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Current Situation for Iowa’s Major Ag Commodities

Lee Schulz ( and Chad Hart (

There is a lot of uncertainty in agriculture right now, from the delayed onset of spring and the delayed planting that goes with it, to the ongoing trade disputes and trade agreement renegotiations, agricultural producers are adjusting production plans to deal with the uncertainty. Below is a quick summary of the current situation for Iowa’s major agricultural commodities, based on the latest reports and surveys from USDA. The majority of the information for the USDA reports was gathered before the latest rounds in the US-China trade dispute. However, the outlook highlights the importance of trade in agriculture and shows the avenues where trade will influence production and consumption decisions.

Hog Prospects Dim

A double whammy of rising feed prices and falling hog prices point to tighter hog margins than were expected earlier this year. Projected 2018 profits in ISU’s farrow-to-finish model dipped from the $11 per head forecast in December to losses of $4 per head in April. Carcass weight prices in 2018 are now expected to average near $63 per cwt compared to about $66.50 last year. News of the Chinese government imposing an additional 25 percent duty on imports of US pork and pork variety meat adds additional volatility to the market.

Table 1
Table 1. USDA Quarterly Hogs and Pigs Report Summary
Notes: *1,000 head; **1,000 litters; 1December preceding year; 2Intentions

The national breeding herd is 1.7 percent larger than a year ago based on early March producer surveys for USDA’s Hogs and Pigs Report (Table 1). Breeding herd additions totaled 21,000 head from December to March. For the March through May quarter, US producers intend to farrow 3.078 million sows. Intended farrowings for June through August, 2018, are up 1.4 percent from 2017. A big question is if producers back off on farrowings given the change in the profitability outlook. A March uptick in sow slaughter suggests they might.

Growing pork export demand had enabled the US industry to continue expanding in recent years. In 2016 and 2017, rising exports required an average annual increase in US production of only 2.2 percent per year. In 2018, USDA expects pork exports for the year to be up 5.2 percent. However, news of the Chinese import tariff hike puts a negative tilt on export growth in 2018. Chinese market uncertainty makes expanding and diversifying export destinations for pork crucial. New and emerging markets in countries such as Colombia, the Dominican Republic, and Chile, and mainstay markets such as Mexico, Japan, and South Korea were strong in 2017 and will be counted on again this year. With over 40 percent of US pork exports going to Mexico and Canada, one could argue that a positive outcome to NAFTA is the biggest piece of the puzzle still in need of certainty.

Cattle Expansion Continues

USDA’s annual Cattle inventory report confirmed that beef herd expansion continued in 2017, albeit at a slower pace than in 2016. Beef herd expansions often last for four to six years. The current expansion began in 2014 and could continue for another year or so. If it does, beef production in this cycle likely would not peak until early in the next decade.

Table 2
Table 2. Cattle Inventory by Class and Calf Crop
Notes: *1,000 head; **2016 and 2017

As of January 1, 2018, the US inventory of all cattle and calves was up 0.7 percent at 94.4 million head (Table 2). The beef cow inventory increased 1.6 percent. Beef replacement heifers were down 3.7 percent. Dairy cows were up a slight 0.6 percent and dairy replacement heifers were up 0.6 percent. The feedlot inventory for all feedlots rose to 14 million head.

A headline grabber in the report was an estimated year-over-year decline of 607,400 head of feeder cattle outside of feedlots. Feeder supply can drop when cattle numbers are still rising. The total inventory of steers, other heifers, and calves was up 0.8 percent. However, large feedlot placements in 2017 pulled the January 2018 feedlot inventory up 7.2 percent year-over-year, meaning that more 2017 crop calves are already in feedlots. If realized, the smaller feeder supply could be a catalyst that could spur shorter-term advances in feeder prices, and help support deferred-fed cattle prices on the presumption that feedlot placements in 2018 will be smaller than previously expected, leading to lower than expected fed beef production later in 2018.

Replacements remain large in absolute number and as a percentage of the beef cow herd. Ample replacements and the larger January 2018 cow herd leave room for the 2018 calf crop to expand, suggesting further growth in total cattle inventory into 2019. The question is whether producers are adjusting their intentions. Producers can easily divert open replacement heifers into feeder markets if their expectations change. Such a shift could easily boost feeder cattle supply and derail further expansion.

Corn Acreage Slips

Table 3
Table 3. US Corn Balance Sheet

For the corn market, the question for most of the spring was how farmers would adjust their plantings in 2018. That question was initially answered with the March release of the USDA’s Prospective Plantings report. Farmers indicated they would reduce corn acreage by over two million acres, with most of that reduction coming from the Great Plains. However, with 88 million acres still in corn production, the production prospects are still quite high. USDA’s yield trend estimate stands at 174 bushels per acre. That would place expected production at roughly 14 billion bushels, on pace to be the fourth-largest corn crop ever (see Table 3). So large supplies remain an issue.

Corn usage (gray box, Table 3) is projected to diminish slightly. The slight drop in feed and residual use is mainly in the residual category as the livestock herd expansion continues. Corn usage for ethanol continues to grow as both domestic and international ethanol use expands. Exports are the area where the biggest setback is expected, and these numbers were set before the latest tariff announcements. While China is not a key market for US corn, Mexico is and the NAFTA renegotiations are critical for this market. Global corn supplies are also at very high levels, so competition in the corn trade market was expected. However, recent projections for the South American corn crops point to smaller crops due to a combination of drought in Argentina and a reduction in second-crop corn acres in Brazil.

Soybean Acreage Sinks As Well

Table 4
Table 4. US Soybean Balance Sheet

The biggest shakeup for the crop markets from the Prospective Plantings report came from soybeans. Throughout March, the soybean market had been preparing for an announcement of a record number of acres planted to soybeans, exceeding corn for the first time since 1983. Well, the second part of that statement happened, but not the first. Farmers indicated they would plant one million fewer acres to soybeans (but the total still exceeds corn). However, like with corn, projected production is still quite large. The 4.27 billion bushels would be the third-largest soybean crop, following the record crop from last year and the bin-buster from 2016 (see Table 4).

USDA’s early projections for 2018 soybean usage will likely face some major revisions given the trade dispute. While domestic usage is expected to continue to grow this year, exports were the major vehicle for the growth in USDA’s usage projections. As Table 4 shows, USDA had projected a strong rebound in soybean exports, mainly driven by China. As China represents roughly 60 percent of that export total, the tariff announcements cast a long shadow over these projections. A 25 percent tariff would be a major impediment for US soybeans to overcome and any slowdown in the flow of soybeans will create issues for the market. While other markets would grow to absorb some of the Chinese allocation, it is highly unlikely that the combined growth would match the loss in the Chinese market.