Highlights from Doane Outlook Conference

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Doane held its annual outlook conference Oct. 21-22. Attendees were provided with insights and information about the issues affecting agriculture – from farm policy to consumer attitudes about food products and everything in between. Here are some of the highpoints from the conference.

The Director of the Food and Agriculture Policy Research Institute, Dr. Pat Westoff, went through the differences in the farm bill proposals, the impacts the different policies would have on prices and  income and the different ways the process could go between now and the end of the year. It is very possible that the farm bill will get rolled into any overall budget deal – but if that doesn’t happen we could see another extension of the 2008 Farm Bill.

click image to zoom The Doane economists went through the 5-year forecasts for the major crops in detail. We expect USDA to lower corn acreage in the November Crop Production report, but boost the national average yield. The changes will partially offset each other and production is expected to still be record large and high enough to push 2013/14 ending stocks up significantly. With ethanol demand leveling off – we will need to see a big rebound in exports over the next few years – and even with that, stocks could continue to rise in 2014/15 and beyond if yields are near trend.

Lower production in Brazil and Argentina should allow for a rebound in U.S. corn exports this season. Over the longer term – we need to reduce corn acreage. Production exceeds 14.5 billion bushels with trend yield and acreage near 97 million acres while demand is expected to be closer to 13.5 billion bushels. We need less than 90 million acres to produce that much with a yield of around 165 bushels per acre.

Soybean supplies remain tight with the third consecutive year of yields below trend in the U.S. but record production in South America. Soybean stocks are expected to edge up a little in 2013/14 but prices should stay high and soybean acreage is expected to increase next year. With yields near trend, we could see 2014/15 ending stocks get back above 200 million bushels – but the stocks-to-use ratio stays pretty low. U.S. exports of both soybeans and soybean meal are expected to increase as the tight supply situation eases. U.S. soybean acreage is expected to trend higher over the next few years getting to 79 million acres by 2015 and 79.5 million by 2017. How EPA decides to handle changes to the Renewable Fuels Standard could have big implications for the soybean oil market and indirectly on the overall soybean market.

click image to zoom We expect USDA to raise the 2013/14 estimate for wheat feed use in the November supply and demand forecast, pulling wheat carryover stocks down toward the 500 million bushels level. Export sales remain strong despite the big increase in foreign wheat production this year. With good wheat prices and better moisture conditions, winter wheat acreage may be up this year and the fall crop condition ratings are expected to be much better than they were in the fall of 2012. With trend yields next year, which would be down from the record levels of 2013, wheat ending stocks move a little higher and acreage declines in 2015. World wheat ending stocks are expected to rise over the next few years, putting some pressure on prices.

Our analysis suggests that U.S. cotton ending stocks for 2013/14 may be a little higher than indicated in the last USDA forecast but ending stocks decline in 2014/15 even if yields are modestly above trend levels and the harvested-to-planted acre ratio returns to “normal”. But the most critical long term factor is still Chinese policy. Prices could drop sharply if China decides to release some of its huge stocks onto world markets – or even if China just stops importing excess cotton and uses mostly domestic production to satisfy domestic demand.

Recent data indicate that the world is not running out of cropland. The amount of land planted to major crops has increased by 185 million acres since 2000 and addition land is available in South America, Africa and the former Soviet Union. But the pace of world demand growth is rising, especially in China, and especially for corn. China’s corn demand is rising at more than 10 million tonnes per year and corn acreage will have to increase substantially for production to keep pace with demand growth. If acreage rises more slowly than it has in the past – China will need to boost imports. Production and exports from Brazil and the former Soviet Union countries are expected to continue to rise in the years ahead and these products will compete with U.S. exports in the world market.

click image to zoom While USDA has not provided any updated information recently, it is pretty clear that the U.S. cattle inventory is still declining. However, cow slaughter has dropped below year ago levels in recent months and heifer slaughter is also dropping. These may be the first signs that producers are beginning to try to rebuild beef herds. But for the near term, beef production is expected to fall significantly below year ago levels and cattle prices should remain high into 2014. Fewer feeder cattle will be available next year and the supplies will be constrained even more if heifer retention rises. Still we can’t expect any significant increase in the inventory before 2015 or 2016 at the earliest. Beef exports have recovered to above their pre-BSE level, but the tight supplies and high prices will probably keep them from rising further in the next year or two.

click image to zoom But hog producers are showing signs of expansion. Farrowing intentions are up for the first quarter of 2014 and sow slaughter is declining. Combine these factors with strong gains in pigs saved per litter and we could see pork production up 2 percent to 4 percent in 2014. At least based on the data in the September Hogs and Pigs report, the PEDV (virus) outbreak this spring had a very modest affect on the size of the pg crop. We haven’t seen much increase in domestic demand but export growth is strong and sales to China could rise even more with the recent sale of Smithfield to a Chinese company.

It has been several months since USDA provided any data on the size of the milk cow herd, but milk production continues to rise. The data suggest that producers are expanding and milk production profits have improved significantly. We believe the number of milk cows has increased to more than 9.26 million head, up from 9.22 million when the last official number was reported in February. Dairy product exports are rising and this has helped to support milk prices. Additional expansion in the dairy sector is expected in 2014.

Conference attendees got an update on the overall macroeconomic outlook from the Chief International Strategist of Wells Fargo Advisors. The outlook for the U.S. economy is generally more of the same – positive but slow economic growth. However, China’s economy could be headed for a major  restructuring.

It appears that China’s government officials may want to shift the economic model from production and export of relatively low value-added goods to production of higher-value items aimed for domestic consumption. While that may be a good thing in the long term – it could cause some problems in the near term including higher unemployment and slower economic growth. The speaker also predicted that the U.S. dollar will strengthen in the year ahead, which will tend to make U.S. agricultural exports more expensive to foreign buyers.

Our weather consultant is forecasting a colder than normal winter and thinks it could stay cooler than normal and maybe wetter than normal in the spring. He does think that we are in a period of more unsettled weather and that assumptions of “normal” weather may prove to be off the mark. Current conditions in the Pacific suggest that we will not see an El Nino of La Nina develop that would significantly affect crop weather conditions for 2014. His forecast suggests improving conditions for crops in South America.

There was a mountain of additional information presented at the conference but these represent our key takeaways from the event. All of the conference presentations are available on our website www.doane.com.



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