May 17, 1996 Ames, Iowa Econ. Info. 1694 PLANTINGS LAG IN EASTERN CORN BELT & SPRING WHEAT AREAS Planting progress will be one of several factors influencing prices in the next several weeks. In contrast to earlier-than-normal corn plantings in Nebraska, Iowa, and Missouri, some eastern Corn Belt farmers had barely begun planting by May 12. The most serious delays have been in Ohio and Indiana, although planting progress lags behind normal in Kentucky, Michigan and Wisconsin. Heavy mid-may rains in Illinois also halted fieldwork in parts of that state after good progress earlier. The grain trade has been hoping for good spring wheat yields in the United States and Canada this year to help offset severe crop losses in hard and soft red winter wheat. However, planting delays have occurred in a large part of the spring wheat area. Percent of corn, soybean, and spring wheat plantings by major states were as follows on May 12, according to USDA's weekly weather and crop report: Corn Soybeans Spring Wheat 5/12 Avg 5/12 Avg 5/12 Avg 1996 91-95 1996 91-95 1996 91-95 AR -- -- 20 8 -- -- ID -- -- -- -- 86 85 IL 52 56 4 17 -- -- IN 10 51 3 18 -- -- IA 83 50 12 16 -- -- KS 88 70 9 6 -- -- KY 35 64 1 7 -- -- LA -- -- 41 13 -- -- MI 14 29 1 9 -- -- MN 43 47 4 15 14 69 MS -- -- 60 19 -- -- MO 78 48 6 7 -- -- MT -- -- -- -- 59 77 NE 76 52 7 9 -- -- ND -- -- -- -- 16 59 OH 6 56 0 22 -- -- SD 29 30 2 6 -- -- WI 24 33 -- -- -- -- 17 Sts 53 51 19 Sts 9 14 5 Sts 32 67 First Winter Wheat Forecast... On May 13, USDA's NASS issued its first field-based forecast of U.S. winter wheat production. Prospects for the white wheat crop in the Pacific Northwest look favorable. However, indicated hard and soft red wheat production is down sharply from last year, despite increased planted acreage. NASS estimated that 57 percent and 30 percent of the Texas and Kansas wheat crops, respectively, will be abandoned this year because of drought. Some of the abandoned wheat acres may be replanted to sorghum, although many areas still need rain to make that an alternative. The U.S. winter wheat crop was tentatively forecast at 1.364 billion bushels, down 12 percent or 183 million bushels from last year and down 18 percent from two years ago. The forecast includes 5.6 million more wheat acres to be abandoned than shown in the March acreage report.
The hard red winter wheat crop (grown mostly in the central and southern Great Plains) was forecast to be down 19 percent, while the soft red crop was indicated to be down 11 percent. Soft red wheat is grown mostly in the eastern Corn Belt, parts of Missouri, and the southeastern U.S. The white winter crop was indicated to be up 10 percent. Most wheat feeding usually comes from hard and soft red wheat. Some winter-killed soft red wheat land could be replanted to corn or soybeans. Corn Acreage Adjustment... In an unusual acreage adjustment, the USDA raised its anticipated 1996 corn planted acreage figure by 1.1 million acres from the March intentions to reflect replantings of wheat to corn. The indicated soybean and sorghum plantings were left unchanged from March. At the same time, the USDA's World Agricultural Outlook Board raised its projected 1995-96 U.S. corn exports by 50 million bushels and lowered its projected September 1, 1996 corn carryover to 317 million bushels. International Crop Estimates... USDA projections show highly tentative projections for an 8.2 percent increase from last year in the 1996-97 world wheat crop, based partly on anticipated acreage and trend yields. World coarse grain (feed grain) production is tentatively projected to be up 11 percent following a 9 percent decline in 1995-96. Increased wheat production is anticipated in Argentina, Australia, Canada, China, EU, Russia, and North Africa. Larger feed grain crops are projected for Argentina, Canada, EU, Russia, and the Ukraine, along with a relatively small 80 million bushel increase in China. Also, in a highly tentative projection, USDA 1996-97 figures show a 1.5 percent increase in world oilseed production. Early indications point to reduced oilseed plantings in Canada, EU, and former Soviet Union (FSU). Major oilseeds in these countries are sunflowerseed and rapeseed or canola. They have a higher oil content than soybeans, but a lower protein content and are considered to produce a lower quality of protein meal than soybean meal. Smaller production of these crops could tighten world vegetable oil supplies somewhat in the year ahead. USDA Balance Sheets... USDA's latest corn and soybean supply-demand projections for the current marketing year and highly tentative projections for 1996-97 are shown in Tables 1 and 2. The center columns for 1996-97 are the USDA projections, including the midpoint of their projected price ranges. The left and right columns are our numbers, showing likely impacts from alternative yield levels. The USDA projections for 1996-97 are based on adjusted trend yields and the latest corn acreage adjustment, rather than on actual field observations. The corn carryover is projected to increase modestly by September 1, 1997, but to remain at a historically low level. To meet the 1995-96 corn export projection, weekly exports from now through summer will need to average about 33.3 million bushels/week. Exports so far have been above that level. Weekly soybean exports will need to average slightly over 10 million bushels per week from May 9 through August 31 to meet USDA projections. Recent weekly soybean exports have been below this level. Table 1. Corn Balance Sheet (Mil. B.) 5/14/96 Proj. USDA Proj. 1996-97
'95-96 A B C Suppl: Pl. A. (mil) 71.2 79.5 81.0 81.5 Harv. A. (mil) 64.9 72.5 74.4 75.0 Bu./A. 113.5 105.0 126.0 132.0 Production 7,374 7615 9375 9901 Imports 15 25 10 5 Carryover 1558 317 317 317 Total 8947 7957 9702 10,223 Util: Feed, Resid. 4700 3900 5150 5250 Other Domestic 1630 1630 1690 1710 Exports 2300 2050 2100 2200 Total 8630 7580 8940 9160 Carryover 317 377 762 1063 Free Carryover 275 377 762 1,063 U.S. Farm Price $3.85 $2.90 Ia. Avg. Price $3.75 $2.80 Hrv. Pr. C. Ia. $2.90 Table 2. Soybean Balance Sheet (Mil.B.) 5/14/96 Proj. USDA Proj. 1996-97 '95-96 A B C Suppl: Pl. A. (mil) 62.6 62.8 62.5 63.3 Harv. A. (mil) 61.6 61.8 61.5 62.3 Bu./A. 34.9 32.0 37.0 41.0 Production 2152 1977 2275 2554 Imports 5 8 5 4 Carryover 335 180 190 180 Total 2492 2166 2470 2738 Util: Crush 1360 1320 1370 1445 Other Domestic 117 98 120 98 Exports 825 610 790 855 Total 2302 2028 2280 2398 Carryover 190 138 190 340 U.S. Avg. Price $6.90 $6.88 Ia. Avg. Price $6.80 Hrv. Pr. NC Ia $6.75 Meal Dctr/T 48% $231 $193 Soyoil, /lb. 25.00 24.00...Robert Wisner HIGHEST HOG PRICES SINCE 1990 For the first time since 1990, cash hog prices at Iowa plants topped $60/cwt (on May 15th). On May 30th that year, cash prices set a record at $68/cwt. Good domestic and export demand and sharply lower hog numbers in the face of increased packer capacity has rallied the market. The futures market continues to lead cash prices. June futures traded near $65 which is close to a record high set in August 1982 at $67.57. The last time prices were in this neighborhood, futures topped out at a similar mark, $67.25 on May 29, 1990. Following 1990... There are similarities between this year and 1990 (Figure 1). Although we are at a lower price level, prices are running parallel to one another.
Neither year experienced a seasonal price decline in the spring, but rather had increasing prices since the first of the year. In both years pork belly prices doubled from the same period in the previous year. Slaughter was well below that of the previous year in both 1990 and 1996. There are also some important differences between the two years. First, recognize that thus far, 1996 prices have averaged $4.50-5.00/cwt below 1990 prices, and in recent weeks the difference has been $7-8/cwt. If this trend continues, the top this year would be $63 rather than $68. Second, fed cattle prices in 1990 were in the mid-$70s rather than the current $60 level. As a result, pork will face stiffer competition at the retail counter this year. Slaughter in May 1990 was less than 1.6 million head rather than the recent 1.7 to 1.8 million head. Third, exports are playing a bigger role today than before. They provide more upside potential, but export customers can be fickle. Our largest pork export customer, Japan, has been an aggressive buyer since early March. Buyers are securing products before a 24% tariff is imposed on pork imported to Japan. The tariff is expected to begin July 1 and continue through March 31, 1997. Because it takes approximately 2-3 weeks for hogs sold to reach Japan, buyers for these orders will be less aggressive after the first week of June. The same tariff was in effect from last November through March. During January to October 1995, U.S. exports to Japan were 59 percent higher than the same period of the previous year. Exports following the tariffþwhile showing year-over-year increasesþhave not returned to the pre-tariff levels seen last fall (Figure 2). Finally, the reduced slaughter in 1990 can be traced to wide-scale herd liquidation following the 1988 drought and resulting high corn prices. That liquidation began in December 1988 and continued until December 1990. Although liquidation began in December of 1994, the current shortage of market ready hogs can largely be traced to breeding problems during last summer's hot weather. This liquidation has not been as deep as previous ones andþ according to USDA figuresþthe December 1995 breeding herd showed an increase over the previous year. The difference between 1996 and 1990 is that heat induced hog shortages are short lived as sows are rebred at a later date. Anecdotal evidence from producers points to empty farrowing crates in November and December followed by more sows farrowing than they could handle in January and beyond. Price Forecast and Pricing Opportunities... Given the factors discussed above, the cash hog market is expected to peak in late May or early June in the mid- to upper $60s. Futures prices are also expected to peak at that time. In 1990, June futures that peaked at $67.25 on May 29th expired June 20th at $60.50. That year, July, August, and December contracts all expired lower than they traded on May 29th. July and August were within $.40 of their contract high on May 29th, December was within $1.70 of the contract high. October futures expired $2.50 higher than their May 29th closing price, but traded as much as $5.50 below it in early September. Also note from Figure 1 that prices made a stronger post-labor Day rally in 1990 than would be expected in most years. There should be opportunities over the next two to three weeks for pricing hogs for the remainder of the year. Table 1 shows the hedging opportunities using the 5-year average basis and May 16th futures closes.-4- Econ. Info. 1694
Table 1. Hedging Potential for Hogs, May 16, 1996 Closing Prices Period Basis Futures Hedge Price June 1-20 -$2.71 $64.67 $61.96 July 1-20 -.96 60.75 59.79 Aug 1-20 -.29 56.00 55.71 Sept 1-15 +.92 50.77 51.69 Oct 1-20 0.0 50.77 50.77 Nov 1-15 -3.35 53.97 50.62 Dec 1-20 -2.31 53.97 51.66 The option market also offers protection from lower prices. After adjusting for basis and purchasing the put option, a producer can set an expected price floor for October hogs at $50 for $2.55/cwt for a net minimum price of $47.55. Although not all periods are illustrated in the example, it is apparent that the futures market believes that cash prices will remain above $50 for the remainder of the year. These prices are currently available to producers that hedge. The futures market may well move higher between now and mid-june, offering even greater hedging opportunities. If 1990 is an indicator, hedging the remainder of 1996 production in the near future will result in higher net prices than staying in the cash market. Given the fundamentals outlined above, prices may decline further than they did in 1990....John Lawrence