Déjà vu all over again in the grain market

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Source: John D. Anderson, Deputy Chief Economist, American Farm Bureau Federation

Whether you realized it or not, last Thursday was a pretty big day in the grain market.  On that day, the last day of February, the price discovery period for Corn Belt corn and soybean crop insurance ended.  Now we know for certain the price guarantee that is available on these crops in the key Midwest growing region.  The planting price available on Revenue Protection (RP) insurance for corn this year is $5.65.  The RP planting price on soybeans is $12.87.  These prices are based on closing prices for the CME Group December Corn and November Soybean futures contracts during the month of February.  Interestingly, the price guarantees are awfully close to the $5.68 and $12.55 RP planting prices for corn and soybeans, respectively, in 2012.  Relative prices between the two crops have shifted toward beans but only slightly. 

With time left before planters roll, it is possible that late changes in relative prices could have some impact on planting decisions, but that impact would most likely be minimal.  Crop insurance is used extensively to manage risk on corn and soybeans, especially in the Midwest.  For example, USDA NASS reported 14.2 million acres of corn planted in Iowa in 2012.  According to USDA Risk Management Agency (RMA) summary-of-business data, over 90% of that acreage was insured with some form of federal crop insurance (with about 85% covered by an RP policy).   Given the importance of crop insurance as a risk management tool, price changes after the insurance price discovery period are unlikely to have much influence on planting decisions.

While grain prices remain high from a livestock-industry perspective, farmers are likely a little disappointed with these insurance price guarantees.  December corn traded consistently in the vicinity of $5.90 in January before losing substantial ground in February.  Similarly, November Soybeans trended higher through January, reaching as high as $13.50 before falling along with corn after the February supply/demand update. 

With planning prices for the heart of the corn/soybean region looking very similar to a year ago, can we expect something close to a repeat of last year’s corn plantings?  To recap, last year farmers planted 97.2 million acres of corn (along with 77.2 million acres of soybeans, by the way).  With $5.65 corn and $12.87 soybeans, enterprise budgets will continue to show a substantial net revenue advantage for corn – even factoring in a 10 – 12 percent yield reduction for corn following corn.  Another big year of corn planting seems likely on the basis of that information.  At their recent outlook forum, USDA forecast a slightly lower corn planting figure for 2013: 96.5 million acres.  The slight decline from last year is predicated less on expected profitability than on expectations of a less favorable planting season in 2013.  Recall that in 2012, planting conditions in much of the country were exceptional, with planting beginning early and proceeding to completion with essentially no interruptions.  USDA seems to basically be looking for farmers to make very similar planting decisions to 2012 with slightly less cooperation from Mother Nature during planting. That seems fairly reasonable. 

The small drop in plantings notwithstanding, USDA’s corn production forecast for 2013 is quite optimistic (at least from a corn-user point of view).  Certainly, if weather cooperates, 96.5 million acres is more than adequate to produce an impressive amount of corn.  USDA pegs expected yield at 163.6 bushels per acre using a trend model that incorporates expected summer precipitation and temperature.  That estimate seems quite high considering the last several years of mostly below-trend experience; but it is clearly not an infeasible number – national average yield was 164.7 in 2009.  To bolster their case for the return to “normal”, USDA notes in their outlook summary that

“…fall and winter dryness have little correlation with conditions during the following growing season and eventual yield outcomes.”

Here’s hoping they’re right.

The Markets

Fed cattle prices were higher last week – sharply higher, even.  The 5-area weighted average live steer prices added very close to $5 compared to the prior week.  Wholesale beef prices showed a bit of life as well, with the weekly Choice cutout gaining nearly $3.  The wholesale market actually looked strongest at the end of the week, with the Choice cutout advancing close to $2 from Thursday to Friday.  It will be interesting to see how much of last week’s strength carries forward.  Clearly, there were some short-run issues on the front-burner last week that may have added a substantial risk premium in the market.  First, of course, the sequester deadline and the highly-publicized threat of meat inspection interruptions added to the perception, if not the reality, of heightened short-run risks of supply disruptions in the market.  Second, last week was to some degree a weather-driven market, with severe winter weather disrupting the normal flow of business over much of the country last week.  Calf markets were also influenced by last week’s storms – to the point that week-over-week comparisons probably don’t mean a whole lot.  Through the middle of the country, quite a few sales were cancelled or greatly curtailed; and in the rest of the country, buyer interest was diminished by the disruption in cattle shipping caused by the weather.


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