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With all the uncertainty, it is at least comforting to recognize that the input side of our business — corn and soybeans — is relatively stable at attractive prices to the livestock industry.
April 10, 2017
There have been plenty of questions surrounding the revenue side of the pork production business. Will the two new plants “save” us later this year? Will packer margins be robust? Will exports remain healthy? Will President Trump do something to throw a wrench in the gears of commerce?
With all the uncertainty, it is at least comforting to recognize that the input side of our business — corn and soybeans — is relatively stable at attractive prices to the livestock industry. The recent Stocks and Acreage report further reinforced the expectation that prices will remain favorable.
Attached are my best guesses at the balance sheets for this coming year based on the March 31 acreage.
The corn balance sheet has shifted as the one to pay attention to as we enter the growing season, but there is seemingly nothing onerous on the horizon. This is a sharp contrast to where we have spent the better part of the past three years, with pressure on the soybean market to perform or see end-users pay the price. Literally.
Note that I am using the USDA acres and a yield that is a little bigger than the traditional 20-year trend in corn. I think we are entering a new era of variable rate planting, hybrid selection based on statistical measurements and yield expression on the part of the scientists at the major corn companies that necessitates a tighter time frame for prediction. Hence, the 170 yield number. I have backed off feed demand slightly in the face of increased animal units. The rationale has everything to do with the second component of the feed demand line, the “Residual.” The best indicator of feed demand is, oddly, not the quantity of animal units but the size of the crop. A bigger crop means more ground piles which mean more spoilage and wastage and a subsequent higher “Residual” value on the balance sheet. The March Stocks report indicated that we have over-juiced this line item on the current balance sheet and a correction is likely in the April numbers later this week. I have also tweaked ethanol with a light increase in grind and backed off exports.
The mitigation of exports is likely given the size of the South American crop and the desire by a major importing nation — Mexico — to do something other than use U.S. product. The carryout number I am using for next year is relatively close to our value this year and I anticipate cash values to be similar, too. It seems to me that the U.S. farmer is going to have to find a way to come to terms with $3.50 corn. Lower seed prices, lower fertilizer prices, lower rent and higher yield is where it is all at. Seed and fertilizer have already come down, and I am not holding my breath for lower rent values. The yield potential is the area that probably holds the most promise for making them whole. The biggest variable on the balance sheet is, of course, yield and we can all be amateur meteorologists and handicap the impact of heat and moisture in our neighborhood, but the long-term forecast does not indicate any specific threat for the growing season.
In my opinion, an end-user of corn can utilize the July option contract as your marker for the current growing season. If we have trouble getting the crop in the ground, the July would historically be the primary recipient of upward pressure. If we rock toward July 1 in decent shape and the weather forecast for pollination looks decent, you can likely begin your sighs of relief. There are plenty of old crop bushels hanging around to bridge the gap until harvest and the pressure will be on the grain production community to move bushels to make room for the fall harvest. This is a good set up for the livestock industry. Plenty of stocks to get us through this year and the prospects of plenty this coming year.
The soybean balance sheet is the one that took the most interesting turn, thanks to the unprecedented acreage number in the March report. Before the balance sheet, I have attached a chart of the historical spread between corn and bean acreage. Note, there was only one time in history, 1983, where the bean acres surpassed corn acres, and that was because of the controversial Payment-In-Kind program that reduced corn acres by 30% in an effort to decrease the quantity of government-owned stocks that were at a burdensome 50% carryout-to-use ratio. The combination of reduced acres in 1983 and a drought that summer did the trick and we have never revisited a similar policy since.
The soybean balance tables are comfortable, if not downright burdensome. This is a tough one to get your mind around if four out of the last five years you have paid $500+ for soybean meal. The cure for high prices is high prices, and the combination of increased acres this coming year and excellent yields in the most-recent growing seasons in both North America and South America have set us up for something that was unexpected just a few months ago — low prices.
The previously mentioned acreage projection, a record 89.5 million, sets the stage for what is likely to result in record stocks at the end of next year, and not by just a minor quantity — nearly 600 million bushels. Compare this to the last few years where we have struggled to end with 200 million bushels, and this is only after prices moved high enough to curtail disappearance. Polar opposite as we come into this year with a big stockpile and it looks like we are going to add to that surplus. I put the yield at 48.5 only because we gained 1.6 million acres from Kansas and North Dakota and South Dakota, this will likely have a tempering impact on average U.S. yields.
I have kept exports at a robust level just because we have to export a decent quantity to keep from drowning in beans. South America will provide stiff competition all year and it could likely be a race to the bottom. Again, good news for the livestock guy.
Not to be ignored in this whole scenario is the trouble in the distiller’s dried grains with solubles export market which is pressuring prices and keeping more product in the domestic market. It is hard to envision a scenario devoid of a massive drought that starts to materially impact input prices for the livestock industry.
Lastly, I have included a basis chart for corn using Cedar Rapids and Fort Dodge, Iowa, as my marker markets. We are already experiencing wide basis in soybean meal and I have no reason to think that will change anytime soon. Corn basis is at historical norms for our storage/stocks situation and should remain favorable, too.
The USDA report will be out on April 11, and may amend these tables a bit, but probably not enough to change the overall tenor of the market.
Bottom line: the outlook for the livestock producer is favorable for feed values. Enjoy the ride.
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