- Commodity market price drivers—
- Even when tariffs are withdrawn, will China return as buyer of US soybeans? There are indications China wants to reduce the amount of protein in its livestock feed rations, saying animals could get by with less soybean meal. The government’s China Feed Industry Association said a reliance on imported soybeans is creating a “bottleneck” for the country’s livestock industry, according to a CNN report. “But getting millions of Chinese livestock producers to reduce the amount of foreign soy protein they feed is a dauting task that is likely to take a long time to carry out and could cause disruption throughout Chinese agriculture.” Paul Burke, senior director of the US Soybean Export Council, at its Shanghai office says he thinks the Chinese government is trying to minimize the import of any US soybeans with its plan. He expects Chinese demand for American soybeans to fall if the proposals are implemented. The real test will be in the coming months when Brazilian supplies dry up. A move to cut back on soybean use in China would need to be skillfully managed, and the government is likely to face a tough task steering millions of its pork producers across the country to follow the lower protein requirements. Farmers may turn to alternatives, such as canola, cottonseed, and sunflower seeds, but it is not a straightforward swap, and some of those options have a limited supply, and too much canola can be fatal to animals. A rapid shift away from soybeans could create “chaos in the animal feed sector,” says Loren Puette of the research firm AgChina, based in Taiwan. “There is no silver bullet that can be readily used” to replace soybeans, said Puette.
- What is at stake, if China bolts from the US bean market? Purdue economist Wally Tyner says the US would lose 9 mil. acres of soybeans to Brazil permanently if trade issues drag out. Tyner said Brazil is a low-cost soybean producer compared to the U.S., making it a more attractive option for big buyers like China. That’s why Tyner gives the trade negotiations a two to three-year timeline before acres start moving to Brazil. “This is going to be really hard, because there’s a lot at stake both for China and for the U.S.,” said Tyner. “Finding some common ground is not going to be easy. There’s so much at stake for both sides.”
- Brazilian port officials report they exported nearly 150 mil. bu. of soybeans in the first 3 weeks of October. That represents 130% more soybeans than in the same period a year earlier. That is significant for a country reported to be running out of soybeans, but indicates some soybeans reserved for domestic use might be shifted to export markets. By the end of October, the International Grains Council projects that Brazilian soybean export shipments will reach nearly 190 mil. bu. Based on vessels prepared to load soybeans from Brazilian ports in November, nearly 100 mil. bu. are already booked for export, putting both October and November at record high levels for soybean exports for those months.
- On the flip side of those statistics is the limitation placed on US soybean exports by China, which typically purchases heavy volumes during October. Reuters commodity analyst Karen Braun says, “On average, 76% of U.S. soybean shipments in October are to China. Not this year though. Statistics are alarming. Bean inspections to China, Oct. 1-18: 50 mil. bu. in 2018, Oct. 1-18, 2017: 125 mil. bu. Year to date soybean shipment inspections to all destinations are down 40% year over year.
- So far, US soybean exports are tracking the projection of USDA economists in the latest Supply-Demand report. But as harvest typically wraps up at this time of year, and US soybeans have had the opportunity flow from elevators to barges to the Gulf, or from elevators to trains to the PNW ports, Nov. and early Dec will be key yardsticks to gauge the rate of soybean export shipments and whether they will stay on track with projections.
- While soybeans get the main focus, the soybean meal market should not be overlooked. The International Grains Council reported, “Global soymeal trade anticipated to increase 2% year over year in 2018/19, underpinned by rising shipments to key markets in Far East Asia, with higher feed demand underpinning requirements.”
- Most US farmers have had all the fun they can stand with tariff-driven marketing plans. But farmers in South America are overwhelmed with governmental-driven frustration as well. In Argentina the current government was elected on the promise of elimination of export taxes on grain. They were removed from corn, along with a promise to phase out the export tax on soybeans. But 3 years later, the corn export tax is back at a 12% rate, and the soybean tax dropped from 30% to 28%, but is proposed to rise to 33% or 35%. South American specialist James Thompson says, “The government’s main revenue stream cuts away at farm profitability.” In Brazil, Sunday’s election put Jair Bolsonaro into the Presidential spot. While he has promised clearing more Amazon land for soybean production, he has made China very nervous with his criticism of their massive investment in Brazil, causing concern among Brazilian farmers they might lose their Chinese golden goose and its hunger for their beans. “Two-way trade between China and Brazil stood at $75 billion last year, according to Brazilian government statistics. China has invested $124 billion in Brazil since 2003, mostly in the oil, mining and energy sectors. China is eager to bankroll railway, port and other infrastructure projects here to speed the movement of its Brazilian grain. But the far-right Bolsonaro, much like U.S. President Donald Trump, has criticized China repeatedly on the campaign trail, saying the Chinese should not be allowed to own Brazilian land or control key industries. Chinese diplomats made it clear they would like to meet Bolsonaro in person, although no meeting has been set. Brazil’s farm sector, meanwhile, has reaped the benefit of China’s feud with Trump. Beijing has sharply reduced purchases of American soybeans, filling the gap with Brazilian grain. Brazilian exports of soy to China are up 22% by value this year with about 80% of its soy shipments now destined there. Bolsonaro’s first major meeting with the Chinese would come soon. Brazil hosts the BRICS summit in 2019, an event that Chinese President Xi Jinping is likely to attend.”
- The Federal Reserve Open Market Committee will be meeting this week to consider higher interest rates, based on economic conditions reported by the economists in the district banks. Here’s what they had to say about agriculture in last week’s Beige Book:
- Chicago Fed. Greater-than-usual precipitation slowed the harvest and reduced the quantity and quality of crops, and expectations for net crop income fell accordingly. While expectations for yields were lower than in the prior reporting period, it was still likely that they would reach record levels. Contacts reported a notable drop in Chinese purchases of US soybeans following an increase in Chinese tariffs. Farmers also faced higher transportation costs due to rail issues, a shortage of truck drivers, and complications in shifting export destinations away from China. Contacts expected the record yields and weak export demand to push crop storage to abnormally high levels. Hog and dairy prices recovered some, boosted in part by US government purchases that were part of a program to compensate farmers for losses from higher foreign tariffs. Even so, dairy farmers continued to struggle. In addition, contacts viewed gains from the new US Mexico-Canada Agreement as too small and too far in the future to help dairy farmers. Moreover, Canada and Mexico maintained their tariffs on US pork and dairy that they imposed in response to US steel and aluminum tariffs.
- St. Louis Fed. District agriculture conditions improved slightly compared with previous reports. Production and yield forecasts increased from August to September for corn and soybeans. Expected production levels also improved for cotton and rice during the same period, but yield forecasts decreased. Relative to 2017, District corn, cotton, and soybean yields are expected to increase, but rice yields are projected to decline. Production levels of all four crops are expected to be greater than those from last year.
- Minneapolis Fed. District agricultural conditions remained weak overall. Persistent rain in early fall delayed or slowed harvests in some areas. Very strong harvests were expected around the District, including potential record yields in some cases. However, commodity prices remained weak, and greater production was not expected to completely offset the negative impact of low prices on farm incomes. International demand for crops, particularly soybeans, has fallen dramatically, according to contacts. A producer of dry beans reported that a large regular annual order from European Union countries was cancelled due to tariffs. A substantial number of dairy operations have exited the business this year.
- Kansas City Fed. The farm economy in the Tenth District remained weak as expectations of increased production contributed to a slight decline in corn and soybean prices since the previous reporting period. Corn and soybean production were expected to be strong in Nebraska, which could offset some adverse effects of low prices. Crop yields in Missouri, however, weakened considerably from a year ago and could further strain farm income. The price of wheat was down slightly from the previous reporting period but remained higher than a year ago. In the livestock sector, the price of cattle increased slightly from the previous period but remained lower than a year ago as inventories generally remained high. In contrast to the prices of other agricultural commodities in the District, hog prices increased sharply in September due to expectations of lower production and higher exports.
- Slowly, but surely the rural American economy is improving, according to the Rural Mainstreet Index of Creighton University. It climbed above growth neutral in October for a ninth straight month, according to the monthly survey of bank CEOs in rural areas of a 10-state region dependent on agriculture and/or energy. Survey coordinator Ernie Goss says, “Our surveys over the last several months indicate that the Rural Mainstreet economy is expanding outside of agriculture. However, the negative impacts of tariffs and low agriculture commodity prices continue to weaken the farm sector.” The farmland and ranchland-price for October sank to 34.8 from 37.5 in September. This is the 59th straight month the index has fallen below growth neutral 50.0. Bank CEOs were asked to estimate the change in farmland prices over the past 12 months and for the next 12 months. On average, bankers estimated that farmland prices declined by 4.0 percent over the past 12 months and expect farmland prices to fall by another 3.2 percent over the next 12 months. According to Fritz Kuhlmeier CEO of Citizens State Bank in Lena, IL, “More than ever, farmland values are extremely dependent upon quality, and location, location, location.” The October farm equipment-sales index fell to 33.3 from September’s 35.9. This marks the 62nd consecutive month that the reading has moved below growth neutral 50.0.
- Have you visited with your crop insurance agent about whether your crop revenue policy will have a payout? Prices are well below spring guarantees, but many farmers are discovering their yields are too high to warrant that extra check. Your farm may be different. While Central IL weather has been good for harvest, much of the Cornbelt has had miserable weather for harvest, and top yields have fallen below mediocre because of field losses attributed to the weather, particularly for soybeans. The kicker comes when damage is more than elevators will accept, and it must be hauled to a salvage buyer, but crop insurance still counts most of the load as good production. Farmers have to alert their crop insurance agents within 72 hours of discovering the damage, and agents can start adjusting yields once damage hits 8% or greater, according to RMA’s factsheet. Livestock feeders may be an outlet. Terminal elevators may not be much of a market because there are plenty of beans available for blending damaged beans, but there are few markets right now for any soybeans. “Under crop insurance rules, the farmer has to sell beans to any buyer in their marketing area as long as the damage level is under 35%. Soybeans with 35% damage or more qualify for a reduction in value, which allows crop insurance adjusters to factor the cost of shipping into viability of selling into a salvage market. They can then decide whether it’s worth it to the farmer to sell it or whether the crop insurance policy should pay an indemnity based on the farm’s guarantee. If no salvage market is available, farmers need at least two and ideally three rejection letters from elevators to qualify for a zero-market value determination. And then, there is the damage that the outcome does to your Actual Production History (APH) and your Market Facilitation Program payment, says TN ag economist Aaron Smith.
- How does your financial position compare with other Cornbelt farmers? Some are in good shape, and others, not so good, according to the balance sheets of several thousand farmers surveyed by IL ag economists. They looked at a couple of different yardsticks:
- Debt to asset ratio. It is a measure of solvency, equaling debt divided by total assets. Generally, debt-to-asset ratios below 0.30 indicate a strong financial position. Debt-to-asset ratios above 0.50 mean the farm’s assets are funded by more debt than equity. Farmers with debt-to-asset ratios above 0.50 face more risk than those with less than a 0.50 debt-to-asset ratio. Debt-to-asset ratios on Illinois grain farms had an overall downward trend from 1991 to 2012, decreasing from .34 in 1991 to a low of .18 in 2012 (see Figure 1). Since 2012, debt-to-asset ratios have increased to .21 at the end of 2017. While a general upward trend is not desired, the average debt-to-asset level at the end of 2017 is not particularly troublesome either. In total, 87.3% of farms had debt-to-asset ratios less than 0.50, meaning a large majority of farms carry a level of debt that is less than half the asset level. At the end of 2018, there are 12.7% of these farms with debt-to-asset ratios exceeding 0.50, meaning debt levels are more than half the level of assets. The percent of farms with above 0.50 debt-to-asset ratios has increased over time.
- Current ratio. It is the measure of the working capital position of the farm. The current ratio equals current assets divided by current debt. Higher current ratios indicate that a buffer exists for meeting current obligations. This buffer is useful in countering any adverse events that may befall the farm. Current ratios above 2.00 are generally viewed as being very strong. A ratio below 1.00 indicates a problematic current position, as not enough current assets exist to meet current obligations. The average current ratio on Illinois grain farms increased from 1.97 in 2006 up to 2.86 in 2012 (see Figure 2). The 2006-2012 period had high commodity prices and costs had not increased enough to offset higher prices, resulting in a period of above-average incomes. This above-average income period allowed farmers to improve their financial positions and strengthen current ratios. Since 2012, commodity prices have been lower, and incomes have decreased, resulting in the current ratio decreasing from 2.86 in 2012 to 1.96 in 2017. The average 1.96 ratio in 2017 is not particularly worrisome, however, the 2017 level is the same level as in 2006, indicating improvement in the current position during the high-income years has been erased. The current ratio of .83 is in the problematic zone below 1.0 for the weakest debt-to-asset category, those with a 0.75 or higher debt-to-asset ratio (see Table 1). On average, the current ratio is below 1.0 for farms with debt-to-asset ratios above 0.50. These farms likely need to restructure assets or debt to improve the working capital position.
- Is your fall fertilizer booked? Most prices continue the higher trends begun earlier this year, and only anhydrous was steady at just under $500 per ton. Urea rose about $20 per ton in the past week to more than $400, $60 higher than last fall. MAP was the only fertilizer to decline in price and that was negligible. For a pound of N, urea is at 44¢, anhydrous ammonia is 30¢, and UAN is at 43¢.
- Where does seed fall in your cropping budget? Purdue ag economist David Widmar says seed prices have declined slightly, but have been a major part of the growing cost of crop production. Corn seed expense (shown in orange) was mostly $40 per acre from 1975 through the mid-2000s. In 2005, the expense began to increase, reaching a high of $105 per acre in 2015. Most recently, corn seed expense has turned lower in recent years. For 2017, corn seed expense was $99 per acre, a $6.25 per acre decline, or 6% lower, over two years. corn seed expense increased from $43/acre in 2000 to $99 in 2017 (in real terms). Over the last 18 years, the expense increased by 131%, or increased at an average annual rate of 5.1%. That is a significant rate of increase sustained over nearly two decades. Regarding soybean seed prices, while soybean seed expense was previously around $25 per acre and 6% of total production expenses, in 2017 it accounted for $58 per acre and 13% of total expenses. Comparing soybean expense in 2000 to 2017, the change over 18 years has been slightly less than corn. In total, seed expense increased by 113%, equal to a 4.5% average annual rate of change. After initially resisting adjustments lower, seed expense for corn and soybean production have turned lower in recent years. Although the changes have been smaller than what was observed in fertilizer and cash rental rates, the improvement has been welcome. However, it is worth noting how much seed expenses increased during the farm economy boom. In most cases, seed still accounts for a historically high share of total production expenses.
- While House and Senate Ag Committee leaders campaign, their staff members continue to work on elements of the new Farm Bill that have held up agreement between the chambers and the political parties. Lobbyists for the American Soybean Association report, “The optimistic forecast would be to have compromises worked out for the farm bill Conference Committee to approve after Congress returns on Nov. 13. Even under this best-case scenario, the Committee would have only three weeks, including the week of Thanksgiving, to prepare a Conference Report that both chambers could vote on before the 115th Congress adjourns. This could happen on Dec. 7, when the Continuing Resolution funding government operations in FY-2019 will expire. A new CR could be passed extending funding through Dec. 21, which would give the farm bill effort another two weeks.” And they project, “The 115th Congress will adjourn once funding for FY-2019 is approved in December. If a new bill cannot be completed by then and, faced with expiration of the current dairy program after December 31 (the so-called “dairy cliff” which revives Depression era parity prices), an extension of the current 2014 Farm Bill would be necessary. This would most likely be for at least one year rather than kicking it to the new Congress through a short-term extension. There has been some talk of a three-year extension to get farm legislation beyond the next elections—and hopefully beyond the current volatile trade conditions facing U.S. soybean farmers.”
- So, refresh my memory, what are the sticking points in the Farm Bill proposals?
- In Title 1 (Commodities), the House would eliminate PLC and ARC payments for base acres that weren’t planted to a program crop in 2009 to 2017 and use the savings to allow farmers who experienced a 20-week drought during 2008-2012 to update their PLC and ARC payment yields. Depending on how analysis of these provisions is done, an estimated 7 mil. acres of “underplanted” base would lose payments, while farmers in 417 counties in west Texas and neighboring states would receive about $500 mil. over ten years, primarily through higher cotton yields under the PLC program. The Senate has not bought into this idea.
- The House expanded farm program payment limitations in size and to recipients, while the Senate requires active engagements and reduces eligibility by lowering AGI limits.
- The Title II (Conservation) change would merge the Conservation Stewardship Program (CSP) into EQIP, reducing the cost of supporting conservation practices on working lands. The Senate does not want to merge the programs and does not cut funding
- The major change in Title IV (Nutrition) is the tightening of work requirements and transfer of funds to establish state job training programs. Democrats and the Senate oppose this.
- The Senate legalizes hemp production to replace the declining tobacco production, but the House version does not address that issue.
- Expiration of the 2014 Farm Bill on Sept. 30 ended USDA funding for foreign market development programs used by the US Soybean Export Council, Grains Council, and other export promotion groups. They are using reserve funds, but those will soon run out.
- And finally, this—
- Agriculture Secretary Sonny Perdue visited the heart of the Cornbelt last week at a Champaign County (IL) farm to stump for Rep. Rodney Davis, R-IL, but answered questions from about two dozen of the hundred attendees. Among those:
- Lender: Trade policy has destroyed commodity prices, what is the end game?
Perdue: We need to get more markets in more places, dependency on China was too concentrated and we need to diversify. Chinese were easy, and it was easy to sell to them. $200 mil. has been allocated for new market development.
- Farmer: Harvest is complete, and we were working on some NRCS projects, but told there is no money available because of no Farm Bill. Why? This is the prime time for that work.
Perdue: Money should be good through end of the year, unless program is overspent.
- Lender: Trade policy has destroyed commodity prices, what is the end game?
- Enviro. org. exec.: IL reducing nutrient loss in waterways, but not neighboring states. Farmers should not have to pay total cost, but what can be done to solve Gulf hypoxia zone?
Perdue: Solution starts with NRCS programs on farms, precise nutrient application, and education to farmers. Big challenge because Mississippi is a big watershed.
- Farmer: When will EPA issue its ruling on dicamba?
Perdue: Dicamba is interesting challenge, probably can do better job in application. Don’t know that it will be banned, will approach decision with science as seen in chlorpyrifos and glyphosate court cases. Need science-based dicamba decision to be good neighbor.
- Minister: For sake of farmers, they need to know if there will be 2nd trade aid payment.
Perdue: 2nd payment planned, was misquoted that it was in doubt, but USDA will calculate potential payment in December, if trade issue continues to impact commodity prices.
- Crop insurance agent: Will Farm Bill make any changes regarding AGI payment limitations?
Rep. Davis: Despite attacks on crop ins., but it is a good public-private partnership.
Perdue: His heart sank when he thought Davis was discussing a tax on crop insurance, until he realized Davis was referring to “attacks.” He made no comment on payment limitations.
- Farm org. officer: Continuing tariffs on Mexican and Canadian steel depressing pork and corn exports particularly in Mexico, which is the leading market for both commodities.
Perdue: That issue getting lot of White House attention, alternative to tariffs being sought.