EXPECT volatility in the soybean and corn markets over the next five years, Pat Westhoff, director of the University of Missouri Food & Agricultural Policy Research Institute (FAPRI), said.
Look for corn prices to drop to $4/bu. and soybean prices to drop to $10/bu., on average, for the next five years, he said. Net farm income is expected to drop 24% in the next year.
Westhoff's comments are part of FAPRI's recent baseline briefing booklet that provide five-year projections for the agriculture and biofuel markets. Westhoff said FAPRI's price projections for the grain markets are "more pessimistic than a year ago" but more optimistic than U.S. Department of Agriculture projections.
Concerns loom about a changing global economy due to unrest in the Ukraine and other parts of the world, he said. Changes in the new farm bill also create "lots and lots of uncertainty."
However, one thing Westhoff is certain about is that overall net farm income will come down from $130.5 billion in 2013 — the highest it has been since the 1970s. Net farm income reached record levels in 2013 in nominal terms and hit the highest level since the 1970s in inflation-corrected real terms, he explained.
U.S. grain production increased 50% from 1993 to 2013, Westhoff said. World production of grains and oilseeds increased sharply in 2013, rebounding from the 2012 U.S. drought. Stocks continued to build as global production exceeded consumption, he added.
Corn prices peaked at $6.89/bu. for the drought-reduced crop harvested in 2012. Prices predicted for 2014-18 average $4.08/bu. Corn prices this year will drop considerably from last year's level and then remain relatively constant through 2018.
"Believe it or not, 2012, a drought year, was the best net return year for corn growers," Westhoff said. For the average U.S. producer, high prices and crop insurance indemnities offset the lower yields.
Westhoff projected that there will be less corn produced this year as farmers shift corn acres to soybeans. Corn acres this year are expected to drop by 4.1 million to 91.3 million acres planted.
More yield per acre and more beginning stocks will continue to push corn prices down in 2014.
Soybean prices also took a hit. Peaking at $14.40/bu. in 2012-13, soybean prices will drop to an average of $9.76 for 2014-18. Soybean acreage is expected to increase by 2.2 million acres to 78.7 million.
Lower prices and returns could slightly reduce the total amount of land planted to corn, soybeans and other crops in 2014. However, adverse weather kept farmers from planting some acres in 2013, so if conditions are more favorable this spring, that could push acreage totals higher.
The good news is that input costs may increase only moderately.
The effect of the new farm bill remains unknown, Westhoff said. Crop insurance payments become an important part of the program. Since crop values have declined, the budgetary cost may be less. Taxpayers subsidize about 62% of the cost of crop insurance premiums.
Unlike the previous direct payment program that made constant annual payments, new farm bill commodity programs may make no payments in some years and very large payments in other years.
Net farm income in 2014 is projected to decline by more than 24% ($30 billion) from 2013 as sharply lower crop prices and reduced government payments offset the impact of strong cattle and milk prices and a slight reduction in production costs.
The National Oceanic & Atmospheric Administration (NOAA) recently issued an El Nino watch, which is positive news for states battling drought. Unfortunately, there is only a 50% chance right now.
According to the statement, a neutral El Nino "is expected to continue through the Northern Hemisphere during spring 2014, with about a 50% chance of El Nino developing during the summer or fall."
According to NOAA's "Spring Outlook" report, the past winter will influence the upcoming season.
"A cold and snowy winter in the Plains and Midwest has raised the potential for moderate flooding," the report notes. "Deeper frozen soil and snow cover means there is more water available for spring runoff than normal."
NOAA said California, on the other hand, is coming off its warmest and third-driest winter in 120 years. More than two-thirds of the state is in extreme or exceptional drought, with some of the most agriculturally productive land at the epicenter of the drought. NOAA reported that the drought conditions extend into Nevada as well (Map).
"The Pacific Northwest, Southwest and southern and central Great Plains are also experiencing severe drought conditions, which were exacerbated by the dry winter," the report adds.
Looking ahead, NOAA said it is likely that the drought will continue across the areas currently experiencing drought conditions. It added that drought pockets may continue to develop in the Southwest and southern Texas. The report did suggest that parts of the Pacific Northwest and Midwest may improve and, in some cases, be completely drought free.
The basis was supporting the soybean market last week, according to Arlan Suderman, senior market analyst for Water Street Solutions.
As demand typically shifts to South America at this time of year, basis levels will fall. This year, Suderman said the basis is holding particularly at export terminals because the U.S. has continued to see export demand from China and other countries. The U.S. soybean supply was tightening up because of ongoing export sales and less farmer selling.
While Suderman thought South America would have enough new-crop soybeans to get the markets through to the fall U.S. harvest, he said those numbers could keep dropping. With China continuing to take shipments from the U.S., the South American harvest has become increasingly crucial to the future soybean supply.
"The trade is starting to believe that supplies are much tighter than previously assumed," Suderman said.
Bryce Knorr, senior editor for Farm Futures, said it was rumored last week that China was trying to resell 11-13 million bu. it had booked from Brazil to the U.S. This helped prices test resistance at the steep 2014 support line broken the prior week.
"Demand for fresh supplies in China continues to ratchet lower, because processor crush margins are under pressure as disease trims poultry production," Knorr noted.
Rice Dairy analyst Jerry Gidel suggested that the ongoing old-crop supply tightness will likely continue to support the soybean complex until 2014 plantings are completed.
Nearby soybean prices settled at $13.9175/bu. last Monday but continued to climb during the week and closed 42 cents higher on Thursday at $14.3375/bu.
Producers continued to sell corn, so there was not as much strength in the basis. Exports weren't as robust as they had been; however, domestic demand remained strong into last week. This may provide May corn futures with their highest trade of the past four sessions after being mixed and closing positive last Wednesday.
Nearby corn prices settled at $4.79/bu. last Monday, and while the market saw modest gains throughout the week, May corn futures closed lower last Thursday at $4.785/bu.
Tension between the Ukraine and Russia continued last week after the Crimean Peninsula voted to join Russia, and Russia approved the annexation. President Barack Obama announced a second series of sanctions last Thursday after the first sanctions failed to make any impact on Russia's actions.
Suderman suggested that the situation may soon become a military conflict after shots were fired last week when Ukrainian troops and families prepared to leave and Russian troops continued to advance throughout the region.
Knorr said last week the financial markets felt the effects of events from the U.S. to Ukraine, driving markets lower in Asia and Europe after losses on Wall Street.
The Federal Reserve issued its latest statement on monetary policy last week, which sent stocks tumbling after it was suggested that short-term interest rates could begin rising next year.