The Rest of the Story: Pre-Report Bullet Points to Ponder

March 27, 2018 02:22 PM
 

The media comments this weekend still had the familiar thread that in the final analysis—regardless of what the acreage survey report states on Thursday—acres planted to corn will likely rise and soybeans fall by the time we know for sure in October. That’s when the 578 reports are finally collected. Given the safety of the USDA Outlook Forum numbers of 90-90, most of the private guesses are huddled around those numbers, with advice to be prepared ahead of time for a surprise but neglecting to state what that surprise might be.

The market is grudgingly discounting a few estimates under 90 at 89.0 mil-ac of corn and above 90 of 91.2 soybeans with a likely increase in spring wheat of 400,000 acres. I say grudgingly because few actually perform a survey of their own nor do they understand or account for the “unintended consequences” of the last three years of poor economic conditions that were only mitigated by record yields.

Informa is reportedly out with an expectation of 88.9 million acres of corn and 91.5 million acres of soybeans, doing so with basically an unchanged estimate for Iowa and an actual increase in corn acres for Nebraska, which makes their estimate highly suspect. But one has to consider that they try to estimate what NASS will say, not necessarily what the end result is going to be.

We (Gulke Group) don’t publicly release client surveys, as we feel them to be proprietary and often have been more accurate than those publicly released. That’s especially true if there is a significant departure from what otherwise might be normal circumstances. Given that focus as a backdrop, I would expect a surprise, and have prepared accordingly.

Conventional wisdom suggests that based on last year’s acreage of near equality in corn and soybeans, we don’t have much room to increase soybeans at the expense of corn. At least without treading dangerously of bean-on-bean production (two years of planting same crop on same land). That conclusion doesn’t consider that two to three years of beans on beans, while not conventional, has happened. It’s also likely to happen again in some areas, especially those areas north of the mail corn belt.

Furthermore, there are states whose corn acreage still exceeds soybeans by a significant amount. A good exercise is to examine that for yourself. If you or your broker has trouble assessing the facts or understanding the implication, contact me and I’ll give some hint, after the report is out of course.

My Top Producer April column (the last until summer) should be released on Agweb this week and explores some realistic facts that may indirectly affect acreage decisions and help keep what we hear on Thursday from changing, barring a weather influence. The following is an excerpt from the column worth contemplating and is based on personal calculations about 30 days or so ago.

While my calculations are debatable, rest assured the non-ag producing speculators or analysts haven’t attempted to understand something only someone in the trenches can relate to. Thus my thoughts that the unusual economic scenarios we find ourselves in make a surprise possible.

Rude Awakening. Based on a per 1,000-acre corn scenario, my seed company makes $93,000, my fertilizer guy makes $73,000 and my landlord makes $250,000 ($250 per acre), while I invest roughly $650,000 in corn for the privilege of making $28,000. Whereas, I invest $574,000 in soybeans and make $90,000. Odds are the machinery manufacturer does better than I do.  A 5,000- or even 10,000-acre farmer increases disposable income, and might argue he can produce his way out of a problem by getting 110% of actual production history. But, in this environment, high leverage, production risk, wide basis and sub-$4-cash corn can bring down an operation in a year or two. We are in a year where the risk is the highest it has been in decades because low prices have deteriorated operating cash.

If dealing with the uncertainty of weather wasn’t enough, I found it equally concerning of the appointment of Larry Kudlow to the administration. Out of archives I found an interview I did on CNBC 10 years ago on the subject of “subsidizing rich farmers,” in which Larry Kudlow was also interviewed. You may recall the backdrop back then of new folks that know little regarding Ag policies were concerned that we were burning corn for fuel (ethanol) while some were going without food.

Take time to listen to the interview, especially Kudlow’s views on farmers and ag:  https://youtu.be/RVGq4ZgxtjQ .

If it were up to CNBC, soybeans would already have capitulated on negative vibes of being the target of China’s retaliation. But fortunately for us, South American supplies will not be as available as most global buyers thought just two to three months ago.

Meats, on the other hand, look to be the most vulnerable as pork prices are at or below cost of production in China. Beef has also seen growth globally and is vulnerable. Depending on exports to keep prices afloat, especially when tied to the 800-lb. Gorilla of China, makes a minor cut in actual or expectations of an export cutback or retaliation that much more tenuous especially in a time of total meat expansion.

If the USDA was kicking the decision can down the road in the February Annual Outlook meeting, they will have the facts to update their perspective including being able to blame the U.S. farmer for his planning intentions.

In addition, the stocks-in-all positions will give us more information on how much was used, how much is left and who is holding it. Especially important is how on-farm stocks compare to off-farm. If the producer is holding a lot of on-farm corn stocks, it is unlikely he will move those stocks until more certainty of U.S. acreage and new-crop potential.

The average analyst still believing we like planting corn for the fun of it. Perhaps there will be another eye-opening event, as there was both here in the U.S. last year and in Canada, where farmers in both countries opted for the least-cost decision.  

Good Marketing,

Jerry Gulke

 


Learn more about the Gulke Group and upcoming events at www.gulkegroup.com

Contact them at 480-285-4745 or 707-365-0601 

Contact Jerry directly by emailing comments and questions to info@gulkegroup.com

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