Weekly Insights: USDA Agricultural Projections to 2030
USDA Agricultural Projections to 2030
Last Tuesday, the USDA released its USDA Agricultural Projections to 2030 report, containing long-term balance sheet forecasts for U.S. grains and oilseeds. The annual release of the long-term forecast precedes USDA’s annual Agricultural Outlook Forum, which is the most important annual conference for analysts covering the agricultural markets. On Thursday, USDA released its initial 2021/22 forecast. The Long Term Report contains balance sheet tables for the major U.S. commodities from 2020/21 through 2030/31. While the USDA Long Range report provides a number for the 2021/22 marketing year, it is important to remember the starting point of USDA’s long-term forecast is the October WASDE report’s predictions. The starting point for the analysis means USDA has substantially revised critical assumptions, like 2020/21 ending stocks, since it made its long-term predictions. As a result, there are projections in USDA’s analysis that would likely be different if USDA based its long-term forecasts on the latest WASDE report.
At the base of USDA’s long-term assumptions is that rising world demand for protein will continue to drive rising trade flows from producing countries to importing countries for feed grains and soybeans. While the saying “a rising tide lifts all boats” applies to USDA’s forecasts, it does note increasing competition for market share from Brazil, Argentina, the European Union, and the Black Sea region. The report also notes ongoing tensions with trade partners (China), and the strength of the U.S. dollar making commodities more expensive in local currencies.
Whether the dollar strengthening continues is an open question. Many analysts believe that fiscal spending will ultimately increase the velocity of the money supply and spur inflation. Expectations of inflationary pressures are already driving capital flows into inflation hedges, like commodities. This could offset the impact on prices from any weakness in U.S. exports due to the dollar’s strength. Many economists believe the fiscal stimulus provided by the U.S. government resulted in an expanded money supply and a larger U.S. budget deficit. That could lead to a weaker dollar, potentially partially negating the USDA’s concerns about the strength of the dollar.
USDA’s long-term forecasts generally do not reflect rising expectations for commodity price inflation. USDA predicts average corn farm prices to increase from $3.56 per bushel in 2019/20 to $3.65 in 2021/22 before falling and stabilizing at $3.55 from 2024/25 through the end of the forecast period. USDA expects average soybean farm prices to be relatively volatile over the next 10 years. USDA predicts peak prices reach $10 per bushel in 2021/22 before dropping to a low of $9.65 in 2024/25 and finally rising to $9.90 in 2030/31. The only forecast that anticipates inflationary pressures is USDA’s wheat projection. USDA predicts a steady increase in average wheat farm prices from $4.58 in 2019/20 to $5.10 in 2024/25, where the average remains through the end of the forecast period.
USDA bases its wheat price forecast on steady demand for U.S. wheat (slow growth in domestic use and declining exports) despite the temporary increase in demand driven by shifts in consumer behavior during the pandemic that favored spending on food at home. Rising global demand drives the increase in USDA’s wheat price forecasts, but it expects increased competition from Russia, Ukraine, and the European Union to limit the growth of U.S. exports.
USDA’s wheat balance sheets project wheat acreage slowly declining from an anticipated 46 million acres in 2021/22 to 44.5 million by the end of the forecast period. Projected growth in the demand for soybeans is likely to keep wheat acreage limited, while an increase in wheat yields raises production from 1.89 billion bushels in 2021/22 to 1.97 billion in 2030/31. The minimal growth in domestic usage offsets a slight decline in exports and an increase in imports to drive ending stocks below 750 million bushels by 2024/25. USDA predicts the U.S. carryout will range between 700 and 750 million bushels over the balance of the forecast period.
Unlike its wheat projections, USDA predicts a substantial increase in corn demand in domestic and export markets. USDA’s forecast of total corn use rises from 13.9 billion bushels in 2019/20 to nearly 16.2 billion bushels by the end of the forecast period. Rising exports account for almost one billion bushels of the 2.3-billion-bushel increase in demand. The sharp increase in purchases of U.S. corn by Chinese buyers highlights a trend in world trade supporting USDA’s prediction.
Growth in domestic use accounts for the remaining 1.3 billion bushels of the change. Rising feed demand provides slightly more than one billion bushels of the increase in the domestic market. The remaining growth is due to a 300-million-bushel rise in the corn ground in ethanol production, which offsets a 30-million-bushel decrease in the remaining food, seed, and industrial (FSI) use. Higby Barrett believes growth in ethanol demand could be substantially more robust than USDA’s forecast.
Despite the sharp growth in USDA’s demand forecast and a slow decline in U.S. corn acreage projection, it predicts U.S. carryout will increase nearly 45%, from almost two billion bushels in 2019/20 to 2.88 billion in 2030/31. A sharp increase in yields drives robust growth in USDA’s production forecast, which rises from 13.6 billion bushels in 2019/20 to 16.2 billion by the end of its projections. USDA anticipates that the average U.S. corn yield will rise to nearly 200 bushels per acre over the next 10 years, increasing more than 18% from 2019/20.
Rising net returns fund the advancement in yields. USDA predicts net returns on corn acreage will increase 44% ($115) from $257 per acre in 2019/20 to $372 in 2030/31. Despite the increase, USDA expects robust growth in world demand for soybean meal to support more substantial gains in net returns for soybeans, leading to acreage gains for soybeans. USDA predicts net returns for soybeans grow from $244 per acre in 2019/20 to $388 by the end of the forecast period. However, the bulk of the gains occur early in the forecast period. Returns are steady through the middle of USDA’s projections before rising again during the last four years.
The early gains in net returns drive a substantial increase in U.S. soybean acreage over the next three years, from 83.1 million acres in 2020 to 89 million in 2021 and 90 million in 2022. USDA then expects the planted area to remain relatively steady over the balance of the forecast period.
Strong growth in demand, which USDA projects will rise 26% (1.025 billion bushels) during the forecast period, drives the growth in returns. USDA projects exports will account for almost 70% (700 million bushels) of the rise in demand. In comparison, crush increases nearly 29% (295 million bushels), and rising seed and residual use account for the balance. Higby Barrett expects growing demand for biomass-based diesel feedstocks to drive more robust growth in crushing volumes.
USDA anticipates average U.S. soybean yields will grow at about the same rate as corn, allowing output to increase nearly 40% from 3.55 billion bushels in 2019/20 to 4.96 billion in 2030/31, despite its assumption of steady acreage from 2022/23 to 2030/31. The growth in production offsets the increase in demand to keep the U.S. carryout around 300 million bushels throughout the entire forecast period. Given that expectations for the U.S. soybean carryout have fallen by more than 50% from USDA’s October WASDE, the acreage growth could occur even more quickly than USDA anticipates. However, with the soybean/corn ratio at 2.6 during the month USDA sets the rates for revenue insurance products, the change in acreage in 2021/22 may not be as dramatic as USDA projects.
One of the critical drivers for trends in grains and oilseeds over the next 10 years will be developments in the biofuel market. USDA’s report predicts soybean oil used in biodiesel production rises from 8.1 billion pounds in 2020/21 to 8.6 billion pounds in 2030/31. Over the last four months, USDA has increased its forecast to 8.3 billion pounds in 2020/21, suggesting the impact of developments in the biofuel industry can substantially impact the outlook for a single year, let alone over the next 10. Given the difference in the current U.S. administration’s environmental policies from the prior administration, the U.S. biofuel policy outlook has changed substantially.
Big Unknown: China (Corn) Imports
With balance sheets, if the USDA makes one major change to one category, then the other line items are usually altered as well. Typically, the changes between October and February are very minor. This year is the exception. USDA’s U.S. corn export forecast based on current data is 325 million bushels higher than the long-range estimate based on record Chinese corn imports.
The current number does not indicate if USDA has a more bullish outlook for China corn consumption going forward or if 2020/21 and 2021/22 are considered anomalies. USDA October WASDE forecasts China corn imports at 7.2 MMT in 2021/22 and the Long Range indicates corn imports are not expected to increase over the next 10 years. In October, market analysts assumed USDA was assuming China will not exceed its trade quota. With China not giving any guidance, the safe route is to assume China corn imports equal to the trade quota. In fairness, China’s lack of transparency puts the USDA in an odd situation. USDA’s WASDE report in February raised China corn imports to 24 MMT, and many traders expect China corn imports to be even higher in 2021/22. Due to the sheer size of this change, it is reasonable to assume the long-term forecasts would be more bullish for U.S. corn and soybean meal, and less bullish for U.S. meat operations. Unfortunately, how USDA views China corn imports long term will not be known until the next long-range report.
China Coarse Grain Imports (2010/11 – 2020/21)
According to China’s Agriculture Ministry, the African Swine Fever (ASF) reduced the market hog population by roughly half in 2019. The Chinese meat sector responded by importing more meat and investing heavily in chicken operations to offset some of the lost pork production. Currently, Chinese government officials have reported they are investing heavily in world-class hog operations that will quickly bring production back online. The ability of hogs to reproduce quickly makes this very easy to do from a biological standpoint.
Asian countries have very little land available for agriculture. With China, India, and other Asian countries accounting for half the world’s population, marginal consumption increases create demand for imported products. Aside from China importing more agricultural products, many other Asian countries have experienced strong gains in disposable income. Because of the low starting point, the absolute income gain is quite small. The area consists of extreme poverty, which is very important for commodity consumption, but especially food products. As income increases, a wealthier person responds by switching to high-end food products and eating at higher-end restaurants. Although they are spending more money on eating, the volume of coarse grains, wheat, and protein meals consumed might not increase. By comparison, as income increases for poor people, they respond by adding ingredients to a basic diet. Eating tastier food often requires vegetable oil, meat, fruits, and vegetables. Meat production requires feed rations of grains and protein meals that are converted into weight gain. For example, if 1.6 pounds of feed is required to add one pound of chicken, switching, or just adding chicken to the dish results in an increase in per capita consumption of grains and protein meals.
Rising incomes, particularly in developing economies, translate to increasing demand for meat, bolstering demand for coarse grains and vegetable meal for feed. However, combined with greater competition from Brazil, Argentina, and Ukraine (numbers 2, 3, and 4 in the global rankings), and growing domestic feed use, USDA forecasts the U.S. market share of global corn trade to slowly decline to 30% over the projection period.
Most people rightly view Brazil as a competitor, but the increase in corn production could have a silver lining. As South America and Ukraine increase corn production, China can increase corn total imports without being too dependent on one country (U.S.). With the recent U.S./China trade war, the ability to switch from importing U.S. soybeans to importing South America soybeans verified the Chinese trade policy of being dependent on the world but not one country. Because the long-range forecast is based on the October WADSE report, USDA’s opinion about whether China will continue to be a large corn buyer is unknown. When presenting the U.S. export forecast based on current data, the presenter did hint at the possibility of China being a larger corn buyer for many years. As everyone learned this year, it is amazing how quickly a balance sheet can change.
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