CHICAGO (Reuters) - The landscape of U.S. corn and soybeans will be changing both literally and figuratively over the next decade, but corn will be facing an uphill battle.
On Tuesday, the U.S. Department of Agriculture released key tables from its annual long-term projections report. The data gives market participants a starting point as to what a “business-as-usual” scenario may look like for the agriculture sector over the next decade.
The supply and demand tables for U.S. corn and soybeans in particular grabbed the market’s attention this time around. The United States’ two primary export crops are both in high supply at the moment, but changes in profitability have prompted many analysts to expect acreage to shift going forward.
The projections take into account things such as macroeconomic conditions, domestic and international policies, farm legislation and growth rates of U.S. productivity. They also operate under the assumptions of normal weather and that no significant supply or demand shocks are likely in markets either at home or abroad.
Although the full report will not be released until February, the agency uses its November estimates for world agricultural supply and demand as the baseline data for the projections while the macroeconomic assumptions are prepared in October.
Of course it is very unlikely that a whole 10 years could pass without some sort of pressure, if not a huge shock, to at least one agriculture market. With protein still in high demand around the world, the soybean outlook is somewhat positive regardless.
But without some sort of shakeup in the corn market, the corn bull could quickly become an endangered species.
SOY EDGES CORN
One of the most sought-after items in the dataset was the split between corn and soybean acreage and how it would shape out for 2017 and beyond. USDA’s figures were generally in line with what many market analysts have been thinking.
USDA projects that soybean acreage will hit a record-high 85.5 million acres in 2017, but corn area will slide 5 percent to 90 million acres. Corn will slowly lose ground to soybeans in the coming years and by 2026 the split will be the second narrowest in history with the yellow grain holding a slight edge at 50.3 percent (reut.rs/2fOa8ej) (reut.rs/2fO1xIE).
The ratio of November soybeans to December corn in the Chicago futures market has been a key point of interest surrounding the acreage discussion since April when the ratio pushed over 2.5, the level above which farmers tend to favor planting soybeans over corn.
The November 2016 soybean contract is now expired, but the active ratio finished at the second-highest level in at least a decade behind 2013’s finish above 3.0. It was probably no surprise that soybean acreage rose by more than 6 million acres in 2014 (reut.rs/2gtRW87).
That comparison might render the expected year-on-year increase of 1.8 million acres too modest, particularly if any issues arise with the current soybean crop in South America, the United States’ No. 1 competitor in the oilseed’s trade.
The world’s increasing appetite for soybeans may also help boost the soybean acreage even further next year and in the coming years, but the extremely optimistic outlook for soybean trade going forward will help keep the carryout in check.
USDA has predicted a similar yearly rate of increase to U.S. soybean exports ever since 2010, but the agency's new projections bump up last year’s numbers by 12 percent. Judging by the past predictions, USDA has had a tendency to undershoot soybean shipments (reut.rs/2gGtmjA).
CORN OUTLOOK DREARY
Despite the downward trajectory of planted corn acreage, baseline corn yield is expected to increase nearly 11 percent between 2017 and 2026 and production will steadily increase. That is compared to 9 percent for soybeans and 8 percent for wheat, the No. 3 U.S. crop, over the same time frame.
By 2026/27, USDA has corn yields reaching 188.8 bushels per acre. Over the next couple of years, we will likely find out just how anomalously large 2016/17’s yield of 175.3 was, but if more huge crops are to follow, the 188.8 bpa is likely to build.
An expanding crop size may not be a concern if use was expanding as well, but that is generally not the case.
Tuesday’s figures reflect the most bearish long-term export outlook that the USDA has ever produced for U.S. corn. In 2026/27, exports are slated to be 2 percent less than is expected for the current marketing year (reut.rs/2gGCdC4).
Some 40 percent of the yearly corn harvest is devoted to ethanol production, and last year for the first time, USDA projected corn for ethanol use to decline over the next decade. The 2017 data reflects that same trend.
Last week’s finalized 2017 volume requirements under the Renewable Fuel Standard set forth by the U.S. Environmental Protection Agency were likely not worked into USDA’s projections based on the close timing. Although the higher-than-anticipated biofuel volumes came as good news to ethanol industry participants, they likely provide only short-term support for corn demand for fuel.
The ethanol issue could be muddied further if crude oil prices remain at lower levels over the next couple of years, which would make the argument for renewable fuels even more difficult.
Corn stockpiles in the United States are now at the largest levels in 30 years. With trailblazing yields and no convincing upturn in use, corn could pile up even further without some serious pullback in acreage, a disaster for a trade competitor, or a renewed interest in current or new sources of demand.
(The opinions expressed here are those of the author, a market analyst for Reuters.)
Editing by Peter Cooney
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