| February 15, 2008 | Archived Issues |
The Acreage Question
Tight old crop (2007-08) supplies and strong demand have contributed to record high wheat and soybean prices along with near record high corn prices. This leads to concerns for the coming year about whether 2008 production will be adequate for meeting growing demand needs. These production concerns will be a factor in the markets for several months because it takes time for production to be determined. The USDA’s final production estimate won’t be released until next January! Until then production depends upon planted acreage, timeliness of planting, growing season weather and possibly even harvest conditions before the upcoming year’s production is known.
In spite of all of the unknown production factors, market participants continually seek to anticipate production in order to estimate supply/demand balances for the upcoming 2008-09 marketing year. At this point, production estimates focus on using trend yields and trying to make estimates of planted acreage. This is not much to go on, but it is all that is available at this time. However, everyone recognizes that actual yields and acreage may vary considerably from these early estimates. So, market participants continuously seek better information to based decisions on.
The first clues on 2008 production prospects will be provided by the USDA’s March 31st Prospective Plantings report. The acreage question is especially important this year due to tight supply/demand balances for all crops. While many of the production questions will still be unanswered, at least everyone will have a better estimate of the acreage side of the production equation. This will let everyone know whether the markets were successful in “bidding for acres” of crops to be planted in 2008.
A year ago, high corn prices were encouraging increased corn production. Producers responded to the market signals by increasing corn acreage by more than 15 million acres resulting in total planted acreage of 93.6 million acres. This huge acreage increase, along with the second highest yields ever (151.1 bpa), resulted in record corn production of more than 13 billion bushels. Following harvest, this seemed like a comfortable level of production that would lead to a more than adequate corn carryover of nearly two billion bushels. However, surprisingly strong feed use in spite of high prices along with continued growth in ethanol production and strong export demand is now expected to result in total use of just under 13 billion bushels. Corn use will almost be equal to the record production! In spite of a huge acreage increase last year, USDA’s corn ending stocks projections will increase only slightly from 1.3 billion bushels (2006-07) to just over 1.4 billion bushels (2007-08). Ethanol use is expected to grow in the coming year and other corn uses are expected to remain strong. The bottom line for corn acreage is that even after a huge increase last year, corn cannot give up many acres in order to maintain adequate supplies in the coming year.
Much of last year’s increased corn acreage came out of soybean production. A reduction of nearly 12 million acres form the previous year resulted in soybean plantings of only 63.7 million acres and production of just under 2.6 billion bushels. However, soybean use is expected to exceed production, totaling more than 3.0 billion bushels. Soybean carryover is expected to drop from record highs to the very tight recent USDA estimate of only 160 million bushels. To maintain current levels of soybean use, more soybeans must be produced in 2008 and more acres are needed to accomplish this.
Strong wheat demand has depleted US wheat carryover to 60 year lows. Declining wheat acreage in favor of other crops in recent years, along with disappointing production in many areas throughout the world, has tightened wheat supplies and led to record high wheat prices. This appeared to be sending a market signal for more wheat acres to be planted for 2008. Although winter wheat seedings (reported by USDA in January) were up, the increase in acreage was less than the markets expected. This suggests that wheat supplies will continue to be very tight and signaled that an increase in spring wheat planting is needed. The problem is that spring wheat production areas are some of the some regions that compete for increased corn or soybean production. This adds to the “battle for acres” among all crops.
Tight world supplies of all crops are adding to the supply concerns. World ending stocks of all grains are declining as strengthening economies in many countries leads to demand for improved diets for citizens in those countries. This stronger world grain demand and a weaker US dollar suggest that exports will remain strong. Large crops are needed world wide and this is why the markets continue to focus on bidding for acres planted to each crop.
It appears that the tight supply situation for grain won’t be “cured” in the coming year and the outlook for favorable prices may continue. However, the balance between crops is critical to meeting demand needs and what happens to prices.
Corn acreage cannot slip much from last year’s 93.6 million acres. Most early estimates for 2008 corn acreage are in the 90 to 92 million acres range. With the current expected carryover of 1.4 billion bushels and trendline yields, this acreage would lead to supplies tightening somewhat and continue to support prices at historically high levels.
It is very important that soybean acreage be increased from last year’s 63.7 million acres. Most analysts expect something in the range of 69 to 70 million acres. This would barely be enough with trendline yields to meet demand needs and ending stocks would remain tight. Soybean prices will likely remain at historically high price levels.
While US wheat producers may not plant a large increase in acreage, producers in other countries are expected to respond to record high wheat prices. Most estimates are that US acreage will increase to 61 or 62 million acres, which is up somewhat from last year’s 60.4 million acres. This increase along with slower wheat exports would allow wheat carryover to increase somewhat from current very tight levels. Wheat prices may decline from record highs, but are likely to remain at historically good price levels.
Although many factors are impacting grain markets, with the tight supply situation the markets will continue to follow new crop production prospects closely. While weather remains an unknown, the first piece of the production puzzle will fall into place with the upcoming March Prospective plantings report. As the coming weeks unfold, watch closely to see if planting intentions fall within the ranges that market analysts are expecting. Any deviation, outside of these ranges (higher or lower), could have significant price impact.