The wide-spread uncertainty surrounding this year’s cropping season around the Midwest, including Michigan and Wisconsin, is creating uncertainty in commodity markets. feed values and late-planted crops will have a ripple effect throughout the marketplace.
This uncertainty was reflected in the Ag Economy Barometer report released by Purdue University on June 4. In the survey of 400 U.S. agriculture producers, respondents exhibited a declining sentiment with a barometer reading of 101, 14 points lower than a month prior. According to the report, the decline in farmer sentiment is attributable to big declines in both the Index of Current Conditions, which fell from 99 in April to 84 in May, and the Index of Future Expectations, which fell from 123 in April to 108 in May.
The Ag Economy Barometer also measures agriculture producers sentiment on trade. For the second month, the index illustrates one source of anxiety for U.S. farmers continues to be uncertainty about agricultural trade. While the U.S., Mexico, and Canada (USMCA) free trade agreement is still in process, progress is being made as Mexico has ratified the USMCA, and Canada has begun the legislative process to ratify the USMCA in their country. U.S. congressional leaders continue to talk about the need for enforcement provisions, but it is becoming more clearer that the U.S. may not have the treaty in place by the August recess. On-and off- again tariff talks could also jeopardize approval of the USMCA.
At the moment, trade talks between the U.S. and China appear to be closer to a truce than deadlock. President Trump’s previous announcement of additional China pressure in the form of tariffs on an additional $300 billion in goods is currently delayed, pending expected trade talks yielding greater progress. The Chinese government is also on hold with their previous intentions of ramping up efforts to apply pressure on the U.S., which would otherwise impose punitive economic measures. Previous to the truce, the Chinese government had went as far as discouraging citizens to visit or study in the U.S., potentially hitting universities and tourist destinations. It is unknown if the cautiously optimistic tone will prevail and when the trade issues will be resolved.
On a positive note in agriculture markets, Agriculture Secretary Sonny Perdue announced May 23 that USDA is initiating a second Market Facilitation Program (MFP) to assist farmers by trade disruptions prompted by unjustified foreign retaliatory tariffs on their products. The President authorized USDA to provide up to $16.0 billion in relief, which is in line with the estimated impacts of the retaliatory tariffs on U.S. agricultural goods. At this time, there are no additional details about the eligibility of the program and what commodities are included, but Secretary Perdue announced that the team at USDA “gathered feedback on last year’s program to make this one even stronger and more effective for farmers.”
Farmers across the U.S. are experiencing a far-from-normal planting season. The industry has faced prolonged wet conditions preventing the crop to be planted. As of June 2, only 67.0 percent of the nation’s corn has been planted, by far the slowest pace on record. U.S. farmers have planted 62.0 million acres of corn and 31.0 million acres remain to be planted. USDA reported 39 percent of the soybeans have been planted, with farmers planting 33.0 million acres of soybeans and have 52.0 million acres remaining to be planted. It is too early to tell how many farmers will shift crops, or for some, not plant at all. The trade dynamics and the 2019 MFP may help influence some farmers to get a crop in the ground, although yield could be effected due to the late planting dates.
The less-than-stunning crop progress reports has brought to the forefront worries of lower acreage and yields for new corn crop. Corn prices and margins have staged a swift and large recovery off contract lows in May. The wet weather conditions extended beyond the important June 5 date for corn producers, and it appears that the market has put some weather premium into new crop prices.
The USDA is forecasting milk production at 218.7 billion pounds for 2019, only 0.5 percent above 2018. The industry has also seen recent increases in most dairy product prices, and coupled with the slight increase in production and relatively stable exports, USDA increased its all-milk price forecast to $18.05 per hundredweight (cwt.) for 2019. The February mailbox milk prices were reported at $16.24/cwt, 10.5 percent higher than prices one year ago. Michigan’s mailbox milk price continues to lag behind the national average driven by processing capacity constraints putting additional pressure on basis, reporting at $14.82/cwt for the same period.
The U.S. swine industry stands to benefit from the global supply shortfall as a result of the African Swine Fever (ASF) that has caused substantial pig losses in China and Southeast Asia. China’s breeding herd is down 22.0 percent versus the prior year, and the region is expected to have a supply shortfall in 2019 and 2020, and likely for years to come. The shortfall of pork supply in the region is also forcing consumers to switch to other proteins, including chicken and beef. The U.S. is the largest exporter of animal protein in the world, which puts the U.S. production in a position to benefit as China and other markets increase imports of all proteins. Tariffs on U.S. pork products to China forces the U.S. to be less competitive; however, as competitors in the global market place supply more to China, this will open other markets for the U.S. to export to, making the U.S. a secondary beneficiary of ASF. As U.S. producers respond to the anticipated higher international pork prices, USDA is forecasting pork production to increase 3.8 percent in 2019 to 27.3 billion pounds and by 3.5 percent in 2020 to 28.3 billion pounds. USDA projects the National base cost, 51-52 percent lean, live equivalent at an average of $54.5 per cwt. in 2019 and $60.0 per cwt. in 2020. This compares to the average price of $40.7 per cwt. in 2018.
In its second estimate release, the Bureau of Economics reported first quarter GDP at 3.1 percent. This growth rate was stronger than most analysts had expected, and represents a pick-up in growth relative to the last quarter of 2018. This performance was due in part to strong exports and a narrowing trade gap, as well as an upturn in state and local government spending, accelerations in private inventory investments and smaller decrease in residential investment.
During its two-day meeting beginning on April 30, the Federal Open Market Committee (FOMC) announced that the federal funds rate will remain unchanged at the range of 2.25 to 2.50 percent. The FOMC further explained that they intend to remain patient in determining future rate adjustments. Overall, the committee cited that the labor markets have maintained solid job gains, on average, and the unemployment rate has remained low. Growth in household spending and business fixed investment has slowed in the first quarter, and for the last twelve months, overall inflation and inflation for items other than food and energy have declined and are running below 2.0 percent. Fear around the trade war remains top of mind for market participants, and helped instigate another recent inversion of the yield curve. The market-implied probability of a rate cut by yearend is rising, which seems to have escalated by recent trade talk. Federal Reserve Bank of St. Louis President, James Bullard, recently said in a speech that the lowering of the central bank’s short-term target rate may be warranted soon, admitting that the Federal Reserve faces an economy that is expected to grow more slowly and an economy with trade uncertainty.
The many factors affecting agricultural markets today, mostly outside of farmers control, points to the importance of using a risk management program to protect margins. Using crop insurance tools, like Dairy Revenue Protection and other products can add some stability to a very unstable marketplace.
Reach out to your GreenStone representative for more information on protecting your margins.
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