The Outlook for Grain Markets and Texas Agriculture in 2013

Emily Kerr and Michael Plante

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Corn Soy Wheat

Share of world production, 2000-2010 average

U.S. dominates world production of corn, soy

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Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13

Dollars per bushel

Corn prices jump 40 percent in two months

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Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13

Dollars per bushel

Soy prices increase 25 percent from May to July 2012

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2006 2007 2008 2009 2010 2011 2012 2013 2014

Dollars per bushel

Soybeans

Wheat

Corn

Other price spikes occurred in recent years

Outline

1. What’s behind recent price movements – Growing demand, supply issues

2. Outlook for the harvest in 2013 – Looking better if weather cooperates

3. Implications for 11th District agriculture – High grain prices adversely affect Texas/N.M.

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2006 2012

U.S. Ethanol

U.S. less Ethanol

China

Rest of World

Million metric tons

The world is consuming more corn!

The Ethanol Situation

Ethanol’s impact on corn demand

1. Huge impact before 2010 – 2010 production 170% higher than 2006

2. Since 2010 little additional demand – About 40% of U.S. crop used for ethanol, byproducts

3. More advanced plants remain profitable – Suggests corn will continue to be used for ethanol

The Ethanol Situation

What does an advanced plant produce? Component of Corn Processed and sold as

Carbohydrate Ethanol

Fat Corn oil

Leftover (mainly protein) Distiller’s grain (animal feed)

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2006 2012

China

Rest of World

Million metric tons

China is driving growth in soybean consumption

Growing demand pressures supply

• World supply has grown dramatically

• Weather issues are a constant threat

• Bad weather for U.S. corn: 2010, 2011, 2012

• Weather issues abroad for soy and wheat

Spillovers are important

Price spikes in one crop can spillover to others:

• Consumers substitute towards other crops (example: away from corn toward wheat)

• Crops compete for acreage

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2007 2008 2009 2010 2011 2012 2013

Corn

Soybeans

Million acres, Y/Y change

Forecast

Corn and soybeans compete for acreage in Iowa

Outlook for 2013

• Demand expected to continue growing

• Drought greatly relieved in Corn/Soy belt

• Future weather remains unpredictable

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2006 2007 2008 2009 2010 2011 2012 2013

Actual Harvest

Sept. 2013 ForecastMillion metric tons

Bumper corn harvest expected in U.S.

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2006 2007 2008 2009 2010 2011 2012 2013

Initial 2013 Forecast

Actual Harvest

Sept. 2013 ForecastMillion metric tons

Bumper corn harvest expected in U.S.

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2006 2007 2008 2009 2010 2011 2012 2013

Initial 2013 Forecast

Actual Harvest

Sept. 2013 ForecastMillion metric tons

Bumper corn harvest expected in U.S.

Looking to our region

High grain prices: bad news for 11th District agriculture

• Grain is a key input for livestock producers

• 11th District agriculture largely livestock – Total TX agriculture=$23 billion in cash receipts

• Livestock=$16 billion – Cattle=$11 billion

• Agriculture accounts for 1% of Texas GDP and 2% of New Mexico GDP – 9% when including linked economic activities

Corn

Cattle

Soybeans Cotton

Fruits/Veg.

Other Crops

Other Livestock

Corn

Cattle Soybeans Fruits/Veg.

Other Crops

Other Livestock

Corn

Cattle

Soybeans

Cotton

Fruits/Veg.

Other Crops

Other Livestock

Regional ag varies from U.S., Corn Belt

U.S. Texas

Iowa

Shown are cash receipts by commodity group, 2011. Source: USDA.

N.M.

Cattle

Corn

Other Livestock

All other

Prolonged drought makes matters worse October 2010 October 2011

October 2012 Current

Source: U.S. Drought Monitor.

Drought – Severe

Abnormally dry

Drought – Moderate

Drought – Extreme

Drought – Exceptional

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2000 2002 2004 2006 2008 2010 2012

Millions Millions

Texas cattle herd dwindling

Texas

Rest of U.S.

What does this mean for Texas?

• Declining share of U.S. cattle herd – Ethanol byproducts give advantage to Corn Belt

• Fewer feedlots, meat processors – Cargill closure, likely more to come

• Farmers planting less cotton, more corn

Drought expected to persist in TX/NM

Source: U.S. Seasonal Drought Outlook. Valid for September 19-December 31, 2013.

What’s the takeaway?

• Growing demand, weather pressuring prices

• Bumper harvest expected in 2013

• Eleventh District agriculture outlook mixed

Extra slides…

The Ethanol Situation

Government support

1. Tax credit for blending ethanol into gasoline – Eliminated in December 2011

2. Tariff on imports of Brazilian ethanol – Eliminated in December 2011

3. Renewable Fuel Standard (RFS) – Production has exceeded mandate in recent years

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2006 2007 2008 2009 2010 2011 2012 2013 2014

SoybeansWheatCorn

Dollars per bushel

Russian export ban lifted

Russia bans exports of wheat

U.S. harvest unexpectedly low

S. American crop fails

U.S. drought

Drought in U.S. and Russia

U.S. harvest unexpectedly low

Demand for soy continues to grow despite skyrocketing prices, inventories decline significantly

Despite 100% price hike, demand continues growing

U.S. plants lowest amount of soy in 12 years

Export bans by India, Vietnam in early 2008 cause global rice market to freeze up, prices skyrocket

Export bans on wheat in India, others in 2007. Australian crop fails, world inventories decline to lowest levels in 20 years, panic buying by governments

Narrative approach provides compelling stories about run ups

Strong soybean production also expected

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2006 2007 2008 2009 2010 2011 2012 2013

Million metric tons

Forecast

2013 U.S. wheat harvest impacted by weather

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2006 2007 2008 2009 2010 2011 2012 2013

Million metric tons

Forecast

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Ending stocks (LHS)

Price (RHS)

Million metric tons Dollars per bushel

U.S. corn stocks severely depleted in recent years

A few notes on crop insurance

• Provides yield protection and price protection

• Who pays? – Premiums subsidized by federal government

• Who uses it? – Most farmers, very few ranchers

• One of several agriculture subsidies mandated by farm bill

Texas ag land values

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2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

2005 dollars per acre

Irrigated Cropland

Dry Cropland

Ranchland