As 2019 turns into 2020, markets have had their fair share of news. Between the United States Department of Agriculture’s “final” production estimates and signed trade deals, there’s been a lot to digest. I don’t know that the pendulum is going to slow down anytime soon, but the hope is that with the increase in news, we might be able to spark some selling opportunities as we move through the winter.
On January 10th, USDA released one of its most watched reports of any year. The Annual Crop Production report is generally the final word on the yield and production of corn, and many times the final word on soybeans, although USDA has often revised that production figure after September 1 the next year. This year, that number is less “final” than we typically see as harvest delays are pushing corn into spring. USDA acknowledged that at the top of the Annual Crop Production report, but as hedgers, we need to realize that the delay of finalizing yield from the Dakotas, Minnesota, Wisconsin and Michigan is probably minimal. It’s not that no yield was assigned to those areas; it’s that USDA wants to wait for more harvest to take place. Could the yield in those states slide lower? Definitely. However, the net effect is not likely going to be large enough to alter an entire balance sheet on its own. So attention is rapidly shifting back to the monthly Supply and Demand estimate reports.
As far as those go, we have seen some constructive changes to the wheat balance sheet. USDA estimates total demand for U.S. wheat for the 2019 crop year was increased by 9 mbu, mostly due to higher demand for feed wheat. It’s not an ideal situation, but it does help drive the balance sheet a little lower. Higher feed demand was also a feature on the 2019 corn balance sheet, which is consistent with the results of the grain stocks survey. In fact, feed and residual demand for corn jumped an enormous 250 mbu between December and January. While that ultimately did provide for a lower carryout number, we’ve also experienced less than ideal exports in the first half of the marketing year. Slowing global demand, weak South American currency, and lower test weight U.S. corn have all played a part in that development.
Perhaps most important of the three is that in the 2019 crop year, USDA is projecting the world will use about 10 mmt less than it did in 2018. Most of that decline is out of the European Union, but other spots have leveled off or dropped as well. That’s tough to overcome in the markets with focus shifting off of the supply curve (production) and more on the demand curve. That scrutiny is likely to intensify in the coming months as the pressure of two “new” trade deals comes into play and traders look to see what effect, if any, they have on demand for U.S. originated product.
Trade deal or not, soybean exports have performed better than corn. It’s tough to say that the U.S.-Chinese trade agreement is going to spark a big run of purchases. The phase one deal does accomplish something in terms of taking some of the tension out of negotiations and moving talks forward. However, tariffs at this point remain in place and we are on the verge of moving into South American soybean harvest. It’s tough to overcome those seasonal tendencies. I would say the agreement may provide some comfort to buyers and sellers on both sides of the Pacific. The signing did not, however, spark a strong market rally. Why not? Because the impetus is now on those export sales to show up. Talking the market up will have less effect than it has simply because we’ve already executed.
Looking ahead to the 2020 crop year, producers are seeing a price environment that, at least as of now, is looking pretty balanced between corn and soybeans. At this time, neither crop appears to be a lot more favorable than the other, at least to the point of attracting new acres. Wheat, for practical purposes, remains a rotational crop for many in the AgCountry territory - although the higher yields in the northern part of our service area do make it a legitimate contender for some. The short story is that an acreage battle is on the back burner.
So what do we do? How do farmers move forward when markets are relatively flat and profitable sales seem hard to come by? That’s always a tough spot to be in and it’s hard to make some of those iffy sales. The thing is, we never know. This time last year no one knew we’d have one of the wettest springs in history and that the crop would be a struggle. No one knew that we’d lose 12 million acres of soybeans compared to 2018. That same is true back in winter of 2012. No one knew we were on the verge of a drought. In 2017, no one knew the Chinese trade talks would turn into a two-year trade war.
The point is, farmers and those in agriculture have always had to operate on the unknown. Sometimes it’s tougher than others; but we have to make those decisions under the assumption that things will be as we know them today. What crop makes you the most money today? Looking at the year ahead as you know it today, when are you going to need cash? Work with your loan officer to make your budgets for the coming year and then back it up with the appropriate crop insurance policy. That crop insurance policy is going to form the basis of your marketing plan. Selling ahead will provide you the chance to manage your margins rather than the margins managing you. Can you sell everything now? No, probably not. Remember you don’t have crop insurance until the crop is actually planted. You can, however, probably assume that you will get something planted. Small sales now make a good groundwork for the year and allow you to be more patient in managing sales later on.
In closing, we would also like to remind producers that sign up is starting for the new farm bill. The program structure is very similar to the 2014 Farm Bill, however, some of the calculations are different. To be quite frank, the price environment is also a totally different animal than it was in 2014. What worked then might not be the right choice today and we’d love to talk with you about those decisions and how they might affect your operation. If you have any questions, please talk to your loan officer or insurance specialist and we can set up an appointment.
