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A Troubling Omen Chinese Farmers Offered Incentive To Increase Soybean Acreage
DR. AARON SMITH
KNOXVILLE, TENN.
Since the USDA released the Prospective Plantings report on March 29th, commodity prices and the price relationships between commodities have changed dramatically. For reference, the March 29th report estimated: corn acres planted at 88.026 million; soybean acres planted at 88.982 million; cotton acres planted at 13.469 million; and wheat acres planted at 47.339 million (spring wheat – 14.631 million acres). Since the report release, the harvest futures contract for each commodity (corn – December; soybeans – November; cotton – December; and wheat – July) has changed as follows: corn up 9 ½ cents ($4.11 ½ to $4.21); soybeans down 10 ½ cents ($10.47 ¾ to $10.37 ¼); cotton up 2.84 cents (77.73 to 80.57 cents); and wheat up 57 ¾ cents ($4.68 ½ to $5.26 ¼). Without considering other factors, such as planting weather and input costs, this change in relative prices would indicate potential increases for wheat (Northern Plains) and cotton Southern Plains and Southeast) at the expense of soy-beans (or other crops, such as sorghum). Additionally, increased prices could pull more acreage into production, the Prospective Plantings report had principle crop acres planted decreasing 1.158 million acres (319.147 to 317.989 million acres), compared to 2017.
China providing incentives to farmers to increase domestic soybean acreage should be troubling for U.S. soybean producers. The short term implications are likely not substantial, however the long term implications may be profound. In 2017, the USDA estimated China’s soybean harvested acres at 19.4 million acres, average yield at 26.9 bu/acre, and total production at 522 million bushels. This is a drop-in-the-bucket compared to China’s 2017 consumption – estimated at 4.07 billion bushels. Long-term, increased acres (or yield) could offset some of the reliance on U.S./Brazilian soybean imports. For a simple example, an increase to 40 million acres harvested and average yield of 40 bu/acre would result in Chinese domestic production of 1.6 billion bushels – displacing about 1.1 billion bushels of potential soybean export business from the U.S. or South America. Due to Chinese investment in Brazil’s soybean transportation infrastructure and the potential continuance of adversarial trade posturing between the U.S. and China, it seems likely that China will rely more heavily on soybeans from South America (for the near and potentially extended future). Chinese acreage adjustments – increased soybean acres would likely require a reduction in other crops – could open export opportunities for other commodities (wheat, corn, cotton etc.). However, there would be more competition for export business for those commodities from other countries (Canada, Australia, Russia, Ukraine, European Union etc.) to potentially provide supplies to China than soybeans, where global production is essentially limited to three countries – U.S., Brazil, and Argentina.
Corn
Across Tennessee, average corn basis (cash price-nearby futures price) strengthened at Memphis, Northwest, and Lower-middle Tennessee and weakened at Northwest Barge Points and Upper-middle Tennessee. Overall, basis for the week ranged from 20 under to 28 over the July futures contract with an average of 2 over at the end of the week. July 2018 corn futures closed at $4.06, up 8 cents since last Friday. For the week, July 2018 corn futures traded between $3.99 and $4.08. Corn net sales reported by export-ers from April 20-26 were within expectations with net sales of 40.2 million bushels for the 2017/18 marketing year and 1.9 million bushels for the 2018/19 marketing year. Exports for the same time period were down 13 percent compared to last week at 58.0 million bushels. Corn export sales and commitments were 90 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31) compared to a 5-year average of 89 percent. Ethanol production for the week ending April 27 was 1.032 million barrels per day, up 47,000 from the previous week. Ethanol stocks were 22.142 million barrels, up 441,000 barrels. Jul/Sept and Jul/Dec future spreads were 7 and 15 cents, respectively.
The Crop Progress report estimated corn planted at 17 percent compared to 5 percent last week, 32 percent last year, and a 5-year average of 27 percent; and corn emerged at 3 percent compared to 8 percent last year and a 5-year average of 6 percent. In Tennessee, corn planted was estimated at 36 percent compared to 30 percent last week, 63 percent last year, and a 5-year average of 55 percent; and corn emerged at 8 percent compared to 1 percent last week, 37 percent last year, and a 5-year average of 24 percent. In Tennessee, September 2018 corn cash forward contracts averaged $4.03 with a range of $3.88 to $4.40. September 2018 corn futures closed at $4.13, up 8 cents since last Friday. December 2018 corn futures closed at $4.21, up 7 cents since last Friday. Downside price protection could be obtained by purchasing a $4.30 December 2018 Put Option costing 35 cents establishing a $3.95 futures floor.
Soybeans
Average soybean basis strengthened or remained unchanged at Memphis, Northwest Barge Points, Northwest, Lower-middle, and Upper-middle Tennessee. Basis ranged from 51 under to 2 over the July futures contract at elevators and barge points. Average basis at the end of the week was 9 under the July futures contract. July 2018 soybean futures closed at $10.36, down 20 cents since last Friday. For the week, July 2018 soybean futures traded between $10.34 and $10.67. Net sales reported by exporters were within expectations with net sales of 15.3 million bushels for the 2017/18 marketing year and 17.3 million bushels for the 2018/19 marketing year. Exports for the same period were up 55 percent compared to last week at 25.4 million bushels. Soybean export sales and commitments were 97 percent of the USDA estimated total annual exports for the 2017/18 marketing year (September 1 to August 31), compared to a 5-year average of 97 percent. July soybean-to-corn price ratio was 2.55 at the end of the week.
Jul/Aug and Jul/Nov future spreads were 4 and 1 cents, respectively. August 2018 soybean futures closed at $10.40, down 18 cents since last Friday. The Crop Progress report estimated soybeans planted at 5 percent compared to 2 percent last week, 9 percent last year, and a 5-year average of 5 percent. In Tennessee, soybeans planted were estimated at 2 percent compared to 1 percent last week, 6 percent last year, and a 5-year average of 4 percent. In Tennessee, Oct/Nov 2018 soybean cash contracts average $10.28 with a range of $10.08 to $10.51. November 2018 soybean futures closed at $10.37, down 10 cents since last Friday. Downside price protection could be achieved by purchasing a $10.40 November 2018 Put Option which would cost 57 cents and set a $9.83 futures floor. Nov/Dec 2018 soybean-to-corn price ratio was 2.46 at the end of the week.
Cotton
Delta upland cotton spot price quotes for May 3 were 83.50 cents/lb (41-4-34) and 85.25 cents/lb (31-3-35). Adjusted World Price (AWP) increased 0.74 cents to 74.99 cents. July 2018 cotton futures closed at 86.9 cents, up 2.39 cents since last Friday. For the week, July 2018 cotton futures traded between 83.32 and 87.06 cents. Net sales reported by exporters were down from last week with net sales of 189,900 bales for the 2017/18 marketing year and 299,100 bales for the 2018/19 marketing year. Exports for the same period were up 3 percent compared to last week at 432,600 bales. Upland cotton export sales were 114 percent of the USDA estimated total annual exports for the 2017/18 marketing year (August 1 to July 31), compared to a 5-year average of 96 percent. Jul/Oct and Jul/Dec cotton futures spreads were -4.05 cents and -6.33 cents, respectively.
Oct 2018 cotton futures closed at 82.85, up 1.99 cents since last Friday. The Crop Progress report estimated cotton planted at 12 percent compared to 10 percent last week, 14 percent last year, and a 5-year average of 14 percent. In Tennessee, cotton planted was estimated at 1 percent compared to 4 percent last year and a 5-year average of 4 percent. December 2018 cotton futures closed at 80.57, up 1.3 cents since last Friday. Downside price protection could be obtained by purchasing an 81 cent December 2018 Put Option costing 5.16 cents establishing a 75.84 cent futures floor.
In Tennessee, June/July 2018 wheat cash forward contracts ranged from $4.95 to $5.53 for the week. July 2018 wheat futures closed at $5.26, up 28 cents since last Friday. July 2018 wheat futures traded between $5.04 and $5.38 this week. July wheat-to-corn price ratio was 1.30. Wheat net sales reported by exporters were above expectations with net sales of 8.6 million bushels for the 2017/18 marketing year and net sales of 7.7 million bushels for the 2018/19 marketing year. Exports for the week were down 52 percent compared to last week at 10.4 million bushels. Wheat export sales were 94 percent of the USDA estimated total annual exports for the 2017/18 marketing year (June 1 to May 31), compared to a 5-year average of 103 percent. The Crop Progress report estimated winter wheat condition at 33 percent good-to-excellent and 37 percent poor-to-very poor; winter wheat headed at 19 percent compared to 13 percent last week, 41 percent last year, and a 5-year average of 30 percent; and spring wheat planted at 10 percent compared to 3 percent last week, 30 percent last year, and a 5-year average of 36 percent. In Tennessee, winter wheat condition was estimated at 72 percent good-to-excellent and 5 percent poor-to-very poor; winter wheat jointing at 91 percent compared to 89 percent last week, 97 percent last year, and a 5-year average of 90 percent; and winter wheat headed at 29 percent compared to 10 percent last week, 82 percent last year, and a 5-year average of 43 percent. Jul/Sep and Jul/Jul future spreads were 15 cents and 62 cents, respectively. September 2018 wheat futures closed at $5.41, up 26 cents since last Friday. July 2019 wheat futures closed at $5.88, up 21 cents since last Friday. Downside price protection could be obtained by purchasing a $6.00 July 2019 Put Option costing 45 cents establishing a $5.55 futures floor. ∆
DR. AARON SMITH: Assistant Professor, Crop Marketing Specialist, University of Tennessee
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