Gulke: Econ 101

I spent most of last week’s column on the implications of the WASDE report on corn. I try not to read chat room comments and/or listen to media comments regarding how surprised they were on the increase in harvested acres and the suggestions that it was fake news coming out of USDA to influence cheap food.

I digressed this time out of curiosity as to the “shock and awe” disbelief I might witness; results gave naive a whole new meaning.

In reality, if one read the WASDE report, it was stated that planted acres were taken from farmer-generated FSA acreage reports, while harvested acres/conditions were taken from farmer surveys. But it was a matter of pure math. The planted acres were right in line — if not exactly — as one would get compared to our internal client survey, which predicted 98 million acres 11 months ago.

Planted acres increased by 8 million. Would it then make sense that those acres were not planted with the intent of cutting for silage? Something similar happened in early 2000 when corn acres were significantly increased and the percentage of harvested acres increased as well. Cattle numbers are down, and silage bunkers were filled more quickly than normal, which was reported by producers.

It should not have been a surprise to brokers and advisers if they did their due diligence. It became fashionable thereafter to tout the same disgust/surprise as producers were verbalizing, as misery loves company. And if all were surprised, then it must be someone else’s fault.

Not all were surprised, however. As it was alluded to before the WASDE, I mentioned uncertainty brings opportunity, and in this case, the cost was cheap to buy either put or call options for about 5 or 6 cents — a far cry from the 28-cent thumping corn took ($50/ac).

So, regardless of one’s view of the data, managing at least some of the price risk was warranted and was common sense.

Subsequently, corn still looks like the crop of choice in the corn/soybean belt, which now reaches all the way from Canada to Texas. Regardless of the advantages of corn over soybeans, thanks to crop insurance enhancements, we won’t produce ourselves out of a surplus regardless of what corn grower groups and sellers of foo-foo dust suggest.

Increasing domestic corn usage via E15/biofuels is an answer, perhaps. So are exports, which are now already at a record. But recent corn sales to “unknown destinations” could be a clue. Global stocks are the second lowest in 10 years. Note that just today, an amendment folded into a bipartisan budget bill expected to advance this month would authorize nationwide, year-round sales of E15 gasoline and tighten eligibility for small-refinery exemptions under federal biofuel blending rules, according to the bill’s text.

As the soybean supply and demand table accompanying this week’s column shows, we have seen soybean acres shift 6 million acres in the past seven years. The baseline estimate by USDA suggests that even with a near-3-million-acre increase, carryout does not grow. Given the EPA final announcement may come in on the high side of hopes, crush was reduced and seems unlikely. Exports don’t predict the 25 million metric ton (mmt) (900 million bushel) purchase by China as feasible. Thinking outside of the box, a slight adjustment in yield and exports could tighten ending stocks even more. See the red highlight on the accompanying chart.

The concerns that lie ahead and what our market discovery process is hinting is what I suggested last week. “The good news is we are more competitive in the global market by 25 cents in corn. The action in soy oil, canola and even palm oil may be hinting that EPA, which delayed long enough to make a decision to see a loss in soybean prices of over $1.40, will finally decide to help the soybean cause — which would help take acres away from corn. We’ve done it before, as the long-term supply and demand tables will show, especially when we took market signals and not political signals!”

Soybeans, soy oil and canola are up strongly at this writing; even palm oil is surging higher. All this after President Donald Trump’s speech in Davos, which educated the Europeans on the history of the U.S. subsidizing their economies after winning two wars. This was a needed shock and awe. A rising tide (U.S. economy) lifts all ships and thus demands for stuff that benefits all. A lesson in Econ 101, perhaps.

Thinking outside of the box is warranted while the new paradigm shift in ag evolves.

Jerry Gulke can be reached at (707) 365-0601 or by email at Jerry@gulkegroup.com