US Farm Outlook: Another Profitable Year Expected20 February 2012
The 2011 crop year will remembered for several reasons, the flooding along the Mississippi and Missouri Rivers, the drought that plagued the Southern Plains, and the myriad of weather events (hail, wind, freeze) that lowered crop yields and production nationwide.
But despite all of those problems, 2011 will also be remembered as a very profitable year for Iowa crop producers. The 2011 Iowa corn crop had the 4th highest yield on record, the 3rd largest production, and, based on current prices, is the most valuable corn crop we have ever produced. Currently, the 2011 Iowa corn crop is projected to be valued at over $13 billion. The previous record is the 2010 Iowa corn crop at $11.7 billion. For Iowa soybeans, the 2011 crop had the 5th highest yield and only the 11th largest production, but is the 2nd most valuable soybean crop we have ever produced. The 2011 Iowa soybean crop is projected to be worth over $5 billion, only the 2010 soybean crop was worth more.
Using the ISU Extension production cost estimates as a guide, it costs roughly $4 per bushel to produce the 2011 Iowa corn crop and $9.67 per bushel for the Iowa soybean crop. So the projected season-average prices for the 2011 Iowa crops can cover costs and provide returns of over $1.50 per bushel for both crops. Based on those returns, USDA has forecast that US agriculture will receive record net farm income in 2011, topping $100 billion for the first time ever. Iowa net farm income in 2011 will also likely be a record.
However, as Figure 1 shows, while returns are very good right now, they are also highly variable. Crop prices during the last half of 2011 have mostly been on the decline. Corcerns about the global economy, in combination with the US harvest, sent crop prices tumbling through September and October. Since then, the corn market has oscillated between $5.70 and $6.40 and the soybean market has bounced between $11 and $12.50. As we move into the 2012 planting season, I see two big factors shaping crop prices. The first is the global economy. As we experienced this fall, the markets will react quickly and decisively if traders sense weakness in crop demand. The Europeans are still wrestling with debt problems; the Chinese are still dealing with inflation; and we continue to see slow job growth (although the latest numbers look promising). Crop demand has been the big driver of the crop markets over the past few years. With ethanol leading the charge for corn and exports doing the same for soybeans, demand for our crops has been enough to absorb all we could produce recently. But ethanol’s growth has slowed and soybean export demand has fallen off with China’s inflation problems. World crop stock levels are relatively high for most crops as well. As Figure 2 shows, the wheat stocks-to-use ratio has been high for the last couple of years. Soybean stocks have been on a general increase over the past decade. Only the corn stocks-to-use ratio would be considered low right now.
At the same time though, there are significant questions on the supply side as well. Global weather is the second factor shaping crop prices. The La Niña that impacted last year’s crops is still around, affecting the South American crops and setting up to possibly affect our upcoming crops. USDA’s January estimates indicated the drought and high temperatures in Argentina have reduced potential production there. That production reduction helped spur crop prices higher in the later half of December and have continued to provide support as we move into spring. Meanwhile, here in the US soil moisture is limited in the northern Corn Belt. Those conditions point to potential lower yields here this coming crop year and are providing upward price pressure.
With these two factors pushing in opposite directions, the markets have been on a see-saw recently, up on weather news and down on economic news. As the economic and weather factors will not be resolved very soon, the near-term pattern is for the markets to continue to ride the see-saw. So we can expect continued high price volatility for awhile. Figure 3 shows the projected 2012/13 season-average prices, based on futures prices over the past eight months. As with the 2011 crops, projected prices were higher this summer and fall, but good prices are still available. ISU Extension’s production cost estimates for 2012 are $4.41 per bushel for corn and $10.96 per bushel for soybeans. With 2012/13 season-average prices in the $5.60 range for corn and $11.90 range for soybeans, 2012 is shaping up to be another profitable year. But the swings in prices could be very dramatic this year, making risk management very important. Crop insurance is always a good risk management tool, but given the current weather situation and outlook, it may be doubly important this year. With the chance for lower yields also comes the likelihood for higher prices, so marketing tools that leave upside price potential should be attractive for 2012 as well. Options, while high priced given the price volatility, offer a quick way to put in a price floor and capture those possible higher crop prices.February 2012