A bountiful harvest

by Ron Sterk
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Ron Sterk

It has been nearly an ideal year for crop production in the United States, which means ample supplies and low prices, a scenario that’s not so good for farmers but great for food manufacturers who are seeing lower raw material costs.

Although corn and soybean harvests are lagging average paces due to wet weather, there remains little doubt the crops will be huge, with both forecast to be record large by the U.S. Department of Agriculture. The U.S.D.A. said corn in the 18 major states was 15% harvested as of Sept. 25, a few days behind the 2011-15 average for the date of 19%. Soybeans in the top 18 states were 10% harvested, also behind the 13% average. Earlier in September the U.S.D.A. forecast 2016 corn production at a record 15,093 million bus, soybean production at 4,201 million bus, the third consecutive record, and wheat production at 2,321 million bus, far from any record but the largest outturn since 2008.

The average price of corn paid to farmers in 2016-17 (beginning Sept. 1) was forecast to range from $2.90 to $3.50 a bu, the lowest since 2006, for soybeans $8.30 to $9.80 a bu, the second lowest (after 2015) since 2006, and for all wheat $3.30 to $3.90 a bu, the lowest since 2005.

Futures have reflected the large crops for some time. December corn and wheat futures were trading modestly above multi-year lows set in late August, while November soybeans also were trading near recent lows but with more volatility.

Perhaps the best evidence of good prices for food manufacturers has been anecdotal reports of a number of flour buyers locking in the futures component of flour contracts well into if not through 2017 to take advantage of multi-year low wheat prices.

Even though the size of the wheat crop is known with spring wheat harvest just concluded and winter wheat harvest completed several weeks ago (estimates were revised in the Sept. 30 U.S.D.A. Small Grains Summary), there’s mixed views on wheat market direction. Some analysts suggested wheat is in the worst shape of the three major crops, but others have voiced some optimism.

In a recent webinar, Purdue University professor and agricultural economist Chris Hurt noted that wheat carryover on June 1, 2017, was forecast at 47% of total use, and was estimated at 51% on June 1, 2016. Those were the highest back-to-back stocks-to-use ratios since 97% and 83% in 1987 and 1988, respectively, according to U.S.D.A. data.

“That’s an extraordinary number,” Mr. Hurt said. “That tells us that our biggest problem of the major grains would be wheat. That would suggest wheat prices will be depressed.”

In contrast, corn carryover on Sept. 1, 2017, was forecast at 2,384 million bus, or 16% of total use, up from 13% in 2016. Soybean carryover was forecast at 365 million bus, or 9% of total use, on Sept. 1, 2017, up from 5% this year. Corn inventories were the highest since 2005 and soybean inventories were the highest since 2006, Mr. Hurt noted.

Adding to woes for corn and wheat this year is the fact the hard red winter crop had a historically low average protein, which is pushing a larger percentage of the crop into feed channels to compete with the record corn supply.

It is generally accepted in the markets that a major upward price move in any of the three major commodities depends on a significant weather event, which doesn’t seem to be in the cards at this point.

That leaves prices at the mercy of demand, which also is a mixed bag. U.S. wheat and soybean use are greatly dependent on exports (nearly equal to domestic use in both cases), with the U.S.D.A. projecting 41% of the 2016 wheat crop and 47% of the soybean crop will be exported. Corn exports are forecast to utilize only 14% of production in 2016-17, with feed use at 37%, ethanol use at 35% and food use at 9%.

It is export potential that some analysts suggest is the lone bright spot for wheat. The U.S.D.A. forecasts U.S. wheat exports up 23% from 2015-16. For the marketing year to date (June 1 to Sept. 22), exports were up 27% from the same period a year earlier. While low U.S. wheat prices and a poor crop in Europe have helped, it still seems like an uphill battle for wheat with world supplies at record levels for the third consecutive year.

Mostly because of strong export sales to China, analysts contend soybeans will fare the best of the three major crops this year, which is leading to early projections that more soybeans and less corn and wheat will be planted in 2017, based on farmers’ returns for 2016 crops.

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