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*Fgt. 111510RIAL 13001( COLLECI1014 PT-Pl19 • DEPARIV1E.141 OF AGlial1151.1, 2'32 Cl.,,SS700V; Nt ECONOMICS L'A VV! 81.1V00 N1,-; AGRICULTURAL LETTER FRB CHICAGO FEDERAL RESERVE BANK OF CHICAGO Number 1669 November 22, 1985 District states pace the upturn in 1985 corn and soybean production Crop production and carryovet estimates revised upward Recent reports issued by the USDA provide updated projections of the 1985 crop harvest and estimates of utilization and ending carryover stocks for the marketing year just completed and the marketing year that lies ahead. The reports show that corn and soybean supplies are larger than previous estimates had implied. Estimates of production and carryover stocks were revised upward while estimates of utilization, for the most part, were reduced. Despite the bearish tone to the reports, corn prices have recovered somewhat from recent lows as the movement of corn under loan with the CCC has accelerated. Soybean prices, following an initial recovery, declined recently as debate on farm program legislation increased the probability that the 1985 soybean loan program will be altered. • The latest production estimates are based on conditions as of November 1. They show that the 1985 corn harvest will likely reach a record 8.72 billion bushels. Such a level would be 14 percent higher than a year ago and 6 percent above the previous high in 1982. The corn production estimate is based on a harvested area of 74.8 million acres—the highest since 1949—and a record-high yield of 116.6 bushels per harvested acre. In addition to the large corn harvest, production of other feed grains is up this year also. The combined harvest of other feed grains—sorghum, oats, and barley—is now estimated at 49.4 million metric tons, up 18 percent from last year and equivalent to 18 percent of total feed grain production. The larger supplies of these feed grains will result in added competition for corn in the months ahead. The 1985 soybean harvest is now projected to reach 2.13 billion bushels, up 14 percent from last year and sufficient for a third-place ranking with respect to the 1979 record of 2.26 billion bushels. Some 62.2 million acres of soybeans are expected to be harvested this year with per-acre yields averaging a record high of 34.2 bushels. The current projections will not be revised until final estimates are released in February 1986. In recent years, final estimates of corn and soybean production have usually exceeded the November estimates. That has been the case in 9 of the past 10 years with corn production estimates and 7 out of 10 years with soybean production estimates. While a similar pattern could prevail this year, analysts increasingly believe that the rain-delayed completion of this year's harvest could result in slight downward revisions. • Whether final estimates are raised or lowered, the fundamental reality that production of both corn and soybeans will far exceed utilization during the 1985/86 marketing year is not likely to be altered. While projections of 1985/86 utilization are tentative, tallies summarizing the just-completed Production Yield per acre Percent change* Million bushels Percent change" 134 124 125 102 107 18 6 12 21 1 1,521 756 1,669 275 364 22 7 16 25 6 124.3 12 4,585 16 116.6 9 8,716 14 37 385 19 21 19 183 310 35 10 35 22 17 9 -29 Bushels Corn Illinois Indiana Iowa Michigan Wisconsin District States United States Soybeans Illinois Indiana Iowa Michigan Wisconsin District States United States 43 41 38 32 30 -3 40.1 26 922 24 34.2 22 2,129 14 From 1984. marketing years for corn and soybeans provide little encouragement for the year ahead. Those tallies show that total utilization of corn in the 1984/85 marketing year that ended with September, although up 6.5 percent from the low yearearlier level, still only reached 7.0 billion bushels. Total utilization of corn in the five years prior to the 1983/84 downturn averaged 7.2 billion bushels. For soybeans, total utilization in the 1984/85 marketing year that ended with August retreated to a seven-year low of 1.7 billion bushels. A break-down of the utilization estimates indicates that both corn and soybean exports fell to eight-year lows in their respective 1984/85 marketing years. Corn exports, at 1.8 billion bushels, were slightly below the low level of the previous two years and a fourth below the 1979/80 peak. Soybean exports, at 600 million bushels, were 19 percent lower than the year before and 35 percent below the 1981/82 peak. A couple of discouraging aspects of the curtailed export shipments last year stand out in particular. For one, the pace of corn and soybean shipments in the latter part of their respective marketing years was exceedingly slow. Corn exports in the final three months of the 1984/85 marketing year fell to an annual rate of 1.2 billion bushels, a level unprecedented since the early 1970s. Similarly, export shipments of soybeans this summer fell to an annual rate of less than 400 million bushels, the lowest since the latter part of the 1960s. In addition, the booking of export orders for future shipments of corn and soybeans languished at a low level during the summer and early fall. While the pace will likely pick up in the months ahead, the summer patterns in export shipments and orders are disconcerting to those hoping that lower U.S. grain prices and a lower value of the U.S. dollar would quickly stimulate shipments. The second discouraging aspect of the weak 1984/85 exports was that corn exports would have been sharply lower had it not been for a surge in shipments to the USSR. In the 1984/85 corn marketing year, corn shipments to the USSR rose 140 percent from the year before and, at a record 620 million bushels, represented a third of U.S. corn exports to all destinations. The sharp increase in shipments to the USSR was more than offset by a one-fourth decline in corn exports to all other destinations. The likelihood that shipments to the USSR will turn lower in the months ahead diminishes hopes for a recovery in corn exports in 1985/86. Aside from exports, other components of corn and soybean utilization rose somewhat in 1984/85. Domestic utilization of corn rose a tenth from the unusually low year-earlier level but at 5.2 billion bushels, was only marginally above the annual average for the five years prior to last year. Nearly 80 percent of the corn used domestically in the 1984/85 marketing year was fed to livestock and poultry, with the remainder used for food, seed, and industrial purposes (mostly in the production of sweeteners, starches, and ethanol). The bulk of the soybeans used initially for domestic purposes are those that are crushed into the joint by-products of meal and oil.' In the 1984/85 marketing year, some 1.0 billion bushels of soybeans were crushed by U.S. processors. That was five percent more than the previous year but was still short of the average level of crushings for the five years prior to the 1983/84 marketing year. If utilization trends of recent years prevail in the months ahead, corn and soybean markets will be dominated by excess supplies and a huge build-up in carryover stocks next fall. Compared to the 8.7 billion bushel corn harvest now estimated for this fall, current USDA estimates imply that total utilization of corn in the 1985/86 marketing year may only marginally exceed 7.0 billion bushels. If those estimates hold, the difference of 1.7 billion bushels between production and utilization will be added to carryover stocks next fall. That would be in addition to the already existing 1.4 billion bushels of carryover stocks of corn, boosting the total to nearly 3.1 billion bushels. Such a carryover would be nearly equal to the record high that prompted the PIK program in 1983 and equivalent to a 23-week supply of market needs. In the same vein, total utilization of soybeans in the 1985/86 marketing year may rise slightly but, according to current USDA projections, is not expected to go much above 1.8 billion bushels. That would be some 300 million bushels short of the amount now estimated as being harvested this fall, foreshadowing that carryover stocks of soybeans next fall will double, perhaps reaching 615 million bushels. Such a level would far exceed the previous high (in 1980) of 358 million bushels in carryover stocks of soybeans and be equivalent to about a 17-1/2 week supply of market needs. A carryover of soybeans at that level would also be nearly equivalent to the 1985 harvest in Brazil, the world's second largest exporter of soybeans and soybean products. Projections of corn and soybean utilization for the year ahead are at best tentative. But several developments support the Corn exports at 8-year low in 1984/85 and expected to decline more in 1985/86 billion bushels 3.0 2.0 1.0 0 1971 '73 '75 '77 '79 '81 '83 '85 '86* year ending September 30 •USDA projection. USDA's current projections that show exports will continue sluggish and that domestic utilization may rise only slightly. An upturn this year in the USSR grain harvest suggests that U.S. corn exports to that destination in the months ahead will tail off considerably from the 1984/85 record. Simultaneously, corn exports to other destinations in the year ahead be held in check by large supplies of corn and other feed • grains in other exporting countries as well as increased production duction in traditional importing countries. Total production of corn and other coarse grains in countries other than the United States in 1985/86 is currently expected to be up nominally from the high year-earlier level. In addition, U.S. corn exports in the months ahead may confront increased competition from Canadian wheat exports. Weather damage lowered the quality of much of the Canadian wheat crop. The lower quality Canadian wheat will likely be available in world markets at prices that are very competitive to corn for livestock feeding. Soybean exports, while expected to rise more than a tgpth next year, will fall far short of earlier highs. The projected upturn in U.S. soybean exports hinges, in part, on current forecasts that the Brazilian soybean crop now being planted will result in a smaller harvest than was recorded a few months ago. Nevertheless, total soybean production in 1985/86 outside of the United States is projected to be unchanged from a year ago and up 6 percent from two years ago. Even larger increases are projected for total foreign production of eight major oilseed crops that compete to some degree with U.S. soybeans. Domestic utilization of corn and soybeans in the months ahead will be mostly influenced by livestock feed demands. Current measures indicate that the numbers of hogs and cattle being fed for slaughter markets over the next several months will lag year-earlier levels. A counterbalance, however, will be rising feed demand for poultry and dairy cattle. But overall, it is doubtful that domestic utilization of corn in the 1985/86 will exceed the 1982/83 high of 5.4 billion bushels. Domestic soybean crushings in 1985/86, while up, will likely fall short of earlier peaks. Corn and soybean prices will be held at relatively low levels by the huge build-up in carryover stocks. As is typically the case, future prices will be heavily influenced by emerging trends in production and utilization world-wide. But more so than in recent years, prices will ako be strongly influenced by price support loan programs and any changes that may be made in those programs. As things now stand, all farmers are eligible to place their soybeans under price support loan with the Commodity Credit Corporation (CCC) at a rate of $5.02 in loan funds for every bushel placed under loan. With 71 percent of corn base acreage enrolled in the 1985 feed grain program, it is assumed that a roughly comparable share of the 1985 corn harvest is eligible for a CCC loan at a national average loan rate of $2.55 per bushel. Unless changes are made, the price support mechanisms of the loan programs will tend to place a large portion of the excess stocks in CCC ownership which, in turn, will tend to pull corn and soybean prices up from recent levels. This has been the case in the recent upturn in corn prices. In mid-October, cash corn prices in central Illinois bottomed at about $2.07 a bushel, down from $2.65 a year earlier. Since then, prices have recovered to around $2.33 a bushel. The recovery has been due mostly to the movement of corn under loan with the CCC. The loan can be repaid at anytime but may extend up to nine months. At that time, the farmer has the option of repaying the loan plus accumulated interest or of forfeiting the grain to the CCC in full repayment of the loan charges. In general, farmers will repay the loan, and sell or store the grain, if actual or expected market prices are high enough to cover the principal and interest payments. Alternatively, if grain prices are below the loan rate, farmers tend to default on their loans, keeping the loan proceeds in exchange for the grain. Once the CCC owns the grain, it is precluded from selling the grain in commercial market channels unless market prices are somewhat above the prevailing loan rate. Because of these features, grain under loan with the CCC, if in sufficient quantities, can substantially tighten market supplies. In such situations, the loan rate typically serves as a price floor at least during some portion of the marketing year. Analysts believe that some 3.0 to 3.5 billion bushels of corn will eventually be placed under loan with the CCC. Assuming the 1985 corn loan program is not changed, such an amount, coupled with other stocks of corn already in CCC ownership or under long-term reserve contracts, would eventually push corn prices up to levels that would encourage some farmers to repay their loans and sell their corn at the higher market prices. At the present time, many analysts believe corn prices might peak at or above the loan rate in early spring. • Similar options are available for soybean farmers. Soybean prices, which bottomed at $4.85 a bushel in early October, had recovered to about $5.15 a bushel in early November. But more recently, soybean prices have dropped back to the October lows, apparently because of Senate debate that has heightened the possibility that the 1985 soybean loan pro- gram could be changed. Some of the proposed changes under debate would offer soybeans farmers who do not default on their CCC loan, or who do not put their crop under loan with the CCC, a direct payment that, on average, might be equivalent to about $1 a bushel. Such a change, if enacted, would discourage heavy use of the CCC loan program by soybean farmers and thus circumvent the "price floor" typically associated with the CCC loan rate. Some observers think that because of the large government costs associated with CCC stockpiles, other changes may be made in the 1985 loan programs for corn and soybeans that could also circumvent the price-floor mechanisms. For example, some have suggested the CCC may use the stocks that it acquires through defaulted loans to make "in-kind" deficiency or, if applicable, land diversion payments to replace the cash that is normally used to make such payments. Whether such a change will be made is purely speculative at this point. But if the change were made in the corn program, it could be implemented through advance payments for 1986 program participants or through deficiency payments that will be made to 1985 program participants in April. If implemented, such a change would tend to increase free market supplies and hold prices lower than would otherwise be the case. In the months ahead, changes in the 1986 loan programs are also likely to affect market prices. While the debate on legislation that will shape future farm loan programs still continues, it is fairly clear that loan rates for grains will be lowered in the 1986 program. Current versions of the farm bill, for example, would set corn loan rates at $2.40 to $2.45 a bushel in 1986. Assuming such a level is retained in the final legislation, corn markets in the year ahead will likely be adjusting to a lower loan rate. The adjustment process implies that prices during the latter part of the 1985/86 marketing year will be more heavily influenced by the 1986 corn loan rate than by the 1985 loan rate. Gary L. Benjamin 1 Each 60-pound bushel of soybeans that is crushed produces about 47.5 pounds of soybean meal (a high protein feed supplement for livestock and poultry) and 11 pounds of soybean oil (a product of widely diverse uses in foods and industrial processes). In recent years, exports have absorbed 20 to 25 percent of the domestically produced soybean meal and about 14 to 16 percent of the domestically produced soybean oil. AGRICULTURAL LETTER (ISSN 0002-1512) is published bi-weekly by the Research Department of the Federal Reserve Bank of Chicago. It is prepared by Gary L. Benjamin. economic adviser and vice-president, Peter J. Heffernan, economist, and members of the Bank's Research Department, and is distributed free of charge by the Bank's Public Information Center. The information used in the preparation of this publication is obtained from sources considered reliable, but its use does not constitute an endorsement of its accuracy or intent by the Federal Reserve Bank of Chicago. To subscribe, please write or telephone: Public Information Center Federal Reserve Bank of Chicago P.O. Box 834 Chicago,IL 60690 Tel.no. (312) 322-5111 Selected Agricultural Economic Indicators Percent change from Latest period Prices received by farmers (1977=100) Crops (1977=100) Corn (Sper bu.) Oats (Slier bu.) Soybeans Opel bu.) Wheat (Sper bu.) Value Prior period Year ago Two years ago October October October October October October 123 111 2.16 1.08 4.83 3.00 1.7 -0.9 -5.3 -1.8 -3.2 0 -11 -19 -19 -38 -20 -13 -8 -17 -31 -33 -39 -17 Livestock and products (1977=100) Barrows and gilts Ober cwt.) Steers and heifers Ober cwt.) Milk (Sper cwt.) Eggs (Cper doz.) October October October October October 134 44.00 56.90 12.50 63.5 4.7 9.2 9.0 1.6 2.1 -3 -1 -4 -11 14 -1 7 1 -9 -7 Prices paid by farmers (1977=100) Production items Feed Feeder livestock Fuels and energy October October October October October 162 148 108 146 202 0 0 -1.8 2.1 -0.5 -1 -3 -14 -3 0 1 -3 -23 0 -2 Producer Prices (1967=100) Agricultural machinery and equipment Fertilizer materials Agricultural chemicals October October October October 295 337 228 457 1.6 0 -0.6 -0.2 1 0 -3 -1 2 3 3 0 Consumer prices (1967=100) Food October October 326 310 0.3 0 3 2 8 6 1,379 318 2.11 1.36 12.0 N.A. N.A. 6.2 13.5 0.7 91 81 -3 -4 10 -56 -8 2 -2 6 Production or stocks Corn stocks (mil. bu.) Soybean stocks (mil. bu.) Beef production (bil. lbs.) Pork production (bit lbs.) Milk production (bil. lbs.) October 1 September 1 October October October N.A. Not applicable AGRICULTURAL LETTER FEDERAL RESERVE BANK OF CHICAGO Public Information Center P.O. 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