The winter wheat markets were fairly boring from September to early February, spending their days between $4.10 and $4.30 a bushel as funds and other traders focused on corn and soybeans. But that changed on Feb. 9 when USDA’s monthly report increased wheat exports and cut ending stocks.
Since then, winter wheat has topped $4.50 a bushel, and wealthy investor funds piled into those markets. As of this writing, the funds were net long in hard red winter wheat and had reduced their net short position in soft red winter wheat.
The world still has plenty of wheat, and Black Sea producers still dominate export markets in Africa and the Middle East, but U.S. wheat is finding homes in Latin America, Asia and a few spots in Africa. USDA in February raised wheat exports by 50 million bushels to 1.025 billion and lowered ending stocks a similar amount to 1.139 billion bushels.
“The biggest surprises came in wheat,” says Farm Futures senior grain marketing analyst Bryce Knorr of USDA’s latest numbers. “Lower world and U.S. ending stocks triggered some short covering by funds. The bigger question may be whether this is just rearranging the deck chairs on the Titanic, because there’s no indication burdensome world supplies are going away anytime soon.”
While wheat exports have not made headlines like the corn sales to Japan or soybeans to China, they have been consistent and are tracking ahead of the previous year’s pace. Year-to-date exports as of early February were up 32% from the previous year.
The report had bullish news for corn, too. USDA increased the amount of grain it expects to be used for ethanol and food production. Those increases reduced ending stocks to 2.32 billion bushels, which was smaller than trade forecasts.
“If ethanol exports hold up, further cuts may be ahead,” Knorr says. “An increase in exports is not out of the question, depending on how the South American crop turns out.”
Soybean futures have moved higher since the report, but not because of the report’s numbers. Exports continue to be brisk, and there are some doubts about the size and quality of Argentina’s crop.
Old- and new-crop soybean futures were well above $10 at this writing, putting cash prices for both at or slightly more than that. That pleased farmers, who rushed to sell supplies from last year’s harvest and then sold some of what they intend to harvest in 2017.
USDA’s report left Brazil’s soybean production unchanged at 104 million metric tons. That has traders concerned, as a number of private forecasters here and in Brazil expect a larger crop, with a few forecasting 105 million metric tons.
“USDA made a modest reduction to soybean production in Argentina due to floods, but not as much as I anticipated,” Knorr says. “The bigger surprise was no change in Brazil. That’s what I penciled in, but local estimates there increased in the last few days.”
Farm income down, but not all bad
U.S. net farm income for 2017 is expected at $62.3 billion, a drop of 8.7% from last year, for a fourth straight year of decline and the lowest since 2002 when adjusted for inflation, USDA said in its latest farm economy report.
Lower returns on wheat and beef cattle are expected this year. However, much of the overall decline is due in part to how USDA calculates it. In this case, net farm income does not include the expected sale of $8.2 billion worth of crops in storage. That money was assigned to 2016 since that is the year when the crops were produced. However, those sales are included in USDA’s 2017 net cash farm income forecast of $93.5 billion, which would be up 1.8% from 2016.
On a commodity basis, Jeffrey Hopkins, an economist with USDA’s Economic Research Service, said in a webcast that accompanied the report that overall farm cash receipts should be about unchanged in 2017, with higher dairy and cotton receipts offsetting declines in wheat and cattle. Receipts for other crops should be about unchanged.
“Cotton receipts are expected to grow 21.5% in 2017 relative to 2016. That is being supported by higher forecast prices for cotton and higher production,” Hopkins said. “Wheat receipts are declining and are forecast to decline by 16.6%.”
Dairy receipts are forecast to be up 13.7% at $4.7 billion, while cattle and calf receipts were projected to be down 6.7% at $4.5 billion.
One bright spot is the ERS expects overall production expenses for crops and livestock to be about unchanged from 2016. In that mix of production costs, fuel costs are expected to be up 13.1%, labor up 5.4%, and fertilizer down 9.1%.
ERS also forecast the following for 2017:
• Farm asset values will decline by 1.1%, and farm debt will increase by 5.2%.
• Farm sector equity, the net measure of assets and debt, will be down by $51.2 billion, or 2.1%.
• Higher real estate debt, up 7.3%, will increase total farm debt.
• Direct government farm program payments are expected to be down by $0.5 billion, or 4%.
Median income of U.S. farm households should trend higher again after declining in 2015. The median income increased from 2010 to 2014, reaching an estimated $81,637 in 2014. It dropped in 2015 to $76,735, but is rebounding now and forecast to reach $79,733 in 2017.
However, median farm income earned by farm households is estimated to decline $1,437 in 2017.
“In recent years, slightly more than half of farm households have lost money on their farming operations each year,” the report said.
However, most of the farm households earn positive off-farm income and “median off-farm income is forecast to increase 6.7% over the next two years, from $67,500 in 2015 to $72,022 in 2017,” the report said.
La Niña abates, El Niño lurks
La Niña has come and gone. The cooling of the Pacific Ocean’s surface existed briefly, but the National Weather Service’s Climate Prediction Center said in February that ocean temperatures now indicate La Niña conditions are no longer present.
However, it did say there is about a 50% chance of an El Niño event from September to November this year.
Weather anomalies that have sometimes occurred during El Niño events include above-normal precipitation on the West Coast and drier conditions in the Central Plains and Midwest. Also, there have been cooler-than-normal conditions in the South and along the East Coast.
Burgdorfer is senior editor for Farm Futures.