Large ending stocks are pulling down prices

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Madison - The coming year is most likely “not going to be pleasant” for grain producers.
            That’s the perspective of Todd Hubbs, an assistant professor of Agriculture Commerce Markets at the University of Illinois at Urbana-Champaign, a specialist who focuses his research on commodity and financial markets. He was in Madison recently to give his perspective on commodity price forecasts and financial stress measurements in the agricultural sector.
            “We have had huge corn crops and it’s looking like a big year in South America,” he said. Those huge crops coupled with the largest ending stocks since the 1987-1988 crop year, all work to depress prices.
“I’ve spent a lot of time looking at South American weather. So much so that sometimes I think I could be a weather forecaster in Buenos Aires,” he quipped.
            The picture is similar for soybeans, with large crops in the United States and Brazil and ending stocks at record levels. Hobbs said the demand for beans is stable and strong but the huge crops in Brazil are a factor. Based on market conditions, it appears likely that there will fewer acres of corn planted this year and more acres of soybeans.
            “It looks like there are going to be some real incentives to plant soybeans in the coming year,” he said.
            Contributing to the huge corn carryover stocks are the large yields U.S. farmers have had in the last three years. Hobbs noted that growers in Brazil and Argentina have also experienced 25-plus percent increases in their production. The United States is up over 11 percent from a year earlier; overall world production of corn is up almost 8 percent.
            A factor in this growing production is the rising level of corn yield per acre. Hobbs noted that although there have been ups and downs in this production due to weather factors, the clear trend line is steadily upward -- from less than 60 bushels per acre in 1960 to about 170 bushels per acre last season (in the United States.)
            On the usage side of corn, he noted that grain-consuming animals have been going up steadily since 2007-08 and the ethanol industry’s use of corn has been building over time, but he said there won’t be a lot of growth in the ethanol industry unless there is some change in the renewable fuel standard at the federal level for gasoline. If the government raised that standard it would mean that more ethanol would need to be made to satisfy a larger call for ethanol blended with gasoline.
            As gas consumption rose in this country and corn prices fell, more ethanol has been produced and exports of ethanol have increased. Hobbs said that in 2016 there were 1 billion gallons of ethanol exported, much of it to Brazil – one of the world’s leaders in ethanol production. He explained that in Brazil, where sugar cane is used to make the fuel, market conditions favor using the cane for sugar production rather than ethanol. With that market calculation in place, Brazil turned to the U.S. ethanol industry for its renewable fuel.
            Some U.S. ethanol was also exported to China, but he said there is talk of some large tariffs going back on in the Chinese market and that would “kill those exports.”
             Though U.S. stocks of corn are building, Hobbs sees them as “manageable” depending on what happens in the coming crop year. “It’s all contingent on what we do with the 2017 crop year.”
            If farmers decide to plant millions fewer acres of corn, that will have an impact, as will the yield – which will be at least partly determined by the Corn Belt’s weather during the growing season.
            Hobbs is predicting a $3.65 season average price for corn, based on market factors.
            On soybean fields there was also an “absolutely massive” crop in the United States and “we weren’t the only one,” he said. About 82 million U.S. acres were used to grow beans with an average yield of close to 50 bushels for ending stocks of more than double what we saw in 2013-14.
            The ending stocks of about 420 million bushels are “just an unbelievable jump” from the previous year’s ending stocks which were 197 million bushels.
            The soybean crush is at near capacity – 14 percent of feed stocks -- and exports have been building year after year. “China will take any beans we have for them,” he added.
            Back in 2000-01, Chinese imports of soybeans stood at a mere 487 million bushels, according to charts presented by Hobbs. Those import numbers have been on a steady upward trend, with over 3 billion bushels of soybeans imported in China last year.
            Hobbs said he hopes there isn’t anything that disrupts the flow of soybeans to China. “We need those exports and they need the beans.”
            Production of soybeans is aided by farmers taking production away from winter wheat and turning those acres into soybeans for a total of 4 million more acres. If the yield trend line of the past few years continues, he said that about 50 bushels per acre seems reasonable and that number could go even higher in the coming year.
            He believes that the world production of soybeans this year will be 7 percent over what was produced last year. The U.S. production is forecast at 4.28 billion bushels in the coming year, an 8.8 percent increase over last year. Total foreign production is forecast to rise 6 percent next year over last year’s levels.
            The prevailing market conditions and forecasts lead him to predict that there will be ending stocks of 481 million bushels after the growing season this year with farm prices standing at $8.90 per bushel. “This is one of those situations where I hope I’m wrong,” he added.
Hubb’s presentation was part of the Renk Agribusiness Institute’s recent Agriculture Outlook Forum on the University of Wisconsin campus. The annual conference was co-sponsored by the Wisconsin Farmers Union, Wisconsin Farm Bureau and UW Extension.

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