Dairy farmers in the U.S. and around the world are being blessed with cheap feedstuffs. Corn prices are at their lowest in four years and wheat prices are at their lowest in 10 years.
However, what some see as a blessing is a challenge for others. "Agriculture is going through kind of a tough time here, a correction from the ethanol boom of 2006 to 2013, " said Dan Basse, president of AgResource Company, an international agricultural research firm that forecasts domestic and world agricultural price trends.
He spoke during the first of a two-part World Class Webinar, "U.S. and World Impact of 2016's Crops and Markets with Dan Basse", hosted by Professional Dairy Producers of Wisconsin.
The world's grain markets have gone global, Basse underlined, and it is important for farmers to understand that 2016 is going to be a very good growing year all around the world.
"This will be the third year in a row of record large world grain supplies and stocks, meaning wheat, corn and soybean," he said.
The world is awash in grain."Understand that there is just too much grain around the world, and it is something that will be there for some period of time," he advised.
The U.S. is on the verge of harvesting its first 15 billion bushel corn crop and its first soybean crop above 4.1 billion bushels.
In addition, the world has increased harvesting major crop acres by 179 million acres since 2006. This record large 10 year increase is largely due to elevated world farm profitability, Basse said.
The trend continues, including Russia's plan to increase wheat seedings by 6 percent.
"This is the problem we have: somehow throttling back production on a global perspective," he said.
The hope is China will become a demand driver, but it, too, is currently awash in grain and slowing imports of barley and corn derivatives.
Argentina has become an ag export powerhouse, based on tax and currency incentives. "Farmers there are plowing up the Pampas and planting wheat and corn. As we think forward to next spring, we think Argentina and Brazil combined could add an extra 30 million metric tons of corn and that can really start to hurt U.S. export policy," Basse said.
As you look longer term, it's hard to find a bullish argument, outside of adverse weather, to change the overall trend in the markets, he added.
The summer of 2016 was wet and warm, with record-breaking heat in places. "When we look back at the summer of 2016, we will see it was exceptionally warm and exceptionally wet," Basse said. "I think that's why we're looking at crop yields, particularly in soybeans, that will be record large. The question is to what degree."
In corn, the combo of heat and moisture produced great variability in yields across the Midwest, depending on how the warmth was timed to pollination and whether the grower used fungicides. If he did not, Basse noted, yields were 20 to 30 bushels per acre lower than growers who did.
The 2016 U.S. corn crop of 15.1 billion bushels is up 1.5 billion bushels from 2015. Basse credited the sizable increase to a record large corn crop and record large yields (174.4 bushels/acre) due, in large part, to corn ear weights, which are record large and well above previous years.
"As a dairy producer, we shouldn't really have any concerns that there's going to be a shortage of corn," he pointed out. "You're not going to see a sustained rally in corn because of all of the supply."
Soybeans echo the trend with a U.S. crop anticipated as high as 4.2 billion bushels, up nearly 300 million bushels from 2015's record large crop. "That's a very sizable crop the market is going to have to chew through with time," Basse said.
Like corn's hefty ear weight, the difference in soybeans is the pod weight, which is already breaking the record by large amounts, Basse said, and could even go up as the fill period continues toward harvest.
"We're thinking about 51 or more bushels per acre yields. That's a record by a tremendous amount, 4.5 bushels above the trend," he said. "In the history books, 2016 will stand out as a year when Mother Nature was kind and seed genetics really came forward."
The weather was not kind to South America, however, which means export demand for U.S. soybeans will be robust due to sizable crop losses in Brazil and Argentina. "The U.S. will serve world soybean demand, as the cheapest source, into early 2017," he predicted.
U.S. corn is also the cheapest in the world for export into March 2017.
"If anybody needs corn, they're looking to the U.S.," Basse observed.
Because of the strong export profile, he advises dairy farmers to take action. "If you are buying feed grains, I would tell you that anytime Chicago corn gets down to $3.20 or below, I would be locking in my corn needs, at least through the end of the year," Basse said.
Looking ahead, Basse advised farmers to consider "de-carbonization." Each and every year forward, there will be declining demand for U.S. unleaded gasoline, due to electrification of vehicles, hybrid technology and rising efficiency standards. "This means the corn argument, in terms of ethanol demand, is now stale," he said.
The United States is the residual storehouse of grain within the world, a situation that is not likely to change anytime soon.
"I have probabilities of U.S. corn, soybeans and wheat stocks growing even more in the years to come," Basse said..
The U.S. has the largest corn, soybean and wheat end stocks going back to 1986. This year, Basse said, the combined grain stocks will tally 100 million metric tons, including 2.5 billion bushels of corn, 400 million bushels of soybeans and over 1. 2 billion bushels of wheat.
That raises concerns that favorable cropping weather in 2017 will strain domestic storage capacity.
If Washington does not enact policy changes, Basse's forecast into 20121 is corn prices grinding lower, causing growing financial pressure on grain producers. "The question is whether the U.S. can cut 17-20 million acres of production without government assistance," he observed.
As it stands, farmers planting winter wheat will lose $110 per acre, the largest loss since the 1980s, and an incentive to plant less acreage.
"The U.S. is no longer the world's low-cost corn producer, a crown it has held for several decades, but lost because of land prices and input costs. These need to be adjusted," Basse said.
Land prices and inputs are compressing net farm income, Basse said. "The extra $300 per acre of production costs — land, nitrogen, seed and fertilizer — must be adjusted if profits are to rise," he pointed out.
One thing that could change the picture is monetary exchange rates. If the dollar falls, it has tremendous positive impact on ag profitability. If it rallies further, it will encourage other countries to expand production. "If you want to get bullish about grain, we need a weaker dollar," Basse said.
In 2016, the global harvest will set the sixth consecutive record in global grain total crop acres. "The market has to slow future seedings," Basse stressed, but other countries are still seeing profits, which leads to expanded plantings.
Noting the estimate of 2016/2017 world grain stocks is record large, Basse said the world has to either devise a method to slow capacity or use more.
"Our big problem with big grain crops is we produce as much as we can and its now going sideways," Basse said. "Everything gets out of kilter. We need to clear the stocks, but the problem today is the world's trade stagnation in the grains."
One issue is Argentina's new leadership changing farm policy and cutting export taxes. The result of the reduction in taxes and cheaper currency rates is a huge increase in revenue per hectare.
"The Argentinean farmers are rejoicing with this newfound profitability and, of course, will respond by planting more grain," Basse noted."It is starkly different than what's happening in the U.S."
On Oct. 12, Basse will discuss the impact of world markets on the dairy industry. For more information or to register, contact PDPW at 800-947-7379 or online at pdpw.com.