A look at USDA’s long-range forecast
A lot of new information and forecasts have become available in the last few weeks. USDA has updated forecasts of crop sector supply and demand for 2012/13 and forecasts for farm income. The semi-annual Cattle inventory report was also released, showing another decline in the sector which will influence livestock markets for at least the next year or two. There was a big report from USDA analyzing the outlook for Kazakhstan, Russia and Ukraine with forecasts out through 2021. The Congressional Budget Office released their initial 10 year baseline report for agriculture and USDA released their projections through 2022. These data and forecasts provide some interesting perspectives on the future for agriculture over the next several years.
USDA’s Agricultural Projections Through 2023
We start this discussion with some of the highlights from USDA’s annual 10 year forecast. Every year USDA releases a 10-year forecast ahead of their annual Outlook Conference that takes place in late February. For the outlook conference USDA may update some of the near-term numbers, but the longer term outlook generally remains as the background for agriculture. For this analysis, we look at both the near term and the long term projections included in the report.
USDA is forecasting a modest decline in corn acreage for 2013. Corn acreage falls to 96 million acres down a little more than 1 million acres from the actual level reported for 2012. U.S. corn acreage has increased pretty dramatically in the last decade as ethanol production increased, significantly boosting demand for corn. A decade ago, corn acreage typically totaled less than 80 million acres compared to the current 96 million to 97 million acres. It takes about 25 million acres to produce the additional 4 billion bushels of corn now used for ethanol production. That accounts for the change in corn acreage over the last decade.
But the expansion in the ethanol industry is probably mostly behind us. Production of ethanol has been declining recently but the total for 2012 was around 13.3 billion gallons. The mandate tops out at 15 billion gallons in 2015. That suggests an increase in corn use of about 630 million gallons over the next 3 years. In fact, USDA’s long term forecast has the amount of corn used for ethanol below 5 billion bushels until the 2019/20 season, a level already exceeded in 2010/11 and 2011/12. Unless there is another good source of demand growth, further increase in corn acreage are unlikely.
USDA expects big increases in corn exports. The most likely place for stronger corn demand is in the export market. U.S. corn exports are expected to drop to their lowest level since the early 1970s this year and a big rebound in exports is essential to even maintaining acreage near current levels. USDA’s forecast has corn exports nearly doubling next year to 1.7 billion bushels, and reaching 2.0 billion by 2015/16. Exports continue to rise to 2.5 billion bushels by the end of the forecast period. China becomes a huge corn importer, with imports rising to nearly 20 million tonnes (770 million bushels) by 2022/23. That accounts for about half of the growth in total world trade. China’s corn demand has increased dramatically in the last several years rising by about 75 million tonnes over the last decade. However, China’s production has increased by nearly the same amount and China remains a very small corn importer. The key uncertainty about China’s corn deficit, and indirectly U.S. corn exports, is how much China can increase corn acreage. China added 10 million hectares of corn (24 million acres) during the last decade. If the acreage increase is similar for the 2012 to 2022 period, China may not need to import almost 20 million tonnes of corn and U.S. exports may not rise to 2.5 billion bushels.
The U.S. corn market also faces serious competitive challenges from Argentina, Ukraine and Brazil. These three countries have added about 17 million acres of corn in the last decade, and all three have room for further expansion. According to the USDA’s long range projections, Brazil’s corn exports increase by about 3 million tonnes over the next decade, compared to a 15 million tonnes increase in the last decade and exports from the former Soviet Union rise by 7 million tonnes, versus nearly 15 million tonnes in the last decade. The U.S. takes market share from these competitors, getting back to 46 percent of the world total by 2022/23.
We may have too much corn acreage. At least with current demand levels, 96 million acres of corn may be too much. USDA has demand totaling 13 billion bushels for 2013/14 and 13.5 billion for 2014/15. With trend yields near 165 bushels per acre, we only need about 80.5 million harvested acres to satisfy demand, which calculates to about 87 million planted acres. So if yields are near trend in 2013, USDA has ending stocks rising to more than 2 billion bushels next year, which pushes prices down to $5.40 per bushel. With the lower prices, farmers cut corn acreage to 90 million acres in 2014, which still isn’t a big enough cut and stocks rise to 2.23 billion bushels, pushing prices down to $4.10. Corn acreage then falls to 86 million acres in 2015 in the USDA forecast, finally bringing production in line with use.
Demand grows a little faster than yields. Total U.S. corn demand rises at a rate of about 1.8 percent per year, according to USDA’s assumptions, reaching 15.3 billion bushels by the end of the forecast. On the other side of the ledger, the corn trend yield goes up by about 1 percent per year. That means that over time, corn acreage needs to rise above the 86 million acres forecast for 2015. Corn acreage gradually increases in the USDA long term forecast back to 92 million acres by the 2022/23 crop year. Stocks gradually decline to around 1.5 billion bushels and prices recover to between $4.50 and $5 per bushel.
Our analysis shows a little stronger increase in trend yields, at about 1.25 percent per year, which means we would need less acreage to satisfy the demand level forecast by USDA.
Soybean production and use recover in 2013/14. USDA also has U.S. soybean acreage declining this year, down more than 1 million acres from the 2012 level. Demand in 2013/14 rebounds back to 3.3 billion bushels, similar to the levels in 2009/10 and 2010/11. The rebound is fueled by a 100 million bushel increase in crush and a 150 million bushel increase in exports. With a trend yield of 44.4 bushels per acre, production and consumption are fairly close, but ending stocks do increase by about 40 million bushels next season. Even so stocks are still tight, below the 200 million bushel benchmark.
Soybean demand growth is pretty slow. Over the 10 year USDA forecast, demand for U.S. soybeans rises at a pretty slow pace. By 2022/23, soybean exports are put at 1.6 billion bushels, up less than 100 million bushels from the USDA forecast for 2013/14. Crush increases by a little more than 1 percent per year, getting to nearly 1.9 billion bushels at the end of the forecast, compared to 1.66 billion bushels next season. The pace of yield growth and demand growth nearly match and total soybean acreage stays around 75 million to 76 million acres throughout the forecast period.
China’s imports exceed 100 million tonnes by 2022/23. The pace of production expansion in South America and the pace of demand growth, mostly in China, will influence the outlook for U.S. soybean exports. USDA forecasts imports by China to roar ahead over the next decade, rising from about 63 million tonnes now to 103 million tonnes at the end of the forecast period. That increase accounts for nearly all of the increase in world trade that goes from 100 million tonnes to 144 million. The outlook for the world soybean market will be dramatically different if China’s imports don’t increase quite as much. An economic slowdown or a real estate market meltdown could cause the outlook to be less robust.
Brazil and Argentina capture most of the market growth. In contrast to the outlook for corn, the U.S. loses soybean market share to our primary competitors. Brazil makes the biggest gain in both exports and market share. Exports from Brazil increase by about 26 million tonnes over the decade (almost 1 billion bushels) while U.S. exports increase by about 1/10th as much. Exports from Argentina increase by a little more than 5 million tonnes (between 150 million and 200 million bushels). The U.S. share of world trade falls from near 40 percent to about 30 percent by 2022/23.
USDA predicts a 26 percent increase in the amount of soybean oil used for biodiesel. Food, seed and other domestic use holds about steady with current levels, suggesting a decline in per capita consumption. Soybean meal prices fall from around $470 per ton this year to $265 in mid-forecast, rising back to $283 in 2022/23. In contrast, soybean oil prices hold between 50 cents and 54 cents per pound throughout the forecast period.
U.S. soybean prices fall next year, according to the USDA long term forecast to $11.35 per bushel. Then, with ending stocks remaining around the 200 million bushel level through the rest of the forecast, prices stabilize mostly between $10 and $11 per bushel. The soybean to corn price ratio moves higher which could convince some farmers to plant more soybeans. However, there is no significant increase in acreage of either crop.
Exports are the key to the wheat sector outlook. U.S. wheat acreage has been generally trending down for decades. The key to the wheat sector outlook is exports, since exports account for about half of total demand and domestic use is generally very stable, rising at less than 1 percent per year. U.S. wheat exports decline from current levels, during the first half of the forecast and then stabilize at 940 million bushels. Exports in 2012/13 are currently put at 1.05 billion bushels. The trend USDA uses for wheat yields rises at about 0.7 percent per year so yield growth generally satisfies the growth in domestic food use. With exports forecast to decline, we probably have too many acres currently planted to wheat. USDA puts the 2013 wheat acreage at 57.5 million acres, up from 55.7 million in 2012.
Foreign competition is increasing significantly. The biggest problem for the U.S. wheat sector is the increasing competition, primarily from the countries of the former Soviet Union. Exports from Russia are forecast to increase by 10 million tonnes during the forecast (about 350 million bushels), exports from Ukraine rise by about 4.5 million tonnes and exports from other Former Soviet Union countries, primarily Kazakhstan, rise by about 4 million tonnes. With world trade increasing by a total of about 24 million tonnes, the Black Sea region picks up most of the market growth. According to the USDA forecast exports from the EU increase by about 7 million tonnes, after being essentially flat during the last 10 years. India stops exporting and becomes basically self-sufficient in wheat.
We probably have too much wheat acreage. With U.S. wheat demand coming in between 2.15 and 2.2 billion bushels per year, wheat acreage needs to decline to around 50 million acres for production and demand to balance. The USDA forecast has stocks holding mostly around 750 million bushels. U.S. wheat prices fall to between $5.50 and $6.00 per bushel for most of the forecast period. So we have corn, soybean and wheat acreage all declining over the next couple of years and staying low through the rest of the decade.
USDA sees a bigger CRP program. The size of the Conservation Reserve program declined by 2.5 million acres at the end of fiscal 2012 and most people expect further declines in the coming years. A lot of the land currently enrolled in the CRP was planted to wheat before entering the program, and further shrinkage of the CRP would make even more land available for wheat production. The USDA forecast shows the Conservation Reserve Program actually increasing in size from 2013 to 2022. At the end of the USDA’s forecast the CRP totals nearly 32 million acres. Both the Senate and the House farm bill proposals put forward in 2012 would have capped the CRP at 25 million acres. The policy climate would have to change before an increasing CRP would seem plausible.
Net cash farm income declines from recent highs. USDA updated the forecast for 2012 and 2013 farm income this week, but the new figures are not part of the long-range projections. The new data shows slightly higher next cash farm income for 2012 and 2013 than indicated in the long term forecast, but not different enough to have any significant impact. According to the USDA’s long range forecast, the peak in net cash farm income is behind us. Net cash farm income was about $135 billion in 2012, but that measure declines to $103 billion by 2017. Then there is a modest rebound in net cash income to $105.4 billion by 2022.
Surprisingly cash expenses also decline early in USDA’s forecast. Cash expenses are put at about $316 billion in 2013, falling by about $20 billion to $297 billion in 2015. Then expenses turn higher reaching $346 billion at the end of the period. Crop cash receipts decline early in the forecast, then recover and end about where they are now. Livestock cash receipts increase from about $170 billion in 2012 to $195 billion in 2022. While we are starting at a very high level, the USDA forecast calls for some significant declines in real net income over the next decade.
The CBO Baseline Forecasts from USDA and CBO are generally similar. The Congressional Budget Office (CBO) released their 10-year baseline last week. Overall, the USDA long range forecast and the CBO baseline are similar. The following table shows some of the key forecast variables from the two government reports.