Editor’s note: The following was written by Heidi Bubela, with Compeer Financial, and Gary Schnitkey, University of Illinois ag economist, for the university’s Farmdoc Daily website Aug. 13.
Prospects are that soybean prices will continue to be low over the next several years, leading to a period of lower farm incomes.
Even given those prospects, prices could go even lower, causing more financial stress to develop. Herein, we present an adverse set of prices that could plausibly occur but are not likely to occur.
These prices are developed for a specific supply/demand situation using a scenario model developed at the University of Illinois for Compeer Financial.
Planning actions that would be taken if adverse conditions do result is part of good risk management.
Stress testing agricultural portfolios is a process that many agricultural lenders go through, partly to understand risks their borrowers face and partly to ensure the lenders themselves have adequate capital to sustain lending and continue to serve agriculture should unexpected stressful events occur.
When stress testing, an adverse set of prices and yields are created to stress incomes. This set of prices and yields then are used to see how borrowers will fare under different modeling assumptions.
Herein, we present a scenario of baseline prices that are “likely” to happen the next several years barring any unforeseen events (e.g., weather disruption). This baseline may even be viewed by some as optimistic in context of the current markets.
Keep in mind that this baseline represents only one set of “likely” prices out of a range of “likely” outcomes and a large degree of uncertainty remains, particularly given the current growing and trade situation.
Baseline and adverse corn and soybean prices for 2019 through 2021 are shown in Table 1.
For 2018, average farm prices for the nation are $3.60 for corn and $8.50 for soybeans. These are the same prices reported by USDA in the August 2019 World Agricultural Supply and Demand Estimates
(WASDE) and represent prices for the 2018/2019 marketing year, which runs from September to August for both corn and soybeans.
Baseline prices for corn are $4 per bushel in 2019/20, $3.80 in 2020/21 and $3.75 per bushel for 2021/22. The beginning point for these baselines is a combination of the USDA August 2019 WASDE as well as the long-run USDA Outlooks released in February of 2019.
From there, several adjustments are made that result in deviations from both forecasts. The largest adjustments on the corn side are to assume lower harvested acres and lower yields than the August USDA WASDE. This reduction in supply results in a 2019/20 higher corn price forecast than USDA.
Baseline prices for soybeans are $8.70 in 2019/20, $8.76 in 2020/21 and $8.85 in 2021/22. On the soybean side, a price adjustment is made to reflect a 2019/20 higher soybean price forecast than current USDA figures.
Again, the adverse scenario is not likely, but it is plausible. Somewhat sobering, baseline prices, particularly for soybeans, can be viewed as stressful in itself.
The set of adverse prices shown in Table 1 are built around the following supply/demand scenario:
- The U.S. economy weakens, leading to a mild recession. This mild recession causes sluggish demand for meats and other products, resulting in lower use of both corn and soybeans.
- Ethanol demand stagnates, leading to reduced demand for corn.
- The full extent of African swine fever becomes known in China and it is large. As a result, soybean exports to China fall, and rebuilding is very slow.
- Trade relations between the U.S., China and other nations continue to be strained, leading to a continuation of tariffs on soybean exports from the U.S. to China.
The adverse scenario also includes supply and demand conditions reflecting:
- Acres harvested are higher in the adverse scenario in 2019/20 as compared to the baseline, creating stronger supplies than expected (82.0 vs. 80.4 million acres). Then acres harvested are slightly lower in the adverse scenario in 2021/22 as compared to the baseline, with low prices assumed to take some acreage out of production (85.6 vs. 86.6 million acres)
- Yields in all three years are higher in the adverse scenario as compared to the baseline (169.5 vs. 166.0 bushels per acre in 2019/20, 179.5 vs. 178.5 per acre in 2020/21 and 181.5 vs. 180.5 per acre in 2021/22).
- Feed and residual are reduced in all three years to reflect a recession in the U.S. (5.125 billion bushels vs. 5.175 in 2019/20, 5.550 vs. 5.650 billion in 2020/21 and 5.7 billion bushels vs. 5.775 in 2021/22).
- Ethanol demand is reduced in all three years (5.375 vs. 5.475 billion bushels in 2019/20, 5.575 vs. 5.725 in 2020/21 and 5.625 vs. 5.725 bushels in 2021/22).
- Exports are reduced to reflect continuing trade difficulties (1.9 billion bushels vs. 2.05 in 2019/20, 2.35 vs. 2.45 in 2021/22 and 2.4 vs. 2.475 in 2021/22).
All of those changes will result in lower prices.
In a similar output for soybeans, changes made to this scenario from the baseline are:
- Acres harvested are slightly lower in the adverse scenario in 2021/22 as compared to the baseline, with low prices assumed to take some acreage out of production. (81.8 vs. 82.2 million acres)
- Yield per acres is increased in 2020/21 and 2021/22 (52.6 vs. 50.6 bushels per acre in 2020/21 and 52.1 vs. 51.1 bushels per acre in 2021/22).
- Crushing was reduced (2.065 billion vs. 2.115 billion bushels in 2019/20, 2.05 vs. 2.1 billion bushels in 2020/21 and 2.08 vs. 2.12 billion bushels in 2021/22).
- Exports were reduced in all years (1.625 vs. 1.775 billion bushels in 2019/20, 1.7 vs. 2.0 billion bushels in 2020/21, and 1.9 vs. 2.0 billion bushels in 2021/22).
Again, all those changes result in reduced prices.
The adverse scenario arguably takes an already stressed outlook and adds further adversity.
A series of stressful events, including U.S. recession, further export disruptions and supply/demand imbalances, was assumed in the above to create a scenario resulting in several years of sustained adverse prices.
While this scenario is not likely, it is based on a plausible set of assumptions. Farmers and others may want to use these adverse prices in pro forma cash flows to analyze the stress that could result.
Note that the prices presented in both the baseline and adverse scenarios make no assumptions around Market Facilitation Payments (MFP). Similar to 2018, MFP payments will be a significant component of incomes in 2019. Without MFP payments, incomes are low even under baseline conditions.
While the current trade situation results in very low prices, a continuation of MFP payments in 2020 could soften adverse financial results causes by lower prices.