Searching for a price boost
The crop markets basically treaded water throughout the month of May. After four months of steadily eroding prices, traders seemed to find floors for the corn and soybean markets. While the coronavirus stands as the greatest reason for the price retreat, several other factors joined it to bring prices where they are today. Trade and tariff issues continue to dog the agricultural markets. Global oil production has exceeded global needs for most of 2020. And we had a great start to the 2020 growing season, leading to concerns about another set of large crops coming in this fall. The challenges are many and they continue, but now is also the time to look for opportunities and explore where rebounds can occur.
In the World Agricultural Supply and Demand Estimates (WASDE) report released in May, USDA outlined their projections for the 2020 marketing year. Those projections show 2020 as another rough year for farm finances, with average prices for corn and soybeans retreating from the levels held over the past couple of years. But the projections also show a rebuild in crop usage from the damage inflicted over the several months from COVID-19 and various other issues.
For corn, the biggest challenge is just the sheer size of the potential crop. In the March planting intentions survey, farmers nationwide indicated that they planned on planting 97 million acres to corn. That would be the most area planted to corn since 2012. With the rapid pace of planting this spring, the acreage target seems achievable and the likelihood of trend-line yields has increased. With USDA’s trend yield at 178.5 bushels per acre, corn production could reach 16 billion bushels, besting the 2016 record by nearly 850 million bushels.
Combine that production with the two billion bushels expected to be in storage and you’ve got over 18 billion bushels of corn to use during the 2020/21 marketing year. But corn usage is also projected to reach record levels for 2020. The problem is it only beats the previous record by 1 million bushels. The grey box in Table 1 highlights corn usage. The impacts of the trade disputes and the coronavirus have knocked out nearly a billion bushels of corn usage. While corn feed usage has ramped up by roughly 400 million bushels (mainly to fill in for the disappearance of distillers grains from the marketplace earlier this year), corn usage for ethanol and exports has shrunk by nearly 1.4 billion bushels. Both of these sectors of corn demand share some common obstacles. The strong value of the US dollar and the ever-changing array of tariff settings worldwide has hurt export potential for corn and ethanol. And the coronavirus pandemic and the myriad of government restrictions based on business and travel have altered typical consumer patterns and trade flows.
However, USDA projects both sectors will rebound for the 2020 crop. As Table 1 shows, corn usage for ethanol is projected to increase by 250 million bushels. Meanwhile, corn exports are expected to rise by 375 million bushels. But for the corn market to find some upward momentum in prices, we will need to see even larger gains in both sectors. Both sectors hit their records with the 2017 crop, with ethanol consuming 5.6 billion bushels of corn and the international markets grabbing 2.4 billion bushels. The lower projected corn prices do support additional corn usage in both areas. But the area I’ll focus on the most will be ethanol, as it has the most room to expand.
Between the global oil supply glut and the severe drop in travel due to the coronavirus, the ethanol industry hit a brick wall this spring. As Figure 1 displays, corn usage for ethanol had been fairly steady for the past couple of years, going through 105-110 million bushels per week. That pace continued into 2020, until the “stay at home” and “shelter in place” orders rapidly spread across the US. With gasoline usage in the US dropping to levels not seen the late 1960’s, ethanol production nose- dived. Within a three week stretch, ethanol plants reduced production by roughly 50%. Several plants shutdown, while the remaining plants reduced output significantly.
But even with the drastic cuts in production, ethanol stocks continued to rise (Figure 2), the falloff in fuel usage was just that great. Mid-April was the worst period for the industry as stocks ballooned to 1.15 billion gallons, even as production dropped.
However, the production restrictions did finally catch up to the falling demand. By the end of April, ethanol stocks were declining. As the calendar turned to May and many states began to ease coronavirus restrictions, fuel usage and ethanol usage rebounded somewhat. That has driven ethanol back to more normal levels and allowed some of the ethanol plants to increase production. The question for the 2020 marketing year is “Can ethanol production return to that consistent 105-110 million bushel range of corn usage each week?” If so, then we could see USDA boost the ethanol number for 2020.
Shifting gears to soybeans, the supply challenges are not as great, but they may be building. In March, farmers indicated they would plant 83.5 million acres to soybeans (Table 2). With the quick planting this spring, there’s a fair amount of chatter that the number could be higher in the June planting report. But even with 83.5 million acres, we are still looking at the potential for a 4 billion bushel soybean crop, the fourth one out of the last five years. The planting problems last year helped hold production in check, as exports fell, limiting ending stocks. So total soybean supplies are high, but are not projected at record levels.
On the usage side, domestic crush has been slowly and steadily building over the past few years. USDA continues that trend. So the wildcard, as has been the case for the last decade, is export demand. The trade dispute with China led to a significant fall in exports for the 2018 crop. The hangover from that dispute and the coronavirus have widened that export gap a bit further for the 2019 crop. So the key to any chance at price recovery for the 2020 crop will be in an export rebound. USDA does project one, with exports expanding by 375 million bushels. But that still puts us around 100 million bushels below the export levels in 2016 and 2017, before the trade tensions.
And here, just like with ethanol and for corn, we are seeing signs of a rebound. But the question is also the same, will the rebound take us back to where we were before. Soybean export sales for the 2019 crop are still well below the levels we had for 2018, but the gap has been shrinking. A few weeks ago, the export gap was 250 million bushels. Now, it’s down to 150 million bushels. And within the last couple of weeks, we are beginning to see increased action in advance sales for the 2020 crop. As Figure 3 conveys, while 2020 sales are still well below 2018 levels, they have now exceeded 2019 levels. Of course, China is the big market to watch here. While there has been a lot of market concentration on "did China buy soybeans today or not", the data show China has been slowly increasing their soybean purchases for both the 2019 and 2020 crops. Currently, 2019 sales to China are running nearly 10% above the pace we had for the 2018 crop. And for the 2020 crop, China represents just over half of the advance sales you see in Figure 3. If China is to even come close to meeting the targets in the Phase 1 trade deal signed early this year, then we will see soybean sales jump in the latter half of the year.
The potential for better prices for both corn and soybeans is there to be found. But it depends on a couple of key sectors returning to pre-COVID-19 and pre-trade war levels. Both sectors are now moving in the right direction, but both also have a long way to go to get back to where they once were. The weekly updates on ethanol production and export sales have become even more critical to watch this summer, as they’ll outline the prospects for better prices or not.
Chad E. Hart, extension economist, 515-294-9911, email@example.com