September 16, 2015

Revised 2015 Corn and Soybean Return Estimates

by Gary Schnitkey, Agricultural Economist - University of Illinois



As harvest is beginning, more information is available to project 2015 revenues and returns. Revised returns are presented in this article for high-productivity farmland in central Illinois. Similar estimates for northern, southern, and low-productivity central Illinois farmland are available in the 2015 Crop Budgets. Overall, returns for 2015 continue to be projected at low levels, with returns being below average cash rent levels.

Revised gross revenue

Table 1 shows revised budgets for high-productivity farmland in central Illinois. Much of the emphasis during this revision related to updating gross revenue estimates included yields, prices, Agricultural Risk Coverage (ARC) payments, and crop insurance payments.

Yields: When originally released, 2015 Crop Budgets contained yield estimates based on trend yields. At this point, the information available to update these yields estimates comes from the National Agricultural Statistical Service (NASS). NASS revised state yield estimates on September 11th. Obviously, yields will vary from expectations across Illinois. At this point, yield estimates for smaller areas are not available. As a result, estimated state yields are used to adjust 2015 budgeted yields.

The NASS state yield estimates for corn in Illinois is 173 bushels per acre. The 173 bushel yield estimate is one bushel higher than the 2015 trend estimate of 172 bushels per acre. As a result, corn yields in Table 1 are adjusted up by one bushel per acre from initial estimates.

NASS estimated the 2015 soybean yield at 54 bushels per acre. The 54 bushel yield is four bushels higher than the trend estimate of 50 bushels. As a result, soybean yields are adjusted up by four bushels per acre from their original estimates.

Commodity prices: Revised World Agricultural Supply and Demand Estimates (WASDE) were released on Friday (for a commentary see farmdocDaily, September 14, 2015).

WASDE’s range on corn price for the 2015–16 marketing year is from $3.45 per bushel to $4.05 per bushel, with a midpoint of $3.75. Current forward cash bids in central Illinois range from $3.85 per bushel for harvest-time delivery to $3.95 for spring delivery. A price of $3.90 per bushel is used in Table 1, reflecting an expectation in the higher end of the WASDE range.

WASDE’s range on soybean price is from $8.40 per bushel to $9.90 per bushel, with an average of $9.15 per bushel. Current central Illinois forward bids range from $9.00 for harvest-time delivery to $8.75 for spring delivery. A price of $8.90 per bushel is used in Table1, slightly below the mid-point of the WASDE range, reflecting the lower forward bids.

ARC payments: Revenue includes $35 per acre for ARC payemnts. This $35 value is an average over corn and soybean base acres, with procedures used to estimate ARC payments provided in an August 18th farmdocDaily article (http://farmdocdaily.illinois.edu/2015/08/2016-arc-co-payment-estimates-for-cash-rent-bid.html). Items to note about these ARC payments are:

  • ARC payments are paid on base acres, not planted acres. Therefore, a blended average of base acres are shown in Table 1. Since planted acres do not matter, the payment does not vary whether corn or soybeans are planted

  • ARC is a county-level revenue program. Therefore, payments will vary across counties.

  • Higher market year average prices will result in lower ARC payments and vice versa.

  • The payments shown in Table 1 will be received in 2016. ARC payments made this autumn relate to 2014 production. Farms in northern Illinois will receive 2014 ARC payments this autumn of about $35 per acre averaged across corn and soybean base acres. ARC payments for 2014 production will not be received in central and southern Illinois.

Crop Insurance: Projected prices for 2015 are $4.15 per bushel for corn and $9.74 per bushel for soybeans. The December 2015 corn contract currently is trading near $3.95 per bushel. If $3.95 is the harvest price, the harvest price would be 95% of the projected price, indicating that yields would need to be below guarantee yields before crop insurance payments would occur. The November soybean contract currently is trading near $8.90, with $8.90 being 91% of the projected price. Similar to corn, yields must be below guarantee yields before crop insurance payments occur.

There will be some areas where crop insurance payments occur, particularly in areas where large amounts of rain occurred this spring. To recognize these payments, budgets in Table 1 include $20 per acre in crop insurance payments.

Gross revenue: Given these estimates, gross revenues are estimated at $840 per acre for corn-after-soybeans, $801 for corn-after-corn, $603 for soybeans-after-corn and $656 for soybeans-after-two-years-corn (see Table 1). Operator and land return

Cost remain unchanged from pervious budgets. Given the above gross revenues and previously estimated costs, operator and land return estimates are $255 per acre for corn-after-soybeans, $217 for corn-after-corn, $233 for soybeans-after-corn, and $286 for soybeans-after-two-years-corn. These are the returns shared between farmers and land owners.

The projected 2015 operator and land returns are below those of recent years (see Figure 1). The last time corn had a lower operator and land return than projected for 2015 was in 2008. Soybean returns in 2006 were lower than the 2015 projected soybean return.

Figure 1 also includes average cash rents for this quality of farmland. Both the 2015 corn and soybean operator and land return are projected to be below the 2015 average cash rent.


Summary

Revised estimates of gross revenue for 2015 are presented in this article. Revised gross revenues point to low returns and low net incomes for 2015. Revisions to these estimates will be made as more accurate yield, price, and cost information is obtained.


September 08, 2015

2016 Cash Rents May Need to Drop $100

Farm income this year is going to be dramatically lower than in the past. Next year doesn’t look any better even on highly productive central Illinois soils. Todd Gleason reports farmers must cut costs to survive, and that cash rents may need to come down by as much as one-hundred-dollars per acre.


August 11, 2015

How Crop Production Reports are Collected

USDA’s National Agricultural Statistics Service (NASS) will release the first survey-based yield and production forecasts for the 2015 corn and soybean crops this month. Even though a description of the NASS crop production forecast methodology is widely available, there always seems to be some misconceptions about how NASS makes corn and soybean yield forecasts. University of Illinois agricultural economists Darrel Good and Scott Irwin put together a brief overview of that methodology and posted it to the FarmDocDaily website.

While they say their summary does not do full justice to the very comprehensive forecasting methodology, it is useful to place the upcoming yield forecasts in the proper perspective.

NASS corn and soybean yield forecasts are made in August, September, October and November. The final yield estimate is released in January based on the comprehensive December Agricultural Survey of producers. Two types of surveys are used each month to collect the forecast data.

The Monthly Agricultural Yield Survey (AYS) of producers is conducted in 32 states for corn and 29 states for soybeans with a total of about 25,000 producers surveyed for all crops in August. The Objective Yield Survey (OYS) is conducted in 10 states for corn and 11 states for soybeans. The surveys are generally conducted in a two week period ending about a week before the release of the forecasts.

For the Agricultural Yield Survey, a sample of farm operations to be surveyed is drawn from those who responded to the June acreage survey. While the sample of operations to be surveyed changes from year-to-year, for any particular year the same operations are interviewed each month from August through November. Survey respondents are asked to identify the number of acres of corn and soybeans to be harvested and to provide a forecast of the final yield of each crop. Based on these responses, average yields are forecast for each survey state and for the nation.

The goal of the Objective Yield Survey program is to generate yield forecasts based on actual plant counts and measurements .The sample of fields (1,920 for corn and 1,835 for soybeans) is selected from farms that reported corn (soybeans) planted or to be planted in the June acreage survey. A random sample of fields is drawn with the probability of selection of any particular field being proportional to the size of the tract. Two plots are then randomly selected in each field.

Data collected from each corn plot during the forecast cycle are used to measure the size of the unit and to measure or forecast the number of ears and grain weight. These data include (as available based on maturity) row width, number of stalks per row, number of stalks with ears or ear shoots per row, number of ears with kernels, kernel row length, ear diameter, ear weight in dent stage, weight of shelled grain, moisture content, total ear weight of harvested unit, lab weight of sample ears, weight of grain from sample ears, and moisture content of shelled grain from sample of mature ears. Corn yield is forecast based on the forecast (or measurement if maturity allows) of the number of ears, the weight per ear, and harvest loss.

Data collected from soybean plots (as available based on maturity) include row width; number of plants in each row; number of main stem nodes, lateral branches, dried flowers and pods, and pods with beans; weight and moisture content of beans harvested by enumerator; and weight and moisture content of harvest loss. The data collected are used to forecast yield based on a forecast (or measurement if maturity allows) of the number of plants per acre, the number of pods with beans per plant, the average bean weight, and harvest loss.

For both corn and soybeans, the state average yield forecast based on the Objective Yield Survey is the simple average of the yields for all the sample fields. In addition, a state yield forecast is also made by first averaging the forecast or actual yield factors (such as stalk counts, ear counts, and ear weight) and then forecasting the state average yield directly from these averages. This forecast is based on a regression analysis of the historical relationship (15 years) between the yield factors and the state average yield. State average yields are combined to forecast the U.S. average yield.

The NASS corn and soybean survey and forecasting procedures produce a number of indictors of the average yield. In August these indicators include: average field level yields from the Objective Yield Survey, average state level counts from the Objective Yield Survey, and the average yield reported by farmers in the Agricultural Yield Survey. Each of the indicators provides input into the determination of the official yield forecasts by the USDA’s Agricultural Statistics Board.

The accuracy of the USDA yield forecasts, write Darrel Good and Scott Irwin, relative to the final yield estimates varies from year to year, but as would be expected, improves each month through the forecast cycle as the crops become more mature.

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Links

Understanding USDA Crop Forecast

Marketing & Outlook Brief


July 21, 2015

Something USDA NASS Cooked Up

Scroll over each state to reveal how its crop condition has changed over the season. Ohio is particularly interesting.


July 17, 2015

Wheat Consumption Tracks Our Eating Habits

The following chart and commentary are posted to a USDA ERS website. Essentially it tracks how many pounds of wheat flour the average U.S. citizen has consumed per year since 1964. The ERS commentary on the reasons for the increase in consumption through the mid–1990’s and sudden drop near the turn of the century reflect the eating habits of a couple generations of Americans.

Wheat consumption stable among U.S. consumers in recent years
title

Per capita wheat flour consumption has been relatively stable in recent years, and is estimated in 2014 at 135 pounds per person, unchanged from 2013 but down 3 pounds from the recent peak in 2007. The 2014 estimate is down 11 pounds from the 2000 level when flour use started dropping sharply, partially due to increased consumer interest in low-carbohydrate diets. From the turn of the 20th century until about 1970, U.S. per capita wheat use generally declined, as strenuous physical labor became less common and diets became more diversified. However, from the early 1970s until the late 1990s, wheat consumption trended upward, reflecting growth in the foodservice industry and away-from-home eating, greater use and availability of prepared foods for home consumption, and promotion by industry organizations of the benefits of wheat flour and pasta product consumption. During this time, the domestic wheat market expanded on both rising per capita food use and a growing U.S. population.  Relatively stable per capita flour use in more recent years means that expansion of the domestic market for U.S. wheat is largely limited to the growth of the U.S. population. This chart is based on the April 2015 Wheat Outlook report.


June 20, 2015

Farmers Overwhelmingly Choose ARC County

Original Article

The U.S. Department of Agriculture, Farm Service Agency (USDA, FSA) recently released enrollment data on commodity program choices made under the 2014 Farm Bill. This article summarizes how farmers split program acres between Agricultural Risk Coverage - County Option (ARC-CO), ARC - Individual Option (ARC-IC), and Price Loss Coverage (PLC). Overall, ARC-CO was the overwhelming choice. ARC-CO was elected on 76% of program acres. PLC was next with 23% of acres, followed by ARC-IC with less than 1% of acres. There were differences in program choices across crops, as discussed below.

Program Choices

Farmers choose ARC-CO for 97% of soybean base acres and 94% for corn base acres (see Figure 1). Analysis indicated that expected payment from ARC-CO were larger than from PLC for both corn and soybeans (see farmdoc daily January 27, 2015 for more detail), suggesting high use of ARC-CO. However, the fact that ARC-CO accounted for over 90% of program acres for both corn and soybeans is astonishing. The large share suggests:

  • Farmers did not split decisions between ARC-CO and PLC. One strategy was to choose ARC-CO on some farms and PLC on other farms, splitting protection between a revenue program whose guarantee will change over time and a target price program with a fixed reference price. Most farmers did not follow the strategy of splitting choices.

  • Farmers raising corn and soybeans placed little value on having the option to purchase Supplemental Coverage Option (SCO). SCO is a county-level crop insurance program that rides on top of individual plans. SCO is only available if PLC was chosen.

  • When making decisions, the default was PLC. Farmers had to make an active decision to sign up for ARC-CO. Most farmers raising corn and soybeans made an active decision to choose ARC-CO.

  • The large percentages suggest that farmers raising corn and soybeans were comfortable with revenue-based programs. Some questioned this because ACRE - a revenue program available in the 2008 Farm Bill that preceded ARC-CO - was chosen by few farmers. The decision to use ARC-CO also mirrors crop insurance decisions made by corn and soybean farmers, where farmers overwhelmingly choose to use revenue insurances.

On corn, farmers used ACRE on 8.1% of base acres in 2013. Hence, revenue program use on corn increased from 8.1% in 2013 up to 94% after 2014 program choices. There are a number of reasons that could have caused this change:

  • To enroll in ACRE, an individual had to give up 20% of direct payments and loan rates were reduced by 30%. Since direct payments were eliminate and loan rates were the same no matter the choice in the 2014 Farm Bill, this tradeoff did not exist for ARC-CO.

  • ACRE was more complicated than ARC-CO, especially as ACRE required two triggers to be met before a farmer could receive payments.Farmers had to provide yields to FSA when enrolling in ACRE. This was not the case for ARC-CO.

  • Given the elimination of direct payments and the choices posed in the 2014 Farm Bill, farmers likely gave the choices more consideration in 2014.

  • Price expectations were different in 2014 than when ACRE decisions were made. There also are expectations for larger up front ARC-CO payments.

At the other end of the spectrum, near 100% of peanut and long grain rice base acres were enrolled in PLC (see Figure 1). These large percentages are not a surprise as studies suggested that PLC would make larger payments than ARC-CO for these crops (see farmdoc daily January 27, 2015 for more detail). Reference prices for these crops are well above market-level prices, leading peanuts and rice farmers to overwhelmingly choose PLC.

Perhaps the surprise in rice is the fact that ARC-CO was elected for a relatively high percentage of acres for Japonica rice. ARC-CO was selected on 34% of acres, ARC-IC was selected on 4%, and PLC for 62%. Note that yield and price dynamics are different for japonica rice than for long grain prices and Japonica's reference price was set at 115% of the long and medium grain reference price. Also, all Japonica rice base acres are located in California, and the drought situation may be playing a role in program choice.

Wheat choices were split relatively evenly between ARC and PLC (see Figure 1). ARC-CO was used on 56% of base cases, ARC-IC on 2%, and PLC on 42%. Studies of expected payments suggested that ARC-CO and PLC were near one another, potentially leading to the relatively even split.

ARC-IC was used on the fewest program acres. Crops having the most use of ARC-IC include large chickpeas (11% of base acres), small chickpeas (9%), lentils (7%), dry peas (6%), mustard (6%), temperate japonica rice (4%), barley (4%), and safflower (3%). There is a geographical dimension to where these crops are raised, with most of the states being located in the northwest. Oregon had the highest share of base acres enrolled in ARC-IC, with 12% of base acres enrolled in ARC-IC. Oregon was followed by Montana (9%), Washington (4%), Idaho (4%), Wyoming (2%), Minnesota (2%), South Dakota (2%), North Dakota (1%), and Colorado (1%).

Geographic Distribution

Overall there was a geographical pattern to program choice, as would be indicated by signup by crop. Figure 2 shows states giving percentages of base acres enrolled in PLC. In general, PLC was used more in states in the south and west. Highest PLC use occurred in Arizona (95% of program acres), New Mexico (87%), Texas (84%), and Utah (82%). PLC use in Corn-Belt states were small. For example, PLC was used on 2% of program acres in Iowa, 3% in Illinois, and 2% in Indiana. 

Summary

To a large extent, program choices followed predictions made prior to sign-up. Two facts, however, stand out. First, ARC-CO was the overwhelming program choice across program crops, particularly on corn and soybean acres. This suggests that farmers will use revenue-based programs, particularly those of relatively straight-forward design. The second was the relatively small use of ARC-IC. While ARC-IC has the desirable feature that it protects farm yields, ARC-IC also is a more complicated program relative to ARC-CO and PLC, combining all crops when determining payments and requiring farmers to report yields to be FSA. These complications may result in its unpopularity.


June 12, 2015

EPA’s RFS Puts Biodiesel in the Driver’s Seat

The nation could be running on a lot more biodiesel in future. The latest U.S. EPA proposal would firmly set a path to create a second biofuels industry in the United States.



The United States Environmental Protection Agency, by the authority of congress, sets mandates - within some congressional parameters - for the amount of renewable energy the nation should consume. Part of this energy plan has allowed U.S. farmers to build and deploy corn based ethanol as a gasoline additive. Phase two, as set out by congress and proposed by EPA in May, may do the same thing for biodiesel made from oilseeds says University of Illinois ag economist Scott Irwin, "If one takes the EPA policy as given and projects for the remaining life of the RFS through 2022, essentially going forward biodiesel is in the driver’s seat rather than corn based ethanol."

Biodiesel is made mostly from vegetable. Essentially the same cooking oils found on store shelves… mostly this oil is pressed from the soybean. The new proposed rules, which again follow the direction of congress to make the United States less dependent on foreign oil for its energy supply, would push U.S. vegetable oil crushing capacity to its limit.

U.S. EIA estimates current production capacity for biodiesel in the United States is around two-point-three-billion gallons. There is a good chance by 2016 or 2017 demand would surpass that number. 

Maybe or maybe not depending on how much soybean oil crushing capacity currently idled can be brought back online and or how much biodiesel can be imported to meet the mandate. Either way it is clear more biodiesel made from soybeans, and some other crops, is now coming into play. The big difference may be that there is already an existing infrastructure to handle most of the increase. The ethanol industry had to be built and deployed. Farmers took on that burden. The oilseed crushing industry already exists and simply needs to be targeted.


June 11, 2015

Why USDA Lowered the Corn for Ethanol Number

This week (June 10th) USDA lowered its estimate of how many bushels of corn would be used to make ethanol. It surprised the market. However, there is an explanation.



Once a month the United States Department of Agriculture releases a report predicting how corn will be used in several different categories; how much will be fed to livestock, how much will be exported, and how much will be used to make the gasoline additive ethanol. This month it dropped the number of bushels of corn to make ethanol by 25 million. It’s still a big number at 5.175 billion bushels, but the trade didn’t like it. University of Illinois ag economist Darrel Good says it may mean less than the surprise it gave the trade. This, he says, is because the number is calculated in a new way.

Quote Summary - USDA sited its new Grain Crushings and Co-Products Production survey instituted last fall. It shows the number of bushels of corn being consumed to produce ethanol isn’t as large as previously forecast. This suggests the efficiency of ethanol production has in fact increased. So, there is a situation where ethanol production is up four-percent year-over-year, but USDA is only projecting a one-percent increase in corn use. This is because of the new survey data.

Consequently, the new data caused USDA to raise the estimated number of bushels leftover from this market year to go up by 25 million bushels. The increase did not surprise the marketplace. It was looking for a 25 million bushel increase. It just didn’t come from the place it thought it would says Darrel Good.

Quote Summary - They were looking for a lower feed and residual number, not a lower ethanol number.

The trade had dialed in a lower feed and residual category number based on bird flu, the number of turkeys and chickens euthanized because of avian influenza, and therefore no longer consuming corn. This may still show up in the end of the month Grain Stocks report. Even then, it may not be clear thinks Good. Historically, the numbers in the June Grain Stocks report have been noisy.

Quote Summary - It is pretty noisy. The June report in recent years has had some big surprises. We just never know the direction of the surprise. The market needs to be aware of that. The market, at this juncture, seems to be thinking the feed demand is a little weaker than what USDA has projected.

This year USDA has a better corn for ethanol number than in the past, though it doesn’t quite fit with trade perception. They’ll need to adjust. The June Grain Stocks report isn’t likely to help. The feed and residual category, which the trade expects to be smaller, is just an educated guess and includes a big buffer - the residual part of the name.


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