Audio Transcript

Crop Outlook Update

May 16, 2022

James Mintert, Professor & Director, Center for Commercial Agriculture

Michael Langemeier, Professor & Associate Director, Center for Commercial Agriculture

Nathan Thompson, Associate Professor, Department of Agricultural Economics

 

James Mintert: Good day and thanks for joining us for our Crop Outlook update. I’m James Mintert, director of the Center for Commercial Agriculture and joining me today are my colleagues Dr. Michael Langemeier, who’s the associate director of the Center for Commercial Agriculture and a professor of economics, and Dr. Nathan Thompson, who’s an associate professor of ag. economics here at Purdue. Well, there’s a lot of information to talk about. And, of course, this is following USDA’s release of the World Ag Supply/Demand Estimates. And let’s just kind of review some of the highlights that were on the report last week.

First of all, no changes to the corn balance sheet for the 2021-2022 marketing year. That leaves corn ending stocks estimated for this year at about 1.44 billion bushels. May is the first month, however, that USDA publishes estimates for the 2022 crop balance sheet for corn. And they did make some changes there relative to at least what people were expecting prior to the report’s release. So, they backed away from the trend line corn yield estimate which they initially projected back at the World Ag Outlook Forum in February.

Earlier, they were at about 181 bushels per acre. They are currently using 177 bushels per acre. That’s the same as it was last year in 2021, and as we’ll see later, is still a record yield. That gives us an estimate with, combined with the planting acreage estimate coming out of the Planting Intentions report of about 14.46 billion bushels. That’s down from last year’s 15.115.

Ethanol usage in the 22 marketing year is estimated to be about the same as it is in the 21 marketing year at about 5.375 billion bushels. And they did reduce exports by 100 million bushels, leaving it at 2.4 billion bushels for the 22 marketing year compared to the 21 marketing year, which is still at 2.5 billion bushels.

The projected carryover net of all of that winds up being 1.36 billion bushels, down 80 million bushels from the 21/22 crop year. And of course, all those numbers are subject to change as we progress through the course of the marketing year and certainly as we move through the course of the summer with respect to production. There were also some changes in USDA’s corn trade projections in the May WASDE estimates, and those are of more interest maybe than normal. This year because of the uncertainty created because of the situation in Ukraine and also what’s going on in South America with respect to weather problems.

02:37

So, the changes in the 21/22 trade matrix, a small increase in the major exporters ending stocks. They raised Argentina’s but reduced Brazil’s, and then there’s a small increase in the Ukraine carryover estimate compared to the April estimate, which was down substantially prior to the estimates that they were publishing before the war got started.

If you look at the 2022/2023 crop year trade matrix, world ending stocks expected to increase modestly, smaller ending stocks as we just indicated in the US. But a big rebound expected in Brazil, based on a large expected production increase in South America for the 22/23 crop year. And then if you look at Ukraine, they’ve got production down a little over 50%, I think 54% compared to 2021, but the export challenge there is still with us and of course that’s going to have a positive impact on those ending stocks. So just a lot of uncertainty as to the availability of those ending stocks.

3:41

So, let’s kind of turn our attention and focus on the domestic market. And I know, Michael, you’ve been looking at this pretty closely. This is the map of corn planted acreage coming off the Planting Intentions report released at the end of March. And through last week, through the 8th of May, and we’re recording this Monday afternoon before the report comes out later this afternoon, just through the 8th. Just 22% of corn acreage was planted in the US. And some uncertainty with respect to how much was planted last week. At the end of the week on Thursday/Friday there was some optimism about those numbers really bumping up quite a bit, but there was a fair amount of rainfall that moved through a good chunk of the Corn Belt over the course of the weekend. So, it’s really a little up in the air in terms of how much has been planted, right?

4:26

Michael Langemeier: Yeah, it certainly is. And particularly in North Dakota, Minnesota, Wisconsin, the planting was way behind. And so, it’ll be interesting to see what the report looks like this afternoon. And that’s one of the primary reasons I think they reduced the corn yield estimate.

James Mintert: Yeah. And it’s going to be very interesting to see how this shakes out. Already some discussion taking place of the possibility of seeing some prevented planting acres in that northern part of the Corn Belt, right?

Michael Langemeier: Definitely that would be the case. And if that’s the case, obviously, that’s going to, you know, make the ending stocks even tighter.

James Mintert: Yeah. So, it’s something the market’s going to be paying very close attention to here for the next certainly the next few weeks. So as Michael mentioned that slow planting pace is probably what led USDA to back away from that trend yield estimate that they published earlier of about 181, or at least that they suggested they might be using.

05:18

That 177 is a new record, but just barely compared to 17 and 18. I think those crops were both between 176 and 177, so pretty close to what we saw in the 17 and 18 crop years, but still a very high yield number relative to history and a lot of risk there. Michael, it wouldn’t take much in terms of pulling that yield back to make a difference on that balance sheet.

Michael Langemeier: Yeah, really the risk is on two sides. Obviously, on the acreage if we have more prevent plant, the acreage is going to be lower. But also, this yield, I mean I was doing some trend analysis and I was coming up with a trend of 179 and that’s with good weather and so certainly we could see something lower than 177 as a fairly strong possibility.

James Mintert: Yeah, you wouldn’t have to have a disaster if I mean for example, if you take…

Michael Langemeier: A bushel or two off.

James Mintert: Or maybe five, you get down like 172, which isn’t by historical standards wouldn’t be that unusual. And so, things could tighten up. So, a lot of uncertainty there on the yield side. Well as I mentioned earlier, the production numbers were at 14.46. That’s down somewhat compared to last year. Most of that’s because of the acreage number. Obviously with the yield basically being held constant with last year’s level.

6:26

So, some risks there. It’s still a big corn crop by historical standards, although it’s not a record yield by any stretch. So, a record production by any stretch. If you look at corn ending stocks, USDA is projection for the 21 marketing year is currently sitting at about 9.6% of usage, and their initial projection for the 22 crop year is at 9% of usage. And I have to say that the risk on both of those really is probably with respect to maybe seeing those numbers come down. What do you think, Nathan?

Nathanael Thompson: Yeah, I would agree. I think that there’s definitely, you know, an expectation that we could see those numbers go down. And again, that has a big implication in terms of how markets are going to respond to that with tighter ending stocks.

James Mintert: Yeah, I mean, as I look at it, I mean, the USDA is essentially assuming as I would, too, in their place that we’re going to see the acreage planted that was on the Planting Intentions report. We’ve got yield at 177. And the risk, I think, is that yield comes in maybe a little lower than that 177. The risk is that the acreage comes in a little bit smaller. And in both of those cases that would point to tighter ending stocks. And what they’ve suggested, at least so far. No guarantee it’s going to be tighter, that would be the risk that I’d be thinking about the most.

7:38

A lot of interest in what’s taken place with respect to corn usage going into ethanol. And you know, we were talking before the program, a year ago if you had told us, any of us really, that you could see corn prices flirting with $8 a bushel and still see positive margins in the ethanol industry, we would have been skeptical to say the least. And yet that’s exactly the situation we’re looking at. Those ethanol margins are still positive.

They are well below where they were last fall, particularly around that Thanksgiving time frame, but still positive. And if you look at usage so far, it’s still up about 9% this crop year versus the prior crop year. And so, USDA’s estimate looks like it’s in the ballpark based on usage so far. Maybe they’re a little bit on the conservative side. I think the grind is maybe running a little bit ahead of their pace, but still not too far off.

And, you know, looking forward with respect to these very strong oil prices and gasoline prices, I think prospects for ethanol usage continuing pretty strong are pretty good.

If you look at the major exporter’s ending stocks, the five countries that really predominate in terms of exports, you know, they they’re tight, but maybe not as tight as we’ve seen in the past looking back at the 2011/2012 crops.

8:59

We had those ending stocks in the major exporters down below 4% in those years. USDA is still projecting this year at 4.4% and next year at 4.7%. But those ending stocks could be tighter than they really appear. So first of all, I think a lot of people in the private sector think the USDA estimate for Brazil is probably still too high with respect to production, that would tighten those numbers up. And then and just to put that in context, Brazil accounts for about 14% of those major exporter ending stocks. And Ukraine, of course accounts for about 15% of estimated ending stocks. So, if you think of it from that perspective, both of those could tighten more than what we’re suggesting here and that could pull the 21 ending stocks down below 4% without too much trouble and of course tighten things up a little bit more in 22.

And again, my inclination is to say that the risk is that the ending stocks are tighter than what USDA is currently projecting. But admittedly there’s a tremendous amount of variability there in terms of estimating what’s going to happen in Ukraine. And how many of those bushels are actually going to be available to the marketplace. It’s still very, very unclear how that’s going to shake out.

10:14

 

Well, where does that leave us in terms of marketing year averages? USDA is at $5.90 for corn for the 21 marketing year, and this was their first estimate for the 22 marketing year and they’re at $6.75 for the 22 crop. That is slightly below where we were in 2012. But based on the discussion we’ve had so far; I think the risk is that it could wind up coming in higher than that. Do you agree with that, Michael?

Michael Langemeier: Yeah, I think definitely if you look at the fall futures, December futures, for example, it’s considerably above that. And, and so that, that leads me to believe that there’s, there’s quite a bit of upside in this corn market.

James Mintert: So, Nathan, you’ve been looking at cash opportunities and storage opportunities. Let’s talk a little bit about that.

10:53

Nathanael Thompson: Yeah. So just kind of start off looking at some forward contract bids for corn at a location here in central Indiana. And so, the darker gold bar that’s running across the top there, that would be the current cash bid that they have in May, June, and July. And then the two other lines that are running below that. So, the lighter gold line and the gray line there are what I’m calling an implied break-even price. So basically, if you’re going to forego the $7.89 bid for delivery now how much would you actually have to sell that corn for in June or July to cover both your storage cost and your opportunity costs? And those are two different scenarios.

One for an on-farm storage scenario where I’m assuming $0.01 per bushel per month of storage costs as well as an opportunity costs at 6% APR, and then a commercial scenario which would have a little higher cost structure, so $0.04 per bushel per month and then that same opportunity cost. And so, what you can see in the chart here, which is different than what we’ve seen in quite a while, is that the current cash bids are above my implied break-evens.

Meaning if you were going to hold on to corn today and forward contract to sell that and deliver it to a particular elevator at $8.04 in June, that would be more than what, based on my assumptions, more than the cost that you would incur to get it there. So that would be a profitable decision. For the longest time, more than 12 months I would say, we have not seen this chart show a positive return to a storage scenario for those forward contract bids. And again, there’s lots of reasons why that is. But the one interesting thing here I think as it relates to kind of where we’re going to go here in the next couple of minutes is that’s all an improvement in basis. So that May bid, and the June bid are both based off of July futures and so the improvement from $7.89 to $8.04, that 15 cent increase is all an improvement in that basis bid from the May to June delivery.

12:52

And so, you know I think that’s really interesting, that $0.15 improvement in basis in one month is obviously going to give you a profitable return to storage because you don’t have that much cost wrapped up in a month and storing that grain. And so that kind of leads us down this road of, OK, well what are we seeing going on in terms of basis right now?

So, on the next slide here, we’re looking at corn basis in central Indiana. The blue line is the historical three-year average for that region. And again, we’re looking at July basis going all the way back. So, this is not a rolling nearby basis. This is looking relative to the July 2022 futures from last fall through now to give us a kind of consistent look at one contract. And what you can see is you know; we had a little bit of a spike in basis for corn back in the beginning of March. Some of that had to do with what was going on in Ukraine and shifting of grain flows. But since then, it’s kind of settled down and is running, you know, I’d say $0.10 under that historical three-year average, but really following the same pattern that we would expect to see just slightly weaker than maybe the historical average.

14:05

On the next slide, we look at corn basis in Southwest Indiana. OK, so maybe a little more indicative of what’s going on in the river, maybe some of what’s happening in export markets. And you can see quite a bit different story. We were running quite a bit weaker than that historical average but have seen basis really strengthen here in just the last couple of weeks and get back near that historical average.

And so, you know, again, a lot of that probably being indicative of what’s going on in export markets. The other thing that I should point out we talked about earlier is, you know, I’m focusing here on the last four to six weeks of the chart. But it’s interesting at this point in the year to take a look back how much improvement we’ve had in basis over a longer period of time. Right, so we started out $0.30 under back in the fall and now we have basis that’s $0.10 over. So, we’re about $0.45 or so improvement in basis throughout the year. That’s really strong improvements in basis that would certainly in our storage hedge scenario, result in some profitable returns. Now, if you wouldn’t have hedged, you know, with the improvements we’ve seen in futures returns would be much larger than that.

But again, for someone who implemented a strategy like that, something we talk about quite a bit, you know, we certainly saw a year with good basis improvements. So, the other thing that I think is interesting here, so again, I’m kind of acknowledging this strengthening of basis there in southwest Indiana the last couple of weeks is to compare that because again, the basis tool is looking at these regional averages. So, everybody in southwest Indiana all gets lumped together. That includes the river market, but also includes inland terminals as well. On the next slide here, I’ve looked at and pulled out just river terminals along the Ohio River, in both southern Indiana and southern Illinois. And so, what you can see in this chart again is a pretty sharp increase in basis at those terminals again in the last four to six weeks.

Again, that is pretty consistent with what I showed you on the chart from the basis tool, but just kind of makes the same point of this kind of strengthening of corn basis recently, likely driven by export demand given the locations.

16:17

James Mintert: So, you know Nathan, if you look at that chart, you can see the bump that took place with respect to export demand right when the war broke out in Ukraine.

Nathanael Thompson: That’s right.

James Mintert: And then that kind of went away and that showed up in the other chart as well. Right? And now we’ve climbed back. We’re basically looking at basis levels that are very, very close to what we were looking at in late February, just as the war broke out, right?

Nathanael Thompson: That’s right. Yeah. I mean, we saw that kind of spike up pretty quickly there and then it really dissipated as quickly as it went up. But now we’ve seen this kind of more steady strengthening really getting us back in line with where history would say we would be for this time of year for those markets. So, yeah, very, very strong basis opportunities right now.

16:57

So then here we’re looking at it from a slightly different angle. This is the Indiana ethanol plant basis and index, right? So, I’ve just averaged together all of these the ethanol plants here in Indiana, what their basis numbers are. Again, there’s a lot going on here, but it really is important to kind of piece this out because so much has happened in these markets in the last several years. And so just quickly, you know, I’ve got several different lines there because really the last couple of years have been pretty exceptional in terms of some events that have happened that have impacted basis at those ethanol plant. So, 18/19, so in the spring of 19, we had planting issues, a lot of prevented planting, that caused basis to really run up at those ethanol plants in the Eastern Corn Belt trying to secure corn, given that we weren’t getting a lot of it planted.

In 19/20 obviously the spring of 20, you could see the red line there. We get this huge drop that had to do with COVID and the impact on gasoline demand. And then the purple line would have been last summer. So, the summer of 21 we saw a huge run up in corn basis at those ethanol plants. So really with all of that as context what I really want to focus on is the blue line that runs through the middle there. That’s the average of 15 to 17, which I’m calling the last kind of normal period of time and then the black line being what’s going on recently. And I think the most important thing to pay attention to there is again similar to what I was showing you on some of those other corn basis charts, basis at ethanol plants has also been strengthening pretty consistently over the last four to six weeks. And again, going back to the comment you made earlier, somewhat surprising given where corn prices are that ethanol plants are continuing to be profitable and continuing to bid strongly for corn, even with futures prices where they are.

18:44

James Mintert: Yeah, and I think what’s going on there, Nathan, is the fact that as you look at it, they still got a positive margin, not nearly as positive as it was last fall for a while. But they’ve had to increase their bids to pull the corn in. We’re kind of in this environment now where users are having to bid up the basis to pull corn out of storage, and that’s especially true during the middle of planting season, right?

Nathanael Thompson: Yeah, it is. I mean, I’ve seen lots of things recently where, you know, people need crop, but farmers, given what we’ve seen, you know, being behind with planting, when farmers want to be in the field, they want to be in the field, they’re not answering the phone to go deliver corn to the ethanol plant, right? And so, certainly in this time of year when we can see some pretty volatile jumps in basis.

So, then kind of just to close out some of the thoughts here on the corn crop and some marketing opportunities, I wanted to shift my attention a little bit to new crop opportunities and have folks start thinking about the 2022 crop. We talk about frequently the seasonality in new crop corn futures. And so, every once in a while, I think it’s useful to throw this chart up just to give people a visual of what we’re talking about. So just briefly, so this is an index. So basically, I say, OK, what was the corn price in January? I’m going to set that to 100%. And on average, if the number on the chart is above 100, that would mean that we typically see corn prices increase above the January 1 price that time of year for numbers that are below 100 that would mean on average, we typically see corn prices that below the 1st of January for that time of year.

So, what you can see is that basically the beginning of April through the end of June is the time where we see the most strength in the new crop corn futures market seasonally. Again, that’s not a guarantee that that’s where the market puts in its high. But on average, right? That’s where we most frequently see the market put in higher prices. And so, we’re kind of right in the middle of that time frame. We’ve been talking about that for several months. Have people looking forward. And so, again, you know, there’s lots of reasons to think that corn markets can continue to strengthen going forward.

But if you’re just basing kind of your decisions on kind of historical patterns, you know, there’s a lot of reasons to think that you’d want to be making some decisions now. And again, on a on a portion of that new crop, you might want to, you know, price some of that. I certainly wouldn’t sell all of it by any means, but this is the time of year when we would expect to see some strength in those futures prices.

21:13

James Mintert: And so, let’s just think about why that might be. I mean, the marketplace this time of year is a little bit uncertain about acreage, right? Obviously uncertain about yield. And as long as that’s the case, you’ve got a risk element essentially bid into those prices. And then on average, what it says is as time goes on, most years we get the crop planted. Most years we have yields that are commensurate with what the expectations were earlier in the season. And when that happens, we see that that risk premium essentially erode as you head through the course of the season. So, what we’re really talking about here is taking advantage of that built in risk premium that usually occurs and the chart doesn’t tell us whether or not this week is the week or next week or the week after. It just tells us to be very, very alert during this time frame, right?

Nathanael Thompson: That’s right. Be paying attention, right? If you’re going to be making some new crop sales, this time of year would, on average, be a good time to be thinking about that. And again, current futures prices are very strong. So that would be a good decision. That doesn’t mean they’re not going to go up from here, but it would certainly be a good time of year.

22:20

James Mintert: Michael, we were talking about this earlier before the program, and you were comparing offerings to expected break-evens on your budgets here for a corn/soybean operation.

Michael Langemeier: Yeah, break even right now is at $5.60 to $5.70. And you start looking at corn, $7.20 to $7.30. That’s got to be pretty attractive.

James Mintert: And I want to emphasize when you say your break even, that’s including the elevated costs that we’re experiencing, right?

Michael Langemeier: Yeah, break evens obviously have increased about 25-26% from last year. But even with that incorporated, we’re still looking at some very, very profitable corn opportunities.

James Mintert: So, you know, the implication is if you haven’t started on the 22 crop marketing, this might be a reasonable opportunity. No guarantee this is the high point or anything like that. But from a profitability and a risk management standpoint it makes a lot of sense, right?

Nathanael Thompson: That’s right.

James Mintert: I mean the essence of risk management is all about the idea that we can’t predict the future that accurately. Right?

Nathanael Thompson: Exactly right.

James Mintert: So that’s why you want to split things up a little bit and maybe lock in some positive returns when they present themselves.

23:25

Nathanael Thompson: And that’s exactly the point that I really wanted to make with this slide here, and that is we don’t know what the price is going to be. Right? So, this is the Farm Doc Price Discovery tool that’s available on the website there on the slide. Basically, what this does, it uses current futures prices and volatility to predict the distribution of what December 2022 corn futures could be at expiration in December.Right, and so you can see kind of on the right-hand side there, price at expiration and the probability that will be at that price or below. And so again, there’s upside potential between now and December and there is downside potential between now and December.

And tying back to what you asked Michael about the break-even prices. I tried to kind of just back of the envelope think through what some numbers might be that would be relevant for comparing to his break evens. So, if you look at corn price say goes down to $6, corn futures price goes down to $6. If we take basis in the fall of say $0.25 under, that would be pretty average based on the basis tool and based on some current bids, that puts you at $5.75 cash price, okay, that’s pretty close to what Michael mentioned in terms of break evens.

We’ve got a 20% chance that we would be below that level, right. So, one in five chance that we could be below that. Now again that’s four or five that we’re going to be above that and that’s good. But just to give you some context for the how good current prices are relative to, we’d have to see a pretty big decline in prices to start approaching those break-evens. So again, you don’t want to price everything today, but you certainly want to take advantage of the opportunities that the market is giving us because they’re very favorable, even in light of cost increases.

25:08

Michael Langemeier: And one of the things that I’ve noticed by looking at this tool on and off over the years is the variability or the difference between the low prices and the high prices really increases as the stocks to use ratio gets tighter. And so, this is a very, very wide set of prices. It’s because of the low stocks to use ratio.

James Mintert: Yeah, that’s a good point.

Michael Langemeier: It just means that with increasing risk, and risk is on the upside and the downside. We always got to remember that.

James Mintert: Yeah. There’s not too many times in the past, if you want to look over the last, say 20 or 30 years where you’d see a $2 spread from top to bottom on that chart. Right?

Michael Langemeier: No, that’s unusual.

25:43

James Mintert: Yeah. All right, let’s turn our attention to soybeans a little bit. Some key changes to the soybean balance sheet. USDA did increase their export forecast for the 21 crop by 25 million bushels. That’s the second month in a row they’ve done that. The new total is now 2.14 billion bushels. That pushes down the ending stocks estimate by 25 million bushels and now they’re at 235 million bushels. They were at 260 last month. And then like corn, this is the first month for the 22/23 crop balance sheet. USDA did stick with their trend line yield estimate for soybeans. So unlike corn they didn’t pull the number back relative to what they were talking about back at the Ag Outlook Forum in February. That left it at 51.5 bushels per acre, and they used the acreage from the Planning Intentions Report. And when you do that, you wind up with a production estimate of about 4.64 billion bushels for the 22 crop. That’s up, not quite 5%, versus 2021. On the initial pass through on the balance sheet, they’re forecasting somewhat larger crush, somewhat larger exports, but that still leads to an increase in the projected carryover from the 21 crop year to the 22 crop year.

They wind up at 310 million bushels for the 22 crop versus 235 as their current estimate for the 21 crop year. If you look at some changes to their world soybean trade matrix, they held Brazil’s estimated harvest for the 21/22 crop year this spring at 125 million metric tons. I have to say that’s higher than many of the private estimates that are out there. There’s quite a few private estimates that are smaller than that, some of them a little bit smaller, some of them a lot smaller. So just some variability there. They did reduce Argentina’s estimates slightly, I think down one and a half million metric tons to 42 million metric tons. And then looking ahead to 22/23, a big increase expected in production in Brazil. Jumping up to 149 million metric tons, up from that 125 this year. And then Argentina expected to increase to 51 million metric tons versus 42 this year.

27:54

And the result would be a fairly large increase in major exporter ending stocks rising to almost 53 million metric tons. That’s a rise of about 30% compared to this year’s major exporter ending stocks estimate. You know, if you look at the soybean numbers, we were talking about this a little earlier today before the program, that 4.64 billion bushel estimate for soybean production is a new record for the US, and one of the things that really strikes me about this chart, looking at it over time, it wasn’t too long ago that basically soybean production in the US was hovering between three and three and one half billion bushels. Now we’re kind of in this four to four and a half billion bushel range. The growth in soybean production has not resulted in what I would characterize as burdensome surpluses. Estimates of usage keep going up as well, right? So, we’re having tremendous amount of growth in soybean usage over time and keeping those stocks relatively tight.

28:59

So, despite that expectation for record production, the carryover is going to remain near its current estimate for the 21 marketing year of just over 5%. There’s been some variability in that estimate as we’ve moved through the course the marketing year. I remember last summer we were in the ballpark of about 4% for a while. Then we got up close to 9% and now we’re back down to 5%. The initial projection for the 22 marketing year is just a little under 7% at 6.7%. All of those numbers are relatively tight by historical standards, and the thumb rule I continue to use is any time you’re below 10%, you’re looking at a relatively tight carryover. And Michael, as you mentioned, with corn, that gives us volatility in prices, right?

Michael Langemeier: That would, that’s definitely the case.

James Mintert: And we’ll see that here in a bit. If you look at the exporter ending stocks the major exporters and just, you know, kind of remind everybody, there’s really a small number of major exporters, right? Obviously, the US is in there. Brazil, Argentina, and then Paraguay, and Paraguay is a pretty small player relative to everybody else in there. So, it’s really three countries that dominate this. Those major exporter ending stocks for the 21 marketing year are currently projected at 13%. Given the big expectation for production increases, especially in South America in 22, bumping up to 16% at least based on that first pass for 22. If you look at that 13% that’s tighter than we were back in that 2011-2012 time frame. And you know I think yeah, a lot of uncertainty there with respect to just how tight those stocks are going to be. I think once again a lot of folks think that USDA could wind up tightening that ending stocks estimate for the 21 crop. I would not be surprised at the end of this marketing year for that ending stocks number to actually fall below 200 million bushels. So, we’ll see how that shakes out, but it’s a tight situation out there.

Michael Langemeier: Even the 16% is a little surprising given what you said earlier. We’ve got a major increase in acreage in the US, major increase in production in Brazil, and we still only have 16% stocks to use. And so, it just goes back to what you’re saying about demand. Demand is so strong.

31:10

James Mintert: And of course, one of the things that’s taking place there is this tremendous increase in demand for soybean oil, right? A lot of that’s about renewable diesel. So, USDA is forecasting the highest marketing your average soybean price since the 2012 crop year, there at $14.40 for the 22 crop, $13.25 for the 21 crop. And as you look at it you know I think you have to ask the question, should we be making some decisions, right? With respect to soybeans. So, let’s take a look at that.

Nathanael Thompson: Yeah. So, let’s start kind of at the beginning here looking at old crop. So, these are forecast contract bids for the next couple of months. So again, the dark gold line running across the bottom there is the current cash bids. The other two lines, the lighter gold line and the gray line are my implied break evens again. So, if you’re going to forego the $16.67 delivery price in May now, how much would you have to sell soybeans for next month or two months from now to cover your both storage cost and opportunity costs in that on farm in the commercial storage scenario? So again, unlike corn here, those current bids aren’t really even covering our storage and opportunity costs. But again, this is a useful exercise for folks that do have old crop and are looking at forward contract bids, or looking at, you know, holding on to the soybeans for a next little bit.

You know, what would you need to be selling that for based on your cost structure in order to make that a profitable decision? Again, the other thing here and we can talk about this more maybe when I get to the basis slides, but we’re at a point in the year where basis just gets kind of crazy and soybean basis, I’ll show you in a minute, it’s kind of gotten to that point where I think there’s going to be a lot of volatility here over the remainder of the crop marketing year. But as you’re looking forward and making those decisions, if you do have old crop soybeans, this would be kind of a structure to put in place to think through those decisions of holding on to that into the summer months.

33:07

So, with that in mind, looking here at soybean basis in central Indiana, you can see again that’s been running maybe $0.25 below that historical two year average. So quite a bit weaker. These last several months. But again, if you look at the whole chart there, we’ve seen strengthening from $0.75 under in the fall to today. You know we’re at about zero. So, you know 75 cent increase in soybean basis between the fall and now in central Indiana. On the next slide we’ll look at soybean basis in southwest Indiana, again starting to maybe reflect a little bit of what might be going on in export markets there along the river. So, you can see not quite as weak as what we showed in central Indiana, probably more in line with that two-year average and maybe strengthening a little bit here, but really just following that historical pattern.

And so, part of what got me thinking here was, you know, I had read some things, James, you had sent me a few things talking about kind of the pull that was happening between soybean processors and export markets. And so that led me to think a little bit about, okay, well, what is going on at these processor markets, or excuse me, let’s start with more of the export market. So, this is soybean basis at the river terminals, again in southern Indiana, southern Illinois, along the Ohio River. And so, what you can see is that wasn’t really reflected in my chart from the crop basis. Again, that’s a regional average, there’s a lot of numbers that go into that.

So, when I looked at it this way, you can see this pretty big jump in soybean basis along those river markets here. The last four to six weeks we’ve seen that up, you know, $0.30-$0.35 per bushel, a pretty big increase. And then again, I wanted to compare that with what was going on at soybean processors and so, I was able to go into the basis tool and just pick out the five or six soybean processors in the state of Indiana specifically.

So, this is a soybean basis at those soybean processor locations and again, you can see this kind of big jump here in the last several weeks in soybean basis at those processors. And so, what we’re seeing is this tug of war, right? People are maybe busy planting and not wanting to move soybeans or maybe just old crop beans are just not as easy to come by. And so processors, which have really strong margins right now, are wanting those soybeans and bidding up their basis. Exporters, on the other hand, right? Have opportunities to sell those beans, they’re bidding up basis. And so, we kind of have this tug of war. And I mean, I’m expecting soybean basis to strengthen quite a bit here through the summer or at least get volatile. Could go one way or the other. But I think there’s a lot of upside potential and what the market’s current currently telling us is there are people that are looking for beans that can’t find them.

36:05

James Mintert: Yeah, the soybean basis story is different than what you showed for corn. So, in corn, you’re looking at a situation particularly at the river markets where we were back to about the levels we were when the war broke out in Ukraine. And of course, the war in Ukraine didn’t have as big an impact on the soybean market as it did on corn. But if you look at what’s taking place at those river terminals now, it’s the strongest basis of the year by a wide margin, right?

Nathanael Thompson: That’s right.

James Mintert: And that’s making this little war, a tug of war between the processors and the export channels, right?

Nathanael Thompson: Right. That’s exactly what it is, right? And so, as basis has increased those processors have had to increase their bids to make sure they can get access to those soybeans.

James Mintert: So it’s yeah, it is going to be very volatile.

Nathanael Thompson: It’s going be interesting. So again, shifting focus to just thinking about some new crop opportunities. We talk about these seasonal patterns all the time. This is the same setup as what I showed for corn. So again, this is an index. Anything above 100 would mean that on average prices that time of year would be higher than what we see the first week of January, below 100 prices that time of year would be lower than the first week of January. And so, again, the timing here is slightly different than that seasonality in corn futures chart, where we see the highest soybean prices on average a little bit later. Maybe end of May into July. And so, you know, we’re maybe starting to approach this period where we tend to see seasonally high soybean prices.

So again, the point that I want to make here is just showing the chart, getting people’s attention to start thinking about this might be a time of year. This would be a time of year historically where you would want to be thinking about pricing some new crop soybeans and locking in what would be on average seasonally high prices.

37:53

James Mintert: So that chart does look different than the corn. So, a couple of things strike me about this versus the corn. So, on the corn chart, if you decided to do some pricing earlier in the year, that really wasn’t too much different than it is in this time of year. Maybe not quite as strong, but still not too far off. The soybean chart is much weaker earlier in the season than the corn chart is. And I think that’s probably tied, at least historically, based on what’s going on in South America.

Nathanael Thompson: That’s exactly right.

James Mintert: Right, now that South America has become a more important corn producer, that relationship could change maybe going forward. So, this is going to be interesting to monitor this going forward if we start seeing some changes in this. But in both cases, both the charts really speak to the idea that this is a time of year when you should be thinking about doing some pricing of new crop.

Michael Langemeier: One of the things I noticed right away when you showed this chart is the seasonality is not as pronounced for soybeans, just different markets. I think that low month for corn was like 94%. It’s 99% for soybeans, and so it’s not as pronounced.

James Mintert: Yeah, good point. So, you’ve taken a look at the price discovery tool for futures as well.

39:00

Nathanael Thompson: Yeah. So again, looking at kind of a distribution of that November 2022 soybeans at expiration. You can see quite a range as Michael alluded to earlier. And so, the one kind of number that I wanted to kind of again tie back a little bit to the break-even price is just to give some context, right? So, there’s a about a 20% chance that we could see soybean futures below $13 when we get to expiration in November, adjusted for say a $0.30 – $0.35 under basis in the fall, that puts you 12.60-12.65. That’s probably…

Michael Langemeier: Very close to break even.

Nathanael Thompson: … very close to breakeven right. So again, that’s just pointing out kind of where current bids are relative to where you know we could see downside risk. Again, there’s plenty of upside risk here as well. So, nobody’s saying you can go out and sell everything because I think, you know, with tight stocks potential, you know, production problems that could happen. You know, I think that there’s lots of upside opportunity, but that doesn’t mean that you don’t want to lock in a certain percentage of the crop at these levels because it’s very profitable compared to what we could see.

40:00

James Mintert: This could be your lowest price of the season, right? But, you know, if you look at the chart, you guys are focusing on the downside. I look at the upside a little bit. I think that chart says there’s about a 32% chance that prices could be above 16. Right?

Michael Langemeier: Yeah. One of the things that’s very interesting when you look at corn versus soybeans, though, it’s true for corn to some extent that the July futures is higher than these futures, but it’s not that big a drop off compared to soybeans. And so, there is quite a bit of risk of still holding on to last year’s soybeans. I think that’s the way I would kind of summarize this story.

40:48

James Mintert: Yeah, good point. All right, Michael, you’ve been tracking these input prices pretty carefully. And I know you’ve gotten lots of questions about it.

Michael Langemeier: Yes, this chart is for March 21 to March 22. The latest available information from USDA is March 2022. As we get the new information from April in a couple of weeks, I’ll update this chart. And obviously there’s been a lot of volatility and basically a surge in farm input prices. You know, the PCE deflator off on the far left there, is at 6.6%. You look at that change and well, it looks relatively low. That’s very high inflation, it’s just that some of these farm input prices have just skyrocketed…anhydrous up 145%, potash up 94%, diesel up 76%. That diesel is actually going to go up next month. We’ve seen actually higher diesel prices recently. So that’s actually going to go up. Even the supplies, machinery, buildings materials at +14% to +23%, those are huge increases.

And so, this chart just does a nice job of illustrating the large increases we’ve seen. In most cases farm input prices have increased more than the PCE deflator. And that’s not real surprising because some of farm inputs follow general inflation fairly closely. Things like fertilizers, seed, chemicals do not. They have their own market fundamentals.

James Mintert: So, Michael, whenever I see a big number on a percentage change chart like this, I think it’s always useful to think about what that means. So, if a percentage change in inflation or the price of an input like anhydrous, if it was 100, that means it has doubled. So, at 144.5, that means it’s gone up in price nearly 1.5 times, relative to what it was last year.

42:31

Michael Langemeier: When you look at that year-to-year, you can find periods in that February-March period was actually triple.

James Mintert: Yeah.

Michael Langemeier: This chart is showing more than double.

James Mintert: Yeah.

Michael Langemeier: Let’s look at where inflation might be heading. And to do that, I’m looking at some Federal Reserve Board projections. I’ll comment on what I think about these. But let’s get to the numbers here. The last 12 months of data available for the PCE Price Deflator, that’s the Personal Consumption Expenditure Price Deflator, that’s one common measure of inflation. Another one is the CPI. The CPI tends to run higher than the PCE Price Deflator. And so, if you’ve seen the CPI index in the news, it has been running at eight and a half percent. So, there are various measures of inflation. But this is the one that the Federal Reserve Board talks about. The Federal Reserve Board is expecting inflation to decline relatively rapidly as we move into the end of 2022, as we get into 2023, and 2024 in the longer run.

I think they’re rather optimistic. And so, I think inflation could show some more legs than what they’re showing here. And so, we could see, we could see inflation in that 6% to 7% throughout most of 2022 into 2023. And so, my main point here is there’s a lot of uncertainty related to where inflation is heading. That’s going to create uncertainty in the farm input price market all the way into 23.

James Mintert: I guess the other thing to think about Michael is, if the Fed is right, what does that imply about a recession? To pull inflation back that hard, that quickly, would almost in my opinion anyway, almost guarantee a recession. Yeah. So, I agree with you with respect to their optimism.

Michael Langemeier: One of the reasons we’re talking about this, is inflation is key to farmland, because farmland is a hedge against inflation, but also because of interest rates, obviously. And so, let’s review where interest rates have been recently. Looking at April 22 data, that’s the latest data available. The Federal Funds Rate was only 0.33% The 10-Year Treasury was 2.75%. The 10-Year Treasury is something that we compare to real estate interest rates, whereas the Fed Funds Rate and the Prime Rate are more comparable to farm operating loan rates. The Prime Rate was 3.55%. In early May the Federal Reserve increased the Fed Funds Rate about 0.5% or a half a percent.

 

That gets us up to about 0.8-0.9%. The Fed Funds Rate, the 10-Year Treasury rate increased to over 3% in early May, and the Prime Rate went up to 4%. Based on the news from the Federal Reserve Board, they’re expecting the Prime Rate or the Fed Funds Rate to increase another percentage point, that would add one percent to the Prime Rate, moving that towards 5% if that does happen.

The question that James asked me this morning, we actually added this to the slide, what does this mean for farm operating interest rates? Well, there’s not a direct link between the Prime Rate and the operating interest rates, but they do tend to move together. And so, if we saw a one and a half percent increase in the operating interest rate from April, for example, we would be looking at operating interest rates ranging from 6 to 6.5 percent. That sounds really high, but that’s about where we were pre-COVID. If you look at 2018/2019, the Federal Reserve Bank of Chicago data, the interest rates were right around 5.75 to 6%. So, we’re going back to where we were, pre-COVID. Again, The Federal Reserve Board does not look at forecasting the Prime Rate. Rather, they look at the Fed Funds Rate. And so, we can apply what the increases in Fed Funds Rate, what they might be doing to other interest rates, because this is a fundamental interest rate that people look at from a forecasting standpoint.

They’re expecting that Fed Funds Rate to go up to 1.9%. That would be a 1.5 percent increase in 22. That’s where I’m getting the 6 to 6.5 percent operating interest rate. And then they’re expecting another increase as we move into 23. Longer run they’re expecting that Fed Funds Rate to be 2.4%. And so, if this all materializes, that means, operating interest rate is not heading to 4% any time soon. We’re looking more like 6%, 6.5 percent long run.

 47:03

James Mintert: So, Michael, thinking about your earlier comments about the Fed pulling back inflation, being optimistic in terms of what they expect to do. Let’s assume you’re right, and they’re wrong what does that imply about farm operating interest rates.

Michael Langemeier: The farm operating interest rates, if the inflation is not as high, we’re probably looking at a little bit lower operating interest rates, because usually you’re looking at the real interest rate being positive, obviously. And so, if there’s not as much inflation pressure, there’s not as much pressure for the operating interest rates to be high. And so, if the Fed’s forecasts are right, we’re probably looking more like the 6% or maybe slightly under. If there’s more inflation, then we’re looking at something 6.5 or even higher, if there’s higher inflation.

James Mintert: Yeah. That would be the risk, right? If the Fed has more trouble slowing down the rate of inflation than what they’re projecting, that means they’re going to have to be more aggressive with respect to how they treat their balance sheet, as well as what they do with the Federal Funds Rate. Both of those things would point to even higher interest rates than what we’ve got on the chart so far, right?

Michael Langemeier: Yeah. I just remember from the early ‘80’s how hard it was to reduce inflation. Obviously, we were dealing with higher inflation than what we’re talking about today, but nevertheless, it’s difficult. And so, all I’m saying is it may take a little longer than what the Fed was forecasting to tame inflation, and so obviously a lot of uncertainty.

48:35

Michael Langemeier: I wanted to throw in a chart there, you know, from a historical standpoint, what this increase in Fed Rate means. You know, 1.9% in 22, 2.8% in 23. Obviously, that’s a much different environment than what we’ve seen since the spring of 2020, right after COVID hit. They reduced that Fed Funds rate to almost zero. Now we’re moving into that environment where we’re closer to 18/19, but we’re not going back to where we were in 2007, for example, when we had the major, major crisis in the US economy in 2008. We’re not going back to that 5%, instead we’re going back to that environment that we had in 2018, 2019.

James Mintert: So, Michael you’ve got this chart starting in 2007, and actually if you put another couple of decades on, for example, that chart, it would help clarify really that the period from 2009 to about 16 or 17 or maybe even 18. That’s the anomaly. That’s the unusual part of the chart.

Michael Langemeier: Yes. And really what they were trying to do there in 18/19 they were trying to change the policy that they had from 2009 to 2017, that anomaly. And they were stopped because of COVID. They couldn’t continue that policy, so they backed away from that. You know, the economy tanked and so they dropped that interest rate to close to zero, you know, to try to improve the economy and so I think all they’re doing is they’re going back to the increase in that Fed Funds Rate, you know, slowly but surely.

50:09

James Mintert: Well, they did two things right. One is they pulled back on the federal funds rate. The other thing is they increased their balance sheet pretty substantially.

Michael Langemeier: Yes.

James Mintert: So, there’s two things going on there that were loosening, over that time frame. Pumping a lot of cash into the economy. Now they’re trying to back away from that. And that’s a tricky business, without having a recession hit.

50:29

So. All right. Let’s take a closer look at net farm income, because you’ve been tracking this pretty closely.

Michael Langemeier: Yeah. We don’t need to belabor this slide. I’ve just updated this slide from last month and 22 looks stronger than 21 now. And part of the reason why 21 doesn’t look better than 22 is remember, I’m following a very simple marketing strategy for corn and soybeans here. Half of the corn and soybeans were sold in late 21. And obviously we’ve had rather large increases in prices since the beginning of 22. And so who sold most of their 21 crop in 22, it would be even higher than that $349 per acre on the chart. And so that’s part of the reason why 22 looks better than 21. But it’s just unbelievable to me. I say this every month, but it’s unbelievable to me that 22 looks that good with our very large increases in break-even prices.

James Mintert: And not only does it look good relative to 21, go back in history.

Michael Langemeier: Historically, I think you’d have to go back to 73, 74 to see something that good.

James Mintert: Yeah. Good, you know, you’re $100 above where you were in 2011. But those are big numbers.

Michael Langemeier: And a long run average at $140, that’s not a bad long run average. We’ve had a good run in production agriculture since 2007. That’s economic profit. I don’t have economic profit illustrated on this chart, but those of you that loved Econ 101 remember, economic profit is profit after we’ve accounted for all cash cost and opportunity costs.

We’ve had economic profits since 2007 on average. It’s not huge, but it’s been an economic profit. That’s a very unusual period. And so, I think that’s worth restating.

James Mintert: The other thing you’ve taken a look at, which is always of interest, is the relationship between expected profitability for corn versus soybeans.

Michael Langemeier: And I realize people aren’t going to change what they plant this time of year very easily unless there’s all kinds of planting issues. But it just illustrates how much the market is telling us it wants corn. I mean, we’re looking at a different advantage towards corn that we haven’t seen since 2011. And you remember back in 2010, 2011, 2012, you know corn was the king for a while there. And we’re back in that similar period where the market really wants U.S. producers and producers around the world to plant corn.

James Mintert: Yeah, and obviously that’s been triggered very heavily by what’s taking place in the Black Sea region and Ukraine.

Michael Langemeier: Yeah. It probably added $100 to that 22 chart. Corn look good all spring you know, particularly once we got to February or March, when we started seeing those increases in corn prices even before the Ukraine conflict, but after the Ukraine conflict, that just jumped all the way to, currently we’re at that $200. And so, it added at least $100 per acre advantage towards corn.

James Mintert: And just to refresh our memories, I think the first time you did this chart was either in October or November.

Michael Langemeier: Yeah. And it was pretty much break even.

53:25

James Mintert: Yeah, pretty much a coin toss for corn vs. soybeans.

Michael Langemeier: It was pretty much a coin toss. And it just went from that to, you know, a huge, huge advantage for corn.

James Mintert: Yeah. Well, that wraps up our discussion for this month’s Outlook. Our next Crop Outlook webinar will be on Monday, June 13th. I think the USDA releases the WASDE report on Friday, the 10th of June. So, we’ll have some new information for you then. And of course, there’s going to be lots of new information between now and then with respect to what’s taking place in 22 crop planting and so forth.

So, details for that webinar will be available at our website purdue.edu/commercialag. And of course, we’ll also be doing some podcasts in between so you can tap into those as well. So, with that I want to thank my colleagues, Dr. Michael Langemeier and Dr. Nathan Thompson. And on behalf of the Center for Commercial Agriculture, I’m James Mintert.