It is easy to get caught up in the moment of the current news cycle trying to decide if it is bearish or bullish. Don’t be afraid at times to think things are not what they seem.
Crop insurance assaults — while it is not new news, they keep coming back at unexpected moments. The 2014 Farm Bill seemed to lay the groundwork for crop insurance to be funded for years to come. It seemed to be safe. With the passage of time we now know that assumption is dead and gone. Last fall opponents in Congress attempted to cut billions of dollars from the crop insurance programs. Battle lines were again clearly defined. Work began in earnest to keep funding intact. Opponents were diligently working to see that funding might only come through an Omnibus spending package. They likely wanted to be able to point out with embarrassment to supporters, it was not a strong program. And if it did not get included in the Omnibus bill all the better. Those year end bills in the past contained funding for many, many items. Crop insurance funding was successful as it was included in a transportation bill. Then, President Obama’s budget for 2017 once again cut billions of dollars in funding.
While it has been known for months, those out of conservation compliance will see their 2016 crop insurance subsidy cut to zero. This will effectively double their premium for 2016. Expect government monitoring of conservation to intensify in the future. Any new findings could likely result in penalty payments to remain in compliance. Bottom line — expect crop insurance battles to continue in the future.
The supply and demand report was thought to be somewhat bearish for grains. Corn exports were lowered 50 million bushels to 1.65 billion bushels. Export reductions for January and February totaled 100 million bushels. Also corn used for ethanol did increase 25 million bushels to 5.225 billion bushels. The ethanol increase is not a surprise due to recent weekly grinds running higher than the average weekly amount needed. U.S. corn exports continue to face strong competition from South America. South American growing conditions the past several months were without any sustained stresses. As a result, corn production in Brazil was estimated at 84 million tons. That increase is 2.5 million tons. In addition, production in Argentina was increased 1.4 million tons to 27 million tons. Expect that corn exports from Brazil and Argentina will be steady and even increasing in coming months. U.S. corn exports are susceptible to further reductions in coming months.
Adding further insult to injury are U.S. corn exports to Japan. They continue to be shrinking in spite of Japan being the largest buyer of U.S. corn. Japan decades ago was courted by various trade groups from the U.S., affirming to them the quality of our products. They also wanted strong assurances that purchased products would indeed get to them in a timely fashion. The peak level of U.S. corn exports seen in the past is likely to be exceeded in upcoming years. Brazil and Argentina can grow corn more cheaply than U.S. farmers. As a result, they will be aggressive in selling their corn exports cheaper than the U.S. In recent years on more than one occasion, corn from Argentina has been exported into the U.S. via Wilmington, North Carolina.
On March 31, USDA will be releasing their 2016 planting intentions for U.S. crops. USDA will soon have their annual outlook conference. During this conference they estimate U.S. crop acres for the upcoming year. Also, they provide estimates for a total of 10 years.
U.S. corn yields in 2015 were 168 bushels per acre, extremely close to the record seen in 2014 at 171 bushels per acre. Past weather events would suggest record, or near trend corn yields three years in a row are extremely unlikely to come to fruition. El Niño has seen record setting strength in recent months. As it wanes, it can bring severe droughts to the western Corn Belt.
Price rallies for grains in the next two months will need to be weather related. Supply shortages are not in the cards at this time.