Category: Crop Marketing

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

A key factor in the development of a new crop price forecast is how many acres farmers plant of each crop.  USDA surveys farmers each year and reports early season acreage intentions in the Prospective Plantings report, released at the end of March. Then at the end of June, the Acreage report from USDA details the area of each major crop planted.  Since 2006, U.S. farmers have planted about 244 million acres to corn, soybeans, wheat, cotton, sorghum, and rice.  Corn and soybeans account for the largest crop areas planted, reaching 181 million acres combined in 2021 (Figure 1).   

Figure 1. U.S. Planted Acres

From an economic standpoint, relative crop profitability is an important driver of planting decisions. One indicator of that profitability is the relative price of one 3.11commodity to another.^[1] Given the large area impacted and the typical rotation between these two crops, the soybean-to-corn price ratio is widely watched as providing insight into what farmers ultimately plant each spring. 

An aspect of how the price relationship between soybeans and corn impacts planting decisions can be seen in the relationship of the soybean-to-corn price ratio and the number of corn acres planted in excess of soybeans each year.  In general, when the price ratio of Risk Management Agency (RMA) soybean-to-corn projected prices, calculated each February^[2] is relatively low, corn acres increase at the expense of soybeans. At high ratios, soybean acres increase relative to corn (Figure 2).    

Figure 2. Corn Acres Minus Soybean Acres and RMA’s Soybean-to-Corn Projected Price Ratio

The average price ratio from 2006 to 2022 is 2.36 and the average number of corn acres over soybean acres is 10 million.  At the extreme, in 2007 the soybean-to-corn projected price ratio was 1.99 and farmers planted 93.5 million acres of corn and 64.7 million acres of soybeans, a difference of 28.8 million acres (Figure 2). When the price ratio has been at its highest, 2.57 to 2.59, we have seen plantings of corn and soybeans about equal (2017 and 2018). But the price ratio at this level is also associated with 6 million more acres of corn than soybeans in 2021.  Corn acres relative to soybean acres were much smaller than expected in 2022, a difference of only 1.1 million acres despite a price ratio of 2.43.  It is likely that risks associated with high fertilizer prices and product availability had an impact on farmers’ planting decisions last year given higher fertilizer requirements for corn compared to soybeans. 

The RMA soybean to corn base price ratio for 2023 is 2.33 ($13.76 soybeans, $5.91 corn). If the total planted area remains constant, that suggests an increase in corn acres and a decrease in soybean acres in 2023 compared to 2022.  In other years when the price ratio rounded to 2.3 (2010, 2013, 2015, and 2016), the range of corn acres over soybeans were 5.3 million to 15.6 million.  If corn and soybean acres again total about 180 million, the low estimate of corn acres for 2023 would be 92.7 million acres and the high estimate of soybean acres 87.4 million acres.  

Of course, other factors besides relative prices matter when farmers make their planting decisions. Among these are crop rotations that boost productivity and input efficiency, input costs, and of course, weather. And in the South, cotton is a major non-grain competing crop enterprise whose price and profitability are not part of this analysis.   But, the price ratio between major crops may provide a key piece of information in forming expectations of what upcoming acreage reports may reveal. 

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^[1] For more on relative price relationships between commodities, see Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023.

^[2] RMA Price Discovery, base prices for 2023, conventional practices with a March 15 sales closing date, RMA Price Discovery – Home (usda.gov).

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Welch, Mark. “The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions.” Southern Ag Today 3(11.1). March 13, 2023. Permalink

Each year, USDA’s Office of the Chief Economist holds the Agricultural Outlook Forum. The event discusses important agricultural topics and provides supply and demand projections for the upcoming year. This article examines the 2023 Agricultural Outlook Forum projections and compares historical Agricultural Outlook Forum projections and final USDA estimates for corn, soybeans, and wheat for the 2010 to 2022 crop years. 

Historical Projections compared to Final USDA Estimates

From 2010-2022, USDA’s February projected production for corn, soybeans, and wheat averaged 655 million bushels higher, 518 million bushels lower, and 15 million bushels higher than final estimates, respectively (Figure 1; production). The difference between February production projections and final estimates can be partially explained by yield or acreage changes, due primarily to weather events. For example, in 2019, floods in the Midwest dramatically reduced planted and harvested acres (Figure 1; acres planted and harvested); and in 2012, severe drought caused final corn yields to be 40.9 bu/acre below the February projection (Figure 1; national average yield). Considering the tremendous amount of uncertainty this time of year (February), USDA has been reasonably accurate with initial projections. On average, the difference (overestimated or underestimated) between projected and final production estimates has been 6.8% for corn, 5.7% for soybeans, and 6.4% for wheat.

Domestic consumption projections have also been accurate with an average discrepancy of 2.8% for corn, 2.6% for soybeans, and 6.0% for wheat. Exports have been more challenging to project, primarily due to the relationships between domestic production, foreign production, substitution, and global demand. On average, USDA has missed export projections by 23.4%, 11.7%, and 12.6% for corn, soybeans, and wheat, respectively.  For corn, from 2010-2022, on average, the USDA February total use projection was 290.4 million bushels higher than the final estimate. Total projected wheat use was 31.4 million bushels higher, and soybean use was 11.4 million bushels lower than the final estimate, on average (Figure 2; exports and domestic use).

USDA has had challenges with projecting ending stocks and prices. Projected ending corn stock estimates have ranged from 1.4 billion bushels more to 316 million bushels less than the final USDA estimate, with an average projection of 342 million bushels higher than the final estimate (Figure 2; ending stocks). Soybean ending stocks have, on average, been projected 51 million bushels higher in February than final estimates, with a range of 320 million bushels higher to 449 million bushels lower than the February projection. Wheat ending stocks have, on average, been projected 47 million bushels lower in February than the final estimate, with a range of 239 million bushels higher to 213 million bushels lower than the February projection.

On average, USDA missed corn, soybean, and wheat marketing year average (MYA) prices by 17.4%, 12.7%, and 13.5%, respectively. In 8 out of 13 years, the February MYA price projection has been lower than the final MYA price for corn, soybeans, and wheat (Figure 2; marketing year average price). For corn, projected prices were under final prices by over 30% in 4 out of 13 years (2010, 2012, 2021, and 2022). The largest projected miss, among years where the February projected MYA price was higher than the final MYA price, was 7.1% in 2013. 

2023 Projections

Initial expectations from the 2023 Agricultural Outlook Forum point to a 3% projected increase in planted crop acres for corn, soybeans, and wheat relative to 2022 plantings. Corn acreage is projected to increase from 88.6 million acres in 2022 to 91.0 million acres in 2023. In 2022, planted corn acreage was affected by weather delays, which prevented plantings in various regions of the United States. Soybean acreage is projected to stay the same as 2022 at 87.5 million acres. Soybean acreage projections are driven by strong demand for domestic crush and growth in biofuel production capacity. Of the three crops, wheat acreage is projected to incur the largest increase in planted acreage, up to 49.5 million acres in 2023 from 45.7 million planted acres in 2022. Increases in projected wheat plantings are driven by tight U.S. stocks and continued high global prices, caused in part by the war in Ukraine. 

Prices for all three crops are projected to be lower in 2023 than 2022 but are projected to remain above their respective 10-year historical averages. Season average per-bushel prices for corn, soybeans, and wheat are projected to fall from $6.70, $14.30, and $9.00 in 2022 to $5.60, $12.90, and $8.50 in 2023. The price projections are driven by low beginning stocks and growth in projected acreage and yield, which will facilitate higher projected exports and ending stocks for the 2023/24 crop year. The decline in 2023 projected prices is driven by record expected soybean and corn crops in South America, which will increase competition in export markets. Additionally, estimates of the impact of increased biodiesel production capacity on soybean prices have been uncertain due to the United States’ ability to adapt planted acres to meet increased feedstock demand. 

There remains a tremendous amount of uncertainty in production, use, stocks, and prices for the 2023 corn, soybean, and wheat crops. However, the current USDA projections have prices softening, compared to last year for all three commodities. As such, producers may want to consider using marketing strategies that protect against downside price movements while maintaining flexibility (such as options). This will allow producers to evaluate and modify pricing decisions when additional information is known about the 2023 crop. USDA will revise projections throughout the year with the next key report being the Prospective Plantings report at the end of March.

Figure 1. USDA – February Outlook Conference Projections Less Final USDA Estimates (Supply), 2010-2022*

Figure 2. USDA – February Outlook Conference Projections Less Final USDA Estimates (demand, stocks, and price), 2010-2022*

References

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/commodity/wasde

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/ag-outlook-forum/commodity-outlooksU.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). Quick Stats. Available on-line at: https://quickstats.nass.usda.gov/

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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. Permalink

Monthly average Rough Rice futures prices broke $16/cwt in March 2022 and have remained well above this price (Barchart.com, 2023). In fact, the monthly average has not been at this level since July 2013, when the monthly average closing price was $16.04/cwt. This spike in prices is most likely driven by the lowest global ending stocks reported in five marketing years due to below trend production in 2022/2023 with a steady increase in consumption since the 2015/2016 marketing year (USDA-FAS, 2023). These historically high rice prices provide an opportunity to lock in higher revenue guarantees for Revenue Protection (RP) crop insurance to help manage downside price risk, which is likely if global production bounces back to trend in the upcoming marketing year.

RP is a risk management tool administered by USDA’s Risk Management Agency (RMA) and provides an indemnity when farm-level revenue for a crop falls below a revenue guarantee. The revenue guarantee is found by taking the product of the farm-level yield expectation given by the actual production history (APH), the projected price determined by USDA-RMA, and the coverage level chosen. The projected price is a 30-day average (prior to planting)^[1] of the harvest-month futures contract for a given commodity, which in this case is November Rough Rice (ZRX). USDA-RMA completed the projected price discovery period on February 14th for long-grain rice producing states in the South with a February 28th sales closing date and has determined the 2023 projected price for long grain rice to be $16.90/cwt (i.e. $7.61/bu^[2]). This price is $2.40/cwt (i.e. $1.08/bu) higher than last year’s projected price of $14.50/cwt ($6.53/bu).

As noted above, revenue guarantees depend on the farm-level APH, projected price, and the chosen coverage level. I illustrate the increase in the RP revenue guarantee for long-grain rice producing states using states in the Mississippi Delta, but the impact is generally applicable across southern states with a February 28th sales closing date. Figure 1 shows the year-over-year changes in the revenue guarantees for the 75% coverage level in 2023 relative to 2022 and assumes the APH yield is equal to the Reference Yield which USDA-RMA provides at the county-level. RP revenue guarantees in the Mississippi Delta are expected to increase by more than $100/ac in most counties and by more than $150/ac in a few others. 

It is not too late for farmers to contact their crop insurance agent to discuss enrolling their rice in RP insurance. The amount of coverage chosen largely depends on each farm’s financial condition and each farmer’s risk tolerance, but 75% tends to be the most popular coverage level chosen. The deadline to enroll is tomorrow, February 28th.

References

Barchart.com. November Rice Historical Monthly Average Closing Prices. Accessed via API.

USDA – Foreign Agricultural Service (FAS). Production, Supply, and Distribution Online. https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

USDA – Risk Management Agency (RMA). Actuarial Data Master. https://pubfs-rma.fpac.usda.gov/pub/References/actuarial_data_master/

USDA – Risk Management Agency (RMA). Commodity Exchange Price Provisions (CEPP). https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Commodity-Exchange-Price-Provisions-CEPP

USDA – Risk Management Agency (RMA). Price Discovery. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

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^[1] The projected price discovery period depends on the sales closing date. For states with a February 28th sales closing date, the projected price discovery period is January 15 – February 14 (USDA-RMA CEPP, 2023). Therefore, the projected price will be the average of the daily closing prices for ZRX over January 15 – February 14.

^[2] One can find the dollars per bushel price of the Rough Rice futures contract, priced in dollars per hundredweight, by dividing the futures price by 2.22.

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Biram, Hunter. “One Last Thought on Revenue Insurance for Rice.” Southern Ag Today 3(9.1). February 27, 2023. Permalink