Mike Murphy, director of research and vice president of risk management services at CattleFax, recently led those listening to the National Cattlemen's Beef Association Reboot through the grain and energy outlook for the coming year.
He also said producers need to look back a little bit to see where we were a year ago. And that starts with remembering the 2020 prospective planting report.
“That was a spot where the USDA had projected there'd be 97 million acres of corn planted for the U.S. farmer,” Murphy said. “What transpired as we came to all the way to where we are currently? We have this decline in acreage, and we've dropped down to basically a little underneath 92 million acres.”
That drop had a huge impact in terms of what the overall corn supply would look like. Soybeans had about the same thing happen with their acres.
“Ultimately what ended up happening is we had about a 6 to 85 bushel decline in yield from those initial projections in May of 2020 to the final number that we got here just back in the month of January,” he said. “So, when you start to change that underlying supply by acreage, and by the yield reduction it certainly starts to set the tone that the market is going to have to fend off the buyers with potentially higher prices.”
It’s not all about supply, and that’s important to understand. There are certainly some impacts on demand, but the demand factor has been a little bit of a variable, according to Murphy.
Corn exports are one segment that really stands out to Murphy, especially when looking at the demand forecast in May 2020.
“This past fall the USDA had actually increased demand from the export sector by 600 million bushels of corn, and certainly that starts to play a role on the ending stocks,” he said.
There was more than one period last spring where there were revisions made downward to that ending stocks number. Murphy said it’s interesting to look back at the last 12 months and see where we’ve come from in both the corn and soybean market.
“Obviously that's changed dramatically,” he said. “We've gone from where we were just projected back in the spring of 2020 on top of 22% stocks to use to now we're at about 10.5% stocks to use when you look at what the USDA is suggesting today.”
Compound that with what was going on last spring just in the commodity market in general, there was a period of time where the crude oil futures were negative for a time.
“We were in that spot where COVID was just weighing heavily on all sectors of our economy and corn was certainly being impacted by that,” he said. “We spent about three months last spring where the average spot corn futures prices were actually averaging below 330 a bushel.”
But at the same time the USDA forecast came out saying there was more than an adequate supply of corn. As stocks to use declined, price had to go up to be able to be in a scenario where a ratio could happen against the tighter supply.
“We need to get prices high enough where we can start to try to find a balance there,” Murphy said. “And at this point in time, it appears that we're in a spot where between both the supply sector and the demand sector, we do have some balance on the corn front.”
For the new crop market, the 2021 production season, Murphy said the feed industry might be holding all the cards. They didn’t have the benefit of restocking their feed supplies because of COVID and in some situations, like the pork industry, they slowed or even stopped production because of the slaughter backlog.
Murphy said it’s important to remember the term residual and how it relates to corn basis, especially in the western Corn Belt where dryer growing conditions in the past year exist. Their residuals are a little bit tighter.
As for ethanol it’s difficult to make a comparison to 2020 because it’s nearly a year since the country shut down because of COVID.
“That was a period of time where there was nobody that was driving to speak of, and as we know, ethanol is a blended product into gasoline,” he said. “So miles driven by the consumer has a direct impact on how much ethanol is going to be utilized and ultimately how much ethanol needs to be produced.”
Murphy said the USDA does have an increase in the ethanol number forecasts of the current market year, but he expects it to be revised a little higher going through spring and into summer—especially if more of a normal lifestyle returns for consumers.
On the export front, it all could really come down to China.
The Phase 1 agreement with China had a huge impact on the overall demand for commodities, but specifically on the corn side and even to a certain degree with soybeans. China has committed to 700 million bushels of corn. In their rebuilding, they’ve become more efficient and are utilizing a higher quality feed. As the industry has become more corporate, they’ve moved away from traditional Chinese feeding methods.
“They're going to be focusing on a more higher quality feed that goes into those animals, so they're going to need the corn,” he said. “We're certainly going to be the ones who are going to be able to provide that to them because we do have that supply.”
And going through a major rebuilding like the Chinese are, price isn’t going to matter much, Murphy said.
“Those hog producers today are making over $300 a head at this point in time,” he said. “Feed costs are not a concern. So we very much believe this is a number that's going to sustain itself as we go forward here.”
Murphy thinks in the second half of 2021 corn and soybean acres are going to reach 181 million acres combined.
“That will be the largest ever in terms of those two commodities in terms of planted acres,” he said. “Now, I think as we look at this internally from an analytical standpoint, we certainly see that there's a strong possibility that that number could be a little bit larger.”
It could go higher, more so when thinking about the soybean side of the equation.
“It needs to be larger because we've got to be able to balance the demand, with being able to build that supply back,” he said. “So, this is where we start.”
Looking over the next several months, Murphy sees a couple of things.
“Beans will have a greater influence on the value of corn,” he said. “Now that's not to suggest that we're going to ignore the impact of what Mother Nature can mean to us because that is going to be super critical all summer long.”
Kylene Scott can be reached at 620-227-1804 or email@example.com.