“Other crop prices also remain well below recent peak levels. Soybean prices average $8.73 per bushel in 2016/17, while wheat averages $4.97 per bushel and upland cotton averages 56.9 cents per pound.”
“With farm income well below recent peak levels and if interest rates increase as forecasted, there will be continued pressure on farm finances and farm real estate values,” the report said, while adding that, “Crop insurance net outlays are projected to average about $8 billion per year for fiscal years 2017-2025.”
Jacob Bunge reported earlier this week at The Wall Street Journal Online that, “Cargill Inc. plans to scale back antibiotics use in its U.S. cattle supply, one of the most significant steps yet among beef processors to reduce reliance on drugs used to treat human illnesses.
“The suburban Minneapolis company said it would eliminate one-fifth of such medically important antibiotics from cattle that Cargill processes into ground beef and steaks, affecting an estimated 1.2 million cattle annually.
“Cargill, which has previously taken steps to reduce antibiotics use in its U.S. turkey supply, is making the move in beef as more restaurants have announced plans to serve meat raised without antibiotics. Companies are responding to pressure from consumer groups and public health officials who have warned that widespread antibiotics use in animal agriculture and human medicine have helped bacteria evolve to resist antibiotics, potentially leaving doctors with fewer tools to treat some illnesses.”
For additional background on this issue, see this FarmPolicy update from last month.
Yesterday, the World Agricultural Outlook Board (WAOB) released its monthly World Agricultural Supply and Demand Estimates (WASDE), which stated in part that, “The midpoint for the projected corn price remains $3.60 per bushel.”
The report added that, “The U.S. season-average soybean price for 2015/16 is projected at $8.25 to $9.25 per bushel, down 5 cents at the midpoint.”
Jesse Newman reported yesterday at The Wall Street Journal Online that, “U.S. federal forecasters on Wednesday boosted their outlook for domestic soybean stockpiles while trimming estimates for global grain and soybean reserves.
“The Agriculture Department said in its monthly crop report that U.S. soybean inventories would reach 460 million bushels at the end of the 2015-16 season on Aug. 31, 10 million more than its February forecast and slightly above analysts’ expectations.
“‘Bigger picture, we’re swimming in corn, beans and wheat,’ said Doug Bergman, an analyst at investment firm RCM Asset Management in Chicago.”
Ms. Newman explained that, “The muted reaction to Wednesday’s report comes as grain and oilseed prices have languished for months due to abundant global supplies, a robust U.S. dollar and stiff competition among exporters.
“While the report avoided piling on more bearish news, it didn’t provide much positive momentum for low crop prices that have pressured profits for farmers, seed companies and tractor makers, said Dan Cekander, president of market-research firm DC Analysis. The USDA in February projected U.S. farm incomes would fall to the lowest level since 2002 because of the continued slump in crop prices.”
University of Illinois agricultural economist Darrel Good also provided a brief recap of yesterday’s WASDE update:
Forrest Laws reported yesterday at the Delta Farm Press Online that, “Secretary Tom Vilsack’s answer to the question was short and to the point.
“After he was asked during a news briefing why he couldn’t designate cotton as an ‘other oilseed,’ a request made by the cotton industry and a number of farm-state congressmen, he replied: ‘Because I can’t.'”
For more detail on this issue, see this backgrounder.
Mr. Laws added that, “But [Sec. Vilsack] went on to explain USDA does want to help cotton producers and two possible avenues for that. One would be to provide a Cotton-Transition-Assistance-Payment-type program, using Commodity Credit Corp. funding. The other would be a cost-share for cotton ginning through marketing assistance funding.
“The latter is being explored through negotiations with the cotton industry aimed at determining the costs and the mechanics of how such a program would work. Vilsack has mentioned a figure of $300 million for the total cost of ginning while the cotton industry estimated the total could be closer to $800 million.”
Recall also that The Wall Street Journal recently looked closer at the issue of Chinese cotton stocks and the market price of cotton.
Recall that back in December, at a House Agriculture Subcommittee hearing on the current state of the U.S. cotton industry, Shane Stephens, the Vice Chairman of the National Cotton Council, explained that: “Current stocks-to-use ratios stand in stark contrast to historical stocks that generally ranged between 50 and 60 percent of total use. The recent increase in stocks was the direct result of policies in place in China for the 2011 through 2013 crops. During those years, China supported its cotton farmers by purchasing vast amounts of its production into government reserves at prices well above the world market.”
Rep. Rick Crawford (R., Ark.), the House Ag Subcommittee Chairman on General Farm Commodities and Risk Management, noted at the December hearing that, “In the not too distant past, we lost to China most of what was once the largest manufacturing sector in America, our textile industry. Now, I believe we are in grave danger of losing the vast majority of our production to China, India, and other countries that are employing anticompetitive trade practices that no American farmer can match.”
Lucy Craymer reported in Friday’s Wall Street Journal that, “Global cotton prices have plunged in recent weeks as speculation mounts that China is getting ready to sell some of its 11 million-metric-ton stockpile—enough to make 10 billion pairs of jeans.
“Commodity analysts expect China to conduct a cotton auction in the next few months, its first since the end of August.
“While the government sells nearly all of its cotton at home, it is such a big player in the market that unloading a chunk would depress global prices by reducing how much foreign cotton Chinese businesses buy. China holds about 60% of the world’s cotton stockpiles and is responsible for slightly less than a third of global consumption.”
The Journal article added that, “The expectation of a new round of selling by China has pushed down prices on the Zhengzhou Commodity Exchange to their lowest levels since 2004. Meanwhile, the benchmark ICE Futures U.S. exchange has cotton trading near its lowest since 2009, dropping about 12% since the beginning of the year; the May contract settled at 56.41 cents a pound on Thursday.”
Ms. Craymer explained that, “One factor putting pressure on China to sell is that cotton deteriorates, so it can’t simply hold supplies for years in hopes the price will rise.
“The stockpile dates back to a government program introduced in March 2011 to improve the livelihoods of domestic cotton farmers by setting a floor for prices. But with global cotton prices dropping, China chose to store the cotton rather than sell it on the global market.
“The result, according to the USDA, was a doubling of the world’s stockpiles, which further depressed prices. USDA estimates of cotton stockpiles are slightly above China’s.”
The Journal article added that: “China has since ended the price-support program for cotton. But that won’t help it with its huge stockpile—which is enough to make three times more jeans than the total sold globally in 2015, according to Euromonitor.”
Lower cotton prices for U.S. producers, and international policies, such as those implemented by China, have been an impetus for cotton farmers to ask the USDA to “use legal authority provided under the 2014 Farm Bill” to provide additional federal assistance to struggling cotton farmers.
So far, Agriculture Secretary Tom Vilsack has indicated that the USDA does not have the authority to make this change.
A backgrounder on the cotton Farm Bill issue is available here.
A news release today from the Food and Agriculture Organization of the United Nations stated that, “The FAO Food Price Index was stable in February, as falling sugar and dairy prices offset a substantial jump in vegetable oil prices from the previous month.
“Averaging 150.2 points for the month, the FAO Food Price Index was virtually unchanged from a revised 150.0 points in January and down 14.5 percent from a year ago.”
Today’s update also noted that, “FAO also issued its first forecast for the world’s 2016 wheat harvest, projecting 723 million tonnes of total production, about 10 million tonnes below last year’s record output.”
Reuters writer Isla Binnie reported today that, “World food prices stabilised in February near a seven-year low as rising vegetable oil and meat prices offset declines in cereals, sugar and dairy, the United Nations food agency said on Thursday.
“Food prices have fallen for four straight years and remain under pressure from ample agricultural supply, a slowing global economy and a strengthening U.S. dollar.”
And, Bloomberg writer Whitney McFerron reported today that, “Wheat prices are near a five-year low as large harvests around the world are set to boost grain stockpiles to the highest in three decades. The FAO expects wheat production to drop in the next season because farmers in Ukraine and Russia, two of the top exporting countries, reduced planting of winter crops because of dry weather.”
Today, the Federal Reserve Board released its Summary of Commentary on Current Economic Conditions. Commonly referred to as the “Beige Book,” the report included the following observations with respect to the U.S. agricultural economy:
* Fifth District- Richmond– “Commodity prices remained depressed.”
* Sixth District- Atlanta– “On a year-over-year basis, monthly prices paid to farmers for corn, cotton, rice, soybeans, beef, broilers, and eggs have declined.”
* Seventh District- Chicago– “Crop farmers continued to cut capacity following another year of low incomes coupled with unexpectedly small declines in input costs. There were reports of major downsizings of large operations and of some farms going out of business. Farmers are also cutting capacity by purchasing cheaper but lower-yielding seeds and by selling machinery. Correspondingly, prices for used farm machinery are low because of plentiful supply. Corn, soybean, and wheat prices moved higher during the reporting period, but remained quite low compared to their five-year averages. Dairy, egg, hog, and cattle prices were up from the prior reporting period, but remained low.”
* Eighth District – St. Louis– “As of the end of January, almost 93 percent of the District winter wheat crop was rated fair or better. Red meat production in 2015 was 6 percent higher than in the previous year, an increase that has been explained, in part, by lower feed costs, although meat prices also fell during the year.”
* Ninth District- Minneapolis– “District agricultural conditions remained weak. A majority of respondents to the Minneapolis Fed’s fourth quarter (January) survey of agricultural credit conditions reported that farm incomes and capital spending fell in the previous three months compared with a year earlier. An animal feed dealer reported that after several years of strong sales, its revenue outlook was flat due to recent declines in the prices of livestock. Prices received by farmers fell in December from a year earlier for corn, wheat, soybeans, hay, hogs, cattle, chickens, eggs, and milk; prices for turkeys increased from a year earlier.”
* Tenth District- Kansas City– “Tenth District farm income weakened further since the last survey period, and cropland values declined modestly. Persistently low crop prices and sharp declines in cattle prices contributed to lower farm income in all District states. District cropland values continued to decrease slightly, while ranchland values levelled off. Similarly, cash rental rates on all types of farmland moderated and were expected to fall further in the next three months. Alongside lower farm income, farm loan repayment rates weakened further, and demand increased for new loans as well as loan renewals and extensions. Looking forward, District contacts expected modest declines in cropland values as well as continued pressure on credit conditions amid tighter profit margins for crop and livestock producers.”
* Eleventh District- Dallas– “Soil moisture conditions remained healthy, with only 2 percent of Texas considered abnormally dry in February, compared with 56 percent last year in some level of drought. While prospects for 2016 crop production are strong, farmers face low prices and downward pressure on exports because of the strong dollar. Industry contacts said many producers will not be able to cover their production costs at the current crop price levels, and some have received calls from their lenders voicing concern. Cotton—Texas’ top crop—has seen prices push even lower with risks to the downside. Contacts reported that low prices and weakening demand will likely result in fewer cotton acres planted this year. Milk prices continued to drift unprofitably low, despite the supply disruption in the wake of winter storm Goliath, which killed roughly 30,000 dairy cows in West Texas and New Mexico. Cattle prices were lower than the record levels posted a year ago but are still relatively high.”
* Twelfth District- San Francisco– “Activity in the agriculture sector was flat over the reporting period. Continued dollar appreciation slowed agricultural exports in general, although exports of pork products rose as demand from Asia strengthened. Contacts reported that domestic demand from restaurants slowed for some vegetable products. Despite an unusually wet winter, overcoming prior drought conditions remains a costly challenge for growers and ranchers in much of the District. Contacts expect conditions in the agriculture sector to remain roughly the same over the coming year as commodity prices remain soft and exports continue to be subdued.”
Yesterday, the Senate Agricultural Appropriations Subcommittee, which is chaired by Sen. Jerry Moran (R., Kans.), held a roundtable discussion on the state of the farm economy.
In prepared remarks, Dr. Patrick Westhoff, the Director of the Food and Agricultural Policy Research Institute at the University of Missouri, indicated that, “Farm commodity prices have declined sharply after reaching record highs in recent years. For example, the marketing year average price for corn fell from $6.89 per bushel in the drought year of 2012/13 to an estimated $3.60 per bushel just three years later (Table 1). Wheat, soybean and cotton prices have also declined. The high prices of the 2010-2012 period and more favorable weather conditions resulted in a large increase in U.S. and global crop production, while a variety of factors limited demand growth, so carryover stocks increased. Crop cash receipts fell by 17 percent between 2012 and 2015.”
Dr. Westhoff added that, “The decline in crop and livestock receipts has resulted in a dramatic reduction in net farm income relative to the record level of 2013. Lower fuel, fertilizer and feed prices helped reduce production costs by about $10 billion in 2015 and another reduction is expected in 2016, but the projected cost reductions are not nearly enough to offset revenue losses.
“Given all the assumptions of our analysis, net farm income remains well below recent peak levels.”
At the conlcusion of his prepared remarks yesterday, Dr. Westhoff indicated that, “If these projections prove correct, it suggests an extended period of financial stress in U.S. agriculture. Not only are farm incomes expected to remain well below recent peaks, but businesses that sell machinery and inputs to farmers are also likely to be negatively affected. Farm asset values are likely to be under pressure, especially if interest rates increase.
“However, it is also important to maintain perspective. While rising debt is a serious concern, debt-asset ratios remain low by historical standards. Even if interest rates increase from current levels, they are likely to remain well below the levels that prevailed during the farm crisis of the 1980s. While commodity prices are well below recent peaks, they remain high by pre-2007 standards.”
Meanwhile, Nathan S. Kauffman from the Federal Reserve Bank of Kansas City observed that, “Corn prices, for example, dropped by more than 50 percent from the peak in 2012 to the latter part of 2014. Since 2014, prices have fluctuated some, but have largely remained flat over the past 18 months. Soybean prices also dropped significantly from 2012 to 2014 and have continued to fall over the past year. The prices for other major crops, such as wheat, sorghum and rice, have experienced similar declines in varying degrees. Input costs for crop production have declined somewhat over the past 12 to 18 months due to lower fuel costs and modest reductions in fertilizer prices. However, costs have generally remained high, and many producers have continued to report negative profit margins, with crop prices below their breakeven cost of production.”
Dr. Kauffman also noted that, “The persistent declines in farm income and poor profit margins have reduced cash flow and increased short-term lending needs in the farm sector.”
The prepared remarks also included this graph depicting regarding land values:
The USDA’s National Agricultural Statistics Service (NASS) released its monthly Agricultural Prices report today, which noted that, “The corn price, at $3.66 per bushel, is up 1 cent from last month but is down 16 cents from January 2015.”
The NASS report added that, “The soybean price, at $8.71 per bushel, decreased 5 cents from December and is $1.59 lower than January a year earlier.”
And today’s update also stated that, “The January price for all wheat, at $4.82 per bushel, is up 11 cents from December but is $1.33 below January 2015.”
With respect to livestock, the NASS report stated that, “At $43.60 per cwt, the January hog price is up 80 cents from December but is $13.80 lower than a year earlier. The January beef cattle price of $130.00 per cwt is up $8.00 from the previous month but $34.00 lower than January 2015.”
And Purdue University agricultural economist Chris Hurt observed today at the farmdoc daily blog that (“Weekly Outlook: Pork Industry – A Little Profit for 2016“), “The outlook for the pork industry has turned somewhat more optimistic in recent weeks. The sources of that optimism include a $2 to $4 increase in spring and summer lean hog futures prices since the first of the year and slightly lower new-crop soybean meal prices. A bit higher hog prices and a little lower cost add to the potential for a profitable year.”
The farmdoc update also included this graph: