Author: J. Mark Welch

In the last 2-1/2 years, wheat futures prices have doubled, from just over $4.00 per bushel in June 2019 to over $8.50 per bushel this past November. This has occurred in both the hard red winter wheat (Kansas City contract) and soft red winter wheat (Chicago contract) markets.  But over most of this period, hard red winter wheat, which normally trades at a premium to soft red winter wheat, traded at a discount. From January 2006 to December 2018, the average premium for hard red winter wheat to soft red winter wheat was 34 cents. From January 2019 through August 2021, hard red winter wheat traded at an average discount of 53 cents to soft red winter wheat. September 2021 to date, hard red winter wheat is back to an average 16-cent premium to soft red winter wheat.

Figure 1. Wheat futures prices, Kansas City hard red winter and Chicago soft red winter, Tuesday close, cents per bushel

The increase in wheat prices generally is associated with tightening world supplies.  Wheat acres globally have increased over the last several years, but the world average yield has declined. Total wheat production is up only 600 million bushels (about two percent) since the 2019/20 marketing year while world domestic use has grown by 1.6 billion bushels (about six percent). World wheat days of use on hand at the end of the marketing year have declined from a 146-day supply to a current estimate for 2021/22 of 130 days.  A decline in this measure of stocks-to-use has put upward pressure on prices.  

World Wheat	2019/2020	2020/2021	2021/2022
Area Harvested, mil ac	533	546	552
Yield, bu per ac	52.6	52.2	51.9
Production, mil bu	28,006	28,510	28,609
Domestic Use, mil bu	27,218	28,462	28,867
Ending Stocks, mil bu	10,876	10,642	10,236
Days of use on hand	145.9	134.7	129.8

Hard red winter wheat is the dominant class grown in Kansas, Oklahoma, and Texas with soft red winter wheat the most common class east of a line from Dallas to Kansas City. While the price of both classes of wheat are higher in the current global environment, there are important differentials in stocks-to-use by class which may help explain the premiums and discounts between these markets. 

As with the global wheat situation, the stocks-to-use ratio for both hard and soft winter wheat have been on the decline in the U.S. the last several years. However, the decline in the stocks-to-use ratio for soft red has been sharper relative to the decline in the stocks-to-use ratio for hard red. 

U.S. Wheat by Class: Days of Use on Hand at the End of the Marketing Year

In the 2017/18 marketing year, days of use for soft red was 34 less than hard red winter. By 2020/21, soft red days on hand were 103 less than for hard red—the soft wheat supply got tighter relative to hard wheat.  The hard red winter wheat premium declined from +8 cents to a 74-cent discount.  That situation appears to be reversing in the 2021/22 marketing year. The stocks-to-use ratio for soft red winter wheat has declined at a slower rate compared to hard red winter wheat and days on hand are back to a 54-day differential—soft winter wheat supplies are more plentiful relative to hard red winter wheat.  The price relationship to date this marketing year has hard red winter back on par with soft wheat. The latest weekly price shows a premium for hard red of 22 cents.  

SRWW days of use on hand minus HRWW days of use on hand and the HRWW price premium

With the U.S. only accounting for about six percent of world wheat production, supply and demand dynamics globally will largely influence the price of wheat overall.  But important distinctions in supply and use levels by wheat class can be important in local markets. For the time being, the fundamental (supply and demand) and price relationship between hard red winter and soft red winter wheat appears to be moving back toward long-term norms.    

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Welch, Mark. “2022 Price Outlook for Hard Red Winter and Soft Red Winter Wheat.” Southern Ag Today 2(5.1). January 24, 2022. Permalink

The current high prices have one certain result—more corn acres.  To the extent that farmers in Brazil, Argentina, and everywhere else, see these high prices they are going to increase their production.                        –Daryll E. Ray and Harwood D. Schafer (2012)

A fundamental approach to a commodity price outlook involves plugging in expectations for various components of the supply and demand balance sheet as well as some influence of expected returns of competing crops.  How the combination of these factors impact ending stocks provides expected price direction: tighter stocks, higher prices; increased stocks, lower prices.  One of the greatest uncertainties related to forming an expected corn price in 2022 is the question of acreage.  

Demand.  U.S. corn use over the last several years has varied little (Table 1 and Figure 1).  Domestic use since 2016 has averaged 12.244 billion bushels, in a range from -178 million to +111 million from that average.  Exports have been the use category that has separated total use from low to high.  Total use was the lowest of the last six years in 2019/20, coinciding with the lowest exports of the time frame.  Total use was the highest of the last six years in 2020/21, the year we set export records for U.S. corn.  The export forecast for U.S. corn in 2021/22 is down compared to the previous year as record production is forecast from our primary export competitors: Brazil, Argentina, Ukraine, and Russia. 

Table 1. U.S. Corn Use

U.S. Corn (million bu.)	2016/17	2017/18	2018/19	2019/20	2020/21	2021/22 est.	Average
Domestic Use	12,354	12,355	12,223	12,185	12,066	12,280	12,244
Exports	2,293	2,438	2,065	1,778	2,753	2,500	2,305
Total Use	14,647	14,793	14,288	13,963	14,819	14,780	14,548

Figure 1. U.S. Corn Use

Supply.  Since 1950, the average corn yield in the U.S. has increased at the rate of about 2 bushels per acre per year (Figure 2).  The trend line yield estimate for the 2021 crop was 176.7 bushels per acre. The latest estimate from USDA for the 2021 corn crop is an average yield of 176.5 bushels per acre.  Given ‘normal’ growing conditions in 2022, that trend line yield estimate is 178.7 bushels per acre.   

Figure 2. U.S. Corn Average Yield and Trendline Projection

Maximum combined planted acres of corn and soybeans in the U.S. the last five years is about 180 million acres.  One early predictor of corn and soybean plantings is the relationship between soybean prices and corn prices prior to planting. Using the base prices for crop insurance set by the Risk Management Agency to calculate the price ratio (February average closing price of November soybean futures divided by December corn futures), shows a range in the soybean: corn price ratio since 2006 of 1.99 to 2.59.  Years in which that ratio is relatively low, corn acres tend to increase relative to soybean acres. In years in which that price relationship is relatively high, the difference between corn and soybean plantings decreases (Figure 3). For example, in 2007, the soybean-to-corn price ratio in February was 1.99.  Corn plantings that year exceeded soybeans by 29 million acres (93.5 million corn, 64.7 million soybeans). In February 2017 and 2018, the soybean to corn price ratio in February was 2.57. Plantings both those years were virtually the same for soybeans and corn (90.2 and 88.9 corn, 90.2 and 89.2 soybeans).  Currently, the price ratio between November soybean futures and December corn futures is 2.25, down from 2.59 in 2021 and below the average ratio from 2006 to 2021 of 2.35.   

Figure 3. Corn acres minus soybean acres, millions (2019 intended, all other actual)

But that price relationship may be affected in 2022 by soaring fertilizer prices. The price of anhydrous ammonia reported by the Agricultural Marketing Service is currently $1,135 per ton, urea is $810 per ton, and 28% liquid N is $475 per ton (USDA, AMS, 2021). Compared to the cost of nitrogen fertilizer in southeastern corn crop budgets for 2021, at 200 pounds of N per acre, the cost increases from about $80 per acre in 2021 to $180 per acre for 2022. With a 200 bushel yield, the additional cost of nitrogen alone adds 50 cents per bushel to the cost of growing corn. Soybeans, which have lower fertility requirements, would have a lower increase in the cost of production when compared to corn.   

If nitrogen affordability is measured by the number of bushels of corn it takes to buy a ton of fertilizer, the current price increase is somewhat more moderate given higher corn prices (Figure 4).  The average price of anhydrous ammonia since September is $884 per ton. At $5.00/bu corn, it takes 177 bushels of corn to purchase one ton of anhydrous.  In 2021, that cost was 101 bushels per ton ($552/ton anhydrous and $5.45 per bushel corn), one of the lowest bushels per ton ratios of the last 25 years. The most expensive anhydrous measured in bushels of corn since 1997 was 230 bushels per ton in 2014 ($851 per ton anhydrous, $3.70 per bushel corn). The average cost in bushels per ton since 1997 is 153.

   Figure 4. Anhydrous Ammonia Prices

Ending Stocks.  Using an estimate of corn use and average yield, we can calculate the planted acres needed to match production to consumption. The likelihood of acres above or below this threshold guides our price outlook based on the number of acres that will tighten or build stocks (Figure 5).  If we assume that total corn use in the 2022/23 marketing year is about the same as the higher levels of the last five years (14.8 billion bushels) and a trendline yield of 178.5 bushels per acre, corn plantings of 90 million acres would match production to use (assuming 92 percent of planted acres harvested for grain). U.S. farmers planted 93.3 million acres in 2021.

It seems likely that the soybean-to-corn price ratio and affordability measures of nitrogen fertilizer will influence producers’ planting decisions in 2022.  Monitoring changes in these relationships over the winter may provide insight in to how this important piece of the fundamental outlook for corn shapes our price expectations and marketing decisions.  

 Figure 5. Planted area and yield needed to produce a 14.8 billion bushel corn crop

References:

Daryll E. Ray and Harwood D. Schaffer,” Production destruction leads to both short-term and long-term demand destruction”, Agricultural Policy Analysis Center, University of Tennessee, Knoxville, TN;  August 3, 2012.

USDA, AMS, Illinois Production Cost Report. October 21, 2021. Available online at https://www.ams.usda.gov/mnreports/gx_gr210.txtUSDA, OCE, World Agricultural Supply and Demand Estimates (WASDE). October 12, 2021. Available online at https://www.usda.gov/oce/commodity/wasde

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Welch, J. Mark. “Estimating U.S. Corn Acres for 2022.” Southern Ag Today 1(46.1). November 8, 2021. Permalink

Events culminating in the fall of 2020 set a course for much higher feed grain prices in the 2021 crop year. In June of 2020, USDA was projecting a record U.S. corn crop just shy of 16 billion bushels. However, the severe “derecho” windstorm of August 2020 damaged corn fields from eastern Nebraska to Ohio, the most costly thunderstorm event in U.S. history. By January 2021, with the damage assessments accounted for, the crop size was reduced to 14.2 billion bushels. In Brazil, corn production in the 2020/2021 marketing year was reduced due to heat and drought in critical corn producing areas.  Early season estimates of a record 4.3 billion bushel Brazilian corn crop ended with a disappointing 3.4 billion bushels. 

Then, China began buying feed grain. Imports of corn and sorghum to China had fallen to 202 million bushels in the 2018/2019 marketing year.  By the end of 2020/2021, these coarse grain import levels had grown to 1.35 billion bushels, with 1.41 billion projected for 2021/2022. In the U.S., thanks to record exports, corn days of use on hand at the end of the marketing year fell below the critical 40-day threshold to a 29-day supply to end 2020/2021, the lowest since the 27-day supply that ended the drought year of 2012/2013 (see Figure 1). 

Figure 1. U.S. corn average farm price and days of use on hand at the end of the marketing year, 2005/2006-2020/2021, 2021/2022 estimate

Tight supplies and strong demand caused grain prices to surge from the fall of 2020 through summer 2021. In August 2020, the national average price for corn in the U.S. was $3.12 per bushel. By July 2021, the average cash price was $6.12 per bushel, the highest since 2013.  With these prices as production incentives and normal weather forecasts, global corn production in the 2021/2022 marketing year is projected to break through the 45-billion bushel barrier (see Figure 2). Record crops are projected for major export competitors Brazil, Argentina, Ukraine, and Russia. U.S. days of use on hand at the end of the 2021/2022 marketing year is now projected to be a 35-day supply, a six-day increase compared to the year before.  

Figure 2. World Corn Production

These same forces will likely shape feed grain prices in 2022. As we wrap up the 2021 crop in the Northern Hemisphere, prices are still relatively high but profits next season will be squeezed by higher input costs. Export demand, driven by the need for feed in China, will continue to drive global corn consumption. 

With normal weather, the trend line corn yield in the U.S. for 2022 will be just above 178 bushels per acre, two bushels per acre higher than in 2021. Even if acres hold steady, that would mean a corn production increase over 2021 (add in higher beginning stocks as well). If total use is unchanged (largely impacted by the level of export competition), days of use on hand at the end of the 2022/2023 marketing year will likely continue to increase, putting downward pressure on prices.

Welch, J. Mark. “Corn and Sorghum Outlook.” Southern Ag Today 1(43.1c). October 18, 2021. Permalink