old crop beyond July. Your goal is gain 20 to 30 cents per bushel, not market on the day of the highest price. Unusually weak basis $8.05 South American crop size speculation $9.25 $7.60 China import tariffs on US soybeans US Planting Intentions $9.25 June Acreage Report US crop size speculation Normal US crop, Harvest Period Price $7.80 Dec 18 Feb/Mar 19 Mar 19 Jul/Aug 19 Sep/Oct 19

33 Cotton and Rice Outlook

34

35 Accumulated US Upland Cotton Exports and Outstanding Sales to All Countries (As of November 22, 2018)

36 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 16/17 17/18 18/19 Million Running Bales Year-to-Date Accumulated US Cotton Exports and Outstanding Sales (As of November 22, 2018) Vietnam China, Peoples Republic Of Turkey Indonesia Mexico Pakistan India Korea, Republic Of Bangladesh

37 November 2018 US Rice Supply and Use Update 2016/ / / /20 % from last % from Units WASDE WASDE WASDE month FAPRI 18/19 Area Planted mil ac % % Area Harvested mil ac % % Yield per Harvested Acre lb/ac 7,237 7,507 7, % 7, % Beginning Stocks mil cwt % % Production mil cwt % % Imports mil cwt % % Supply, Total mil cwt % % Domestic & Residual mil cwt % % Exports, Total mil cwt % % Ending Stocks mil cwt % % Avg. Farm Price $/cwt % %

38 2019 Growing Conditions

39 Drought Conditions Current versus the Height of the 2018 Drought November 20, 2018 August 14, 2018

40 I d show you the drought outlook for 2019, but remember last year

41 1/8/15 3/8/15 5/8/15 7/8/15 9/8/15 11/8/15 1/8/16 3/8/16 5/8/16 7/8/16 9/8/16 11/8/16 1/8/17 3/8/17 5/8/17 7/8/17 9/8/17 11/8/17 1/8/18 3/8/18 5/8/18 7/8/18 9/8/18 11/8/18 Dollars Per Acre Fertilizer Costs Per Acre By Crop (Excludes Application Fees) Corn Soybean Cotton Fertilizer application rates for corn and soybeans are based on the Missouri Crop Resource Guide developed by FAPRI at Fertilizer application rates for cotton are based on USDA s 2007 ARMS Survey which is available at

42 1/8/15 3/8/15 5/8/15 7/8/15 9/8/15 11/8/15 1/8/16 3/8/16 5/8/16 7/8/16 9/8/16 11/8/16 1/8/17 3/8/17 5/8/17 7/8/17 9/8/17 11/8/17 1/8/18 3/8/18 Dollars Per Gallon Diesel Prices Up 15% from March Source: USDA-AMS, Illinois Production Cost Report, GX_GR210

43 Soybean to Corn Price Ratio

44 2017/ / / / / / / / / / / / / / /20 Million Acres U.S. Planted Area Corn Soybeans Wheat Rice Cotton FAPRI projections for 2019/20 based on November 2018 Preliminary Baseline.

45 Farm Income & Policy

46 Crop production values U.S Change Production (mil. bu.) Corn 14,604 14, % Soybeans 4,411 4, % Crop year price ($/bu.) Corn $3.36 $ % Soybeans $9.33 $ % Crop value ($ bil.) Corn $49.1 $ % Soybeans $41.2 $ % 2-crop total $90.2 $ % Missouri Change Production (mil. bu.) Corn % Soybeans % Crop year price ($/bu.) Corn $3.36 $ % Soybeans $9.33 $ % Crop value ($ bil.) Corn $1.86 $ % Soybeans $2.73 $ % 2-crop total $4.59 $ % Source: Pat Westhoff estimates based on Nov USDA estimates (Crop Production, midpoint of WASDE U.S. prices)

47 Market Facilitation Program payment rates Initial payment is on 50% of production so soybean rate is equivalent to $0.825 per bushel produced in Program is subject to payment limitation rules No more than $125,000 per person or legal entity Average AGI for of less than $900,000 Second round of payments will occur and USDA is expected to announce the payment rates are expected this week Secretary Perdue has said this program will not be repeated in 2019 Initial payment rate on 50% of production USDA estimate of initial payment Soybeans $1.65/bu. $3.63 bil. Hogs $8.00/head $0.29 bil. Cotton $0.06/lb. $0.28 bil. Sorghum $0.86/bu. $0.16 bil. Dairy $0.12/cwt $0.13 bil. Wheat $0.14/bu. $0.12 bil. Corn $0.01/bu. $0.10 bil. Total $4.70 bil.

48 MFP payments in context (Crop value and payments in billion dollars) U.S. Soybeans Corn 2-crop total 2017 crop value Missouri Soybeans Corn 2-crop total 2017 crop value crop value initial MFP payment 2018 crop value + initial MFP crop value initial MFP payment 2018 crop value + initial MFP Source: Pat Westhoff estimates. Crop values based on Nov USDA estimates of crop production and marketing year average prices. MFP payment estimates are based on this formula: Initial MFP payment = Payment rate * Production * 0.5 * The 0.5 reflects the plan to make initial payments on 50% of production; the 95% is a rough adjustment for payment limitations.

49 Billion dollars Billion dollars Missouri farm receipts, costs & income (Based on August 2018 FAPRI-MU update) Farm cash receipts Soybeans Corn Cattle All other Net farm income Receipts Expenses Net farm income Source: History from USDA s Economic Research Service. Receipt projections for prepared by the author and Abigail Meffert, based on the FAPRI August 2018 baseline update and September 2018 NASS estimates of the 2018 crop.

50 It s not the 1980s, but During the 1980s farm financial crisis, the farm debt/asset ratio peaked at 22% It declined to half that level in 2012, but has been increasing since then Besides lower levels of debts relative to assets, interest rates are far lower now than in the 1980s But it is concerning that the debt/asset ratio continues to increase, even as interest rates are rising U.S. debt/asset ratio and prime rate 25% 20% 15% 10% 5% 0% Debt/asset ratio Prime rate Sources: Debt/asset ratio from USDA and FAPRI-MU, Sept. 2018; Prime rate from FRED and IHS Markit, July 2018

51 Dollars per participating base acre ARC & PLC payments under current law (Based on November 2018 FAPRI-MU baseline) Corn ARC payments in 2017 and 2018 likely to be much lower than from Olympic average price in benchmark has fallen from $5.29/bu. in 2014 and 2015 to $3.70 floor PLC payments occur when U.S. marketing year average prices drop below $3.70/bu. PLC likely to be more attractive option, once uncertainty is considered Low or no payments at Nov. baseline prices, but prices below $3.70 are certainly possible We assume 70% choose PLC for corn in 2019 Corn ARC & PLC ARC PLC Source: USDA and FAPRI preliminary baseline, Nov Note: stochastic estimates would show higher mean payments, as there is a chance prices (or yields) could fall low enough to trigger large PLC (or ARC) payments

52 Farm bill agreement has been reached in committee Congress expected to vote in next 2 weeks No details released yet Representative Peterson s comments: few changes on crop insurance ARC and PLC expected to continue CRP acres allowed to expand by 3 million acres to 27 million acres, but at lower rental rates Small dairy farmers (< 5 million lbs of milk per year, roughly 240 cows) get higher safety net that should keep them in business No forestry management included in the bill SNAP will not be subject to work requirements

53 US-China 90 Day Trade War Truce U.S. Statement China Statement Current US tariffs on Chinese goods remain in place but do not escalate on Dec 1 as planned (Jan 1 is the new date) No higher US tariffs on Chinese goods. Current US tariffs on $200 billion of Chinese goods will be raised from 10% to 25% if deal is not reached in 90 days US & China will negotiate immediately on forced technology transfer, IPP, non-tariff barriers and cyber theft China will purchase very substantial farm, energy, industrial and other products No mention of 90 day deadline US & China will work together to reach a consensus on trade issues. China will import more US goods. China will immediately restart buying agricultural products Not mentioned. Not mentioned US & China agree to boost market access Source: Adapted from Bloomberg News, December 2, 2018

54 Key Crop Takeaways Back in a period of low prices, tight margins, and large stocks. PLC program looks to be the most attractive for producers. No major changes expected with new farm bill. Crop demand growth is export driven. Expect price volatility Nearly 2/3 of soybean demand and ¼ of corn demand is export dependent. Mexico is pivotal in corn export growth, China is pivotal in soybean export growth. If the trade war continues prices will be volatile but arbitrage will help stabilize prices.

55 Key Crop Takeaways Marketing plans are now more important than ever to pick up the extra 30 cents per bushel. Value added production and off-farm employment will be critical to cash flow. Benchmarking costs against other producers and keeping down fixed costs will be keys to success. There will be pricing opportunities due to the usual factors weather, oil prices, disease outbreaks, and other events.

56 Extension Action Plan Develop value added opportunities for farmers Fruit and vegetable production Organic egg production Feasibility of expanded goat production Holding outlook meetings and workshops of preparing marketing plans Demonstrate the historical performance of alternative marketing strategies Demonstrate the value of identifying your cost of production and benchmarking Overview of designing and marketing plan and working through examples Monitor progress of alternative marketing strategies throughout 2019/2020 Follow up on marketing plans with pre-planting meetings and pre-harvest meetings. Development of a new extension marketing webpage. Develop 30 Missouri sample farms capable of simulating historical and projection farm income under alternative scenarios of yield and price risk using alternative strategies for marketing, crop insurance, government program participation, debt load, etc. (Not yet funded.) Encourage farmers to follow sound bookkeeping practices and benchmark themselves against others.

57 Livestock Outlook

58 Dollars per Pound Retail Meat Prices Bacon Ground beef Chicken breast

59 Billion Pounds Meat Production Beef Pork Chicken (p)

60 Meat Production and Trade, Nov. WASDE Projected Production (billion lbs.) Beef Pork Chicken Other Exports (billion lbs.) Beef Pork Chicken Other Imports (billion lbs.) Beef Pork Other

61 Change in Total Meat, Billion Lbs. U.S. Meat Markets: How Does Trade Figure In? (p) Production Net Trade

62 Pounds per Person More Meat for U.S. Consumers Still to Come Domestic Meat Availability (p)

63 Meat Availability and Prices, Nov. WASDE Projected Availability (lbs. / capita) Beef Pork Chicken Other Prices (cents / lb.) Fed steer Barrow and gilt Chicken Turkey

64 Percent China Tariffs for Selected Products $39,921M Value of exports since Jan 2015 (Million U.S. $) $748M $630M $240M $70M Soybeans Swine offal frozen Swine cuts frozen Hams bone-in frozen April 2 increase July 6 increase current applied rate Bovine meat

65 Cattle Outlook: Beef Demand Has Kept Pace Since 2016: Supply pressure Economics and weather pointed to beef cow expansion Other meat supplies have followed suit Prices resilient thus far 2017 a rare year with supplies & prices up, 2018 strong too High-quality beef is still a growth market Changes coming? Cow herd expansion slowing or coming to an end? Domestic demand at a new level? Can exports continue hot?

66 MED. & LRG. #1 STEER CALF PRICES Pounds, Southern Plains, Weekly $ Per Cwt JAN APR JUL OCT Avg Data Source: USDA-AMS Livestock Marketing Information Center C-P-49A 11/19/18

67 Dollars per Ton Hay Prices U.S. Missouri

68 ESTIMATED AVERAGE COW CALF RETURNS Returns Over Cash Cost (Includes Pasture Rent), Annual $ Per Cow Data Source: USDA-AMS, Compiled and Analysis by LMIC Livestock Marketing Information Center C-P-66 08/18/18

69 Million Head How Many More Beef Cows? Beef Cow Inventory (p) Comic relief: What did the mama cow say to the baby cow? It s pasture bedtime.

70 Percent Beef Cow Slaughter / Jan. 1 Inventory (p)

71 Percent Heifers / Total on Feed

72 Million Head Cattle on Feed, Capacity Lots JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC avg. 2018

73 MAJOR US BEEF EXPORT MARKETS Carcass Weight, Annual Mil. Pounds Japan Canada Mexico Korea Avg. 2012/ (YTD through Sept.) Data Source: USDA-ERS & USDA-FAS, Compiled by LMIC Livestock Marketing Information Center

74 Percent Change vs. Year Ago Beef Availability per U.S. Resident fed steer price change: AVG MAX MIN 11 years with <-1% Q change 7.0% 24.7% -10.3% 9 years with -1 to 1% Q change 1.4% 7.8% - 4.2% 6 years with >1% Q change -5.7% 6.6% -18.4% (p)

75 Million Pounds vs. Previous Year Beef Production and Export Changes Production Exports

76 Dollars per Cwt. Cattle Prices (p) (p) Fed Steer Feeder Steers ( lb)

77 Hog Outlook: Too Much Pork for Current Demand U.S. hog producers have been expanding rapidly Production: faster growth than population 14 of 15 quarters How long until breeding herd increases stop? Exports: volume growth continues, but not value; but ASF? Domestic demand strength has performed well Good meat demand has moderated price pain Demand for pork products has been mixed Feed prices will moderate cost increases This appears the only bright spot for profitability

78 Million Head U.S. Hog Breeding Herd Inventory

79 Breeding Herd Growth by State Other states combined Pennsylvania Ohio Oklahoma Nebraska Iowa Texas N. Carolina S. Dakota Missouri Illinois Thousand Head, June 2018 vs. June 2014

80 Percent vs. Year Ago Pork per Sow Growth % avg. growth since % avg. growth since 2010

81 Million Pounds vs. Previous Year Pork Production & Export Changes Production Exports

82 Pounds (retail weight) Pork Availability per U.S. Resident hog prices: AVG MAX MIN 8 years with <49 lbs years with lbs years with >51 lbs (p)

83 February 2019 Lean Hog Futures

84 African Swine Fever How Important?

85 Percent U.S. Pork Exports as % of U.S. production as % of world exports 2017

86 Dollars per Cwt Hog Price (Quarterly) (p)

87 Know What to Look For Moving Forward Average profitability will struggle through 2019 Heavy supplies and tariffs weigh on prices and limit any rallies The market will be volatile due to breaking ASF news Feed prices should remain stable barring harvest surprises Locking in positive profits will be difficult That does not mean that you can t limit losses Know what keeps you afloat and lock that in when you can Domestic demand could offset a lot of other negatives Economic projections still bright The majority of our meat is still consumed in this country

88 Thanks! John Kruse, PhD State Specialist, Ag Business and Policy Extension Associate Professor