It’s a new year at USDA, at least for those of us forecasting agricultural commodity markets. Every May, the World Agricultural Outlook Board (WAOB) in the Office of the Chief Economist releases USDA’s initial projections of the markets for the crops and livestock that will be produced and harvested in the new crop year. WAOB develops USDA’s official forecasts by coordinating Interagency Commodity Estimates Committees (ICECs) to compile the latest and most comprehensive information and intelligence available from across USDA agencies. On May 10, USDA released its World Agricultural Supply and Demand Estimates (WASDE) report with these estimates for the 2019/20 crop year. The report also includes updated information on the 2018/19 and previous marketing years, but the early assessment of the “new crop” is a focal point of the May report.
This month’s WASDE projects abundant corn, soybean, and wheat supplies for the coming crop year, both in the U.S. and around the world, with modest growth in livestock and products. With soybean prices under pressure from Chinese tariffs and uncertainty on demand by China’s feed industry for soybeans due to the reduction in its hog herd from African Swine Fever, U.S. farmers have signaled a shifting of some acres from soybeans to corn. At the same time, with good second crop corn production in Brazil adding competition to the global market, along with expanded domestic corn acreage, U.S. corn stocks are expected to build by 390 million bushels to the highest level since the late 1980s. These abundant supplies are projected to push corn prices down to a season average price of $3.30 a bushel, the lowest since 2007. Despite the anticipated contraction of U.S. soybean acres, with Chinese soybean crush demand forecast to be flat in 2019/20 after a contraction in 2018/19, U.S. stocks are expected to fall minimally from the 2018/19 forecast record of 995 million bushels, keeping soybean prices under pressure until those stocks are worked down.
Wheat is the crop we know the most about as of May, since the winter wheat crop was planted in the fall. This year, the global wheat market is characterized by favorable weather across most major growing regions of the world, leading to a current expectation that major exporters will have larger crops in 2019/20 than the year prior. This will pose significant competition for U.S. wheat producers in global trade markets, pressuring world and U.S. wheat prices.
Meanwhile, modest growth in U.S. meat production in 2020, coupled with an expectation tightening global meat protein markets due to African Swine Fever in China, lead to improved livestock prices. Some of those price improvements, in hogs in particular, were influenced by the possibility of a trade deal with China.
How do we forecast the markets for crops that in large part haven’t yet even been planted? The answer is to focus on the information we have and make several important assumptions about future developments that are currently unknowable.
For example, weather is a critical determinant of crop yields, but at this stage in the year, it is impossible to know how the weather will turn out during the critical phases of the growing season. So, we assume “normal” weather and yields that follow long-term trends reflecting technological progress and historic productivity growth. Similarly, because we can’t predict future changes in government policy that might affect markets—such as the outcome of trade agreements under negotiation—we assume the current policies remain in place and leave policy speculation to other analysts and commodity traders.
Projected U.S. crop acreage is based on the USDA National Agricultural Statistics Service Prospective Plantings report that was released March 29, which provides the results of a nationally representative farmer survey of their crop acreage intentions for 2019. Ending stocks for the current crop year carry over as beginning stocks for the upcoming crop year. And since agricultural markets are global, production underway in other parts of the world—such as the southern hemisphere—provides critical insight into the prospective global supply and demand conditions—and ultimately the prices—U.S. farmers might face during the growing season and into harvest. For example, this month we looked closely at the 2018/19 second crop corn production in Brazil that will begin harvest in earnest in June and offers early competition to our own corn harvest that will get underway in the fall. Meteorological data suggests that the early-planted Brazilian crop has also benefited from abundant rainfall into May across the primary growing areas in the central-western regions. Satellite imagery, along with on-the-ground reporting, supports this assessment.
So, our first look at the upcoming marketing year is complete. From now until this crop is fully planted, harvested, and ultimately sold well into 2020, we will continue to update our estimates to incorporate all of the new and unfolding information we have about production, demand, prices, and global competition. And, one thing we know for certain is to expect the unexpected. Unanticipated weather events in the United States and around the globe, policy developments that affect global trade patterns, and truly unusual events like the spread of African Swine Fever in China, can each have profound implications for the global commodity markets in which U.S. farmers operate. The dedicated members of the ICECs who contribute to each month’s WASDE report will continue to monitor such events, and we eagerly await to see what developments arise in the months to come that today may not appear on anyone’s radar.