WILLAg Notes

August 01, 2015

Corn Price Fade may be too Early

The price of corn has dropped because the trade believes there will be plenty of it around. Farmers, generally, are not convinced that will be the case, at least east of the Mississippi River.



The price of corn in Chicago increased about $0.90 per bushel from mid-June to mid-July. The increase was driven by a combination of a smaller-than-expected USDA estimate of June 1 stocks and production concerns stemming from record June rainfall in much of the eastern Corn Belt. Over the past two weeks, corn futures prices have declined nearly $0.80 per bushel as production concerns have subsided. Today the trade thinks, based on price, the amount of corn available for the next year will be more than needed.
 

CME Group December Corn Futures - Daily Chart

There are couple of ways this could change. University of Illinois Agricultural Economist Darrel Good says a tighter supply and demand balance sheet for the coming year could be generated by a tighter supply of old crop corn carried into that new marketing year.

Darrel Good - Based on the current pace of ethanol production, for example, the use of corn for ethanol production during the current marketing year (ending August 31) could be about 10 million bushels more than the current USDA projection of 5.2 billion bushels. Similarly, exports could be slightly larger than the projection of 1.85 billion bushels if Census Bureau export estimates for June, July, and August exceed the USDA export inspection estimates as was the case in the first nine months of the marketing year. However, for carryover stocks to be lower than the current projection of 1.79 billion bushels by enough to meaningfully alter the 2015–16 supply and demand balance would require larger than expected feed and residual use of corn during the final quarter of the marketing year.

This won’t be known until the Grain Stocks report is released September 30th. A tighter supply and demand balance sheet for corn could also result from larger than expected consumption during the year ahead. Such a development would obviously take time to unfold, but opportunities for consumption to exceed the current projection appear to be limited thinks Good. This leaves the size of the crop in the ground as the primary lever by which prices might be pushed higher.

Darrel Good - The trade's average yield expectation appears to be near 165 bushels, 1.8 bushels less than projected in the July 10 USDA WASDE report. The August production forecast will also reflect the estimate of harvested acreage, but a large change from the June acreage forecast is not expected. Based on the projection of 81.1 million acres harvested for grain, a yield of 165 bushels would result in a crop of 13.38 billion bushels, about 150 million bushels less than projected in the July WASDE report. Still, if 2015–16 marketing year consumption is near the current USDA projection of 13.735 billion bushels, year-ending stocks would be abundant at about 1.45 billion bushels. On the other hand, a yield forecast of 161 bushels or less would likely be sufficient to push prices back to the mid-July highs.

Recent corn price declines indicate, says Darrel Good, that the market is removing the production risk premium from the price structure in anticipation of another year of surplus. The question is whether that removal is premature. The USDA’s Crop Production report to be released on August 12 will contain the first survey-based yield and production forecasts for the 2015 crop.


July 23, 2015

Projected 2015 Net Incomes on Grain Farms

by Gary Schnitkey, Extension Agricultural Economist - University of Illinois

Average 2015 net income for grain farms in Illinois is projected at around $15,000 per farm, down considerably from the 2014 average of slightly above $100,000 per farm (see Figure 1). Furthermore, the 2015 net income will be below incomes in 2010 through 2012 which were above $200,000 per farm. This decline in incomes raises questions.

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What do incomes in Figure 1 represent?

Historical values in Figure 1 are average net farm incomes of grain farms enrolled in Illinois Farm Business Farm Management (FBFM). These farms are located throughout Illinois and represent a variety of farm sizes, tenure relationships, and debt positions. Farms have increased in size over time. In 2014, average farm size was close to 1,500 acres, but the sample included many smaller farms and may larger farms. There were a relatively large number of farms of over 5,000 acres.

How was the 2015 net farm income projected?

Commodity prices, yields, input costs, and cash rents were projected for 2015. More detail on these projections are contained in the 2015 budgets which are summarized in the July 7th FarmDoc daily article. Key items impacting projections are:

  • Commodity prices are $4.20 per bushel for corn and $10.00 per bushel for soybeans.
  • Yields are presumed to be near trend line levels.
  • Non-land costs are projected to declines slightly from 2014 levels.
  • Cash rents are projected to decrease slightly from 2014 levels.

Can 2015 net incomes vary from projections?

Of course. Differences in prices and yields from those used in projections will change incomes. For example, corn price could easily be $.50 per bushel different from the $4.20 price used in projections. With higher prices or higher yields, 2015 net incomes could be above $50,000. However, it is difficult to build a case where 2015 incomes are not considerably lower than 2014 incomes.

Why are 2015 net incomes projected so much lower than 2014 net incomes?

The projected 2015 commodity prices ($4.20 for corn and $10.05 for soybean) are above commodity prices received for 2014 crop (likely $3.70 for corn and $9.75 for soybeans). Given higher prices, why then are projected 2015 incomes lower than 2014 net incomes? Two reasons:

  • Trend line yields are used in 2015 projections. Much of Illinois had above average yields in 2014, contributing to higher net incomes.
  • Marketing gains contributed a large amount to 2014 incomes. Grain produced in 2013 was valued at a lower price on the end-of-year 2013 income than it was sold in 2014. More detail is provided in the May 27th FarmDoc daily article.

Why is projected 2015 net income lower than averages between 2000 through 2005?

From 2000 to 2005, net incomes on Illinois grain farms averaged $57,500, higher than incomes projected in 2015. When making 2015 projections, a $4.20 corn price and $10.00 soybean price are used. These 2015 projected prices are significantly above prices from 2000 to 2005 when prices received by Illinois farmers averaged $2.18 for corn and $5.69 for soybeans. Given higher prices, revenue is projected higher in 2015 than from 2000–2015. However, costs are projected much higher as well. For example, non-land costs for corn have increased 224% from $256 per acre average from 2000–05 to $578 per acre in 2015. Cash rents have increased 205% from $139 per acre to a projected $286 per acre. These cost increases are the primary factor offsetting higher commodity prices, leading to lower projected incomes in 2015.

Will lower incomes signal financial stress?

These lower incomes suggest the need for continuing financial adjustments. More on the financial strength and need for adjustments will be covered in the July 28th FarmDocDaily article.


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.


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