Does a record crop mean record usage?

Why not just buy putsMichael Swanson, Ph.D., Wells Fargo Chief Agricultural Economist

The September World Agricultural Supply and Demand Estimates (WASDE) report confirmed the USDA’s previous estimates for record yields in corn at 174 bushels per acre, and soybeans at 51 bushels per acre. Given the large acreage planted, the U. S. should produce 15.1 billion bushels of corn and 4.1 billion bushels of soybeans.

Record food production is something to celebrate, not something to complain about. After all, the whole point of agriculture is to feed people and to supply energy and clothing to the world. Of course, ample supplies have caused prices to fall to below break-even for many producers. So, this will add a third year to the recent string where cost of production has exceeded price for a large share of the producers.

Looking at the USDA’s estimates for corn and soybeans in the tables from the WASDE report, it becomes clear that the USDA has projected record corn and soybean consumption. The point of low prices is to increase demand and decrease supply, but the USDA’s demand estimates deserve as much scrutiny as their supply numbers. A couple of elements need to be looked at with particular caution since they make or break the USDA’s projections. The first is the feed usage number and exports for the corn market, and the second is the soybean exports primarily to China.

Swanson Blog Charts

The USDA has increased the expected feed and residual usage by 9% in 2016/2017 versus the 2015/2016 crop year, and exports are projected to increase by 14%. In a mature market like the U.S., these types of changes need to be supported by something more substantial than hope. Exports are always volatile, and they are very sensitive to exchange rates and competitor pricing.

The most common argument for the export strength relies on Brazil’s short crop. The domestic price of corn in Brazil has spiked much higher compared to that of the United States as they try to retain feed for their large domestic demand. Even with Brazil out of the export market, total feed grains are relatively abundant with the large global supply of wheat and other grains. This makes the 14% increase in exports more of stretch than a slam dunk for demand increases.

The much bigger stretch number is the feed and residual increase of 9% at the same time record ethanol production will be increasing the supply of distiller’s dry grains (DDGs) for feeding. With 5.3 billion bushels of corn expected to run through the ethanol mills, this will create 1.6 billion bushels of DDGs as a residual. DDGs have been displacing corn and soybean meal through the U.S. protein complex since the explosive growth of ethanol began in the 2005. A 9% increase in feeding usage should be followed by a proportional increase in meat production. The USDA’s forecasts for 2016 and 2017 do not show those levels of protein increases. Beef shows some relative strength in production, bouncing back from its recent lows, but the bigger components of the protein markets are pork and chicken. They are projected to grow in the low 2% range, not a 9% increase. So where would all the feed go?

U.S. Red Meat and Poultry Forecasts

Even these relatively minor increases are too much for the domestic market to absorb. The U.S. population growth rate is 0.7% annually. Domestic per capita consumption rates have been relatively static for decades. Since 2007, per capita meat consumption (including broilers) is down about 20 lbs. per person. Rising wages relative to meat prices will help recover some demand, but it will be a slow process, not a sharp 9% increase. Once again, this leaves exports as the mechanism to find new demand, but this doesn’t explain the discrepancy between the 9% increase in feed usage and the 2% increase in production.

U.S. Per Capita Meat Consumption

In contrast to the corn usage numbers, the soybean demand adjustments are much smaller, and are consistent with recent market activity. The following table shows that 7% increase in production of soybeans is offset by a modest 3% increase in total usage. The difference drops to the carry-out stocks which show a sharp 87% increase, but this large percentage change overstates the carry-out number. Compared to the total demand, carry-out stocks only represent a 9% surplus (corn’s stocks are closer to 17%). The only real risk to the demand comes from the element of Chinese demand. The USDA estimates that China currently accounts for 60% of the total global imports for soybeans. A slowdown in economic growth or a change in agricultural policy is impossible to factor into the numbers, and it would make or break the USDA’s projection.

So, it makes sense that record production will lead to record usage, but low prices are the grease that will get the wheel to turn. Will low prices reduce planting acreage in 2017? That’s a question for another day. However, I always ask and remind farmers, “Exactly, what did you think unpredictable meant?”

U.S. Soybeans and Products Supply and Use