Key Supply-Demand Factors “Driving” Grain Markets (KSU Extension Ag Economics)

The following presentation on “Key Supply-Demand Factors ‘Driving” Grain Markets” was given on Tuesday, March 14, 2017 to the AgEcon 605 class on “Price Analysis and Forecasting” as a guest lecture.  The class is regularly taught by Dr. Richard Llewelyn of the Kansas State University Department of Agricultural Economics.

This presentation focuses on the key factors that have been “driving” or influencing grain markets over the last 15-25 years.   The full presentation will be available on the KSU Agricultural Economics website at the following web location:

http://www.agmanager.info/sites/default/files/pdf/OBrien_GrainMarketDrivers_03-15-17.pdf

 

 

 

KSU Wheat Market Outlook in February 2015 – Examining “Next Crop” 2015/16 Market Scenarios

An analysis of U.S. and World Wheat supply-demand factors and price prospects based on information from the February 10, 2015 USDA Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports will shortly be placed up on the KSU AgManager website (http://www.agmanager.info/default.asp).

Following is a summary – with the full analysis-article for Wheat to be found here: http://www.agmanager.info/marketing/outlook/newletters/Wheat.asp

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Summary

Overview

Since the USDA released its World Agricultural Supply and Demand Estimates (WASDE) report on February 10, 2014, U.S. wheat market prices traded in a volatile pattern – moving both higher and lower than the price range the day of the report. For the “current crop” 2014/15 marketing year the USDA projected that a) World wheat production, supplies, and total use would be at record high levels, b) World wheat export trade would be 3.4% lower than a year ago but still the second highest on record, and c) World wheat ending stocks and percent ending stocks-to-use would be at their highest levels in three marketing years, although still less than during the 2009/2010 through 2011/2012 period. For the U.S., the USDA also lowered its projection of U.S. wheat exports for MY 2014/15 to the lowest level in 5 years. Wheat prices in the U.S. are projected to be down to a four year low due to limited U.S. wheat exports and domestic livestock wheat feeding.
The USDA projects that foreign wheat supplies are more than adequate to “mitigate” shortfalls in 2014 U.S. hard red winter wheat production in the Central and Southern plains states again in MY 2014/15 as in MY 2013/14. Also, no other major production problems in competing World wheat exporting countries have yet emerged to the degree that the “large crop-over-supply” situation in World wheat markets has been changed. However, there are developing concerns about wheat export supply availability from the Black Sea region, and the ongoing possibility of crop problems developing among major World wheat producers / exporters. United States’ wheat exports have been reduced by a recent strong positive trend in the U.S. dollar.

USDA U.S. Wheat Forecast for “current crop” MY 2014/15

The USDA maintained its projection of lower 2014 U.S. wheat production, reduced total use, increased ending stocks and % stocks-to-use, and lower prices in “current crop” MY 2014/15 vs a year ago. The USDA’s projected “current crop” MY 2014/15 scenario is for a 2.026 billion bushel (bb) 2014 U.S. wheat crop, 2.776 bb total supplies (down 20 million bushels or ‘mb’ from January on reduced imports), 900 mb exports (down 25 mb), 2.084 bb total use (down 25 mb), 692 mb ending stocks (up 5 mb), 33.2% ending stocks-to-use (vs 32.6% last month), and a forecast U.S. price of $6.00 /bu (range of $5.85 to $6.15) – compared to $5.90-$6.30 ($6.10 midpoint) from January.

KSU U.S. Wheat Forecast for “next crop” MY 2015/16

KSU projections of “next crop” MY 2015/16 supply-demand balances and prices are represented in two scenarios, either “Trend Yield” or “Short Yield” scenarios, which are as follows. A) “Trend Yield” Scenario: 60% prob. of 54.830 million acres (ma) planted, 46.105 ma harvested, 45.9 bu/ac trend yield, 2.116 billion bu. (bb) production, 2.958 bb total supplies, 1.050 bb exports, 2.260 bb total use, 698 mb end stocks, 30.9% S/U, $6.20 /bu U.S. average price. B) “Short Yield” Scenario: 40% prob. of 54.830 ma planted, 46.105 ma harvested, 43.5 bu/ac trend yield, 2.006 bb production, 2.858 bb total supplies, 1.025 bb exports, 2.224 bb total use, 634 mb end stocks, 28.5% S/U, $6.45 /bu U.S. average price. The key assumption in these KSU projections is that there will be a moderate recovery in U.S. wheat exports.

USDA World Wheat

World wheat total supplies of 912.5 mmt in “current crop” MY 2014/15 are up from 891.6 mmt in MY 2013/14, and 855.4 mmt in MY 2012/13. Projected World wheat ending stocks in “current crop” MY 2014/15 of 197.9 mmt (27.7% S/U) are up from 187.5 mmt (26.6% S/U) in MY 2013/14, and from 174.5 mmt (25.8% S/U) in MY 2012/13. For perspective, these figures can be compared to the historic World wheat ending stocks and ending stocks-to-use minimums of 129.7 mmt and 21.1% S/U in MY 2007/08.

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https://i2.wp.com/kansasagnetwork.com/wp-content/uploads/2014/02/Winter-Wheat-Snow.jpg

Kansas Wheat fields a year ago (January 2014) (Source: http://kansasagnetwork.com/2014/kansas-wheat-condition-drops-significantly-during-the-month-of-january/)

KSU Wheat Market Outlook in December 2014

An analysis of U.S. and World Wheat supply-demand factors and price prospects based on information from the December 10, 2014 USDA Crop Production and World Agricultural Supply and Demand Estimates (WASDE) reports will be placed up on the KSU AgManager website (http://www.agmanager.info/default.asp).

Following is a summary – with the full analysis-article for Wheat to be found here: http://www.agmanager.info/marketing/outlook/newletters/Wheat.asp

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Summary

Introduction

Since the USDA released its World Agricultural Supply and Demand Estimates (WASDE) report on December 10, 2014, U.S. wheat market prices have trended higher. The USDA projected marginally larger World wheat production, ending stocks and ending stocks-to-use, but marginally higher U.S. domestic wheat supply-demand balances. The USDA projected for the “current crop” 2014/2015 marketing year that a) World wheat production, supplies, and total use would be at record high levels, b) World wheat export trade would be 4.7% lower than a year ago but still the third highest on record, and c) World wheat ending stocks and percent ending stocks-to-use would be at their highest levels in three marketing years, although still less than during the 2009/2010 through 2011/2012 period. Wheat prices in the U.S. are projected to be down to the lowest levels in four years due to limited U.S. wheat exports and domestic livestock wheat feeding.

What to Watch for Through mid-January 2015

The USDA projects that foreign wheat supplies are more than adequate to “mitigate” shortfalls in 2014 U.S. hard red winter wheat production in the Central and Southern plains states. Also, no other major production problems in competing World wheat exporting countries have yet emerged to the degree that the “large crop-over-supply” situation in World wheat markets has been affected. However, there are developing concerns about dry wheat production conditions in Australia, crop quality problems in parts of Europe, and wheat export supply availability from Russia and the Black Sea region. United States’ wheat exports have been reduced by a recent strong positive trend in the U.S. dollar. The wheat market will now likely focus on weekly export sales and shipments, the condition of U.S. and foreign crops in the field, Russian export supply news, and the upcoming January 12, 2015 USDA NASS Crop Production Annual Summary report.

USDA U.S. Wheat Forecast for “current crop” MY 2014/15

The USDA maintained its projection of lower 2014 U.S. wheat production, reduced total use, increased ending stocks and % stocks-to-use, and lower prices in “current crop” MY 2014/15 vs a year ago. The USDA’s projected MY 2014/15 scenario is for a 2.026 billion bushel (bb) 2014 U.S. wheat crop, 2.795 bb total supplies (up 10 mb), 925 mb exports, 2.141 bb total use, 654 mb ending stocks (up 10 mb), 30.6% ending stocks-to-use (vs 30.1% last month), and a forecast U.S. price of $6.00 /bu (range of $5.80 to $6.20) – compared to $5.65-$6.15 ($5.90 midpoint) from November. If recent wheat futures prices hold through May, the USDA “current crop” MY 2014/15 price may rise to near $6.38 /bu.

KSU U.S. Wheat Forecast for “current crop” MY 2014/15

KSU projections of “current crop” MY 2014/15 supply-demand balances and prices are essentially equal to the USDA’s except for the possibility of either “Lower Export” or “Higher Export” scenarios, which are as follows. A) “Lower Export” Scenario: 10% prob. of acreage, yields, production and total supplies being the same as those of the USDA, but with 125 mb less U.S. wheat exports. This would result in 800 mb exports, 2.016 bb total use, 779 mb ending stocks, 38.64% S/U, and a forecast price of $5.65-6.15 /bu (midpoint of $5.90 – down from $6.00 for the USDA). Cash wheat prices in the U.S. will need to decline to $5.20-$5.25 for January-May 2015 for this price forecast to occur. B) “Higher Export” Scenario: 20% prob. of acreage, yields, production and total supplies being the same as those of the USDA, but with 125 mb more U.S. wheat exports. This would result in 1.050 bb exports, 2.266 bb total use, 529 mb ending stocks, 23.35% S/U, and a forecast price of $6.60 /bu (up from the USDA midpoint of $6.00). Cash wheat prices in the U.S. will need to rise to $7.75 for January-May 2015 for this to occur.

USDA World Wheat

World wheat total supplies of 907.5 mmt in “current crop” MY 2014/15 are up from 889.2 mmt in MY 2013/14, and 854.1 mmt in MY 2012/13. Projected World wheat ending stocks in “current crop” MY 2014/15 of 194.9 mmt (27.4% S/U) are up from 185.3 mmt (26.3% S/U) in MY 2013/14, and from 174.5 mmt (25.7% S/U) in MY 2012/13. For perspective, these figures can be compared to the historic World wheat ending stocks and ending stocks-to-use minimums of 129.0 mmt and 21.0% S/U in MY 2007/08.

 

https://i2.wp.com/kansasagnetwork.com/wp-content/uploads/2014/02/Winter-Wheat-Snow.jpg

Kansas Wheat fields a year ago (January 2014) (Source: http://kansasagnetwork.com/2014/kansas-wheat-condition-drops-significantly-during-the-month-of-january/)

https://i2.wp.com/russia-insider.com/sites/insider/files/styles/s400/public/2666914808.jpg

A farmer scooping wheat in Russia (Source: http://russia-insider.com/en/business/2014/11/05/04-37-47pm/weaker_ruble_boosts_russian_wheat_exports)

 

 

 

Understanding “Headline” versus “Core” Inflation – via KC and St. Louis FED articles

In the latest issue of its publication “The Rocky Mountain Economist”, Kansas City Federal Reserve Bank (i.e., the KC FED) Dr. Alison Felix – regional economist and lead officer in the states of Colorado, Wyoming and New Mexico, describes “describes common measures of inflation and explores how recent inflation trends compare to the policy objectives of the Federal Reserve.”

This article can be found at the following web address: http://kansascityfed.org/publicat/rme/rme-2Q-2013.pdf?ealert=rme0610.

Dr. Felix describes how “Since January 2012, the Federal Open Market Committee (FOMC) has maintained a long-run target for the inflation rate of 2 percent. This means that the FOMC is pursuing monetary policy aimed at meeting 2 percent annual inflation.

Therefore, it is important to understand just what specific measure of inflation that the U.S. FOMC is paying attention to in terms of this “2% annual inflation target”.

Felix goes on to state: “The personal consumption expenditure (PCE) price index is one broad-based and frequently cited measure. It is the measure of inflation used as a monetary policy target by the Federal Reserve and is forecasted throughout the year by the FOMC. The PCE price index measures the prices of goods and services purchased by households or by nonprofits on behalf of households; estimates of the PCE price index are released by the Bureau of Economic Analysis each month. In March, the PCE price index estimated that consumer prices had increased 1 percent in the past year.

One part of this article explains the difference between “Headline Inflation” and “Core Inflation”:

Because food and energy prices tend to be the most volatile components of inflation, core inflation, a measure
of inflation that excludes these purchases, is often used to examine underlying inflation trends. Core PCE inflation excludes energy purchases, such as gasoline and electricity and food purchases for home consumption. Core PCE inflation has increased 1.1 percent in the past year as of March, similar to overall headline inflation of 1 percent. Headline inflation, however, has a much larger variance because of large swings in food and energy prices (Chart 2).

In this article Dr. Felix goes on to explain how the PCE price index relates to the commonly quoted Consumer Price Index (CPI).

https://i2.wp.com/www.kc.frb.org/images/speechbio/felix.jpg

Alison Felix, Kansas City Federal Reserve Bank Assistant Vice President and Denver Branch Executive

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In April 2011 James Bullard, the head of the St. Louis Federal Reserve Bank, commented on issues pertaining to “Headline versus Core Inflation” in the following article: http://www.stlouisfed.org/publications/re/articles/?id=2089

Monetary policymakers are responsible for maintaining overall price stability, which is usually interpreted as low and stable inflation. In order to decide on appropriate
policy actions given their objective, policymakers need to know the current rate of inflation and where it is headed. What makes for a reliable predictor of future inflation has been debated throughout the years and continues to be the subject of economic analyses today. One debate that has received attention recently is whether the focus should be on headline or core inflation. The former is calculated from an all-item index, whereas the latter is commonly calculated from a price index that excludes the highly volatile food and energy components.

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A natural question to ask, then, is: If the Fed ultimately cares about overall prices, why would it ever look at core inflation, thereby excluding items on which Americans spend a nontrivial portion of their income? The reason is because, historically, the food and energy components were highly variable (for example, due to temporary supply disruptions), and their large price fluctuations were usually expected to correct themselves within a relatively short period of time. Consequently, the FOMC focuses on core PCE as a measure of underlying inflation trends and, thus, a predictor of future headline PCE inflation. Assuming core PCE is an appropriate measure to use, we would expect to see headline inflation fluctuate above and below core inflation over the short run.”

…..

As I asserted in my previous commentary, one interpretation is that, during times of continuous increases in the relative price of energy, perhaps core PCE is a misleading indicator of underlying inflation trends. This implies that core PCE may not be a good predictor of future headline inflation after all. Under these circumstances, headline PCE inflation should probably have more weight in policymaking decisions than core PCE inflation.”

…..

Of course, if the evidence shows that core PCE is not the best measure to focus on for policy purposes, exploring other options may make sense. One alternative measure could include all components but put less weight on those that have highly volatile prices. Such a measure would avoid systematically excluding certain prices and would more accurately reflect consumers’ expenditures. Additionally, studies have shown that other existing “core” measures, such as PCE trimmed-mean or PCE weighted-median inflation, may be better predictors of headline PCE inflation than core PCE. In the end, the policymakers’ goal is to use the inflation measure that helps them achieve low and stable headline inflation in the long run.”

It is important to read all of Bullard’s April 2011 article to be sure and understand the context of each of these statements quoted above.

https://i0.wp.com/www.stlouisfed.org/newsroom/images/hires/JamesBullard_color.jpg

James Bullard, St. Louis Federal Reserve Bank President and CEO

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Finally, for perspective, see the following chart of consumer inflation expectations of approximately 3% from the University of Michigan (Source: http://research.stlouisfed.org/fred2/series/MICH)

Graph of University of Michigan Inflation Expectation

KC-FED Economists wary of “The Wealth Effect in U.S. Agriculture” with deleveraging / asset value declines

The Kansas City Federal Reserve Bank (KC-FED) (http://www.kc.frb.org/) recently published an article in its The Main Street Economist publication on The Wealth Effect in U.S. Agriculture.  The article was authored by Jason Henderson,Vice President and Omaha Branch Executive and Nathan Kauffman, Economist, and can be found at the following web address: http://www.kc.frb.org/publicat/mse/MSE_0113.2.pdf

This article addresses a) The Historical Wealth Effect in U.S. Agriculture, b) Leverage Cycles in U.S. Agriculture, c) The Risks to Farm Wealth, and provides the following conclusions with regard to the potential negative impact of another “wealth effect” on the U.S. agricultural economy.

https://i1.wp.com/www.kansascityfed.org/images/imgLibrary/Agriculture01.jpg

Source of picture: http://www.kansascityfed.org/

Conclusions (emphasis to particular parts added by Daniel O’Brien, KSU Ag Econ)

The stage is set for another wealth effect and leveraging cycle in U.S. agriculture. Expanding global populations and rising incomes in developing nations are boosting expectations for persistently high agricultural commodity demand. Farmers have responded by increasing production capabilities through capital investments. As a result, projections of farm profits indicate that the combination of rising supplies and higher production costs could cut farm profits by 2014.”

“Historically, initial declines in farm profits have not triggered a reduction in capital investments as farmers tapped their wealth to finance their capital investments. As long as farm wealth remains elevated and interest rates remain low, real estate and non-real-estate investments by farmers could continue to remain high even with lower profits.”

If historical precedence holds and farmers use debt instead of retained earnings to finance capital investments, the wealth effect may trigger another phase of the leverage cycle. Current farm debt ratios remain near historical lows. Yet, projections of lower farm incomes, high wealth and low interest rates are the recipe for another wealth effect in U.S. agriculture.”

“History has shown that significant increases in farm leverage set the stage for deleveraging cycles and farm busts if land values fall. Working capital is the first line of defense farmers can use to manage through periods of weak profitability. Whether this farm boom simply fades or busts depends on the wealth effect and how farmers finance agriculture investments.”

https://i2.wp.com/www.kc.frb.org/images/about/newbuildingnw.jpg

Kansas City Federal Reserve Bank (http://www.kc.frb.org/)

KSU Weekly Grain Market Summary – with 2013 Feedgrain and Wheat Market Projections (via KSU AgManager)

Grain market summary notes, charts and audio for the KSU Agriculture Today Grain Outlook to be played on Friday, December 21, 2012 are up on  the Kansas State University www.AgManager.info website at the following web address: http://www.agmanager.info/news/Articles/KSRN_GrainOutlook_12-21-12.pdf

The recorded radio program was aired at 10:03 a.m., Friday, December 21st on KFRM Radio (here) – web player available.  The recording can also be listened to via a link from the following website in the “Radio Interviews” section: http://www.agmanager.info/news/default.asp

United States Seasonal Drought Outlook Graphic - click on image to enlarge

The U.S. Seasonal Drought Outlook report available from the National Weather Service Climate Prediction Center (http://www.cpc.ncep.noaa.gov/) at the following web address: http://www.cpc.ncep.noaa.gov/products/expert_assessment/seasonal_drought.html

Source: http://faculty.weber.edu/kmackay/walter_prescott_webb__great_plai.htm

“Estimated Rules for Monetary Policy” (via George Kahn, Kansas City Federal Reserve Bank)

George Kahn, Vice President and Economist at the Kansas City Federal Reserve Bank (http://www.kansascityfed.org/) released an applied research article in October 2012 titled “Estimated Rules for Monetary Policy” which can be found here.

The author indicates the following about this critical topic:

“This article estimates policy rules over periods of favorable economic performance to derive benchmark rules that might be useful guides for future monetary policy.”

“Section I describes two simple, nonestimated rules that have been proposed as guides for policy and examines how closely they describe the actual setting of policy over various periods.”

“Section II identifies time periods over which macroeconomic performance has generally been favorable and estimates policy rules that describe how monetary policy responded to key indicators over these periods.”

“Section III evaluates past and current policy relative to the estimated rule and gives a number of reasons why policymakers should remain cautious about blindly following any estimated rule.”

“The article concludes that a rule that puts somewhat greater weight on inflation than output in determining a setting for the federal funds rate has worked well in the past and could be a useful guide in the future. However, some of the unique features of the current economic situation—including a binding zero lower bound on interest rates and a desire to manage downside risk to the outlook for economic activity—may suggest a need for flexibility in following the prescription of any rule based on past performance.”