Purdue looks at USDA reportsWritten by Natasha Wheeler
“We have to make those short-term decisions to position the farm for the long-term,” noted Corinne Alexander, a Purdue University professor and Extension ag economist.
Alexander and her Purdue University colleagues Chris Hurt, a professor and ag economist, and James Mintert, a professor and director of the Center for Commercial Agriculture, reviewed the USDA’s March 2015 Prospective Plantings and Grain Stocks reports in an April 1 webinar.
“Either costs will come down or prices will come up in the long run. The margins won’t be as tight, but now is really a crunch period,” commented Hurt.
Corn, soybean and wheat stocks indicate that the U.S. has built up inventories of these commodities since last year.
“Corn stocks relative to a year ago are up 11 percent, and soybeans are up 34 percent,” stated Alexander. “We have had a really huge rebuild in inventories for soybeans.”
Wheat inventories were up six percent to 1,124 million bushels on March 1. Soybean stocks were reported at 1,334 million bushels and corn were reported at 7,745 million bushels.
“If we take a look at where corn stocks are, we see about 7.7 billion bushels, about 117 billion bushels higher than what the trade was expecting,” explained Alexander.
A Dow Jones survey predicted 7,628 million bushels in corn stocks, indicating that either production was higher or usage was lower than expected in the last year.
“One point that stands out right now is that corn exports are running slower than what is needed to meet those USDA expectations for usage,” she stated.
Overall, the difference between expected and actual corn stocks is considered bearish.
“For soybeans and wheat, the report was much more neutral,” she continued.
In the Prospective Plantings report, farmers indicated that soybean acres will increase, while corn and wheat acres will be reduced.
“Planting intentions for corn came out to an estimate of 89.2 million acres, down two percent from last year, farmers say they are going to plant 84.6 million acres of soybeans, up one percent from last year, and wheat planting is down about three percent at 56.8 million acres,” she described.
Corn acreages have plateaued since 2012 as demand for soybeans has increased.
“We have seen three years now of declining corn acreage and soybeans continuing to go up,” noted Hurt.
He contributed much of that growth to demand coming from China.
“We are starting to see emphasis on growth where the world market is,” he added.
Soybeans are also a less expensive crop to grow, according to the March 2015 Prospective Plantings report.
“For 2015, our crop budget is saying it is going to cost $446 to put out an acre of corn, $222 to put out an acre of beans and $183 to put out an acre of wheat,” said Alexander.
These prices represent variable costs such as seed, fertilizer, insurance and fuel that are needed to maintain crop acres.
“One of the reasons we have been talking about farmers shifting more acres to soybeans is from a cash flow perspective, in terms of the cost of buying those inputs,” she continued.
Overall, it appears that while input prices stay steady or rise, commodity prices are dropping, making profit margins small or even negative.
“We have just gone through this eight or 10 year boom period where revenues went up higher than costs. We are now shifting to revenues that are well below costs,” Alexander stated.
Producers may have to consider different profit strategies to be successful in the current market.
“We have to think about how we become low-cost producers again and really ratchet down, holding the microscope to every single cost that we have,” she said.
Hurt encouraged producers to consider their costs compared to crop price outlooks.
“If we have four dollar corn and nine dollar soybeans, can we raise corn and beans?” he asked. “We should strive to get those costs at those levels or lower.”
Alexander added that marketing strategies do play a role, but there is a limit to what they can do.
“Marketing isn’t going to get us out of a low price period,” she commented.
Mintert explained that commodity crops are part of a different kind of market environment than they have been in the past.
“We were in a period where the strategy was to wait for the future and tighter supplies, to hold on to the expectation of stronger prices,” he said, “but in our environment today, we need to take advantage of opportunities as they arise. It’s a different mindset than we have had in recent years.”
As the season turns to spring, markets will become more dependent on actual plantings and national weather.
“Over the next several months, weather will be the factor that could determine if we stay in the predicted trading pattern or if we break out of that, either on the upside or the downside,” noted Hurt.