Bullish Outlook for Corn, Soybean Prices

July 26, 2012 12:07 AM
Bullish Outlook for Corn, Soybean Prices

But the forecast for farm profits isn’t quite as rosy, according to reports at a recent Federal Reserve symposium.

The good news is that speakers at the Kansas City Fed’s Agriculture Symposium were mostly upbeat about the direction of corn and soybean prices through 2021. The bad news is that some production costs likely will post significant increases during the next several years.

The bottom line: farm profits are likely to fall over the next nine years.

The two biggest wild cards to long-term prosperity are politics and weather, said William Hudson, principal and founding partner of The ProExporter Network, a speaker at the annual event. Politics are a big unknown, he said, because crop demand is largely determined by political decisions here in the U.S. and abroad.

Fortunes in agriculture will be tied to continued high import levels from China, U.S.-government-supported ethanol production, and historically low interest rates, a triad of stimulants that will determine whether agriculture’s present golden era can be sustained. "History tells us that golden eras of agriculture often turn into fool’s gold," said Jason Henderson, vice president, the Federal Reserve Bank of Kansas City.

In a paper presented at the conference, Henderson notes that the current golden era resembles many from the past—with a big exception. Farmers didn’t make big capital investments in land and equipment and take on extraordinary debt this time around. He questioned whether that would be enough to prevent a bust, though. See presentations from this year’s conference.

Hudson, for his part, remains reasonably bullish on crop prices and farm income moving forward. His long-term projections call for corn prices to moderate but remain at profitable levels through 2021, remaining above $4/bu. In his "blue-sky model," he forecasts average farm corn prices to fall from $6.20 in the 2011/12 marketing year to $5.01 in 2013/14 and $4.71 by 2015/16. He has them rising slightly to $4.73 by 2020/21.

In the meantime, rising production costs will cut into profits. Hudson predicts that corn and soybean seed costs will nearly double over the next nine years, rising from $11.6 billion for U.S. farmers in 2011/12 to $21.6 billion by 2020/21. Fertilizer costs over the nine-year span are also likely to rise, from $13.5 billion $16 billion, while chemical costs will decrease slightly, from $3.6 billion to $3.2 billion to 2020/21, Hudson predicts. He anticipates land costs to increase from $21.6 billion to $27.3 billion, then level off.

Cost pressures will depress profitability during the nine-year period, though Hudson expects the industry to remain in the black. Hudson forecasts net return over total costs for crop producers to fall from $33.3 billion in 2011/12 to $14.4 billion in 2014/15, then decline to 6.4 billion by 2020/21.

Hudson doesn’t believe the federal government will relax its ethanol mandate, even though there is talk about doing so. Ethanol producers will be required to buy 100 million tons of corn during the 2012/13 marketing year, although falling gas prices and rising corn prices make this an unfavorable economic decision.

Hudson acknowledges that a relaxation of the mandate is the biggest threat to corn prosperity. Around 40% is diverted to produce ethanol for auto fuel. If EPA did not grant a waiver in 2008, "when corn prices were $7/bu.," Hudson said, the agency is unlikely to do so this year. Moreover, EPA believes it has only narrow authority to impose a waiver.

"Futures prices this year of $8.50 or higher" is within the range of possibility, Hudson says. So is a yield of 136 bushels per acre. Already, USDA has lowered its forecast for corn yields from 166 bushels to 146 in its latest estimates. "We’re importing corn from Brazil to North Carolina. That’s how bad things have become," Hudson says. For the U.S., he says "the market drivers have been politically driven fuel ethanol and China. That’s it. China is the big Kahuna."

While Hudson is reasonably bullish on U.S. farm income, because of he expects high demand to continue, he notes that U.S. competitors are increasing crop production at a more rapid rate. Global production of the 10 major row crops increased by 184 million acres from 2003/04 to 2012/13. Of that, the U.S. only increased production by 8 million acres, while the Black Sea region (former Soviet Union) increased by 48 million acres, accounting for 26% of the total increase.

South America added 42 million more acres, accounting for 23% of the increase. China, despite its imports, increased production by 31 million acres over the period, accounting for 17% of the global row crop increase.

Corn crops registered the highest global production increases over the 2003/04 to 2012/13 period, rising 80 million acres. Corn was followed by wheat, up 53 million acres; and soybeans, up 45 million acres. Crops in decline were barley, down 18 million acres; and peanuts, down 3 million acres. Global cotton acres increased a modest 4 million over the period, while U.S. cotton acres decreased by 2 million acres. U.S. wheat acres fell by 4 million acres over the period, with sorghum acres slipping by 3 million.

Hudson forecasts U.S. corn acreage, which has been increasing at the expense of other crops, to decline from 96.4 million acres in 2012/13 to 91 million acres by 2014/14 and 89 million acres by 2020/21. He predicts soybean acreage to increase, however, from 76.1 million acres in 2012/13 to 78 million acres in 2015/16 and 80 million acres in 2020/21.

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