2020 Agricultural Outlook USDAs Office of the Chief Economist - - PowerPoint PPT Presentation

Office of the Chief Economist Office of the Chief Economist

USDA’s Office of the Chief Economist February 20, 2020

2020 Agricultural Outlook

https://www.thedickinsonpress.com/business/agriculture/4730104-Snow-increases- harvest-worries-as-North-Dakota-considers-disaster-declarations

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Office of the Chief Economist

Outline

• 1. Trade
• 2. Crops & Livestock
• 3. Farm Economy

Photographer: Tiffany Hagler-Geard/Bloomberg via Getty Images (Moriah Ratner/Bloomberg News) CREDIT MADELYN BECK / ILLINOIS NEWSROOM

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Office of the Chief Economist

World growth forecast down, led by weakening of emerging markets and developing countries (not including coronavirus)

Data: International Monetary Fund, World Economic Outlook. April 2019, October 2019, and January 2020.

3 1 2 3 4 5 2017 2018 2019 2020 2021 Annual percent change Apr 2019 Oct 2019 Jan 2020 1 2 3 4 5 2017 2018 2019 2020 2021 Annual percent change Emerging: Apr 2019 Emerging: Oct 2019 Emerging: Jan 2020 Advanced: Apr 2019 Advanced: Oct 2019 Advanced: Jan 2020

Office of the Chief Economist Office of the Chief Economist

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Data: Refinitiv and China’s National Health Commission

Coronavirus tops macro global economy concerns; markets expecting recovery

10000 20000 30000 40000 50000 60000 0.85 0.9 0.95 1 1.05 1.1

# of Covid19 infections

S&P500 and Shanghai Index, Dec 1 2019=1

S&P 500 vs Shanghai Composite Index and Corona Infections

# of Covid19 infections S&P500 Index Shanghai Composite Index

U.S. and China reach Phase One agreement

Office of the Chief Economist

U.S. dollar appreciated early in the year before declining across many currencies

Data: Refinitiv

• 10%
• 5%

0% 5% 10% 15% 20% 25% 30% 35% UK pound South Korean won Russian rouble Mexican peso Japanese yen Euro Chinese renminbi yuan Canadian dollar Brazil real Australian dollar Argentina peso

US $ appreciation in 1st and 2nd half of 2019

1st half 2nd half

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Office of the Chief Economist

U.S. agricultural exports by trade agreement status, size of trade

2020 Agreements: 51%

Previous FTAs: 14% Notification of Intent: 8% No Agreement: 26%

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Canada USMCA signed into U.S. law

• Jan. 29, 2020

$20.6B China Phase One entered into force

• Feb. 14, 2020

$19.5B Mexico USMCA signed into U.S. law Jan. 29, 2020 $18.6B Japan Entered into force Jan. 1, 2020 $11.9B Hong Kong $4.2B

South Korea

$6.9B

EU27 $9.7B

UK $1.7B Source: USDA, 2017 data

TWN $3B IDN $3B

PHL $2.6B VNM $2.5B

THA $2B TUR $2B

India $1.6B SAU $1.5B

UAE $1B PAK $1B

Rest of World $12.6B

CAFTA $4.3B Australia, Peru, Israel, Panama, Singapore, Chile-$5.6B

Colombia $2.5B

Kenya $0.1B

Office of the Chief Economist

U.S. agricultural exports in billion $ from 1990 to 2019 (FY) by income level

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Source: USDA using gapminder

Office of the Chief Economist

U.S. agricultural exports forecast to rise $4 bil. in FY2020

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Source: USDA using gapminder

+$3.9B

+$0.8B

+$0.6B

• $0.1B
• $0.3B

Office of the Chief Economist

And where do we expect the largest growth in import demand?

Projected growth in global imports over the next ten years (2020-2029)

Source: USDA

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Office of the Chief Economist

U.S. Crop and Livestock sectors forecast to improve in 2020

Forum News Service/Agweek/Mikkel Pates 10

Office of the Chief Economist

June 11, 2019

A wet autumn further delayed an already slow U.S. harvest.

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Office of the Chief Economist

18-Nov- 18 22-Feb- 19 10-May- 20 11-Jun- 19 11-Jul-19 12-Aug- 19 12-Sep- 19 10-Oct- 19 8-Nov-19 10-Dec- 19 10-Jan- 20 acres harvested 84.6 84.6 85.4 82.4 83.6 82 82 81.8 81.8 81.8 81.5 Yield 176.5 176 176 166 166 169.5 168.2 168.4 167 167 168 160 162 164 166 168 170 172 174 176 178 79 80 81 82 83 84 85 86

Yield, Bu/acre Acres, millions

First 2019 WASDE Acres = NASS Prospective Plantings Yield = WAOB trend Acres and Yield = NASS surveys

Source: USDA.

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Office of the Chief Economist Source: Adjemian, Arita, Hungerford, Breneman, and Johansson (Illinois FarmDoc, October 2019)

(400) (200)

• 200

400 600 800 Million bushels

Figure 1. USDA Aug. corn production forecast minus average private trade expectations Aug 2019 USDA report

USDA August corn production forecast minus average private trade expectations

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Office of the Chief Economist

50 cent drop in futures price Reaction inline with relationship

When USDA and the trade are on opposite pages, a price correction is usually coming

Source: https://farmdocdaily.illinois.edu/2019/10/market-reaction-to-usda-august-corn-crop-reports.html

300 320 340 360 380 400 420 440

Figure 2. Corn Dec19 Contract (cents/bu)

USDA report released Aug 12, 2019

y = -1.09x + 0.003 R² = 0.46

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8%

• 4.0%
• 3.0%
• 2.0%
• 1.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%

Figure 3. Average Corn Futures Reaction to August USDA Reports, against the Market Surprise in the Production Forecast

x-axis: % Difference between USDA Prod. Forecast and Avg Trade Guess y-axis: % change in Dec Corn futures on day of Aug Report Aug 12, Source: Reuters, USDA; author

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Office of the Chief Economist

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25%

• 15%
• 10%
• 5%

0% 5% 10% 15% 20% 25%

2019 2016 2013 2010 2007 2004 2001 1998 1995 1992 1989 1986 1983 1980 1977 1974 USDA Trade Estimates

Forecasts of final corn production have been getting more accurate

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Since 2010, August corn production estimates have been < 5% from final

Data: USDA, Refinitiv

Office of the Chief Economist

16 million acre decline in 2019 --- where do they end up?

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Source: USDA-NASS.

Office of the Chief Economist

Global stocks in days of use: stocks are relatively high but expected to decline over the next few years (except rice)

Data: USDA

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20 40 60 80 100 120 140 160 1990 1995 2000 2005 2010 2015 2020 2025 2030 Days of Use/ Consumption

Wheat Corn Rice Soybeans

Office of the Chief Economist

Continued expansion expected in Brazil’s soybean and corn production

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• 1,000

2,000 3,000 4,000 5,000 6,000

2007/08 2008/09 2009/10 2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Million Bushels

2nd Corn 1st Corn Soybeans

Source: CONAB. 2nd Corn assumed to be all corn minus 1st crop.

Office of the Chief Economist

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New crop futures soybean:corn price ratio for 2020 points to a large corn crop, with some basis effects

Data: CME, Geograin.

Office of the Chief Economist

Corn and rice prices expected to edge down in 2020/21

Crop 2016 2017 2018 2019 2020F %∆ Wheat ($/bu) 3.89 4.72 5.16 4.55 4.90 8% Corn ($/bu) 3.36 3.36 3.61 3.85 3.60

• 6%

Soybeans ($/bu) 9.47 9.33 8.48 8.75 8.80 1% Cotton (cents/lb) 70.5 68.6 70.3 63.0 64.0 2% All Rice ($/cwt) 10.4 12.9 12.6 13.0 12.0

• 8%

Data: USDA-OCE.

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Office of the Chief Economist

Crop (mil. acres) 2016 2017 2018 2019 2020F %∆ Corn 94.0 90.2 88.9 89.7 94.0 5% Soybeans 83.5 90.2 89.2 76.1 85.0 12% Wheat 50.1 46.1 47.8 45.2 45.0 0% Cotton 10.1 12.7 14.1 13.7 12.5

• 9%

Other feedgrains 12.6 10.7 11.0 10.8 11.1 3% Rice 3.2 2.5 2.9 2.5 3.1 21% Total 8 crops 253.4 252.3 253.9 238.0 250.7 5% CRP 23.9 23.4 22.6 22.6 22.7 0% 8 crops + CRP 277.3 275.7 276.5 260.6 272.7 5%

Cropland area mostly up from last year

Source: USDA-OCE. Area planted. Values in red denote record levels.

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Office of the Chief Economist

Record production projected in 2020

Data in red denote record levels. 1 Total red meat and poultry. 2Skim-solids basis exports as a percent of total milk production

Item 2010

Exports as a % of prod.

2019

Exports as a % of prod.

2020F

Exports as a % of prod.

Billion pounds Beef 26.3 8.7% 27.2 11.1% 27.5 12.0% Pork 22.4 18.8% 27.6 22.9% 28.9 25.5% Broilers 36.9 18.3% 43.9 16.2% 45.8 16.2% Total1 92.1 15.2% 105.2 16.3% 108.8 17.3% Billion pounds Milk2 192.9 15.8% 218.3 19.0% 222.0 19.6%

Data: USDA-OCE.

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Office of the Chief Economist

54 2 55 7

47 3 49 7

36 4 40 7

• 10

20 30 40 50 60 China Production World Exports to China China Domestic Consumption World exports to everyone but China

China pork production, supply and demand

2018 2019 2020F

2020 Production down 18 mmts from 2018 2020 China Imports projected up 2 mmts from 2018 China 2020 Consumption down 15.8 mmts Not enough global export supply to fill China’s ASF shortfall

MMTs

China 2018 vs 2019 imports (mmts)

African Swine Fever shocks China and global pork supply

Data: USDA and TDM

Office of the Chief Economist

Prices: hogs, milk up, broilers down; steers largely unchanged

Item 2016 2017 2018 2019 2020F %∆ Dollars per cwt Steers 120.86 121.52 117.12 116.78 117.00 0.2% Hogs 46.16 50.48 45.93 47.95 49.00 2.2% Broilers 84.3 93.5 97.8 88.6 87.0

• 1.8%

Milk 16.30 17.65 16.27 18.60 18.85 1.3%

Data: USDA-OCE.

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Office of the Chief Economist

Recent milk production increases driven by cow numbers and milk per cow gains

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 8,800 8,900 9,000 9,100 9,200 9,300 9,400 9,500 Milk/cow/day (pounds) Cow numbers (Thousands) Dairy Cow Numbers (Left axis) Milk per cow per day Data: USDA

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Office of the Chief Economist

U.S. Dairy Herd by Size of Operation

1 2 3 4 5 6 Million milk cows Size of Operation by Number of Milk Cows (Head) 1997 2002 2007 2012 2017

Year Milk Cow Inventory (millions) Operations with Inventory (thousands) 1997 9.1 125.0 2002 9.1 92.0 2007 9.3 69.9 2012 9.3 64.1 2017 9.5 54.6 Data: USDA-NASS.

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Office of the Chief Economist

Distribution of Milk Production Cost by Farm and Production

$0 $10 $20 $30 $40 $50 $60 10 20 30 40 50 60 70 80 90 100 $/hundredweight Percentile of Farms or Production Farms Production 2019 All-Milk Price

Data: USDA-ERS, Agricultural Resource Management Survey, 2016.

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Office of the Chief Economist

Farm Economy and Policies

https://www.cnn.com/2017/03/08/us/ka nsas-wildfires-livestock-lost/index.html https://www.11alive.com/article/weather/hurricane/timeline- how-will-hurricane-michael-affect-georgia/85-602040370 https://www.producer.com/2019/12/u-s-sugar-beet-farmers-face- frozen-harvest/

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Office of the Chief Economist

How optimistic are you about economic prospects over the next 6 months?

Data: Refinitiv, USDA, University of Michigan, NAHB, Creighton, NAHB, Purdue/CME

70 80 90 100 110 120 130 70 80 90 100 110 120 130 Feb 2019 = 100 Feb 2019 = 100 Corn Price Agbarometer DJIA Consumer Sentiment Rural Mainstreet Housing Market

Corn price increases with the knowledge of widespread prevent plant. Slow planting progress and increased trade tension Signing of the phase I trade deal with China

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Office of the Chief Economist

Distribution of farm household income shows half of all farms earn negative farm income

Percentile Farm Income Off-farm Income Total Income 5

• $47,714

$0

• $8,526

25

• $9,950

$33,577 $35,978 50

• $1,735

$65,841 $72,481 75 $8,783 $112,500 $122,991 95 $148,850 $205,000 $304,715

Source: USDA-ERS, Agricultural Resource Management Survey, 2018

• $50,000

$0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 $350,000 10 20 30 40 50 60 70 80 90 100 Percentile Total income Farm Income Off-farm Income 30

Office of the Chief Economist

Net returns are expected up, with lower expected government payments and crop insurance indemnities

Data: USDA-ERS

$0 $20 $40 $60 $80 $100 $120 $140 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Billion dollars (2020$) Federal crop insurance indemnities minus premium Direct government payments Net farm income minus government payments and net federal indemnities 31

Office of the Chief Economist

Prevent plant boosted insurance indemnities in 2019 by > $4 billion

Source: USDA-Risk Management Agency * 2019 data collection is still ongoing.

0.0 0.5 1.0 1.5 2.0 2.5 $0 $2 $4 $6 $8 $10 $12 $14 $16 $18 $20 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Loss Ratio Billion dollars (2020$) Drought/Heat/Excess Sun Excess Moisture/Precipitation/Rain/Flood Hurricane/Tropical Depression/Cyclone Other Prevented Planting Price WHIP/WHIP+ Loss Ratio 32

Office of the Chief Economist

MFP payments overlap areas where estimated damages are the highest

Source: USDA

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Office of the Chief Economist

Debt-to-assets ratio remain low --- 13.59%, and debt financing cost falling despite total debt at historic levels

Data: USDA-ERS

“Interest repayment capacity” =Interest Expenses divided by (NFI before interest and taxes) 2020, $425.3B 2020, 15.22% 2020, 13.59% $0 $50 $100 $150 $200 $250 $300 $350 $400 $450 $500 0% 10% 20% 30% 40% 50% 60% 70% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 Billion dollars (2020$) Percent Debt (right axis) Interest repayment capacity Debt to asset ratio 34

Office of the Chief Economist

The percentage of corn, soybean, and hog farm businesses that are very highly leveraged has been trending upward

Data: USDA-ERS. Note: very highly leveraged farms have debt to asset ratios of >70%.

0% 2% 4% 6% 8% 10% 12% 14% Corn specialized farms Soybeans specialized farms Hog specialized farms 35

Office of the Chief Economist

Farm bankruptcy rates remain historically low

5 10 15 20 25 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 1899 1903 1907 1911 1915 1919 1923 1927 1931 1935 1939 1943 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015 2019 Bankruptcy Rate / 10,000 farms Number of farms, excluding sharecroppers Total farms Bankruptcy Rate

Source: USDA-ERS, U.S. Courts

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Office of the Chief Economist Data: U.S. Courts

AK AL AR AZ CA CO CT DE FL GA IA ID IL IN KS KY LA MD ME MI MN MO MS MT NC ND NE NH NJ NV NY OH OK OR PA RI SC SD TN TX UT VA VT WA WI WVWY

2 4 6 8 10 12 2 4 6 8 10 12 10-year average of bankruptcies per 10,000 farms Number of bankruptcies in 2019 per 10,000 farms

Many states remain near their 10-year average bankruptcy rate.

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Office of the Chief Economist

Negative returns for some heading into 2020

• -- not including government payments

Data: Illinois, Arkansas, Kansas extension farm management budgets; MFP for 2019 tranche 3 only.

AR, conventional, furrow irrigation Central IL, high prod, after soy Central IL, high prod, after corn South Central KS, continuous 2020F Cotton Corn Soybeans Wheat Market returns: Total costs (dollars/acre) $952 $864 $617 $271 Value of production (dollars/acre) (includes cottonseed value for cotton) $923 $835 $540 $211 Market returns per acre using total costs ($28) ($29) ($77) ($60) 38

Office of the Chief Economist

Concluding Remarks

• 1. Current conditions point towards an improved outlook for 2020
• Trade deals will improve our access and trading opportunities
• A return to more normal trade will lower friction
• 2. Economic fundamentals are stable
• Interest rates remain low and keep borrowing costs down
• Equity remains high relative to debt
• Stable land values
• 3. Weather conditions will likely be better
• Corn and soybean area likely to be up from 2019

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Office of the Chief Economist

Concluding Remarks (con’t.)

• 4. Livestock sector poised for continued growth
• Modest growth in beef production, stronger growth in pork and

poultry

• Growing opportunities for meat exports reflecting the Phase One deal,

U.S.-Japan agreement, and global income growth

• 5. International competition in crop and livestock production is intense
• Corn and soybean expansion continues in Brazil
• 6. U.S. productivity remains remarkably strong
• Continued investment in technology and innovation key to

maintaining markets and profitably, and feeding a growing global population

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Office of the Chief Economist

Expectations for 2029/30?

Productivity of staple commodities continues to grow, fueled by technology In 1929, approximately 6.3 million farms produced 105 million metric tons of crop and fiber, feeding and clothing 121 million Americans. In 2017, 2.0 million farms produced 561 million metric tons of crops --- an increase of more than 400% on 9% fewer acres, feeding and clothing 330 million Americans and exporting food and fiber to help feed and clothe billions globally. And over the next 10 years, we would expect an additional 90 million tons of production.

Data: USDA-NASS; USDA Baseline. Note: USDA WASDE crops included in the chart are wheat, corn, sorghum, barley, oats, rice, soybeans, and cotton.

50 100 150 200 250 300 350 100 200 300 400 500 600 700

1929 1939 1949 1959 1969 1979 1989 1999 2009 2019 2029

Total planted acres USDA WASDE crops (Millon) Total production of USDA WASDE Crops (Million MT)

Crop production versus planted acres

Total metric tons (millions) Total planted acres

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Office of the Chief Economist

The number of undernourished people in the world still number more than 800 million, and is heading in the wrong direction

Source: FAO, SOFI 2019.

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