Dim ag outlook kicks off 2020 Farm Bureau convention
AUSTIN, Texas -- Prices for commodities from corn to soybeans to wheat are poised to get a boost from the new trade agreement signed by China and the U.S. this week.
Yet caution remains about whether that demand can outpace an expected increase in supply in 2020, after farming suffered a “terrible production year” in 2019.
If a rebound in supply gets ahead of demand, it would mean a “fairly negative outlook,” according to John Anderson, the former deputy chief economist of the American Farm Bureau Federation and a professor of agricultural economics at the University of Arkansas.
Anderson spoke Saturday during an economic outlook session at the American Farm Bureau’s annual convention in Austin, Texas. “That's ultimately the race that we're always in with these commodities, but that contrast is more stark as I look at it in 2020 than I typically see it,” Anderson said. “There are times in a market when I really feel confident about the explanation I can give about what's going on. … This is not one of those times.”
Even so, the production issues of 2019 did result in tightening of the ratio of grain stocks to the amount used, Anderson said.
Farmers in the U.S. reported that they were unable to plant crops on more than 19.4 million acres in 2019, according to the USDA, the most since the USDA started reporting the figure in 2007. If the newly minted trade deal with China does spark enough demand to outstrip any recovery in that production, that’d mean improved pricing, Anderson said.
Futures prices indicate the market consensus is a moderate uptick in pricing. The potential rise in demand from China due to the trade agreement means there may be more upside than current futures prices imply, Anderson said. That is dependent on changes in production, of course. “If we add another 19 million acres to what we produced last year, we'll be in a pretty tough supply situation regardless of how many commodities the Chinese are willing to buy,” he said.
The U.S. and China signed a phase one agreement that calls for China to purchase $36.5 billion in U.S. agricultural goods in 2020 and $43.5 billion in 2021. In 2017, the year before Trump first imposed tariffs on Chinese goods and the Chinese retaliated with tariffs against the U.S., the Chinese purchased $24 billion in agricultural commodities from the U.S.
U.S. trade officials have said they will be monitoring the Chinese purchases of agricultural commodities to make sure they meet the two-year total of $80 billion.
As for ethanol markets, Anderson said he doesn’t expect to see much change in the use for corn in a way that would impact pricing. Environmental regulators in December kept the minimum amount of ethanol and other biofuels that oil refiners must add to the U.S. gasoline and diesel supply at 15 billion gallons, which has been the target for the past two years. Advocates have said the target doesn’t go far enough, as the Wall Street Journal reported.
Even if the rules were adjusted, Anderson said he doesn’t believe there would be much change in corn use, which has been steady since 2011.
The economic environment is less supportive now than the years between 2006 and 2010 when corn use spiked dramatically, which was driven both export growth and global production issues, in addition to the implementation of the Renewable Fuel Standard, Anderson said.
The oil market is also different now than it was in the early 2000s; whereas a disruption in the Middle East might instantly drive the price of a barrel of oil to $180 from $60, the oil market has done nothing even as there is currently turmoil in Iran, Anderson said.
“I don't care what kind of tweaking we do with the rules, we won't see this kind of rate of change in this or any component of demand anytime soon,” Anderson said. “That was a once-in-a-lifetime event.”
Anderson said he expects growth in exports of pork, in part due to the outbreak of African swine fever that has killed half of China’s hog herd since 2018. “They are facing a challenge and it has some potential to be very beneficial to our markets,” he said.
By David Holley, a freelance writer for Agriculture.com