March 31, Northwest Situation

Transcription

1 March 31, 2016 Although weather conditions are mixed throughout the Northwest, all areas face a common storm low wheat prices. Fundamentals affecting growers include: 1) Ample moisture, with the exception of Montana: Growing conditions are excellent in Idaho, Oregon and Washington, fueled by a wet winter and early spring. Soil moisture conditions are much drier and dire in Montana. 2) Depressed prices and financial shortfalls: Wheat markets continue to languish below most producers breakeven price. Although markets may rally this spring, any upswing is likely short-lived given record global production, supplies and ending stocks. 3) Alternative crops: Facing low wheat prices, growers are reconsidering spring wheat planting and substituting alternative crops where moisture permits. Popular alternatives include peas and lentils. 4) Headwinds and market opportunities: Notwithstanding surging global supplies, wheat producers face market opportunities in domestic or foreign production challenges, geopolitical conflicts and broader strength in grain markets. Northwest Situation Washington, Idaho and Oregon wheat producers report early spring growing conditions as good as any in recent memory. Following a drought-ridden fall, wet winter snows and early spring rains present seedbeds ripe for planting and germination. In the Palouse region of Washington, soil profiles are saturated as deep as four feet. Abundant moisture has resulted in early reports of stripe rust in Washington, requiring fungicide along with herbicide application this spring. Stripe rust is a foliar fungal disease that adversely impacts grain yield and quality. Montana is an exception, where conditions are drier than the prior year in most areas. Exacerbating dry conditions, late winter temperatures in Montana reached as high as 70 degrees. Warm Montana weather matched with strong winds leave soil moisture stressed for spring planting and stimulated winter wheat growth well in advance of historic dates. Disclaimer: This material is for informational purposes only and cannot be relied on to replace your own judgment or that of the professionals you work with in assessing the accuracy or relevance of the information to your own operations. Nothing in this material shall constitute a commitment by Northwest FCS to lend money or extend credit. This information is provided independent of any lending, other financing or insurance transaction. This material is a compilation of outside sources and the various authors opinions. Assumptions have been made for modeling purposes. Northwest FCS does not represent that any such assumptions will reflect future events Northwest Farm Credit Services

2 U.S. Drought Monitor December 15, 2015 March 15, 2016 Source: U.S. Drought Monitor; March 19, 2015 and March 22, 2016 Hopes for a strong start to spring are met with depressed wheat prices. Markets for hard red and soft white wheat are below $4.50 per bushel (cash, net price to producers). Breakeven prices for all but the most efficient producers are between $4.75 and $5.50 per bushel. Breakeven prices, though, are falling with lower fuel and fertilizer prices. Crop insurance guarantees at 85 percent coverage levels are below most producers breakeven for the second consecutive year. Producers are increasingly considering Whole Farm Revenue Coverage as a complement to existing crop insurance products. Notwithstanding its effectiveness in risk management, crop insurance doesn t guarantee profitability. Northwest FCS preliminary review of wheat growers financial results for 2015 report widespread financial stress. Although Agricultural Risk Coverage County (ARC-CO) program payments softened profit losses and working capital drawdowns in 2015, profit shortfalls eroded many producers working capital. In some cases, losses required producers to borrow against equity to replenish working capital and pay down operating line balances. Established producers with strong working capital and real estate equity are best positioned to survive a prolonged downturn. Conversely, financial stress is most pronounced where farmers purchased land and equipment and depleted working capital, creating a fixed cost structure (i.e., annual payments) difficult to service at current wheat prices. Cash on hand is also thin where producers have yet to sell their 2015 crop. Select grain cooperatives report as much as 50 percent of the 2015 wheat crop in storage. Low prices and tight margins aren t unfamiliar and wheat growers are ingenious. Exercising this ingenuity, many are considering alternative crops suited for their growing area. Where moisture allows, legumes are increasingly popular. In Montana, pea protein is being researched. Where genetically modified organisms (GMOs) are a concern, peas (which are non-gmo) may be a substitute for GMO soybeans (over 90 percent of the U.S. soybean crop is genetically modified). Organic wheat is also increasingly popular where Conservation Reserve Program farmland is re-entering production. 2

3 Despite their higher prices, most substitute crops aren t proven throughout the entire Northwest and/or face thin current markets. For example, projected increases in Montana legume acres between 10 and 25 percent may increase supplies and depress prices. Despite low prices and financial stress, agricultural real estate values in dry land regions remain stable to higher throughout the Northwest. Continued demand for farmland is fueled by farmers and non-farm investors. United States and World The USDA projects higher year-over-year U.S. wheat beginning stocks and production, fueling projected wheat supplies of 2.92 billion bushels (up 5.7 percent from the prior year). Higher total domestic use, up 2 percent from the prior year, does not offset rising wheat supplies and lower exports. At 775 million bushels, U.S. all-wheat exports are their lowest since , when the U.S. exported 599 million bushels. Lower U.S. exports are attributed to ample global wheat supplies and stiff foreign competition, exacerbated by a strong U.S. dollar. Forecast at 966 million bushels in , U.S. ending stocks are their highest since Similarly, U.S. all-wheat stocks-to-use at 49 percent are well above the five-year average of 32 percent. Year-over-year changes in ending U.S. wheat stocks by class include hard red winter up 43 percent, hard red spring up 36 percent, soft red winter up 10 percent, soft white winter down 18 percent and durum up 31 percent. Globally, forecast wheat production of million metric tons is the highest ever. A year-over-year increase in beginning stocks, matched with record world wheat production, surge global wheat stocks to a record high million metric tons, up 10.7 percent from World wheat exports during the same period are forecast down, 0.9 percent below Russia projected to be the world s largest wheat exporter in faces rising competition for wheat exports as its currency strengthens with higher energy prices. Recently, less expensive grain from Romania, France and Ukraine displaced Russian wheat sales to Egypt. Argentina s grain exports are also increasing up 32 percent over the prior year as export taxes and trade restrictions are relaxed under its new president. 3

4 U.S. and World Wheat Forecasts U.S. World (Projected) Year-over- Year Change (Projected) Year-over- Year Change Million Acres Area Planted % Area Harvested % Bushels Yield per Harvested Acre % Million Bushels Million Metric Tons Beginning Stocks % % Production 2, % % Imports % % Supply, Total 2, % Food % Seed % Feed and Residual % % Domestic, Total 1, % % Exports % % Use, Total 1, % Ending Stocks % % Average Farm Price -18.2% to $4.90 $5.10 (US$/bushel) -14.9% Source: World Agricultural Supply and Demand Estimates; USDA; March 9, 2016 World Ending Wheat Stocks and Price Source: World Wheat Supply and Demand Situation; U.S. Wheat Associates; March 9,

5 Impact of the 2016 Crop According to the USDA National Agricultural Statistics Service s 2016 Prospective Plantings report, planted winter wheat acres in the U.S. for harvest in 2016 are estimated at 36.2 million acres, down 8 percent from Of the total planted acreage, about 26.2 million acres are Hard Red Winter, 6.60 million acres are Soft Red Winter, and 3.37 million acres are White Winter. Winter wheat planted acres are up 3 percent in Washington, constant in Idaho, and down 6 percent and 8 percent in Montana and Oregon respectively. Overall, 2016 planted winter wheat acres in Idaho, Montana, Oregon and Washington are down 2.9 percent from the prior year. United States growers intend to plant 11.3 million other spring wheat acres (excluding durum) this year, down 14 percent from Other 2016 spring wheat acreage is up 5 percent and 11 percent in Idaho and Oregon, but down 18 percent and 24 percent in Montana and Washington. Overall, 2016 other spring wheat acres in Idaho, Montana, Oregon and Washington are estimated down 15 percent from the prior year. Durum wheat acres are projected up 10 percent and 2 percent in Idaho and Montana in The USDA March 31 Grain Stocks report reveals March 1, 2016, all wheat stocks of 1.37 billion bushels, 20 percent higher than last March. On-farm stocks and off-farm stocks are higher than the prior year, up 15 percent and 22 percent respectively. All durum wheat stocks are estimated up 10 percent from Wheat prospective plantings are slightly lower and quarterly stocks are slightly higher than analysts consensus estimates. Outlook Analysts note wheat markets could rally as much as $0.50 per bushel this spring as large funds close out short positions fueled by speculation over bearish factors including worldwide oversupply and strong foreign competition. However, price upswings are likely short-lived, constrained by longer-term fundamentals, including record forecast wheat production, supplies and ending stocks. World wheat ending stocks-to-use of 33.5 percent are their highest in 14 years. As a point of context, world wheat stocks-to-use were 20.9 percent in the year the world faced a short crop marketing year. Factors that would improve the U.S. wheat market outlook include production shortfalls and a weakening U.S. dollar, making U.S. wheat exports more competitive in global markets. The USDA s season-average farm price for all wheat is projected at $4.90 to $5.10 per bushel. The midpoint season average price of $5 per bushel is the lowest since prices averaged $4.87 per bushel in Daniel O Brian, Extension Agricultural Economist with Kansas State, forecasts all wheat prices at $4.25 per bushel. This forecast price reflects the assumptions below and compares to USDA average prices of $5.99 per bushel in , $6.87 per bushel in and the record $7.77 per bushel in

6 Kansas State Price Variables U.S Variables Projection Wheat plantings million acres Wheat harvested acres million acres Trendline wheat yields 46.0 bushels/acre Total wheat production billion bushels Total wheat supplies billion bushels Wheat exports 850 million bushels Wheat feed and residual use 175 million bushels Total use billion bushels Ending stocks billion bushels Ending stocks-to-use percent Source: Wheat Market Outlook; Kansas State University; March 17, 2016 Growers who haven t borrowed in recent years are re-establishing operating lines of credit. Leases may require reconsideration to rebalance risk/reward and soften this downturn s blow to farmers working capital. Without improvement, lower wheat prices are expected to increase early grower retirements and/or exit. Longer term, the USDA s February year projections for U.S. agriculture forecast wheat prices ranging from $4.90 to $5.99 per bushel. Factors constraining wheat prices include wheat stocks-to-use forecast above 30 percent through Overall, domestic demand is forecast stable throughout the decade. U.S. exports increase modestly through from recent lows and close the forecast period with 15 to 16 percent of the global wheat trade. Stiff competitors for wheat exports include Australia, Canada and the former Soviet Union countries, notably Russia. Additional Information Northwest FCS Business Management Center Columbia Grain CME Group Minneapolis Grain Exchange Pacific Northwest Grain & Feed Association U.S. Department of Agriculture U.S. Wheat Associates World Ag Stats Reports World Malting Barley Report Columbia River Pilots GrainNet News Merchants Exchange of Portland, Oregon National Grain & Feed Association Port of Portland www2.portofportland.com U.S. Ag Stats Reports World Grain USDA Weekly Weather Reports 6

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