A `normal' year for U.S. crops?

by Ron Sterk
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As of mid-March, nearby U.S. wheat, corn and soybean futures prices were well below year-ago levels.

The first major piece of the 2015 crop puzzle will fall into place March 31 when the U.S. Department of Agriculture releases its annual Prospective Plantings report. But there have been plenty of hints as to what the Department and private analysts expect this year, and it’s mostly different than the past five or six years, maybe even close to “normal.”

A look at the three major U.S. commodities — wheat, corn and soybeans — along with the macro-economy, transportation and all-important weather will round out the picture.

As of mid-March, nearby U.S. wheat, corn and soybean futures prices were well below year-ago levels with not much upside potential seen for the rest of the year. May wheat prices were down about 25%, corn futures were down more than 20% and soybean futures were down 30%. There were modest but mostly typical carries going into the fall, although new crop soybean futures were at a discount to old crop.

Based on the U.S.D.A. March 10 World Agricultural Supply and Demand Estimates report, prices paid to farmers in 2014-15 for all wheat were forecast to average $6 a bu (midpoint of range), down 13% from $6.87 a bu in 2013-14 and the lowest since $5.70 in 2010-11. Prices for corn were forecast to average $3.70 a bu, down 17% from $4.46 a bu last year and the lowest since $3.55 a bu in 2009-10. Prices for soybeans were forecast to average $10.20 a bu, down 22% from last year and the lowest since $9.59 a bu in 2009-10.

In its long-term outlook released in February in conjunction with the annual Agricultural Outlook Forum, the U.S.D.A. projected 2015-16 (beginning June 1, 2015, for wheat and Sept. 1, 2015, for corn and soybeans) average prices paid to farmers below those of 2014-15 for all three commodities, with all wheat at $5.10 a bu, corn at $3.50 a bu and soybeans at $9 a bu.

The U.S.D.A. also projected planted area in 2015 below 2014 area for all three crops, with the smallest decline for soybeans, which remain a favorable alternative because the crop is expected to produce the best return per acre in 2015 compared with corn, wheat or cotton, with acreage for the latter expected to tumble 12% this year. Wheat planted area in 2015 was forecast at 55.5 million acres, down 2% from 2014 but up 1% from the five-year average of 55.04 million. Corn planted area was forecast at 89 million acres, down 2% from 2014 and down 4% from the five-year average of 92.7 million. And soybean plantings were forecast at 83.5 million acres, down slightly from 83.7 million last year but up 7% from the five-year average of 78 million. Those early forecasts will receive their initial test in the March 31 Prospective Plantings report.

Any discussion about wheat, corn and soybean prices can’t be made without looking at the macro-economy largely because of the importance of exports in determining domestic grain prices. The value of the dollar against the euro fell to par (one dollar equal to one euro) in the week ended March 13 for the first time since 2003. A strong dollar tends to discourage exports because it makes U.S. commodities more expensive to foreign buyers. About 45% of the U.S. wheat and soybean crops and more than 10% of the corn crop are exported annually.

Another key factor is the price of crude oil, which also is affected by the value of the dollar. But separately, low oil prices affect the price of biofuels (ethanol and biodiesel), which affect the price of corn, soybeans and in some countries sugar. Nearby crude oil futures prices last week were about $45 a barrel, down more than 50% from a year ago and at six-year lows. Use of corn for ethanol rivals use of corn for livestock feed (each forecast at about 37% of 2014 corn production).

Transportation, while not necessarily a key factor affecting farmers’ spring planting decisions, does play a role in the price farmers receive for their grain, and thus can be seen as an indirect factor in planted area. While the price of grain and grain products such as flour were driven higher by historically poor rail performance last year, prices paid to farmers moved in the opposite direction. The cash basis (amount above or below the nearby futures price) in the country was pushed lower because of slow rail movement last year, especially in spring wheat areas of the Upper Midwest where rail grain shipments had to compete with crude oil being shipped from the Bakken shale oil region. One of the harshest winters on record last year slowed rail movement across much of the country, with one major railroad reporting “average days late” in early May 2014 at 26 days and “past-due” cars near 14,500.

But the transportation situation is significantly better this year, with that same railroad reporting average days late at 16 days and past due cars at around 2,700 as of late February. Despite the record-breaking snowfall in the Northeast, winter weather across most of the rest of the country has had considerably less impact on transportation this year. Cash basis levels and rail shipping rates are at more “normal” levels.

Now attention will turn to weather during the growing season, and unless you’re in California, it looks good.

“Weather during the growing season will be somewhere between good and excellent,” said David Salmon, head of Weather Derivatives, a Belton, Mo.-based energy and agricultural weather consulting service. He said the various weather models indicated good moisture and slightly above average temperatures from the Great Plains on east. “Warm and wet is good,” he said. Overall, weather during the season should be “solidly good,” Mr. Salmon said, and just slightly below last year’s favorable conditions.

Mr. Salmon said moisture conditions in the hard red winter wheat area of the southern Plains are better than a year ago, especially Texas and Oklahoma, with the exception of Kansas, which remains dry. Part of the Upper Midwest also has been dry, he noted, but it likely wasn’t a big enough area to impact overall production.

Which brings us back to March 31. Some may argue that the Prospective Plantings report is early enough that farmers have time to change their plans. To some degree that’s true, but the majority of growers already would have made seed and fertilizer commitments and many are locked into a crop rotation that limits significant change. In last year’s report, the U.S.D.A. noted that changes between intentions and the final estimates during the past 20 years (combined for corn, soybeans, winter wheat, durum and other spring wheat) have ranged from 12,000 acres to 3,844,000 acres with intentions above final estimates 47 times and below 53 times. But until the first winter wheat acreage and production estimates on May 12 and the annual (planted) Acreage report on June 30, it’s the best data available.

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