Iowa Farm Outlook Sept. 15, 2003 Ames, Iowa Econ. Info. 1871 September Crop Forecast: Less Damage to Corn Crop & More to Soybeans Than Anticipated USDA, NASS s September 11 crop forecasts indicated the record-dry August in Iowa and parts of neighboring states, and +100 degree temperatures did less damage to the nation s corn crop than almost all private forecasters had anticipated. The production forecast indicates the potential corn crop is about 1.2% smaller than the previous forecast, which was based on August 1 conditions. The indicated U.S. average yield is a near-record 138.5 bushels per acre, down 1.4 bushels per acre from last year s preliminary final estimate. The record U.S. corn yield was in 94, at 138.6 bushels per acre with nearly ideal growing conditions across the Corn Belt and lower-yielding corn genetics than are currently available. In contrast to corn, the adverse weather and aphid infestations sharply reduced the soybean production potential from earlier indications. USDA s forecast soybean crop, at 3% less than last year s weather-reduced harvest, was less than most private forecasters had anticipated and points to a further tightening of U.S. soybean carryover stocks in the year ahead. The indicated U.S. average soybean yield, at 36.4 bushels per acre is 1.4 bushels less than last year s yield, when adverse weather east of the Mississippi River and from South Dakota to Kansas and Missouri sharply reduced yields. The U.S. corn crop is forecast to be up 10% from last year s drought-reduced production, and is expected very slightly exceed potential utilization in the year ahead. In the foreign picture, USDA s World Agricultural Outlook Board indicates grain production in Europe was not impacted as severely as many had anticipated, although its crops as well as grain production in the former Soviet Union are down substantially from last year. The balance sheets on our web site (http://www.econ.iastate.edu/faculty/wisner/ ) in Column B show our projections of supplies, utilization, cash and futures prices if final production is near current forecasts. The balance sheet also has comparisons with previous years and a sensitivity analysis of impacts from potentially higher and lower yields than shown in
Column B. Based on historical performance of the crop report, we would expect final yields to fall within the range shown in Columns A and C about 67% of the years. Soybean Supply-Demand Prospects In contrast to corn, the nation s soybean crop was affected more seriously by the combination of late summer drought, high temperatures, and widespread aphid infestations. Yield forecasts dropped most sharply from August to September in Iowa, Minnesota, Kansas, South Dakota, Wisconsin, and Missouri. Decreases from last month in forecast yields for these states ranged from 9 bushels per acre in Wisconsin to 7 bushels in Iowa, and six bushels in South Dakota, Minnesota, and Kansas. U.S. soybean production is now forecast at 3.2% below last year s production and approximately 5% less than total utilization in the marketing year ended August 31, 2003. This combination creates a production-use gap of approximately 150 million bushels or 5.4% of last season s total use. If final production is near the current forecast, the gap will have to be filled by a combination of (1) reduced crushings and exports, and (2) reduced carryover stocks. It appears that the carryover stocks could be reduced by another 25 to 30 million bushels in the year ahead, thus helping to fill a small part of the production-use gap. The rest will need to be filled by (1) rationing of use through relatively high prices and (2) replacement of U.S. soybean and soybean product exports with foreign supplies, primarily from South America. Combined Brazilian and Argentine soybean production since 2000 has expanded by 791 million bushels or 33 percent. Adding the three smaller South American soybean producers, Paraguay, Uruguay, and Bolivia gives more than an 800 million bushel increase in production in the region in the past three years an increase equivalent to 30% of this year s U.S. crop. Since 2000, the world demand for soybean meal has increased considerably as the EU and Japan banned the feeding of meat meal, tankage, and related animal-based protein feeds to prevent the spread of Mad Cow Disease. Market impacts of the bans have now been completed, and the world appears to be in a period of slower expansion of livestock production than in the recent past except possibly for China. The strong late-summer rally in soybean prices has occurred early enough to encourage South American soybean producers to plant as many acres as possible to soybeans. South America thus is expected to fill a major part of the U.S. soybean productionuse gap, barring major weather or disease problems there. Even so, the shortfall of U.S. production is expected to tighten world supplies some, when compared to the past year, and to cause the U.S. season average soybean price to be 25 to 30 cents higher than in the marketing year just ended. For the next 2 or 3 weeks, there is significant down-side risk for cash prices as the market transitions from very tight old-crop supplies to much less tight new-crop supplies as harvesting gets underway. Our analysis suggests there also may be modest downward risk in November futures and new-crop prices as new-crop beans become available to the market. The extent of the down-side risk will depend some on how many of this year s soybeans are unusually small in size. Counter-Cyclical Payments The upper left-hand column of our web site noted above has a section showing U.S. monthly average prices for the 2002-03 marketing year, including preliminary prices for August. There is a possibility that corn growers may get a very small counter-cyclical payment (CCP) for the 2002 crop, although such a payment for soybeans looks quite unlikely. For the year ahead,
no CCP is expected for soybeans, although a very modest corn CCP is possible if production estimates stay at or above the current level. Our balance sheets show our very tentative projections of possible corn CCPs for the 2003 crop. The CCP is on 85% of payment bushels, and the advance payment-- if a payment is projected to be made for the crop year-- (except for the 2007 crop) is to be made not earlier than October 1, and if practical, not later than October 31 at 35% of the projected total payment for the crop year. The legislation does not provide detailed explanation of how the projected payment is calculated early in the marketing year for determination of the amount of the advance payment. However, seems likely that the mid-point of USDA projected marketing year average prices will be used. For corn, this would imply an advance of $0.02 cent per bushel total payment x 0.35 for the advance x 0.85 for the portion of historical bushels to be paid on. That works out to 6/10 of a cent per bushel of CCP payment base production. Australian Crop Forecast Two days before the USDA report, the Australian Bureau of Agricultural and Resource Economics (ABARE) released a report indicating recent rains have improved its crop prospects. ABARE forecasts Australian wheat production to be up 157% from last year s extremely small crop, along with increases of 124% for barley, 92% for sorghum, and 73% for canola (which competes with soybeans). Australia is one of the world s leading exporters of wheat, but is a relatively small producer and exporter of feed grains and oilseeds. Its improved crop outlook along with better than expected crops in the U.S. is psychologically slightly negative to corn prices. Yield Variations by State While yield potential is estimated to have dropped moderately from last month in Iowa, Minnesota, Wisconsin, and Missouri, improved weather conditions brought slightly higher yield forecasts in Nebraska, Indiana, Colorado, Ohio, Kentucky, and a number of smaller eastern and southern corn producing states that suffered severe drought last year. Table 1 below shows the indicated corn yield changes from last month and last year by states. Note the very large increases in yields for states from New York, Pennsylvania, and New Jersey southward along the Atlantic coast and into the south central U.S. These states have small corn acreages but the very large increases in yields from last year s severely reduced levels has contributed 2 million bushels to the predicted increase in this year s U.S. corn crop. As this is being written, the East Coast is being threatened by a possible major hurricane, which leaves final yields in these states a little uncertain. Despite the driest August on record in 2003, Iowa is forecast to continue as the No. 1 corn producing state again in 2003.
Soybean Crop Forecasts by State Table 2 shows a similar comparison for soybeans. In contrast to corn, Iowa is forecast to be the second ranking soybean producing state this year, with Illinois being the leading soybean state. Among major producing states, yield prospects dropped most sharply in Iowa, Wisconsin, Minnesota, South Dakota, and Kansas. Yield potential had already been reduced some in Nebraska, Kansas, and Missouri by hot, dry weather in the last half of July. Will Crop Forecasts Change More on October 10 and November 9? Figure 1 below shows the percentage changes in USDA corn yield forecasts from the September crop report to the final estimate for the season, for the last 38 years. Over this period, the corn yield forecast/estimate has increased 71% of the time. The average increase over all years was 0.9%. A similar increase this year would raise the U.S. average yield by 1.25 bushels
per acre, and would raise U.S. corn production by about 90 million bushels, assuming acreage remains at the current estimate of 71.8 million acres. Years of large decreases in corn yields from September to the season final estimate were 65, 70 (corn blight year), 74 (early Pe rc en t Ch an ge 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% Figure 1. USDA Corn Yield Forecasts, Percent Change Season Final Estimate, (Increased 71% of time) 68 70 68 74 65 67 69 71 73 75 77 79 81 83 Sept. frost), 83 (severe drought), 93 (severe W. Corn Belt flooding), 95, and 2000. An unknown question this year is to what extent test weights will be lower than normal and will reduce yields from current forecasts. 85 87 89 91 93 95 Avg. All Years, +0.9% 97 00 20 99 01 Figure 2. USDA Soybean Yield Forecasts, Percent ChangeSeptember to Season Final, 65-2002 15% 10% 5% 0% -5% -10% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 2001 Figure 2 shows similar comparisons for soybeans. In contrast to corn, the soybean estimates have shown a 50% track record of declines from September to the season final estimate over this time period. On average, over the past 38 years, the September yield forecast has been below the season final by 0.68%. A similar increase this year would raise the final production estimate by a very modest 18 million bushels, assuming no change in harvested acreage.
Geographic Changes in Crop Production Our web site (http://www.econ.iastate.edu/faculty/wisner/ ) in the upper right-hand column shows a map of forecast changes in U.S. corn yields by states, and also tables showing Iowa crop reporting district yield and production forecasts and changes from last year. Areas of Iowa with the largest potential decreases from last year in corn and soybean production are the northeast, southwest and north central districts. Robert Wisner Risk Management at Record Prices Fed cattle prices have been stronger than expected all summer and into the fall. The previous record high prices were $85.50/cwt the week ending March 25, 93. Choice steer prices averaged near $89.79 ($134.80 carcass) the week ending September 12 and several traded over $90. Will the trend continue? Seasonally fed cattle prices are expected to trade higher through the end of the year. Since 85 Choice prices were 4% higher in December than they were in August. In four of these years prices declined, in the past five years the prices increased less than 5%, and in half the years prices increased 5% or more. This history suggests that prices will trend higher by the end of the year. However, 2003 may be an anomaly. In 15 of the last 18 years Choice steer prices have declined from April to August. This year the August price was essentially the same to slightly higher than the April price and is bucking the trend. In the three years that August was higher than April, December prices were higher still. Thus, it is possible that prices could move higher yet, but these 3 years had prices in the $60s rather than the $80s and $90s. The record prices are due to both supply and demand factors. Cattle slaughter through the first week of September was 1.7% (421,500 head) higher than the same period in 2002. During the first 20 weeks of the year ending the week before Canada found the BSE cow and closed the border slaughter was about equal to the pace of 2002 (up 25,500 head). In the 16 weeks following the border closing slaughter increased 3.5% (396,000 head) as US packers tried to fill the void left by Canadian slaughter cattle. However, because of lighter weight carcasses total beef production has not increased as much as slaughter. Year-to-date though the first week of September beef production was down 0.4%, but it was up 0.6% since the border closed. In 2002 Canadian imports of beef and cattle accounted to slightly more than 8% of US consumption. Thus, compared to the same period in 2002 beef supplies are down more than 7%. While we do not have current export data, it is generally believed that US beef exports increased while Canada could not export. Canada will be able to export beef from animals under 30-months of age to the US after September 1, 2003. It is doubtful that Canadian imports will rise very quickly so domestic beef supplies will be limited through at least the end of the year. August Cattle on Feed inventories
were 5% lower than the year before and carcass weights remained nearly 3% lower. Steer carcasses between late May and early September averaged 26 pounds per head less than in 2002. How high? How long? Looking ahead there are factors that may limit how high prices go and for how long the market can maintain prices at these levels. Once the higher cattle prices are reflected as higher retail prices consumers may reduce consumption. We are also entering the period of plentiful pork and turkey features. Retailers and consumers will likely begin to shift interest to a cheaper alternative. The good news is that commercial slaughter is expected to remain lower than the year earlier period throughout 2004 (see Table). Weights are forecasted to increase to rebuild some of the supply. In total, beef supplies and per capita consumption will post year-over-year declines through the second quarter of 2004. Choice steer prices are forecast to average above $80 through March and possibly beyond. Summer lows should remain in the mid $70s. Yearling and calf prices are also expected to stay strong. Supply and Price Forecast by Livestock Market Information Center, September 10, 2003 Percent Change Western Kansas Steer Prices Supply Per Capita Choice 7-800# 5-600# 4Q03-3.9-4.9 $80-83 $95-97 $99-103 1Q04-2.1-3.9 80-85 95-98 103-107 2Q04-5.6-2.6 78-83 90-95 104-112 3Q04-3.5 1.3 73-78 87-95 97-107 4Q04-1.1 0.6 76-82 85-94 93-104 2004-3.1-1.1 76-81 89-95 99-108 Locking in Prices or Managing Risk Typically the topic of managing risk arises after long periods of losses and prices that do not offer much in the way of profit opportunities. Why worry about risk management when there are record high fed cattle prices? For cattle feeders buying feeder cattle at or near record prices the answer is obvious, as the fed cattle prices and recent feedlot profits appear to be bid back into feeder cattle prices. For cowherds retaining ownership, the current market offers an opportunity to lock in prices well over the cost of production. However, there is a difference between locking a price and managing risk. While they can be one in the same, it may be better to think of them separately. Locking in a price is simply that. Using the futures or forward contract to establish a price for cattle delivered at some point in the future. Managing risk refers to evaluating the current market environment, determining the chance of an unfavorable outcome, and deciding how best to protect against the risks that you want to avoid. For some producers this means protecting against any downward movement in prices. For others it may refer to avoiding a catastrophic drop in prices. Tools available for locking in a price to protect against lower prices include futures contracts and forward contract for delivery with a packer. The advantage of the forward contract is that there are no margin calls and no basis risk. The disadvantage is that the packer has a
captive supply of cattle for a given delivery period because the producer is obligated to deliver the cattle to the packer offering the contract. While futures prices are at or near record levels through the end of the year, prices for February, April and June are not as favorable. There is concern that current profits will encourage increased placements to increase supplies next spring and summer. Also, consumers will have time to adjust their purchase in response to higher retail prices decreasing demand for beef. Because these market forces are a real potential, cattle feeders should be cautious. Recent events provide examples of how markets can react and trigger catastrophic losses. Look at the market decline following terrorist attacks September 11, 2001 and discovery of BSE in Japan September 10, 2001. BSE dropped Canadian cattle prices by 70% and a case of BSE or FMD, (or potentially even a false positive test for either) would have a similar effect in the US. In addition to futures and forward contracts, ways to avoid a catastrophic loss include buying a put option or buying cattle revenue insurance. These strategies provide price protection at prices below the current futures market price, but allow the producer to take advantage of higher prices if they occur. Options have been available since 87, but Livestock Revenue Protection for cattle just went on the market in June of this year. Tables 2 and 3 show the options and LRP premiums and expected floor price for a range of protection levels. For February marketings (Table 2) the LRP coverage level is very close to the expected floor price with options and at lower premiums. The LRP premiums are subsidized 13% which may explain part of the difference. April marketings (Table 3) did not have the same level of coverage from the LRP. Premiums were lower, but so is the coverage. For about the same premium ($1.70 v. $1.93) options will buy a $2.65/cwt higher floor. Table 2. February Marketings Costs and Expected Floor Price for Options and Livestock Revenue Protection ($/cwt) Strike Option Expected Coverage Price Premium Floor LRP Premium Level 80 3.50 74.40 2.39 74.21 78 3.03 72.87 1.73 72.77 76 2.20 71.70 1.32 71.13 Table 3. April Marketings Costs and Expected Floor Price for Options and Livestock Revenue Protection ($/cwt) Strike Price Option Premium Expected Floor LRP Premium Coverage Level 76 3.15 74.75 1.93 69.55 74 2.25 73.65 1.43 67.98 72 1.70 72.20 1.07 66.30
There are other important differences. First is that LRP provides basis protection that options do not. However, options provide more flexibility on marketing. They expire the first Friday of the delivery month. The LRP coverage is for a fixed number of weeks, for example 30 weeks, and then the contract is settled whether your cattle are already sold or not. For more information about LRP check the Iowa Farm Outlook from May 1, 2003. http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/050103.pdf or the RMA website that reports LRP premiums. http://www3.rma.usda.gov/apps/livestock_reports/lrp_select_date.cfm John Lawrence