EASTERN CORN BELT DELAYS CONTINUE, MORE FARM PROGRAM DETAILS

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1 May 31, 22 Ames, Iowa Econ. Info EASTERN CORN BELT DELAYS CONTINUE, MORE FARM PROGRAM DETAILS Corn prices in the next two weeks will continue to be moderately sensitive to weather and planting progress east of the Mississippi River. As we noted in the last Iowa Farm Outlook, even with a normal trendline U.S. average yield of around 14 bushels per acre, the intended corn plantings would produce a crop slightly below expected utilization for the coming year. A U.S. average yield four bushels below trend or a couple million acres smaller planted acreage than anticipated would have the potential to significantly tighten corn supplies for the year ahead. Perspective on E. Corn Belt Here are some numbers to help put the importance of eastern Corn Belt problems in perspective. The six eastern Corn Belt states and Missouri together account for about 39 percent of this year s intended corn plantings, so a substantial part of the corn producing region is affected despite generally good conditions in Iowa.. U.S. average corn yields (bu./a) for the last four years were as follows: 21: : : : Corn production with these yields and intended corn acreage to be harvested for grain would range from a high of 9,937 million bushels to a low of 9,62 million bushels. If the 1997 yield of bushels per acre is included in the comparison, the low end of production would drop to 9,11 million bushels. The record U.S. average corn yield was bushels per acre in 1994 when conditions for most of the growing season were nearly ideal across the Corn Belt. Current total U.S. annual corn use (including exports) is about 9,89 million bushels. For the next marketing year beginning September 1, with increased hog, poultry and dairy production, a sharp drop in South American corn production and exports, and more than a dozen new ethanol plants coming into operation, total use is likely to be around 1,1 million bushels. Corn carryover stocks on August 31, 22 are projected at about 1,53 million bushels, down from 1,89 million bushels a year earlier. Thus, yields within the range of the last four years would be expected to produce August 31, 23 U.S. corn carryover stocks of 1,367 to 1,5 million bushels. If ¾ million acres of corn does not get planted (because of prevented plantings insurance benefits or a shift to soybeans), this has the potential to reduce carryover stocks another 1 million bushels. In case of a repeat of the 1996 average yield, stocks would be expected to drop below this range by another half billion bushels, creating a much tighter corn supply situation than in the last few years. Weekly average total use of U.S. corn in the coming year will be about 194 million bushels, with monthly average use at 777 million bushels. Since corn harvesting activity normally is limited until about early October, normal minimum working stocks for the grain trade are approximately 8 million bushels, or slightly over a month s supply. These are needed to keep exports, processing plants, feeding operations, and feedlots running until the new crop is widely available in commercial channels. Stocks 1 million bushels above this level probably would be comfortable for the grain trade if a large crop is about to be harvested and stocks are not expected to decline further in the coming year. But prospects for harvest delays or a crop falling further below expected annual use could strengthen prices substantially. For more detail on past corn production use and stocks, as well as 22-3 projections, see our latest balance sheets at: The other side of the yield picture is that in the 45% of the nation s corn crop planted west of the Mississippi River (excluding Missouri, which is late), the crop was planted early. Cool weather has delayed development, but warm weather in the next few weeks can accelerate growth. And across the Corn Belt, subsoil moisture supplies generally look ample to excessive, which should help carry the crop through summer dry spells. With good conditions from here onward across

2 the Corn Belt and a U.S. average yield half as far above trend yields as in 1994, the U.S. average yield would be about 148 bushels per acre. With the intended plantings, that would produce a crop of about 1.65 billion bushels, pushing next year s carryover stocks up about half a billion bushels and creating storage space problems this fall. This week s USDA planting progress and crop condition report revealed an estimated 1.6 million acres of corn yet to be planted in the eastern Corn Belt as of May 26, with plantings lagging well behind the five-year average in the eastern Corn Belt. Moreover, corn that is in the ground there generally was planted later than normal. See Figures 1 through 4 for indications of the magnitude of planting problems in these states. Percent Planted APRIL 3 U.S. Corn Planting Progress, Selected Lateplanting Years and 1996 Normal APRIL 4 MAY 1 MAY 2 MAY 3 Weeks MAY 4 JUNE 1 JUNE Norm Avg. JUNE 3 U.S Yield deviat from trend (%) Eastern Corn Belt, Millions of Unplanted Corn Acres on 5/27/2 3.5 Corn in Eastern Corn Belt, Million Acres Planted Later Than Normal, 5/27/ Mil. Acres Not Planted Mil. Acres Illinois Indiana Ohio Michigan Wisconsin Missouri Kentucky Illinois Indiana Ohio Michigan Wisconsin Missouri Kentucky Corn Crop Condition Rating Record Low This week s report also contained the first corn crop condition report of the season. At 43 percent, it showed the lowest percent of the crop in good-to-excellent condition on record for the first report of the season. Early season corn crop condition ratings date back to Part of the reason for the low rating was the slow emergence of corn throughout the Corn Belt, but especially in Minnesota, Nebraska, the Dakotas, and the eastern Corn Belt. The comparison is a little misleading since, in other years, USDA issued its first corn condition ratings the first week of June. At this time of the year, crop conditions can improve substantially in a week s time with good weather. While soybean plantings also were delayed, yield impacts are less of a concern for beans at this time.

3 Percent Corn, % Good to Excellent, 5/27/2 and a Year Earlier 9 5/27/22 8 Year earlier Iowa Nebraska S. Dakota Kansas Minnesota Missouri Illinois Indiana Ohio Wisc. Mich. Ky. 18 states Major states: 43% (record low first rating) vs. 7% a year earlier Other Price Influences Other price influences for the next several weeks will include weekly corn, soybean, and soybean product exports and export sales. With an exceptionally strong weekly export number on May 28, cumulative U.S. corn export inspections since last September 1 are essentially unchanged from a year ago. Outstanding unshipped sales on May 23 were up 1 percent from a year earlier. USDA projects U.S. corn exports for the current marketing year to be down.5% or 1 million bushels from last year. However, sharply reduced competition from South America and outstanding unshipped sales indicate U.S. corn exports for the current marketing year may be 3 million bushels or more above that of last season. This spring s South American corn crop (now about 2/3 harvested in Argentina) is estimated to be down more than 3 million bushels from last year. Brazil and Argentina normally are the main alternative sources of corn on world markets for at least the next six months. Their reduced production also will increase price sensitivity to weather and crop conditions. Our corn use projections assume China will continue to export corn about at the level of recent years, despite WTO. China is shifting its corn subsidies from exports to domestic marketers and possibly producers. Planting Progress Table 1. Corn and Soybeans, Percent of Intended Acreage Planted. Corn Soybeans 22 5-yr. avg yr. avg. % Planted % Emerged planted % Planted % Emerged planted Iowa Nebraska Minnesota S. Dakota Kansas Illinois Indiana Ohio Missouri Michigan Wisconsin Kentucky Major states The table above shows planting progress and percent of the crop emerged by major producing states. Some are comparing this year with That year, corn plantings in Iowa, Nebraska, and Kansas were earlier than normal.

4 Plantings were delayed modestly in Minnesota and South Dakota, and were late in the eastern Corn Belt but not as late as this year. On May 26, 1996, 78 percent of the corn and 35 percent of the soybeans in major producing states were planted, vs. 83 and 51 percent, respectively, this year. The major states accounted for 91 and 94 percent of the U.S. acreage, respectively. The percent of the major-state corn crop rated good-to-excellent the first week of June in 1996 (first report of the season) was 51 percent, 8 percentage points above this week s report. That year, the U.S. average corn yield was about.7 bushels per acre below the long-term trend yield. It should be recognized that one factor contributing to the trend increase in corn yields in recent years is the progressively earlier average planting dates as farmers have shifted to larger sized planters. The normal percent of the major states corn crop planted by May 26 in 1996 was 84 percent vs. 95 percent now. More Farm Bill Details In the May 1 issue of Iowa Farm Outlook, we described the major features of the new farm bill and how the three types of payments work. LDPs work the same as in recent years, except that they likely will be smaller for soybeans and larger for corn, wheat, and grain sorghum. That s because the U.S. average soybean loan rate was lowered by $.26 per bushel, while corn, wheat, and sorghum were increased by $.9, $.22, and $.27 respectively per bushel. Direct payments are the one type of payment that does not change with prices. See our May 1 issue of this newsletter for a review of the size of these payments. The other payments, counter-cyclical payments, are similar to the old deficiency payments of the pre-1996 programs, except that it is not necessary to plant the crop to receive the payments. Countercyclical payments can vary inversely with prices. If the U.S. average marketing year (Sept. Aug. for corn and soybeans) price of the commodity is at or below the loan rate, the full counter-cyclical payment will be received. If the U.S. marketing year average price is above the loan rate, the payment per bushel of program production will decline penny for penny with each one-cent rise in price. Both the direct and counter-cyclical payments are paid on 85% of the FSA program bushels, due to requirements of WTO trade negotiations. Updating FSA Bases and Yields The major farm program decision producers and land-owners will need to make in the next few months is whether to update acreage bases and yields. This decision will need to be made before payments under the new program can be received. Program yields can be updated only if the acreage bases for program crops are updated. Acreage bases can be updated without updating yields, although in most cases, farmers would want to update yields if acreage bases are being changed. This feature might be useful in the highly unusual situation where a farm had unusually low yields for the updating period, If one old-program crop s base is updated on a farm, all old-program crop bases must be updated. In the past, soybeans and other oilseeds were not program crops. The old base acres for non-oilseed crops can be left unchanged and soybeans or other oilseeds added up to the acreage limits of the farm (with allowances for double cropping in areas where it was practiced in the last four years). Or if it is advantageous, the land owner may change the base acreage of old program crops to fit the actual crop acreage mix planted in the period. Updating decisions are made by the individual farm units recorded by FSA. Note that the updated yields affect only the counter-cyclical payments. Direct payments are made on the old FSA yield plus the soybean yield adjusted back to the equivalent average yield for the old base period used for corn. This again was a requirement for WTO. If yields are updated, there are two choices: Take 93.5 percent of the farm average yield Add 7 percent of the difference between the new average yield and the old program yield to the old program yield. General Guidelines for Base Updating Decisions For producers who have large historical FSA corn or wheat base acreages, it will generally be advantageous not to update the bases. Also, there is incentive to replace historical oat base acres with soybeans. For a farm with a 12 bushel per acre FSA corn yield, a 65 bushel oat yield, a 7 bushel sorghum yield, a 4 bushel wheat yield, and adjusted soybean yield of 32 bushels per acre, and assuming the marketing year average price for each crop is at or below the new loan rates, potential 22-3 non-ldp payments per base acre are as follows,: Corn $74.4 Wheat 42.4 Sorghum 39.2 Soybeans 25.6 Oats 3.25

5 From these numbers, it can be seen that there is a major disadvantage to replacing corn base acres with lower-paying acres of other crops. Suppose the acreage base would be unchanged in the updating process, but the yield would go from 12 bushels per acre to 15 bushels per acre. The higher yield would affect only the counter-cyclical payment, which, for 22-,3 is a maximum gain of $1.2 per acre in this example. For 24-27, the maximum corn counter-cyclical payment will be $.6 per bushel higher due to a 3 cent drop in the loan rate and a 3 cent rise in the target price. Thus, for those later years, the maximum gain per acre for updating the corn FSA yield in this example would be $12/acre. If updating the yield required replacing part of the corn base with soybeans, this gain could easily be erased by the much lower soybean payments per acre. For examples of updating base and yields, refer to my website mentioned above. Robert Wisner HOG MARKET COLLAPSE Prices typically rally through the month of May. In fact, prices from mid- to late May have increased in 26 of the last 29 years, but 22 is clearly different. Live hog prices the last week of May averaged near $32/cwt and are the lowest for this time of the year since 198 when they averaged $28. While there is still hope for a summer hog price rally, the peak will be lower than expected and the summer high will struggle to exceed the $42 prices on late January. The University of Missouri reports that pork demand in April was up 1 percent from the year before, but supplies are overwhelming prices. Pork production hit a record for the month of April this year and has continued high through May (Figure 1). Weekly pork production in May was as high as 8 percent greater than the year before and year-to-date production is 2.4 percent higher than in 21. 1% Change in Pork Production, 22 v. 21: Weekly and Cumulative 8% 6% 4% 2% % -2% -4% -6% -8% -1% 1/5 1/26 2/16 3/9 3/3 4/2 5/11 6/1 Weekly Cumulative Figure 1 The May 31 USDA Hogs and Pigs report estimated that the April pig crop was up 1 percent as was the total number of sows and gilts bred in April. Figure 2 shows the monthly pig crop; April 22 is larger than April 21, but less than the same month in 1998 by 58, head. However, pig imports from Canada have increased since then and will likely offset much of the smaller U.S. pig crop. Imports of Canadian slaughter hogs totaled 17, 18, a month last fall and are likely to equal that again this fall. The import of Canadian pigs, weaned and feeder pigs, January through March

6 (the last report) has been approximately 3 percent higher than the year before. Pig imports for May-August 21 averaged 27, per month. A continued 3 percent increase would result in 35, pigs a month. Thus, the combination of 18, slaughter hogs in the fall and 35, weaned/feeder pigs in the summer is still less than the 58, difference in the pig crop. However, the numbers are dangerously close to the 1998 level. Prices are expected to improve into the summer and spend some time in the upper $3s to possibly $4 live basis before turning lower in the fall. Fourth quarter hog prices are still forecasted to be well below cost of production. Prices in the low $2 are likely and even lower prices are possible. For producers that have not already taken price protection, it may be too late to hedge an acceptable return. However, shackle space could be a major challenge this fall as it was in It will be important that producers plan their hog marketing well ahead of schedule to secure a market. Also monitor feed prices. Low hog prices are particularly offset by low feed costs. However, higher grain and SBM prices this summer would increase losses to pork producers even further. 9,5 Monthly Pig Crop (1, Head) 9, 8,5 8, 7,5 7, Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Figure 2 John Lawrence