Category: Crop Marketing

The USDA February 2023 Cotton Outlook projects world cotton consumption bottoming at 110.7 million bales for the current 2022/23 marketing year.  They then forecast 2023/24 consumption recovering to 115.5 million bales due to: 1) post-Covid reopening in China with increasing GDP, 2) lower Chinese production and greater need for Chinese imports, and 3) an “unusual inventory dynamic” of pent-up cotton demand following previously Covid-disrupted deliveries of cotton textile goods.  Other bullish influences for cotton consumption include the competitively low prices of raw cotton, which appear to have translated to higher levels of U.S. cotton exports since January.

Beyond China, world GDP is also currently forecasted by the International Monetary Fund to rise slightly to 2.9% (Figure 1, dashed green line).  This is important to the cotton market because cotton consumption tends to rise with economic growth and fall with economic declines.  For example, the blue line in Figure 1 shows world cotton consumption ranging between about six and eight pounds per person per year.  The peaks and valleys of per capita cotton consumption coincide with the respective trends of world GDP.  This is not surprising since cotton-made apparel and home furnishing products are both semi-durable and somewhat discretionary.  

Growing expectations of stronger economies, increasing mill use, and stronger export demand are, in turn, bullish influences on ICE cotton futures.  In the near term, they could contribute to stronger old-crop prices, especially if the current hedge fund net short position is liquidated in a short covering rally.

There are, of course, counter influences. First, a bullish demand response would be somewhat self-correcting as mills generally buy less cotton at higher prices. It remains to be seen how long and how high the “unusual inventory dynamic” will push cotton prices.  In addition, there is a potential macro-economic risk shrinking the demand curve and putting downward pressure on prices.  The latter could result from strong recessionary influences due to high interest rates as central banks continue their attempt to lower inflation to target levels.  

Figure 1. World Per Capita Cotton Use and Global Economic Growth

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Robinson, John. “Competing Influences and Expectations for World Cotton Demand.” Southern Ag Today 3(16.1). April 17, 2023. Permalink

Photo by Pixabay: https://www.pexels.com/photo/full-frame-shot-of-cracked-pattern-255509/

Although the Russian war with Ukraine has been pinpointed as the leading cause of high fertilizer prices, the price of nitrogen fertilizer began to increase in May of 2021, long before Russia invaded Ukraine on February 24, 2022. The increases in fertilizer prices in 2021 were caused by supply and demand factors. On the supply side, increases in natural gas prices and shipping costs likely influenced fertilizer prices (Smith, 2022). Additionally, corn futures prices increased drastically in May 2021, incentivizing farmers to apply more nitrogen per acre. Following nitrogen application, fertilizer prices dropped slightly before increasing again in February of 2022 due to the Russian invasion of Ukraine, which caused supply chain disruptions in nitrogen fertilizer exports. Since September, fertilizer prices have dropped significantly. In this article, we reframe fertilizer prices to look more closely at the recent declines in fertilizer prices. Specifically, we focus on the fertilizer price to new crop corn futures ratio. Using this ratio, we can frame fertilizer prices in a form allowing us to account for fertilizer and corn prices.

Figures 1, 2, and 3 show the plotted ratio of fertilizer price to new corn futures ratio for NH3, urea, and UAN from 2020 to early March of 2023, respectively. Unsurprisingly for all three commodities, the lowest ratios occurred before the price increases in 2021. Following the 2021 price increases, the impact of the Russian-Ukrainian war sustained an already high nitrogen price. The red line in each graph depicts the 2023 nitrogen price relative to the price of corn. For UAN and urea, the ratio of fertilizer to new crop corn price has fallen below the 5-year average levels, whereas the price of NH3 is still slightly above the 5-year average. These results may indicate that ammonia fertilizers are still unreasonably high due to Russia being the second largest NH3 exporter, behind Trinidad and Tobago (World Bank, 2021). 

Figure 1. NH3 (Anhydrous Ammonia) Price Relative to New Crop Corn Futures

Figure 2. Urea Price Relative to New Crop Corn Futures

Figure 3. UAN Price Relative to New Crop Corn Futures

As the ratio for NH3 remains above the five-year average, it may be time to look at alternative nitrogen sources. One nitrogen source of interest is urea, the nitrogen source furthest under the 5-year average. The average price of nitrogen/pound of urea is historically higher than that of NH3. However, this season, the current price per pound of nitrogen from both sources is similar, making the switch from NH3 to urea more appealing. If in-season nitrogen application is needed, the relative price of urea is historically lowest in June. However, it is worth noting that an escalation in Ukraine or a discontinuation of the Black Seas Grain Deal would likely cause the price of each nitrogen source to increase.

Sources:

Smith, Aaron. “The Story of Rising Fertilizer Prices.” Aaron Smith, March 2, 2022. https://asmith.ucdavis.edu/news/story-rising-fertilizer-prices.

World Integrated Trade Solution. “Ammonia; Anhydrous Exports by Country |2021.” World Bank. Accessed March 20, 2023. https://wits.worldbank.org/trade/comtrade/en/country/All/year/2021/tradeflow/Exports/partner/WLD/product/281410.

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Gardner, Grant, and Hunter Biram. “Rethinking Fertilizer Prices.” Southern Ag Today 3(15.1). April 10, 2023. Permalink

Photo by Todd Trapani: https://www.pexels.com/photo/corn-field-1382102/

On Friday, March 31^st, USDA released the Prospective Plantings report. These acreage estimates are based primarily on surveys conducted by the National Agricultural Statistics Service (NASS) during the first two weeks of March. Principal crop acres planted were projected nationally at nearly 312 million acres, up roughly six million acres compared to last year. Corn acres are estimated at 92.0 million, up 3.42 million from last year. Soybean planted acres are estimated at 87.5 million, up slightly from last year by 55 thousand acres. Cotton acres are projected to be down 18% from last year, at 11.3 million acres. Peanut acreage is projected at 1.55 million acres, up 7% from last year, and rice area is projected at 2.58 million acres, up 16% from last year. All wheat acreage is projected at 49.86 million, up 9% from last year. Projections from the Prospective Planting results are comparable to recent projections released at the February USDA Outlook Forum which had March projections calling for 1 million more acres of corn, no difference in soybean acres, and 500,000 fewer acres of cotton. 

The market expected more corn acres in 2023 compared to last year. Corn plantings were held back in 2022 due to high fertilizer prices, which have been alleviated slightly, allowing for a rebound in acreage.  Cotton was expected to struggle to retain acres this year due to struggling demand and lower prices compared to other commodities. Every state, besides Arizona, is projected to remain steady or see a decrease in cotton acreage from last year. Rice acres are seeing a rebound on higher prices, but a forecast of wet weather in the Midsouth over the next couple of weeks could lower plantings. Price reaction from the report was mixed, with harvest contract corn unchanged, soybeans 10-15 cents higher, cotton 0.40 cents lower, and rice unchanged.

How reliable are the March prospective planting numbers? The NASS planted acreage projections across the U.S. generally hold well with low predictive error and hold especially well for corn and soybeans (Figure 1). There appears to be a larger error, albeit still quite small, when predicting planted acreage for cotton and rice. This is likely for two reasons stemming from the fact that cotton and rice are grown primarily in southern states.  The larger variance can be due to (1) the smaller sample size of farms and (2) the alternative crops available to plant in place of corn and soybeans. Most of the U.S. corn and soybean acreage is grown in the upper Midwest but tends to take up acreage across the entire U.S. which allows for a larger sample of farmers and less variance. In the south, farmers rotate corn and soybean crops with cotton, peanuts, and even some vegetables.  This makes it more difficult to project acres that may shift based on rotational needs, commodity prices, input costs, and weather.  

One way to investigate the difficulty in projecting acreage is by choosing the subsample of southern states to see if 1) there is more variance across the changes in corn and soybean acreages given a smaller sample and 2) the pattern of acreage changes across cotton and rice still holds in the subsample. We find this to be true (Figure 2). We see more differences each year between prospective and actual planted acreages in corn and soybeans across southern states, and the general pattern of differences each year for cotton and rice still holds between the full U.S. sample and the southern subsample. This implies that we should generally not expect any significant changes in harvest price expectations driven by differences in planted acreages but rather look to future market-moving events.

Figure 1. Comparison of Prospective vs. Actual Planted Acreage across the U.S. (2014-2023)

Figure 2. Comparison of Prospective vs. Actual Planted Acreage across Southern^[1] States (2014-2023)

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^[1] States included are Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

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Biram, Hunter, and William E. Maples. “Key Takeaways and Reliability of the 2023 Prospective Plantings Report.” Southern Ag Today 3(14.1). April 1, 2023. Permalink

At the Agricultural Outlook Forum in late February, the USDA released its first supply and demand projections for the 2023 crop year. In the March 20^th issue of Southern Ag Today, we looked at how changes in corn exports could change the stocks-to-use (STU) ratio and, thus, price. In this article, we perform a similar analysis for soybeans. Specifically, we find that the soybean STU is much more sensitive to changes in demand than corn. Results indicate that a miss-projection of domestic crush levels could significantly affect soybean STU and price. Although we focus on soybean crush in this article, results would be the same for other increases in demand, such as exports or other domestic products. 

 As mentioned in our previous article, STU is a fundamental indicator in commodity marketing, as it compares commodity ending stocks to commodity demand. The impact of missed projections on STU provides insight into each commodity’s supply and demand dynamics (Gardner and Smith, 2023). Plot A of Figure 1 shows the year and soybean marketing year average price at various levels of STU. Generally, we would expect a larger STU to indicate more supply than demand which would cause a lower price and vice versa. From 2011 to 2013, supply was short due to below trend line yields or lower harvested acres, thus causing a shortage relative to demand that resulted in higher prices. Lower STUs and prices occurred in 2014 and 2015 due to increased acres (5 million acres more were harvested in 2014 and 2015 than in 2013) and a return to trend line yields. Since 2016, domestic crush capacity has increased substantially (CME Group).

Figure 1. Stocks-to-Use (STU) Ratio and Price by Year and Impact of Missed Soybean Crush Projections on STU

Plot B of Figure 1 displays the potential impact of an under-projection of soybean crush on STU, holding other factors constant. The American Soybean Association projects U.S. soybean crush capacity in 2023 to increase by close to 64 million bushels in 2023 (460 million bushels of increased capacity by 2025); however, the EPA is only assuming an increase in crush demand of close to 45 million bushels (Gerlt, 2023). This difference between increased crush capacity and crush demand could result in an underestimation of projected soybean crush in 2023. If soybean crush is underestimated, an increase in crush numbers of 5 million bushels lowers soybean STU by 0.12%, indicating that soybean STU is more sensitive to demand shocks than corn. If crush expansion and demand are met, soybean STU could quickly move lower than 6%, indicative of 2022, in which the soybean price was $14.30. 

Changes in projected supply and demand will impact soybean STU and, consequently, the marketing year average price. The USDA current marketing year average soybean price for 2023 is projected to be $12.90, but if biodiesel capacity expansion increases soybean demand, the marketing year average price could be higher in 2023. Soybean prices could also increase with a rise in export demand or a supply shortage. Producers and traders should be mindful of projected changes in STU and use this information as one factor that could influence price expectations for the upcoming crop. 

Sources:

CME Group. “US Soybean Crush.” Accessed March 21, 2023. https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/soybean-reports.html.

Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Corn Exports.” Southern Ag Today, March 20, 2023. https://southernagtoday.org/2023/03/20/sensitivity-of-usdas-agricultural-outlook-forum-projections-to-changes-in-corn-exports/.

Gerlt, Scott. “Economist’s Angle: EPA’s Proposed Blending Levels Threaten Ongoing Industry Growth.” American Soybean Association (blog). Accessed March 14, 2023. https://soygrowers.com/news-releases/economists-angle-epas-proposed-blending-levels-threatens-ongoing-industry-growth/.

United States Department of Agriculture. “Grain and Oilseeds Outlook,” 2023. https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf.

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Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Soybean Crush Demand.” Southern Ag Today 3(13.1). March 27, 2023. Permalink

Supply and demand projections for the upcoming 2023 crop year were released at the USDA’s Agricultural Outlook Forum on February 23. In the March 6^th issue of Southern Ag Today, we looked at how close previous projections have been to final USDA estimates for corn, soybeans, and wheat. In this article, we expand upon missed projections and look at how changes in corn demand from the USDA’s projections could affect the stocks-to-use (STU) ratio and, thus, price. The simple analysis gives us insight into the supply and demand dynamics for the upcoming crop year. Specifically, we focus on changes in corn exports.  China, the largest importer of U.S. corn last year, cleared more Brazilian firms for corn export on March 6^th to ease their dependence on U.S. imports (FAS, 2023; Samora, 2023). Additional access for Brazilian corn to China could reduce U.S. corn exports.

STU is a fundamental indicator in commodity marketing as it compares commodity ending stocks to commodity demand. The impact of missed projections on STU provides insight into each commodity’s supply and demand dynamics. Plot A of Figure 1 shows the STU and marketing year average price for corn by year. The main takeaway from Plot A is that a higher STU indicates lower demand relative to supply and, thus, lower prices, whereas a lower STU shows higher demand relative to supply and higher prices. For example, in 2012, the drought impacted the supply of corn, resulting in lower STU and higher commodity prices. 

Plot B of Figure 1 looks at the impact of missed export projections by the USDA on STU. In 2023, the USDA is projecting a 15% increase in corn exports from last year (USDA, 2023). Holding all the other USDA corn estimates constant and changing exports, we find that a 100-million-bushel miss-projection in corn exports would change corn STU by 0.39%. 

As the Brazilian corn crop is projected to hit record numbers, increased Brazilian corn exports could negatively impact U.S. corn demand (Donley, 2023). In 2022, China imported 5.26 billion bushels of corn from the U.S. (FAS, 2023). If these numbers were cut by just 500 million bushels, causing the USDA to over-project exports, corn STU could be higher than 2018 levels when the average corn price was $3.61, assuming the other projections are unchanged. The current average corn price for 2023 is projected at $5.60. If exports are cut, and STU increases, the marketing year average corn price will likely be lower than projected. Changes in projected supply and demand will impact STU for corn, and consequently the marketing year average price. Producers and traders should be cognizant of projected changes in STU and use this information as one factor that could influence price expectations for the upcoming crop. 

Figure 1. Price and Stocks-to-Use (STU) Ratio by Year and Impact of Missed Corn Exports Projections on STU

Sources: 

Donley, Arvin. “Brazil Expecting Record 2022-23 Corn Crop | World Grain.” World-Grain. Accessed March 14, 2023. https://www.world-grain.com/articles/17791-brazil-expecting-record-2022-23-corn-crop.

Foreign Agricultural Service. “U.S. Corn Exports in 2022.” USDA Foreign Agricultural Service, March 8, 2023. https://www.fas.usda.gov/commodities/corn.

Samora, Roberto. “BRAZIL SAYS 90 FIRMS CLEARED TO EXPORT CORN TO CHINA IN EARLY 2023.” Reuters, 2023. https://www.world-grain.com/articles/17924-us-ag-exports-expected-to-fall-in-2023.

Smith, Aaron, and Grant Gardner. “February USDA Agricultural Outlook Forum Projections Compared to USDA Final Estimates.” Southern Ag Today 3(10.1). March 6, 2023. https://southernagtoday.org/2023/03/06/february-usda-agricultural-outlook-forum-projections-compared-to-usda-final-estimates/

United States Department of Agriculture. “Grain and Oilseeds Outlook,” 2023. https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf.

Photo by Pixabay: https://www.pexels.com/photo/orange-corn-kernels-60507/

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Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Corn Exports.” Southern Ag Today 3(12.1). March 20, 2023. Permalink