AG Insight

Weekly
The Wheat Crop is Off to a Good Start
The winter wheat crop is in much better condition this year than it was at this point in 2012. Even in Kansas where drought problems persist, most of the crop is in either good or excellent condition. If the crop survives the winter it will have high yield potential depending on spring weather.
CORN Central Illinois, bu Omaha, NE, bu

November 1, 2013

A weekly analysis of agricultural issues. Prepared by Doane Advisory Services

YEAR AGO

LAST WEEK

THIS WEEK

11/2/12

10/25/13

11/1/13

DRIED DISTILLERS GRAIN, Iowa, ton SOYBEANS Central Illinois, bu Memphis, TN, bu SOY MEAL, 48 prct, Decatur, ton WHEAT Kansas City, HRW, bu Minneapolis, 14 prct DNS, bu St. Louis, SRW, bu Portland, soft white, bu Durum, ND, bu SORGHUM, Kansas City, cwt COTTON, 11/16 SLM, 7 areas RICE, Baton Rouge, LA, cwt BARLEY, Minneapolis malting, bu OATS, Minneapolis, No. 2 heavy, bu ALFALFA HAY, Rock Valley, IA, ton SUNFLOWERS, Fargo, ND, Nu Sun, cwt HOGS, Nat'l base cost carcass wt. FEEDER PIGS, 40 lbs, Nat'l avg., hd CHOICE STEERS, NE, cwt FEEDER CATTLE, Oklahoma City Steers, 700-800 lb, cwt Steers, 500-550 lb, cwt Heifers, 450-500 lb, cwt COWS, Utility, Sioux Falls, SD, cwt MILK, Class III, CME spot mo, cwt LAMBS, Slg., San Angelo, TX, cwt ENERGY Ethanol, Iowa, gallon Diesel, US gallon

7.51 7.34 267.00 15.53 15.84 504.30 8.76 10.11 8.54 8.84 8.25 12.79 65.83 14.55 7.25 3.95 292.50 24.20 79.52 81.64 126.87 141.34 173.71 160.38 71.56 21.08 87.50 2.31 4.03

4.24 4.32 200.00 12.91 13.37 457.0 7.59 8.74 7.12 7.33 6.90 7.23 76.51 15.25 5.50 3.62 -19.30 86.29 69.70 132.83 168.17 183.29 175.96 -18.25 144.67 2.00 3.89

4.15 4.20

Crop Budgets for 2014

Most people agree that we need to see farmers plant less land to corn in 2014, but so far the budgets are not giving farmers much reason to shift to other crops. One reason is the big decline in fertilizer prices, which are generally down 20 percent to 25 percent from a year ago. Things could change by spring, but corn acreage may stay too high in 2014.

12.63 12.95 434.60 7.34 8.90 6.91 7.11 7.00 7.19 74.66 15.25 5.50 3.58 190.00 19.60 83.13 72.54 131.95 167.18 187.82 174.27 76.25 18.84 145.00

Chinas Purchases of Land in other Countries has People Worried

There is growing concern about Chinas purchases of land in other countries. Actual data are hard to find, but it appears that China has millions of hectares of land in developing countries. Some of the production from this land will be exported to China which could affect domestic food supplies.

The Recent Surge in PEDV Cases May Bode Ill for 2014 Hog Supplies
Hog slaughter has fallen well below expected levels in recent weeks and some think the outbreak of a virus that kills young pigs is to blame. However, the effects of the virus outbreak would be later this fall and winter. So maybe the pigs are out there and hog slaughter and hog weights will increase in the next few weeks.
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The Wheat Crop is Off to a Good Start

The 2014 winter wheat crop is off to a good start. The condition ratings as of October 27 are well above the dismal reading last year at this time and above the 10-year average. The condition rating index is calculated at 263, the highest level for this time of year since 2009. Last year the index stood at 225 at the end of October and it fell even further over the next few weeks. Even so, the national average wheat yield turned out to be record high in 2013. The Drought Monitor still shows severe to extreme drought in much of western Kansas, but the drought is much less widespread than it was at this time last year. But even with the drought persisting, the majority of the Kansas wheat crop (55 percent) is rated good and 4 percent is rated excellent. Only in Texas is more than 10 percent of the crop rated in the poor and very poor categories. It is worth noting that 11 percent of the crop in Texas is rated excellent, which is second only to Colorado in the hard red winter producing area.

WINTER WHEAT CONDITION RATINGS Index (excellent = 400)

300 290 280 270 260 250 240 230 220 210 200 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
As of the end of October

10-yr average

The U.S. Seasonal Drought Outlook map shows the drought persisting through the rest of this year all across the Plains states. Some improvement is expected in eastern Texas and the Delta states, but the heart of the winter wheat producing area shows no improvement. However, the winter wheat crop will soon move into dormancy and the moisture requirements are small. Unless the crop is harmed by winter kill or wind erosion over the winter months, spring weather will be the most important factor impacting hard red winter wheat yields in 2014.

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Crop Budgets for 2014

With harvest winding down across the Midwest, farmers are beginning to make decisions about what crops to plant in 2014. The economics have changed with corn prices currently down about 40 percent year-over-year and soybean prices off about 15 percent. This week we update the budgets for 2014 to see if there are incentives for farmers to significantly shift acreage from crop to crop. On Friday, USDA will update crop acreage, yield and production for 2013 and some significant changes are possible. The data suggest that farmers wanted to plant about 98 million acres to corn this past spring, but the wet weather may have put actual acreage close to 96 million acres. Soybean acreage would probably have exceeded 78 million acres with normal weather this spring. Will farmers shift some of their land intended for corn in 2013 to soybeans in 2014? We really wont get any official indication of farmers plans until the end of March. Most analysts conclude that we need to see a reduction in corn acreage. If we assume that corn demand rebounds to around 13.5 billion bushels in 2014/15 (up about 7 percent from the forecast for 2013/14 and 20 percent higher than use in 2012/13) and yields are near trend of 164 bushels per acre, corn production would match use with a little less than 90 million acres planted. Even if demand soars to more than 14 billion bushels, we dont need to plant as much corn as we did this year. But at least at this point the markets dont seem to be sending the signal to farmers. Using new-crop corn futures of $4.75 per bushel for corn and soybean futures of $11.61, net returns over operating costs are still a little better for corn than they are for soybeans, even if we assume a 12 bushel per acre yield drag for corn-following-corn. One of the key reasons for this is the big drop in fertilizer prices. As we head into the fall fertilizer application season, fertilizer prices are about 20 percent below where they were a year ago. If these budget projections are anywhere close to accurate it is hard to see why farmers would shift several million acres away from corn.
CROP BUDGETS FOR 2014 (dollars per acre)
CORN CORNFOLLOWINGCORN SOYBEANS

REVENUE OPERATING COSTS NET RETURNS

$779 $331 $448

$722 $349 $373

$505 $150 $355

Estimates based on $4.75 for corn and $11.61 for soybeans. The corn yield is 164 bushels per acre, and the corn-following-corn yield is 152 bushels per acre.

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RETAIL FERTILIZER PRICES (dollars per ton)

DAP Potash Urea Anhydrous

900 850 800 750 700 650 600 550 500 450 400 2012 2013

Land costs are not included in the operating costs in the budgets. In some cases cash rents may be high enough to squeeze most or all of the profits out of crop production. However, that would still probably not result in a big drop in corn acreage. Renters cant afford to leave the land idle and they would not want to risk losing the land to another renter by giving it up for a year. Clearly the market will get swamped with corn if farmers plant as many acres to corn in 2014 as they did this year and the national average yield is near trend. But the driving force for change is the economics among crops and at least at this point the budgets do not give farmers a good reason to plant a lot less corn. That could change by spring and some decline in total crop acreage may occur due to the smaller profit margins, but the risks are still that production may exceed demand by a wide margin in 2014/15 adding to stocks and pressuring corn prices down below the $4 mark.

Chinas Purchases of Land in other Countries has People Worried

It was recently announced that China is purchasing a significant amount of land in Ukraine. There have been previous announcements of China purchasing land in other parts of the world and many are concerned that the production from this land will be exported to China rather than benefit the countries where the land is located. The World Bank reported that in 2009 investors acquired 45 million hectares (111 million acres) of land, 32 million in Africa alone. There are repots of Chinese projects covering 83 million hectares of land in developing countries. However, Chinas Deputy Agriculture Minister says that China will not join the growing trend of outsourcing food production by investing in farmland overseas.
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There are diverse claims about the use China plans for their land investments in other countries. The Chinese government has reportedly purchased 2 million hectares in Zambia and 1.5 million hectares in Indonesia for biofuels production. Land purchases in Argentina, Brazil, Kazakhstan and Russia are designated for food production for export to China. On the other hand the output from several smaller land investments in poor African countries is reportedly produced for local markets. China is also trying to boost domestic production. According to Chinas 2011 notification to the WTO, government support for agriculture almost doubled between 2005 and 2008 to near $93 billion. The investment in agriculture is one reason for the dramatic reduction in poverty in the country and strong growth in rural incomes. China does import a lot of agricultural products, especially soybeans which account for nearly 40 percent of the total. Imports of cotton, palm oil, dairy products, wool, and hides are also substantial. To facilitate these imports China has significantly reduced tariffs. The tariff on imports of soybeans was 114 percent in 2002 but it is now down to 3 percent. China plans to boost both production and imports of biofuels to replace petroleum. In recent years there has been a shift from relying on world markets to relying more on foreign direct investment to secure imports. In 2001 China adopted a Go Global strategy that makes it easier for Chinese companies to invest in other countries. During the 1990s, Chinas total overseas direct investment was around $2 billion per year. By 2010 that had increases to $68 billion. However, only a small fraction of that is invested in land. The Ministry of Commerce in China says that the country owns about $2.6 billion worth of land in other countries. Actual data on Chinas land purchases and production partnerships are difficult or impossible to obtain. There are huge differences between the amount of land some sources contend has been purchased by China and the amount of land transfers that can be confirmed. Still there is no doubt that Chinas land ownership in foreign countries is rising and that production from some of that land will be exported to China. These developments could have significant implications for food availability in some of the poor countries and for world trade flows in the future.

The Recent Surge in PEDV Cases May Bode Ill for 2014 Hog Supplies

Late summer and early fall hog slaughter fell well below expectations based upon recent USDA Hogs & Pigs reports, thereby playing a major role in boosting swine and pork prices to record highs for this time of year. Industry analysts are trying to divine the underlying causes of the supply shortfall and their implications for the late 2013-2014 price outlook.

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Although the ongoing spread of the Porcine Epidemic Diarrhea Virus (PEDV) seems likely to reduce market hog numbers in late 2013 and early 2014, its difficult to blame PEDV for the recent decline. It may have killed a few more feeder pigs than was anticipated, but it is mostly deadly for weanling piglets. Indeed, a prominent industry analyst made the latter point in a widely touted item published this week. He blamed the quality of the feed left from the 2012 grain/soy harvest, as well as surprisingly droughty late-summer 2013 conditions, for the bulk of the late shortage. He also argued that producers were delaying sales of market-ready animals in late October in hopes of getting higher prices for those (heavier) animals. The following chart offers considerable evidence to back up this contention. Hog weights were clearly running well above year-ago levels in early summer, but underwent a relative decline when the numbers shortage was most severe in early September. Industry analysts didnt realize that weights were rising so dramatically during early October, since the government shutdown caused the USDA to suspend publication of numerous livestock reports. Ultimately, this suggests the supply of market-ready animals is much larger than was the case in early autumn, with the underlying implication that slaughter rates and pork production could accelerate in early November. That might prove especially correct if the USDA was correct in implying late-2013 hog supplies will average about 1% over levels seen in November and December 2012.
IOWA-SOUTHERN MINNESOTA PIG WEIGHTS

On the other hand, questions concerning potential winter and spring hog supplies are growing. The following chart shows the number of U.S. farms reporting cases of PEDV has accelerated upward with the arrival of autumn conditions. Indeed, the latest weekly total, at 68 operations, easily topped the spring high. The fact that a large percentage of those cases are occurring in North Carolina is also worrisome. However, while veterinarians have counts of the types of farms being affected, the industry still has a very poor handle on the size of those farms, the number of pigs affected and the size of piglet death losses. Traders and farmers still expect to see the first evidence of the disease outbreak in early December and anticipate persistent supply reductions through winter. However, the latest surge in cases suggests
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the losses will grow next spring and makes one wonder if theyll spike upward during winter. These developments largely explain the large gains posted by deferred futures this week. Indeed, increasing case totals might send the summer 2014 contracts even higher. Nevertheless, industry participants should also keep the September USDA Hogs & Pigs report in mind, since it seemed to find very little evidence that the PEDV outbreak had affected litter sizes or the size of the U.S. pig crop last summer. For example, it stated the average size of summer litters at 10.33 pigs saved per litter (2% larger than the comparable 2012 total). That average also represented an all-time quarterly record.
U.S. PEDV CASES (FARMS)

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Editor: Rich Pottorff; Economists: Rich Pottorff, Martyn Foreman, Bill Nelson, Dan Manternach, Dan Vaught, Gaogao Yu AgInsight Weekly is published weekly by Doane Advisory Services, a division of Vance Publishing Corporation, PO BOX 3593, Northbrook, IL 60065. Copyright 2013 by Vance Publishing Corp., all rights reserved. Information contained in this publication is believed to be accurate but is not guaranteed by publisher. The publisher assumes no responsibility or liability for any action taken as a result of any information or advice contained in this report, and any action taken is solely at the liability of and responsibility of the user. Risk Disclosure Statement: The risk of loss in trading commodities can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results. This brief statement cannot disclose all the risks and other significant aspects of the commodity markets. You should therefore carefully study commodity trading before you trade.

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