Models point to crop prices moderating
Enjoy this year. Profitable prices are likely to continue, although nowhere close to last year’s record for key crops. High commodity prices and large crop insurance indemnity payments are projected to lead to record U.S. farm income in 2013. In fact, this year will be the third straight of high farm income, the highest since the early 1970s, record or not.
Beyond 2013, however, prepare yourself for a shocker. Economic models show that from the 2012/13 marketing year to 2014/15, average farm corn prices are expected to decline $3.50 per bushel, from $7.60 per bushel to $4.10, according to USDA long range projections. More immediate forecasts have lowered 2012/13 corn expectations somewhat, but prices are still expected to average above $7 for the current marketing year (as of mid-March). Similar rates of decline are forecast for other crops, too.
"One factor seems certain: despite a drop in incomes over the next few years, producers will be receiving a higher percentage of their income from the marketplace."
From the $4.10 low in 2014, corn prices will post modest gains each year, yet will not rise out of the $4 range from 2014 any year to 2022, USDA reports. From 2015/16 to 2022/23, the department calculates corn prices range from $4.30 to $4.85, with year-over-year improvements.
Slightly higher long-range prices of $4.81 for corn from 2014 to 2022 are forecast by the Food and Agricultural Production Research Institute (FAPRI) at the University of Missouri.
Can producers break even on that? "It depends on what you pay for rent," says Pat Westhoff, FAPRI director. "If you pay top market rates, margins will be pretty tight." The main reason for its higher corn price projection is that FAPRI assumes stronger ethanol growth during the period than USDA. In particular, the institute sees ethanol consumption breaking through the 10% blend wall while USDA does not.
Even though corn prices are expected to average sub-$5 from 2014 to 2022, volatility is likely to continue, even as global supplies increase. Corn prices could be less than $3.50 per bushel or more than $6 in any given year, FAPRI models suggest. Westhoff explains those prices are based on computer-generated probabilities of 500 possible outcomes.
"Actual volatility and uncertainty may be greater," he warns. In addition, both FAPRI and USDA projections assume trend yields, which might not materialize, as last year proved.
Corn for China? One particularly good piece of news for corn growers is export potential through 2022. "We expect China to emerge as a large player in U.S. corn exports," Westhoff says.
China will account for about 40% of the global growth of corn imports during the period, according to USDA.
The U.S. will remain the world’s largest corn exporter, in USDA’s view, accounting for an average of 45% of global corn trade to 2022. This share is much lower than the 1970-2000 average above 70%, however. Chalk it up to skyrocketing U.S. ethanol use.
Corn acreage is likely to take a big hit, USDA predicts. After peaking in 2012 at 96.9 million acres, acreage drops to 90 million in 2014 and by another 4 million to 86 million acres in 2015. That’s a reduction of 10 million acres in two years. However, as global markets grow and profitability gradually improves, USDA sees an increase in corn beginning with an upswing to 88 million acres by 2016, and back up to 92 million acres by 2022.
Moreover, the department sees a silver lining to its bearish crop price outlook relative to recent years, driven by continued growth in global demand for corn and soybeans. As a result, while prices decline considerably, they remain above pre-2007 levels all the way to 2022. FAPRI agrees.
On the cost side, USDA’s model sees variable corn costs per acre marching higher during the period, from $349 per acre this year, gradually increasing in future years and be $390 by 2022.
While fertilizer prices increase, they remain below the 2008 peak, FAPRI says. Another key cost—short-term interest rates—is forecast to increase only when U.S. unemployment drops below 6.5% beginning in 2016.
Combining variable costs with USDA’s expected corn prices, net returns will fall from a high of $582 per acre in 2012/13 to a low point of $329 per acre by 2014/15, or a hit of $253 per acre in two years. Net returns will improve later in the decade, from $371 in 2015/16 to $487 by 2022/23. Corn yields, meanwhile, are forecast to post impressive growth: from 163.5 bushels per acre this year—rebounding sharply from the drought—to average 181 bu. per acre by 2022/23.
Soybeans Come Back. Looking at other crop price forecasts, FAPRI predicts average soybean prices will decline to $11.48 per bushel from 2014/15 to 2022/23. Variable costs per acre increase from $147 per acre in 2013/14 to $164 per acre by 2022/23 in USDA’s model. Net soybean returns per acre drop from $440 in 2012/13 to $317 in 2014/15—a $123 per acre decline. However, returns gradually improve from $333 per acre in 2015/16 to $385 per acre by 2022/23. USDA forecasts soybean yields to bounce back from last year’s drought-reduced 39 bu. per acre and range from 44 to 48 bushels per acre during the period.
Soybean acres see more modest reductions than corn: a drop from 77.2 million acres in 2012 to 74 million acres by 2014. Similar to corn’s trajectory, soybeans begin a modest march higher in 2015, of 75 million, and remain at 76 million into 2022.
Wheat Loses Ground. Wheat prices are forecast to average $6.21 throughout the period, from a low of $5.95 to a high of $6.36 per bushel. Its outlook is less rosy than that of both corn and soybeans.
Producer returns initially fall and then rise less than returns for other crops in subsequent years. Moreover, wheat’s net returns per acre are lower than corn and soybeans. Wheat returns decline from $249 per acre in 2012/13 to $120 per acre by 2014/15, and range between $132 and $157 per acre from 2015/16 to 2022/23.
Such modest wheat returns relative to other major crops lead to a decline in wheat plantings, continuing a long-term general downward trend since the early 1980s. USDA looks for wheat acreage to decline from a decade-high peak of 57.5 million acres in 2013 to the period’s low point of 50 million acres in 2022. U.S. wheat also loses ground against up and coming competitors.
Markets Rule. One factor seems certain: despite a drop in incomes during the next few years, producers will be receiving a higher percentage of their income from the marketplace.
For example, direct government payments will average $9.7 billion per year to 2022, far below the average of $16 billion in 2000 to 2010, reports USDA. Government payments, which represented more than 8% of gross cash income in 2005, are 2% to 3% during the projection period.