On Your Markets, Get Set, G&O: Baseline Update

For the years to come, our baseline scenario indicates that prices are likely to remain higher than the average farm prices the market observed during the past few years. For the three major row crops, the baseline model found that the balance between supply and demand will likely remain tight for the following years. Total demand is likely to grow slightly faster than production, making demand less sensitive to prices and making it very hard for stocks to recover quickly. As a result we anticipate price levels and volatility to remain high.

For the 2021/22 cycle, the baseline model estimates average corn prices could near USD 5.50/bu; soybeans at around USD 13/bu and wheat at USD 7/bu. In the longer run, farm average prices are likely to moderate. However, the price floor has moved higher. For example corn prices may find a new support at around USD 4.5/bu; soybeans at USD 11/bu and wheat at USD 5.5/bu (see Figure 1 and 2).

However, given the current and expected tightness in the market, we believe prices could face extreme volatility. Particularly, prices are likely to be exceptionally sensitive to supply shocks (i.e. droughts and lower-than-expected yields) adding price risk to the upside, as seen in Figure 1 and 2

Tight inventories and relative high prices will keep acreages at near record highs for multiple years. For the next two to three years, average corn, soybean and wheat acreage could push over 229m acres, just below the record high of 230m acres registered in 2014/15. However, as input costs rise with commodity prices, we anticipate area to eventually return to its ten-year average at around 225m acres.

Yet, even with near combined record level of acreage, total combined production of these three crops over the next four years – assuming trend yields – remains well below the 21.7bn bushels registered in 2016/17. Marginal growth in soybean yield, a flat or marginal decline in wheat acreage and stagnant corn acreage continues to keep US production growth well below the record.

In 2021/22 US total demand for corn and soybeans is expected to decline around 1% and 4%, respectively due to higher prices and limited supplies. However, as we move forward to the projected period, US consumption and exports are expected to increase at a marginal rate, with corn growing at 0.8% and soybeans at 0.6%. Marginal growth over the forecast period is mainly supported by growth in domestic demand rather than exports.

Domestic demand has become less responsive to high prices because of the need to maintain a natural rate of utilization driven by biofuel mandates, livestock feed demand and crushing demand. Even so, the baseline is projecting ethanol demand for corn to remain at an average marginal growth of 0.4%. Soybean crushing demand over the long-term is expected to grow at an average of 0.5%.

Feed demand has been affected this year as drought and high prices have caused corn to be substituted by other ingredients, such as wheat, but our baseline expects this trend to revert.

If our baseline scenario holds, many of the same opportunities and challenges for players in the supply chain will remain in place for longer than previously expected. Row crop producers are the main beneficial early in the cycle as profitable margins return to the farming operation. However, as input prices increase with commodity prices, margins will be squeezed. Also, farmland values and cash rent have increased and will be well supported with higher prices. Input suppliers will benefit not only from higher acreage and sales volumes, but higher commodity prices give them the opportunity to increase prices to farmers. Margins and profitability for grain companies will continue to be positive with increased production volumes, export volumes and price volatility.

The profitability in the livestock sector will be challenging with higher feed costs, but the sector is making adjustments to feed rations to adapt to the new environment. Grain processors will also experience a challenging margin environment with higher feedstocks prices, but as product prices increase processing margins will rebound.