Demand for WI commodities still relatively low through summer, ag expert says
While some commodity prices like dairy and soybeans are continuing to ride high waves, those prices are expected to fall with demand by the end of the summer, says AgResource president Dan Basse.
Basse said during an episode of "The Dairy Signal" June 11 that dairy prices are on a "sugar high" right now that soon won't be sustainable, resulting in another crash. The high prices, amid a surge in demand, are a result of the US Department of Agriculture and many state agencies and nonprofits, like the Commodity Credit Corporation, buying up dairy products to donate to food pantries.
"Now longer term, once I get beyond this sugar high, I will find that milk supplies are larger than demand, and that's going to produce some real weakness unless there's a new program forthcoming," Basse said. "American Farm Bureau yesterday indicated that they would like to have another a program for US farmers ... we were talking about more checks coming in the mail directly."
Demand will drop by the end of July as many of these federal- and state-funded programs are set to end, like the Farmers to Families Food Box program from the Farm Service Agency, Basse said. Although restaurants and food services are opening back up, capacity is still hovering around half the normal value, so demand is not necessarily increasing significantly despite economic re-openings across the country.
Basse also said the China's position in US trade exports is unclear at the moment because of a volatile trade relationship with the Trump administration, as well as China's recent re-closings due to new spikes in COVID-19 cases. While he is confident China is still in the market, he said the concern is over the volume of US ag exports and whether it will be enough to sustain the ag industry, which depends on these exports.
Ultimately, Basse said, due to capacity limits and a lack of demand, supply will overtake demand again soon. He said farmers should be thinking about getting margin coverage or other insurance now, or re-evaluating the level of coverage they already have, in case prices plummet again.
"We need to be protective of third quarter and fourth quarter milk margins," Basse said. "We really don't know if there'll be a second wave of the virus."
Despite these warnings, Basse said some Wisconsin commodities are doing relatively well during this chaotic time. Fluid milk exports are at about the same level they were this time last year, although overall dairy exports are low. Domestic butter production also met a record high in April, but he said supply is not meeting demand on that front. Cattle herd liquidation rates are also low right now, indicating a relatively stable market, but those rates will likely go up as we approach winter.
Basse also said recovery in the ethanol industry will be slow as gasoline consumption continues to lay low, with many in the US still working from home and restricting travel. While some ethanol plants are re-opening, demand for gas is still nowhere near 2018 and 2019 levels, he said.
"Right now, the market's kind of on tenterhooks, waiting to see what the forecast is going to bring for the month of July, and that's the key," Basse said. "Farms already are having a heavy short corn position because of the ethanol destruction, the margin that we've seen."
Weather shifts in the next few weeks will also make or break crop yields this season, said Eric Snodgrass, principal atmospheric scientist for Nutrien Ag Solutions who joined Basse on the episode. Wisconsin will continue to see dry, warm weather, with higher than average winds, he said. While temperatures are already warm, Snodgrass said Wisconsin will need higher temperatures, and a bit more moisture, in order to maximize crop yield. He said weather prediction models are calling for a heat return.
"During ... that critical beginning of July, we make a good moisture return back into the Corn Belt, and if that occurs if this model verifies perfectly, it's going to really skyrocket those yields because we need the heat," Snodgrass said. "But if we get the heat in the moisture, it's not detrimental to the crop. So that's what we're going to be watching."
Snodgrass said that the US in general is becoming wetter over time, though, with recent years returning 5.5" inches of rainfall above average during the summer season. He said farmers will mostly see that precipitation in the form of thunderstorms throughout the summer. He also said the most recent season with comparable weather was the summer of 2016.
"It's going to be warm, more than likely, much of that warmth coming in overnight loads," Snodgrass said. "For summer 2016, we were wet in this area. ... That's what I think might be a good outlook for this upcoming year."