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.
Last year federal crop insurance performed really well. This means it covered losses in the way it was designed to do the job. Over time crop insurance is meant to even out the ups and downs in annual income experienced by commodity farmers.
It does this by paying out one dollar for every dollar of premium a farmer pays in to the system to purchase the insurance. The farmer can expect there will be many years when a payment is not made, but when the income from crops drop, a crop insurance payment will help alleviate the gap. Here’s another explanation from University of Illinois Extension Ag Economist Gary Schnitkey, "The crop insurance program was designed to have a loss ration of about one. The loss ratio equals payments-made divided by premium-paid. Over time the federal crop insurance program is supposed to pay out roughly the same amount it collects in premium. A loss ratio of one is about the target.
A loss ratio of less than one means payments were less than the premium collected and if the payments made are more than the premium paid, then the loss ratio is greater than one. Last year, for all covered crops harvested in 2014, the loss ratio was point-nine. This is slightly above the annual yearly average of the last decade. The long run average is point-eight-two.
Quote Summary - Overall you would say 2014 was an average year. The high happened in 2012. That year the loss ratio was one-point-six-two. The low year is point-five-three which happened in 2007.
The 2014 loss ratio for corn was one-point-zero-five. Wheat losses nearly topped that chart at one-point-one-three. Rice had a bad income year. Its loss ratio was one-point-four-nine. By contrast the soybean loss ratio was just point-five-four.
Last year Gary Schnitkey says the data shows most of the corn belt state payments were made in Iowa and Minnesota. Many of the counties in the northern two-thirds of Iowa and in Minnesota had loss ratios above two. Losses in those parts of the country were quite high.
The reason is because we had price declines on both corn and soybeans and those areas last year were not as good as the rest of the corn belt. The remainder of the corn belt had very low loss ratios. The loss ratios were below one in Illinois, Indiana, Ohio, Missouri, and the Dakota’s.
The trade has turned its primary attention to the soybean crop being planted across the United States, but that doesn’t mean it has fully discounted last year’s harvest as market maker.
This year the United States Department of Agriculture expects about one-point-eight billion bushels of soybeans will be used within U.S. borders. This is more than last year and it appear USDA is on target with its projection. The pace of domestic crush has steadily picked up as the fiscal year has passed. University of Illinois Ag Economist Darrel Good says the pace needs to pick up a bit more to make the target.
Quote Summary - To reach the USDA projection, the crush during the last four months of the marketing year needs to exceed that of a year earlier by 7.7 percent.
The NOPA crush estimate for May is scheduled for release on June 15, and that’ll offer more insight into domestic usage. The other primary point of usage is the export market for soybeans.
Quote Summary - The USDA projects that U.S. soybean exports during the current marketing year will reach a record 1.8 billion bushels, 9.3 percent more than the previous record of last year. With about 14.6 weeks remaining in the marketing year, cumulative USDA export inspection estimates have reached 1.722 billion bushels. For the first seven months of the marketing year, export inspections tracked Census Bureau export estimates very closely. To reach 1.8 billion bushels for the year, exports during the final weeks need to total about 78 million bushels, or about 5.35 million bushels per week.
The last five weeks have seen exports above 10 million bushels each. It very likely, thinks Darrel Good, that USDA’s export projection for soybeans will be easily met. This brings him to the ending stocks figure, or the number of bushels to be leftover at the end of the fiscal year in September. That number will be calculated and it could result in an adjustment of the size of last year’s crop, and then there is this year’s crop.
Quote Summary - Until very recently, few concerns have been expressed about the 2015 soybean production season. Planting has proceeded at a pace that exceeds the previous 5-year average pace and expectations have been for acreage to exceed intentions reported in the USDA’s March Prospective Plantings report. The recent weather pattern, however, has generated a few issues. In particular, the area of extreme rainfall amounts in Texas and Oklahoma that extends into southern Kansas and parts of Arkansas have raised a few concerns about the timeliness of planting and the potential for some prevented planting. The focus is on Kansas due to the combination of the slow pace of planting (17 percent as of May 17) and the magnitude of soybean acreage (3.8 million) intended to be planted in that state.
For the U.S as a whole, there is some measurable yield loss as the percentage of the crop planted after May 30 increases. For the period from 1986 through 2014, the percentage of the crop planted after May 30 has ranged from nine percent (2012) to 66 percent (1995) and averaged 34 percent. With 45 percent of the crop reported planted as of May 17, the percentage of the crop planted after May 30 this year will not likely exceed the average of the previous 29 years due to the rapid pace of planting in northern growing areas. The impact, if any writes Darrel Good in his Weekly Outlook posted online to Farm Doc Daily, of the extreme wetness on the magnitude of planted acreage of soybeans should be revealed in the USDA’s June 30 Acreage report.
Twice a year USDA tries to officially predict how many acres of corn and soybeans U.S. farmers will plant. Todd Gleason has more on the anticipated changes this year as we move from the March Prospective Plantings survey to the June Acreage report.