Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation
USDA released their latest World Agricultural Supply and Demand Estimates (WASDE) update last week. As usual, most of the market’s focus was on the monthly update of grain supply and use tables, particularly corn. On that point, adjustments were fairly minor. In response to slow May planting, USDA dropped projected 2013 corn yield to 156.5 bushels per acre – 1.5 bushels below last month’s estimate. With no change in projected acreage, the effect of the reduced yield was to drop production by 135 million bushels to 14.005 billion, still a massive crop by historic standards. Of course, the question that will continue to circulate in the market over the next couple of weeks is “What will the final planted acreage be?” There was little chance that USDA would revise this month’s acreage estimate in advance of the survey-based June 28 Acreage report, but just about everyone expects that report to revise acreage expectations to some degree. Trade estimates are being formulated now, but it appears that estimates will range from about a million to as much as five or six million acres below the current 97.5 million.
The fairly wide discrepancy in expectations about corn acreage reflects uncertainty over how farmers have responded to significantly delayed planting. It is instructive to consider the options that are available to farmers under the terms of individual crop insurance. Farmers purchasing crop insurance above the catastrophic level of coverage are able to get coverage against prevented planting. That is, they can receive an indemnity if conditions prevent them from being able to plant their crop by the final planting date defined in their policy. They can receive an indemnity, but they don’t have to. Farmers who do not have their crop planted by the final planting date actually have three basic options. First, they can go ahead and plant the crop late. During what is called the late planting period – typically the next 25 days beyond the final planting date – the crop insurance guarantee is reduced by 1% for every day that planting is delayed. Beyond the end of the late planting period the insurance guarantee is the same as the prevented planting payment would be (i.e., 60% of the original crop insurance guarantee). Second, they can plant a different crop after the end of the late planting period. For corn, of course, that second crop would in all likelihood be soybeans. Finally, they can plant nothing (or a cover crop) and receive a full prevented planting indemnity, which generally amounts to 60% of the crop insurance guarantee.
So the question about final corn acreage this year comes down largely to a question about how farmers have evaluated their crop insurance options under delayed planting conditions. That evaluation can be fairly complicated, requiring consideration of prevented planting indemnities, revenue potential of a second crop, and assessment of the yield potential of corn planted well past the optimal date. Other considerations will also affect the final decision. For example, fertilizer or chemical applications may have already been made in anticipation of planting corn. This may limit planting alternatives. The bottom line is that final corn acreage is really difficult to assess this year. The market has two more weeks to wrestle with the question before the Acreage report answers it (or at least provides as definitive an answer as we are going to get for several months).
In the meats section of the WASDE, there was at least one point worth noting. USDA’s estimate of this year’s second quarter beef production was revised up by 240 million pounds (almost 4%) from last month. Third and fourth quarter projections were raised by smaller amounts. The report narrative noted that drought conditions had kept feedlot placements relatively high and also contributed to higher cow slaughter. Cow slaughter figures have certainly been high in the last couple of months. Since about mid-March, beef cow slaughter has run consistently above year ago levels. That statistic is perhaps a bit misleading, though, because before the drought really set in last year, cow slaughter was fairly low. However, cow slaughter since mid-March has been running just about even with the 2009-11 weekly average. Keep in mind that the 2009-11 beef cow slaughter was supported by a cow herd that had not been severely depleted by two years of persistent drought. Thus, as a percentage of the herd, the rate of beef cow slaughter in the second quarter this year has been higher than in 2009-11. So far this year, beef cow slaughter levels continue to look consistent with further herd contraction. Producers may try to offset this aggressive culling of cows with aggressive retention of heifers if pasture/feed/water availability will allow it. In some key parts of the country though, that is unfortunately still a big “if”.
The fed cattle market slipped another $1.50 to $2 in most regions last week. The 5-area weighted average price for the week worked out to $120.78, down just over $2 from the prior week. Trade was slow again last week, with practically no sales volume until Friday. Feeder cattle prices were strong last week, called steady to $3 higher in the National Feeder and Stocker Cattle Summary report. Wholesale beef prices continued to sag last week. The Choice cutout averaged $201.62 for the week last week, down $2.59 from the prior week. Friday’s Choice cutout actually broke below the $200 mark for the first time since May 1, making the May run look like a brief Memorial Day binge. As for competing meats, the pork cutout continued its upward march last week, averaging $100.76 for the week – up by $5.26 from the prior week. Last week marked the first time the pork cutout has broken $100 since about this time a year ago – but note that was the old voluntary price reporting series so the comparison is a bit imprecise.