Author: J. Mark Welch

  • Key Farm Management Considerations in Turbulent Times: The 5% Rule

    Key Farm Management Considerations in Turbulent Times: The 5% Rule

    The 2023 winter wheat crop will soon be going in the ground.  As planning and preparations are under way, producers continue to struggle with the challenges of high input costs, volatile commodity markets, weather extremes (drought in the west, flooding in the east), and global geopolitical instability. 

    As many input costs are being locked in, an important question is where do output prices go from here? A key tenet of economic theory provides insight into that question. In 1890, Lord Alfred Marshall told us where prices are going in the long run: prices will go to the cost of production (Marshall, 1890).  In a free market economy, a price above the cost of production will provide incentives for an increase in supply or entice other entrants into the market. Prices below the cost of production will cause supply to decrease or participants to exit the marketplace.  

    Successful and sustainable financial performance in an economy where prices move to the cost of production implies two key components of management strategy that revolve around production and price:

    1. Be the low cost/high quality producer. Input use efficiency is critical to achieve the lowest possible breakeven cost. Tools to achieve this goal include the use of crop rotations, hybrid and variety selection, conservation tillage, soil, and plant testing, and precision application of inputs.
    2. Lock in profitable prices.  Tools of financial management include budgets and breakeven analyses, cash flow projections, crop insurance, marketing plans, and price safety net provisions. 

    Does this management approach work?  Evidence of the impact of these management strategies can be found by looking at the financial performance of the top 20 percent of corn producers over the last several years.  This information can be found in the FINBIN database (FINBIN, 2022). This database summarizes actual farm data from thousands of agricultural producers.  

    Sorting key production and price characteristics by financial performance shows that, compared to the overall average, the top 20 percent of corn growers in 2021 had higher yields, received higher prices, and had lower costs (Figure 1).  Looking back over the last several years, this group, the top 20 percent, outperformed the average every year in every category with one lone exception. In 2018, the average of all corn producers received a one percent higher price (Figure 2).  

    As a farm management philosophy, consider the adoption of what Danny Klinefelter, retired professor in the Department of Agricultural Economics at Texas A&M University and founder of The Executive Program for Agricultural Producers (TEPAP), calls the ‘5% rule’ (Janzen, 2018).  In the upcoming crop year, where can I lower my costs by five percent? How can I increase my yields by five percent? How can I increase my average price received by five percent? Making relatively small changes in critically important areas over time can have a dramatic impact on financial performance.    

    Figure 1. 2021 Corn on Cash Rent Summary Report

    FINBIN(2022) Center for Farm Financial Management: University of Minnesota.

    Figure 2. Corn on Cash Rent Summary Report Comparisons, High 20% to Overall Average, 2018-202

    FINBIN(2022) Center for Farm Financial Management: University of Minnesota.

    References

    FINBIN. Center for Farm Financial Management, University of Minnesota. Accessed August 1, 2022 and available at https://finbin.umn.edu/

    Janzen, Joseph. “The “5% rule of farm management shows how all the pieces matter”, Department of Agricultural Economics and Economics, Montana State University, Business and Finance posts, January 16, 2018.  Accessed August 2, 2022 and available at https://ageconmt.com/

    Marshall, Alfred. Principles of Economics, London: Macmillan, 1890.  

    Welch, J. Mark. “Key Farm Management Considerations in Turbulent Times: The 5% Rule“. Southern Ag Today 2(34.1). August 15, 2022. Permalink

  • World Per Capita Grain Consumption and Global Economic Growth

    World Per Capita Grain Consumption and Global Economic Growth

    Since the early 2000’s, global economic growth has been driven by emerging market and developing economies (Figure 1). Since 2000, the average annual increase in Gross Domestic Product (GDP) from this group of nations has been five percent, compared to just under two percent for advanced economies.  The “altered economic landscape” of the 21st century that drove this growth includes technical change (the internet, and access to it), lower transportation and communication costs, reductions in tariff rates and other barriers to trade, in general, lower costs of international trade.  This transformation reduced poverty and improved living standards across much of the globe (Krueger, 2006).  

    Figure 1. Global Economic Growth, Annual Percentage Change, GDP, 1980-2022, 2023-2027 projected

    Average incomes in the largest economies within the category of ‘Emerging market and developing economies’—Brazil, Russia, India, China, Mexico, Indonesia, Vietnam, Philippines, Thailand, Malaysia, a group that accounts for half of the world’s population—started to rise rapidly in 2003 (Figure 2) (IMF, 2022).  Measured in current $US, the average income in these ten countries (weighted by population) from 1980 to 2002 increased from $433 to $1,232, about $35 per year.  Incomes grew from $1,356 in 2003 to $6,319 in 2020, about $275 per year.  

    Figure 2. Emerging Economies Gross National Income Per Capita and World Per Capita Grain Use

    World Bank. DataBank. Accessed June 8, 2022 and available online at https://databank.worldbank.org/home.aspx.

    This economic activity has had a direct impact on grain markets. While world grain consumption (barley, corn, millet, mixed grains, oats, rice, rye, sorghum, and wheat) increased steadily from 1980 to 2002, per capita grain consumption was flat to trending lower from 1980 to 2002.  Beginning in the 2003/2004 marketing year, per capita consumption began to increase along with incomes in emerging economies, from 312 kg per person to 364 kg per person in 2021/22, an increase of 17 percent. As incomes grew in emerging economies, so did the demand for grain—for food, feed, and fuel—in the subsequent marketing years. For comparison, per capita grain use in the rest of the world (all countries other than emerging economies) increased seven percent from 2003/04 to 2021/22. Measuring consumption on a per capita basis accounts for overall population growth experienced in these emerging economies over this time span. 

    Since 2003, there have been five marketing years in which a decline in production has been associated with a drop in per capita use: 2006/2007, 2012/2013, 2015/2016, 2017/2018, and projections for the new marketing year, 2022/2023 (Table 1).  In 2012/13 and 2015/16, the setback in grain use was short lived, in that after a one-year decrease, consumption increased to a new, higher level in the year following.  That increase in use coincided with increased production and a continued rise in average incomes.   

    Table 1. World Grain Production* and Per Capita Grain Use

    Marketing YearWorld Grain ProductionmmtProduction Change mmtPer Capita Grain UseKg/personUse Change
    2003/20041,86643 312 1.97 
    2004/20052,044178 315 3.43 
    2005/20062,017(27)317 2.02 
    2006/20072,005(12)316 (0.71)
    2007/20082,132127 322 5.46 
    2008/20092,252120 327 5.48 
    2009/20102,253330 2.78 
    2010/20112,213(40)330 0.15 
    2011/20122,344130 339 9.02 
    2012/20132,296(48)329 (10.71)
    2013/20142,512217 343 14.41 
    2014/20152,56048 346 3.25 
    2015/20162,518(42)341 (4.80)
    2016/20172,668150 358 16.39 
    2017/20182,619(49)354 (4.25)
    2018/20192,63213 355 1.98 
    2019/20202,68048 356 0.44 
    2020/20212,72444 361 5.03 
    2021/20222,79469 364 3.06 
    2022/2023p2,765(28)360 (4.32)
    *Barley, corn, millet, mixed grain, oats, rice, rye, sorghum, and wheat
    Source: USDA, FAS PSD

    Due to mostly geopolitical events, the 2022/2023 marketing year for grains is shaping up as a short crop year.  Inflation, rising interest rates, and lingering pandemic impacts are among the factors limiting economic growth prospects in the near term. Among the factors that will determine whether we extend the recent trend in world per capita grain use are future crop production levels and global economic conditions.  The combination of a short-crop and a slowdown in income growth can impact per capita grain use beyond the current marketing year.  

    References:

    Krueger, Anne O. “The World Economy at the Start of the 21st Century”, International Monetary Fund, Annual Gilbert Lecture, Rochester University, New York, April 6, 2006. Accessed May 31, 2022 and available online at https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp040606.

    International Monetary Fund (IMF). IMF Datamapper. Accessed May 31, 2022 and available online at https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD.

    USDA, Foreign Agricultural Service. Production, Supply and Distribution (PSD). Accessed June 8, 2022 and available online at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home.

    World Bank. DataBank. Accessed June 8, 2022 and available online at https://databank.worldbank.org/home.aspx.

    Welch, J. Mark. “World Per Capita Grain Consumption and Global Economic Growth“. Southern Ag Today 2(25.1). June 13, 2022. Permalink

  • Outlook for Feed grain Fundamentals in the 2022/2023 Marketing Year

    Outlook for Feed grain Fundamentals in the 2022/2023 Marketing Year

    The war between Russia and Ukraine has upended grain flows from the Black Sea region for months. Since the first days of fighting in late February, Ukraine’s export terminals in the southern part of the country have been closed. This from a nation that provides 10 percent of the world’s wheat exports and 12 percent of global corn exports.  

    As fighting continues, the threat to grain supplies extends beyond the export of old crop grain (2021/2022 marketing year) to the production of the 2022 crop.  Russia, with its military control of the region, may still be able to provide wheat to its trading partners. The world wheat trade has other participants that may be able to increase their sales.  

    The impact of the conflict on the feed grain market may be harder to compensate for. Ukraine is the fourth largest corn exporter, 23 mmt in 2021/2022, 12 percent of the world total, and there are not many other major export providers of feed grain. After Ukraine, the next largest corn exporter is the EU at 4.9 mmt or 2.5 percent of total exports.  Much uncertainty surrounds Ukrainian agriculture and market participation in the upcoming crop year in terms of productive capacity, foreign market access, and export controls due to domestic food security concerns. What will the implications be for 2022 world feed grain fundamentals—supply and demand—without the contribution of Ukrainian agriculture? 

    In this article, feed grain statistics are those reported for world coarse grains by USDA (corn, sorghum, barley, oats, rye, millet, and mixed grains) as well as wheat for feed.  Since 1980, wheat for feed has constituted about 20 percent of total world domestic wheat use (Figure 1).  The contribution of wheat as a feed grain for this analysis will be 20 percent of total wheat production, use, and stocks.

    Without Ukraine, feed grain supplies in the 2022/2023 marketing year would decrease by about 60 mmt: 53 mmt for coarse grains and 7 mmt of wheat (USDA, WASDE, 2022). A simple linear regression model of the response in consumption to a supply change in feed grains yields a regression coefficient of +0.34, in that a 60 mmt decrease in supply would have an estimated 20 mmt decrease in use (Figure 2). 

    Using those estimates, without Ukraine, the feed grain days of use on hand at the end of the marketing year would fall to a 78-day supply in the 2022/2023 marketing year, down from an 85-day supply for 2021/2022.  This extends the downward trend of the last six years, a time frame in which the marketing year average price of corn, which accounts for over 70 percent of all feed grains, has increased from $3.36 per bushel to a current estimate of $5.80 per bushel. This would be the lowest days of use on hand number since 2013/2014 (Table 1 and Figure 3). The years of tightest stocks to use in feed grains (lowest days on hand) since 1980 was from 2003/2004 to 2012/2013.  

    If, instead of a complete loss, the supply of feed grain in the upcoming marketing year from Ukraine were to decline by half, that would reduce world feed grain supplies by 30 mmt and use by about 10 mmt. The resulting days of use on hand at the end of the marketing year would be an 81.6-day supply.  The impact of the Russia/Ukraine conflict is having severe and significant impacts on the world grain trade. In the short term, this impact is creating the tightest supply situation for feed grains that we have seen in the last ten years.  The World Food Program’s emergency coordinator in Ukraine expects 20 percent of planted acres will not be harvested this July and that spring planted area will be down by about one third (Reuters, 4/21/2022).  Even if this conflict were to be resolved relatively soon, damaged infrastructure will limit commodity shipments for an extended period of time.  The longer drawn out the conflict, the greater the magnitude of fundamental adjustments that will be required 

    Figure 1. World wheat feed use as a percentage of total domestic use, 1980/1981-2021/2022

    Figure 2. Response in feed grain use to a change in feed grain production

    Table 1. World feed grain production, use, stocks, days on hand, and the corn marketing average farm price

     Beginning stocks,
    mmt
    Production,
    mmt
    Use,
    mmt
    Ending Stocks,
    mmt
    Days on
    Hand
    U.S. Corn
    MYA $/bu
    2016/20173991,5661,5264381053.36
    2017/20184381,5141,5244281033.36
    2018/20194281,5451,561406953.61
    2019/20204061,5701,572396923.56
    2020/20213961,5921,610379864.53
    2021/20223791,6571,655386855.80
    2022/2023 est3861,5971,63434978 

    Figure 3. World feed grain production, use, and days of use on hand at the end of the marketing year, 1980-2021, and 2022 estimate

    Welch, J. Mark. “Outlook for Feed Grain Fundamentals in the 2022/2023 Marketing Year“. Southern Ag Today 2(21.1). May 16, 2022. Permalink

  • World Wheat Supplies in Response to Russia’s Invasion of Ukraine

    World Wheat Supplies in Response to Russia’s Invasion of Ukraine

    World wheat supplies are tight, and Russia’s invasion of Ukraine puts at risk a significant portion of the world’s wheat supply. World wheat ending stocks in the 2021/22 marketing year are estimated at 278 mmt, the lowest since 2016/17 (263 mmt) (USDA, FAS, PSD, 2022).  In the current marketing year, Russia is expected to account for about 10 percent of global wheat production (75.16 mmt) and 16 percent of global wheat exports (33.00 mmt) (Figure 1). Ukraine’s wheat production is about four percent of the world total (33.00 mmt) and its 19.00 mmt of exports is 10 percent of the world total. 

    With its control of the Black Sea, Russia has the ability to continue exporting grain in the midst of this conflict. One impact of economic sanctions may be to change the normal allocation of Russia’s wheat exports. But with strong global demand and Russian wheat priced competitively in global markets, it seems unlikely that total Russian wheat exports will fall substantially.  

    Ukraine’s ports have been closed since the first day of fighting and the Ukrainian government has banned some grain exports to ensure domestic food supplies.  The 2022 wheat crop is at risk not only in active conflict zones but more broadly due to shortages of equipment, fuel, fertilizer, and labor. Where harvest is possible,  it is safe to assume infrastructure damage (e.g., storage, roads, rail, ports) will impact the movement of agricultural products from field to international markets.    

    What is the worlds’ capacity to make up for the loss of wheat exports from Ukraine, which average about 18 mmt, just below the current marketing year’s 19 mmt? In addition, the global wheat trade has increased 11 mmt over the last five years.  In the short-term, exports have increased significantly from Argentina, Australia, the EU, India, and Brazil (Figure 1).  In the 2021/22 marketing year, Argentina’s exports are up 2 mmt from its most recent five-year average. Australia is projected to export an additional 12 mmt. Exports from the EU are up 5 mmt. India’s wheat exports are up 8 mmt compared to its 5-year average and Brazil’s wheat exports are up 2 mmt.  These combine for an increase of 28 mmt.  

    Major wheat exporters whose sales are down in 2021/22, compared to the 5-year average, are the U.S. and Canada. Both had significantly smaller spring wheat crops in 2021.  U.S. wheat exports are down 5 mmt and Canada’s sales down 8 mmt.  A return to normal would add 13 mmt to world wheat exports in 2022/23.  

    All wheat acres in the U.S. for 2022 are up about 700,000 from 2021 to 47.4 million (USDA, Prospective Plantings, 2022).  Across the South, wheat acres increased in Alabama (+3%), Arkansas (+5%), Kentucky (+6%), Mississippi (+5%), North Carolina (+16%), Tennessee (+5%), and Virginia (+22%).  Wheat acres were unchanged in Oklahoma and Texas.  Acres were down in Georgia (-5%), Maryland (-12%), and South Carolina (-4%).  

    Further complicating the wheat market, drought conditions in the U.S. Southern High Plains look to decrease winter wheat yields and increase unharvested acres in this region. For U.S. and Canadian wheat production to increase and augment exportable supplies, favorable growing conditions are needed for the upcoming spring wheat crop. 

    While the loss of Ukraine’s wheat crop in 2022 would have a significant impact on world wheat supplies, high commodity prices are providing incentives for agricultural producers around the world to plant more acres.  However, the loss of Ukraine’s production amplifies the importance of production disruptions in other wheat producing regions, should issues occur. Longer-term production will certainly increase as weather and crop input availability and affordability allow. 

    Figure 1. World Wheat Exports, average 2016/17-2020/21 and 2021/22 (million metric tons)

    Source: USDA, World Agricultural Supply and Demand Estimates and FAS, PS&D

    References

    USDA, Foreign Agricultural Service, Production, Supply and Distribution, accessed April 12, 2022, https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery.

    USDA, Prospective Plantings, March 31, 2022

    USDA, World Agricultural Supply and Demand Estimates, April 9, 2022

    Welch, J. Mark. “World Wheat Supplies in Response to Russia’s Invasion of Ukraine“. Southern Ag Today 2(17.1). April 18, 2022. Permalink

  • 2022 Corn Outlook

    2022 Corn Outlook

    For many feed grain producers, 2021 was a profitable year; however, the uncertainty and risk associated with the 2022 corn crop is elevated. Following is a look at how the components of the supply and demand balance sheet might provide price direction as we head into the new crop season.  Importantly, is there a likelihood of an increase in ending stocks that puts downward pressure on prices, or might stocks get tighter and prices go higher? 

    USE:  U.S. corn use over the last six years has ranged from a low of 14.0 billion bushels (2019/20) to a high of 14.8 billion bushels (2017/18, 2020/21, 2021/22).  Domestic use over this time frame is little changed, varying in a range from 12.1 to 12.4 billion bushels. 

    Looking at the major use categories, growth in the corn for fuel use category seems limited due to uncertainty around the Renewable Fuel Standard and gasoline demand projections.  With rising fuel-efficiency ratings and a growing number of vehicles on the road that do not use gasoline, the Energy Information Administration forecasts motor gasoline demand in the U.S. (the foundation of ethanol demand) to decline over the next several years in its Annual Energy Outlook (https://www.eia.gov/outlooks/aeo/). 

    Impacting the corn for feed category is a decline in grain consuming animal units (GCAU) over the last two years and a decline in energy feed per GCAU over the last five years (https://www.ers.usda.gov/data-products/feed-grains-database/). 

    Food, seed, and industrial use (other than ethanol) have held steady in a range from 1.415 to 1.453 billion bushels since 2016.

    Exports have been the use category with the most variability over the last several years and have therefore had the most impact on ending stocks. U.S. corn exports hit an all-time record high in 2020/21 at 2.753 billion bushels. Corn production from the top four competitors for U.S. corn exports: Brazil, Argentina, Ukraine, and Russia, is forecasted to be at record high levels in 2021/22, while U.S. exports are projected to be back down to 2.425 billion bushels. High corn prices provide incentives for producers all around the world to increase acres.  At the time of this writing, the conflict between Russia and Ukraine has the potential to upset grain flows from the Black Sea region, an important component of the global grain trade.  

    SUPPLY:  One of the greatest areas of uncertainty for 2022 is the impact of record-high fertilizer prices and crop input availability. How will this impact farm productivity, profitability, and planting decisions? Will farmers opt for crops that are less fertilizer intensive given these high input costs? Will herbicide cost and availability shift planting decisions to crops with a wider range of alternative crop production systems that are less reliant on over-the-top herbicides? The current ratio of soybean to corn prices suggests net farm returns are about equal between these two crops in Midwest crop budgets (farmdoc dailyhttps://farmdocdaily.illinois.edu/2021/12/2022-updated-crop-budgets.html).  Late-spring input pricing and input product dealer inventories may keep the acreage question unanswered longer than normal this spring.  

    ENDING STOCKS AND PRICE:  If farmers plant about the same number of corn acres in 2022 as 2021 (about 93 million), we once again achieve a trendline yield (about 179 bushels per acre), and projected use holds steady in 2022 as currently projected for 2021, total production would exceed the 14.8 billion bushels of projected use. That would increase ending stocks in 2022 and fundamentally put downward pressure on prices.  

    RISK MANAGEMENT:  A primary area of financial risk in 2022 is that producers will have locked in high input costs early in the season only to see prices fall significantly by harvest. This highlights the importance of a two-prong approach to risk management. First, focus on cost management and input use efficiency while maintaining productivity. This is to get the break-even cost as low as possible. Second, have an accurate estimate of break-even cost and a plan and the tools in place to not let profitable price opportunities get away.  

    Welch, J. Mark. “2022 Corn Outlook“. Southern Ag Today 2(10.1). February 28, 2022. Permalink