The current market outlook for row crops is dominated by huge crops from the past year and the resulting carryovers.
“We had a huge cotton crop in the United States this past year, producing 23 million bales,” says Bob Goodman, Auburn University Extension economist. “We also produced 11.8 billion bushels of corn with an average production of 160 bushels per acre. In addition, U.S. growers produced 3.1 billion bushels of soybeans. All of this made for a tremendous crop in 2004.”
Goodman presented his market outlook at the recent East Alabama Cotton Production Meeting, held in Marvyn.
Ending stocks have more than doubled, he adds, and that sets the stage for the current market outlook.
An interesting aside to the top yields and high production of this past year is that acreage has remained constant, says Goodman.
“Acreage, for all crops, has not been increasing, but yield and production continue to climb. We can look at world fertilizer use to help bring this into perspective,” he says.
On a worldwide basis, fertilizer use increased up until about 1988. says Goodman. “It’s not more land, and it’s not more fertilizer. It’s more the technological side of inputs. Genetics play a big factor, including the varieties we plant and the crop protection chemicals we use. Yield and production keep going up without additional land or fertilizer,” he says.
Management also could be characterized as one of the technological inputs that keep yield and production going up, he continues. “This fact has important implications for the farm bill that is coming up, and I think it will be beneficial to farmers, Extension and research,” he says.
All U.S. crop production was up in 2004, says Goodman. Cotton production was up 26 percent while soybean production was up 28 percent. “When supplies go down, price goes up. It’s an inverse relationship, and this is driving the markets,” he says.
Ending stocks also are up for all crops, says Goodman. Corn ending stocks tripled from about 900 million bushels to 1.9 billion bushels. Cotton ending stocks went from less than 4 million to more than 7 million bales in one year.
“After a strong start last year, prices of all major commodities have fallen. Nearly half the value of the cotton crop was lost in the market. If you didn’t get to participate in the market early last year, you pretty much lost out.”
Looking ahead to planting season, growers in Alabama and the Southeast have a lot of alternatives, says Goodman. “The good news is that we’re not in so much of a monoculture. We’re looking at rotational crops, and we even have the flexibility to plant peanuts. “But $2 corn on the Chicago Board of Trade nets you $2.20 to $2.30. And, given the increased cost of nitrogen, the outlook for corn isn’t all that great. We have tremendous carryover in corn and tremendous price pressure.”
November soybeans, says Goodman, are at $5.40. “In Alabama, you’re going to have to make more than 30 bushels per acre to cover your expenses with $5 soybeans. In addition, we have Asian Rust coming in, and we don’t know what impact it will have. If it shows up, we can budget in $20 to $40 for control, and that doesn’t compute in our budgets. When I look at any soybean budget, I can’t find $40 left to spend.”
December cotton, he says, was at 52 cents, and without a considerable LDP, that’s not very attractive.
“Peanuts — at $380 to $400 per ton — are attractive in that we can make those top yields when we first grow them. But if you can’t make more than 1.5 ton, it’s not attractive.”
Looking at fixed and variable costs for the various crops, Goodman says a yield of 655 pounds per acre just covers the $386 out-of-pocket expense of producing cotton.
“That bale of cotton isn’t getting the job done anymore. You need more than 800 pounds per acre to cover all of your expenses at 55 cents. That’s achievable, but not year in and year out.”
Corn, he says, is in a similar situation, with out-of-pocket expenses of $155 per acre. “We probably can expect to make 69 bushels per acre unless it’s a dismal year. But it’ll take 100 bushels per acre to cover the total costs of a little more than $200 per acre.”
Peanut costs vary considerably, but with estimated variable costs of $400 per acre and a total production cost of $526 per acre, it would take a yield of 3,370 pounds per acre to cover total costs, says Goodman.
“With estimated variable costs for soybeans at $125 per acre and fixed costs at $69 per acre, it would take a yield of 37 bushels per acre to cover all production costs.”
Turning to the market outlook for various crops, Goodman says factors to consider in corn are the huge carryover, and the increased cost of nitrogen.
“The low market price and the increased nitrogen cost may drive some acreage out of corn. But the threat of soybean rust might drive it back in. If we hold steady and plant a 90-million acre crop, that will give us enough so we won’t be able to reduce that huge 1.7 billion bushel carryover much next year. So we’re looking at another low price year for corn.”
The carryover in soybeans doubled, says Goodman. “So I’d say the outlook there is most bullish. If we’re hit with rust, there is a glimmer of upside potential in soybeans that I don’t see in corn.”
Everyone was worried last year that the world might produce a 100-million bale cotton crop, and the effect such a crop would have on prices, says Goodman.
“Who would have thought we’d produce a 115-million bale crop? We have nearly 40 million bales in ending stocks, and that’ll depress the market. On the positive side, China has indicated it’ll shift a substantial acreage from cotton into grain production. If that happens, we’ll still have robust consumption. Demand continues to be strong, so we should work through this and come out of it okay.”
Goodman says his marketing advice for cotton is to put in a floor but leave the top open.
“Don’t plant anything you haven’t already sold. You’re not going to take a hard hit — you won’t hit the high market, but you’ll come out on the top side of the average.”
Other options, he says, include puts and calls. “They give you the right but not the obligation to take a position in the futures market. That’s one way to put in a floor and leave the top open. There are several kinds of marketing contracts for future delivery or basis contracts. Be careful if you sign a basis contract. Find out what happens if the market really goes against you.”