Soybeans

Economist Patrick Westhoff discussed the impact of the new farm bill, recent government shutdown and trade disputes on commodity prices last week.

The new farm bill, government shutdown and trade disputes have caused questions among farmers and economists about the future of agricultural markets.

Taking these issues into consideration, Patrick Westhoff, the director of the University of Missouri’s Food and Agricultural Policy Research Institute, dissected market potential in a recent webinar, "The Market Outlook under the New Farm Bill," hosted by the University of Arkansas as part of an series on food and agribusiness.

“Markets are always uncertain,” Westhoff said.

“We never have perfect information… There is always a good excuse for why our numbers may not be right, but I have more uncertainty to talk about than normal today around market projections.”

Westhoff explained FAPRI economists use a stochastic analysis, which generates hundreds of models to get a distribution of prices within a certain probability, rather than generating a single-point estimate for commodity prices.

Uncertainty playing into market projects includes the lack of information on how long trade tariffs and restrictions will be enforced, if the U.S.-Mexico-Canada trade agreement will be finished by Congress, and if new trade disputes will emerge with China. The government shutdown also has led to a lack of information on exports, grain stocks and winter wheat seedings.

“There’s more uncertainty about the basic facts of life than we would normally have,” Westhoff said.

When it comes to the new farm bill, he explained those who like the 2014 version will probably like its successor.

“It’s an evolutionary bill, not a revolutionary bill,” the economist said.

The new farm bill has slight modifications to the Agricultural Risk and Price Loss Coverage programs but the basic structure remains the same. One positive point, Westhoff notes, is that some producers may be able to update PLC yields to their advantage and will have opportunities for new ARC and PLC selections. Based on county-level data, southeast Kansas, southwest Missouri and northeast Oklahoma producers may want to look into making those adjustments. However, producers need to pay attention to what the final rules say when they are released.

“Given what we know today, which of course could change, we would expect heavier PLC participation in 2019 than in previous years, especially for corn and wheat,” Westhoff said.

The economist also showed different percentage increases in loan rates for different commodities. “We don’t expect deficiency payments to be common in the new farm bill for these commodities, but it does improve the ability of marketers to use this as a tool,” he explained. “You can take out a loan and repay it later to give you some cash flow.”

The new farm bill also makes important changes to payment limitation rules, including the change making nieces, nephews and first cousins more likely to qualify as actively engaged on the farm. However, Westhoff cautioned producers to wait to see what the regulations say and to speak to an attorney to advise them on this issue.

“If you’re a dairy producer, you definitely want to pay attention to the changes that have been made in the farm bill,” Westhoff said, explaining dairy producers can insure a higher level of coverage and they should take a look at the new provisions to determine what best fits their situations.

Conservation programs also saw changes with an increase on the cap on Conservation Reserve Program of 24 million acres over time to 27 million acres by 2023. However, the maximum rental rate has been lowered to 85 percent for general sign-up and 90 percent for continuous sign-up of the county soil-type average. The Conservation Stewardship Program was scaled and restructured, and more funding was provided for the Agricultural Conservation Easement Program and Regional Conservation Partnership Program.

Looking at the macroeconomic environment, Westhoff explained the gross domestic product has been relatively constant in the U.S. and there has been constant growth since 2010. However, U.S. growth is projected to slow to 2.5 percent in 2019 and 2 percent in 2020. World economic growth has been about 3 percent each year since 2011 but is also projected to slow slightly. Additionally, China’s economy continues to grow but at a slower pace.

“The Fed has started to tighten the interest rate environment, and we are seeing higher interest rates across the board,” Westhoff continued, adding rates are projected to increase in 2019. Inflation is expected to average about 2 percent in 2019. An increasing federal budget deficit could also have implications for farm markets if the trade balance does not improve.

In June 2018, the U.S. Department of Agriculture was projecting producers would see $10 per bushel for soybeans, the highest price since 2014. However, things have changed and December estimates show about $8.60 per bushel for the 2018-2019 marketing year.

“Instead of projecting the highest prices since 2014, now we are talking about the lowest price since the 2006-2007 market year, a pretty dramatic change in projection,” Westhoff said. However, futures show a little bit stronger prices.

What caused the price drop? Westhoff attributed record yields and trade disputes. Despite an agreement to not increase tariffs at the G20 meeting last December, China has not gotten rid of the tariff that caused the sharp slowdown of U.S. soybean sales.

“China has been a very large market for U.S. agricultural products,” Westhoff said.

“The tariffs… have the effect of pushing up prices of U.S. soybeans delivered to final users in China. Tariffs, on the other hand, push down prices of soybeans in the U.S. market.”

As trade patterns shift to accommodate this change, export prices from other supplies should go up making it easier for the U.S. to sell products in other markets. “But China is so big that the increases in other markets aren’t enough to offset drops in sales to China,” Westhoff said.

“We saw a few more acres and a lot higher yield than anticipated in the soybean crop, relative to June estimates,” he continued. With losses in export sales, this resulted in the average price estimate change by $1.40 in December.

Overall, Westhoff said he doesn’t see the new farm bill having a big impact on the prices of commodities. However, a trade resolution would make the future look more optimistic.

MU’s FAPRI baseline has shown lower prices than the futures, a difference Westhoff attributed to FAPRI’s assumption that the current situation will not change.

“My opinion is that the market appears to be assigning some probability that the trade dispute will be resolved,” he said.

“When people are optimistic about a resolution, prices go up. When people are pessimistic about a resolution, the prices go down.”

Currently, FAPRI predicts higher exports but a lower price than USDA. Westhoff attributed this to the fact that, even with a sharp drop in acreage and production, the U.S. would still have a lot of soybeans.

Corn, however, sees a little more optimism in 2020 and beyond with predicted prices at about $4 per bushel.

“We don’t know what Chinese stocks are,” Westhoff said. “It’s a state secret in China. Even if the Chinese knew themselves, they wouldn’t tell us.” However, imports of corn in China have been small relative to supply and demand.

With declining corn stocks in the U.S. and other countries, weather issues could result in higher corn prices in the future but are not guaranteed, as stock estimates for December have not been released. Trend or above-trend yields could also keep corn prices below $4 per bushel.

Westhoff said the U.S. could also see more competition if South America has normal crop yields.

“We have seen some wheat price bounce back from the extraordinarily low prices of 2016-2017,” Westhoff said, explaining FAPRI and USDA predictions are very close for the current marketing year.

Smaller crops in the EU and Russia lead to lower stocks but China is estimated to have large stocks. Westhoff said unless there is another short wheat crop globally, he expects wheat prices to move with corn prices.