The Van Trump Report

FAPRI Outlook Highlights Uncertainty for Global Ag Markets

The University of Missouri Food and Agricultural Policy Institute (FAPRI) just released its Agricultural Markets Outlook. FAPRI uses their models to develop a range of projected market outcomes that consider major sources of uncertainty about future supply and demand conditions. This year’s projections were based on market information in January 2022, which was before Russia’s invasion of Ukraine and further drought-induced declines in South America’s soybean crop. FAPRI says that although some of the assumptions used to determine its baseline have been overtaken by events, it can still be used as a point of reference to evaluate the implications of new market developments or policies. The full report is HERE.

For 2022/23, FAPRI estimates 93.9 million acres of corn, 87.7 million acres of soybeans and 48.4 million acres of wheat. Over the next decade, the group expects acres for major crops to remain fairly steady. In later years, FAPRI notes that corn area could fall towards 90 million acres as current projected prices fall throughout the baseline, which extends out to the 31/32 marketing year.

FAPRI was projecting lower prices for most crops in the 2022/23 marketing year, due in part to record-high input costs. Since then, low-season soybean harvests in South America and the war in Ukraine have pushed up oilseeds and grain prices, at least in the near term, says Pat Westhoff, director of FAPRI. The group believes reduced South American supplies will support U.S. exports and prices well into the 22/23 marketing year. Further, the war in Ukraine has disrupted trade flows of grains and oilseeds from both Ukraine and Russia, creating the potential for higher prices, though FAPRI feels it is premature to offer precise quantitative estimates of the impacts. With that in mind, below are some highlights from FAPRI’s latest outlook:
Crop Variable Expenses: FAPRI defines variable production expenses to be USDA’s operating expenses plus hired labor. This includes seed, fertilizer, fuel, chemicals and other variable inputs, but does not include the cost of land or machinery replacement. For corn, higher fertilizer costs contribute to a combined +19% increase in variable expenses in 2022/23. Over the 2022-31 period, corn variable expenses increase by an average of +2.2% per year.

Relative to corn, soybeans utilize less fertilizer, and per-acre variable production expenses are lower. Soybean market revenues per acre are also lower than for corn, but net returns (market revenue minus variable production costs) are similar, as the crops compete for acres. Projected soybean production expenses also increase by 2.2% per year between 2022 and 2031. In contrast, national average cotton variable expenses per acre are greater relative to market receipts than in the cases of soybeans and corn. Similar to the case of corn, cotton fertilizer expenses jump in 2022/23 by +27%. Projected cotton variable expenses grow by about +2.3% per year between 2022-2031.

Corn: After the low in 2019/20, the continued rebound in ethanol production into 2022/23 coupled with lower-than-historical stock levels have all contributed to the higher 2021/22 prices. Corn ethanol use averages 5.46 billion bushels throughout the baseline. Stocks continue to increase steadily throughout the baseline and prices gradually fall, helping increase exports in 2023/24 and later years. Market returns for corn and soybeans increased sharply in 2020/21 and are expected to again in 2021/22. Returns remain elevated in 2022/23, helping to incentivize more area for both corn and soybeans. Projected market net returns decline in 2022/23 and later years but remain above the average of the last five years. Market net returns are defined as price times yield less variable costs and exclude government payments and crop insurance net indemnities.

Rising demand for distiller’s corn oil as a biomass-based diesel feedstock spurs projected overall corn oil production higher toward 8 billion pounds by MY 2027/28. The expansion in feedstock use also comes at the expense of food and other uses of corn oil. Distillers dried grains with solubles (DDGS) production follows the trajectory of dry mill ethanol production and averages about 41.6 million tons over the projection period. This is slightly below the peak of 2017/18, which came in at 42.1 million tons. Domestic use of DDGS keeps pace with the increases in production as net exports remain roughly constant in the projection period. Projected prices for DDGS rise again in 2021/22 to a recent high of $219 per ton before following a lower path alongside corn. Over the rest of the projection period, DDGS prices average $180 per ton on average.

Soybeans: After seven years with soybean farm prices averaging less than $11 per bushel, the 2021/22 price exceeds $12, and the increase in futures prices has been even more dramatic. Projected price increases in 2022/23 partly can be attributed to increasing domestic demand for soybean oil heading to biofuels. Many firms have announced renewable diesel fuel expansion plans. If even a fraction of the planned capacity is installed and operated, the demand for soybean oil and other fats and oils would surge. This new vegetable oil market force puts upward pressure on prices, reduces U.S. exports and could lead to substantial U.S. imports. At the same time, restricted sunflower oil exports from Ukraine, the world’s leading exporter, cause additional disruptions and price strength.

China’s imports of U.S. soybeans rebounded to record levels in 2020/21. A recovery to China’s pork industry from ASF and the U.S.-China Phase 1 deal both played a role in the increase. The outlook for U.S. soybean exports decline in 2021/22 in part as profitability of China’s pork production hit a temporary snag and softened its soybean crush demand for meal and slowed import demand for U.S. soybeans in the first half of the marketing year. U.S. soybean production increased in 2021 to reach a new record high. At the same time, the large increase in soybean exports in 2020/21 resulted in the second straight year of sharply-reduced ending stocks hitting a 5-year low. Projected ending stocks improve modestly for 2021/22 as exports decline more than the increase in domestic consumption.
Prices for soybeans and soybean oil increase in 2021/22, with the value of soybean oil increasing +12% above the recent 5-year average and maintaining crushing margins. In this period, soybean meal accounted for approximately two-thirds of the value of crushed soybeans, but this declines to average 52% during the projection period as increasing demand for soybean oil heading to biofuel production increases. U.S. soybean oil exports remain modest, as Argentina exports of soybean oil and Asian palm oil exports continue to dominate global vegetable oil trade.

Wheat: Higher wheat area combined with an assumed return to trend yields in 2022/23 leads to a large production increase (+24%) from last year. The lower production in 2021/22 was caused by low yields, which were the lowest since 2015/16. Steady exports and building stocks weigh on prices in the 2022/23 marketing year and later years. Production, exports, and stocks all continue to grow throughout the baseline.

Winter wheat area has increased for the second straight year in 2022, contributing to an increase in total wheat area. Higher wheat prices and lower spring wheat beginning stocks are expected to help drive the higher total wheat area in 2022. For the 2023/24 crop year and later, total wheat area is expected to average 46.6 million acres in this baseline.

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