Commodity Situation and Outlook for Ohio - May, 2018

Corn

Ben Brown, brown.6888@osu.edu

Agriculture is an uncertain industry, where the only certainty is a guarantee that there will indeed be uncertainty and risk. Already in 2018, frequent rains have delayed spring planting and increased the risk of disease and pest pressure. International trade disputes have increased the volatility in grain and livestock markets and international oil supply forecasts have led to unexpected increases in farm input costs. While the drivers of risk fall outside the hands of producers, individuals respond, react, and make decisions based on the best information available. This report summarizes several of the commodities important to Ohio producers and provides an outlook of supply and demand given current policies and expectations. Unless otherwise specified, the volatility caused by the renegotiation of the North American Free Trade Agreement (NAFTA) and the trade dispute with China are not considered due to their highly fluid situations at the time this article went to press. Supply and demand estimates for the 2018 Marketing Year (MY 2018) are published by the World Agricultural Outlook Board while Ohio inventory estimates are compiled by the National Agricultural Statistics Service. Understanding the balance sheet for many of Ohio’s commodities is important when making short and long-term decisions affecting farming and ranching operations.

Cattle Expansion Enters Fifth Year

The U.S. cattle herd on January 1, 2018 was larger than the count a year earlier, making 2017 the fifth consecutive year of herd expansion. Expansions in beef typically last four to six years. The U.S. appears poised for the possibility of at least one more expansion year in 2018 that would push beef production increases into the early part of the next decade. With constant demand for beef products, increases in beef production put downward pressure on the price received by producers. A cow that would have brought $2,000 in January 2015 brought about $1,200 in April 2018. As beef becomes cheaper, it starts to compete with other goods like pork for market share.

The inventory for all cattle including calves in the U.S. on January 1, 2018 was at 94.4 million head, up 0.7% from the previous year. Ohio’s inventory sits at 1.2 million head, a 0.8% increase. The average lifespan for a beef cow is 8 to 12 years meaning that 9.4 million replacement heifers are needed to maintain the current herd size. At almost 11 million replacement heifers at the start of the year, it is likely that 2018 will also be an expansion year in the national herd. In Ohio, dairy replacement heifers were up 0.8%, however it is likely that these heifers will leave Ohio for larger operations in Texas and Idaho where costs of production are lower. Cattle on feed decreases in Ohio by 6.7% while the national average increased 7.2%. Lower feed costs in Oklahoma, Kansas and Nebraska pull calves off farms earlier and out of Ohio. The outlook for cattle appears slight bearish as higher expected feed costs and dry weather in the southwest will move cattle into the market early. The number of cows and replacement heifers sold for slaughter will be important in determining if a herd expansion happens again in 2018.

Low to Negative Margins Drive Hog Industry

Rallies in grain markets, especially soybean meal, have increased feed costs for hog producers that did not lock in contracts when prices were low. Higher input costs along with a decline in pork prices erased many of the margins hog producers experienced in the first quarter of 2018, but prices rebounded in May. Large increases in hog production in Missouri, Ohio, Oklahoma, and Nebraska have contributed to the low prices. The national average for fed hog prices was $52.50 in January but fell to $45.30 by April. Prices have rallied in recent weeks, but are still below 2017 levels during this similar period. Prices reached a peak in July of 2017 at $67.30. Markets for the nearby July futures contract signal horizontal movements in price. Current prices would suggest a per head return of $2-$5 as a national average for 2018. With higher feed costs expected in 2019, negative margins could return.

Exports to international markets will be a large factor in the hog outlook. Exports of U.S. pork were lowered 35 million pounds in the May WASDE report on concerns around Chinese demand. With the implementation of a 25% tariff on U.S. pork, exports to China have lagged. Increased exports to emerging markets like South Korea and the Dominican Republic will be important in offsetting decreases to China and increased domestic supply. Exports make up roughly 22% of U.S. pork production with the largest markets being Mexico and Japan. However, U.S. pork exports to Mexico decreased in the first quarter of 2018, substituted by large amounts of turkey imports. The USDA forecasts even higher pork production in 2018. The key question will be levels of domestic and international consumption of pork with competition from potential substitutes like beef and poultry. If China backs away from U.S. pork, negative margins could return as early as next month.

Corn Acreage Continues to Decline

Three supply shocks have increased corn prices and brightened the outlook for corn producers. A drought in South America, reducing both the Argentina and Brazilian corn crop, gave corn prices their first positive outlook. Then in March, U.S. producers indicated that they were going to plant 2 million fewer acres in 2018 than in 2017. Even with the reduction in acres, a trend corn yield would make the 2018 crop the fourth largest crop recorded. Frequent rains throughout the central and eastern regions of the Corn Belt have delayed spring plantings and increased prices. With three supply side adjustment to annual production, the corn market has been bullish with December 2018 futures contracts trading well above $4. Dealing with large supplies will continue to be a focus for grain merchandisers. Total supply in 2018 is expected to be 4% lower in 2018 than 2017.

Demand for corn (represented by the shaded area) continues to be strong. Feed and residual is expected slightly higher throughout the remainder of the year but lower in the next marketing year on the adjustments to the national herd size. If the national herd size continues to grow, this number will also increase. Ethanol continues to show growth and is up 1% from 2017 and up 8% since 2014. Changes in Chinese ethanol policy will drive international ethanol demand in the coming years. China announced in 2017 that it would mandate that all fuel for vehicles contain 10% ethanol. Their policy was three fold in that they wanted to reduce their large supplies of domestic stock, clean up air pollution, and create jobs. Whether China imports more raw corn or ethanol, the shock is expected to increase demand for corn on the world market. Only 2% of corn production is exported to China as raw exports. It is possible that it will take China a few years to increase their imports of U.S. corn. Even with the positive signals for demand for U.S. corn, total use is reduced in 2018 mostly a result of lower exports.

The outlook for corn looks favorable to producers as both supply and demand shocks suggest upward pressure on prices moving forward. Lower ending stocks for U.S. corn will increase the magnitude of price shifts due to weather-related events in the coming months. The stocks to use ratio of 19% is lower than 25% in 2017, but above the five-year average of 16%. The U.S. corn crop is mostly planted, and weather will be the largest variable driving U.S. supply through the summer months. December futures prices are currently above cost of production for most producers and potentially a strong option for those that have on-farm storage.

Soybean Price will rely on Demand

For the last few years, soybeans have provided a per acre return to producers greater than corn. Thus, acreage shifts to soybeans have ensued across the Midwest. The ratio of new crop soybean to corn prices from November 2017 to April 2018 traded at 2.5:1. Historically a ratio of 2.5:1 or greater signaled that acres would continue to move from corn to soybeans and that the expectation was for more soybean acres in 2018. However, in March, producers signaled that they intended to plant 1 million fewer acres than 2017. With a trend yield of 48.5 bushels/acre, the expected soybean crop would be the third largest crop on record behind the record set in 2017 and the third straight year over 4 billion bushels. Weather will be the largest factor over the summer months to the final production value, but expectations are for another large crop. The carry-over from 2017 was also high, creating an expectation that the 2018 supply will be 2.5% higher than a year ago. 

Demand for soybeans and soybean products continues to be strong. Increases in livestock numbers, especially pigs, has driven demand for soybean meal. Increases in crude oil prices could encourage use of biodiesel and expand soybean crush further. Chinese per capita income is strengthening and the demand for pork continues to grow internationally. Exports of U.S. soybeans to china have tripled in the last decade, but since 2012, Brazil has been the largest supplier of soybeans to China. Nearly 60% of U.S. soybean exports head to China, and the strength of that market will continue to influence U.S. soybean demand. Exports are projected higher in 2018, but Chinese tariffs would shrink Chinese demand of U.S. soybeans. The drought in South American weakened Chinese leverage over the U.S, as production in South America finished below expectations. Overall, the growth in soybean use appears strong at a 5.5% increase next year, but international trade and weather provide large uncertainties looking forward.

Soybean prices in 2018 are expected to be similar to 2017 with the potential for a rally in late June, which would set up an opportunity for producers to contract grain. Trade uncertainty in the Chinese market could change the outlook for soybean profitability for both old and new crop soybeans. Weekly sales numbers will be an important indicator of the ending U.S. export value. Access the entire report, with information on poultry, eggs and wheat: https://tinyurl.com/yb5nkw3l