OKOBOJI - 2012's drought will continue to affect grain markets through most of 2013 and some profitability will return to the pork industry this year.
These are two factors for 2013 outlined by Chad Hart, an associate professor and Iowa State University Extension ag economist, on Jan. 9 when speaking to farmers and agribusinessmen at the crop advantage series meeting in Okoboji.
"We've seen a strong pull-back in corn demand due to the high prices we're seeing now," said Hart. "Will it rain? And how quickly will that demand rebound? I'm concerned that it can't rebound as quickly as we'd like."
High corn and soybean prices created by the drought resulted in producers reducing their livestock herds, cutting back on domestic corn demand.
"We've removed many animals from the farm," Hart said, "and that has literally killed demand here."
It could take years to recover from that pull-back, he said, "It's a real concern of mine going into 2013."
While the drought had a significant impact on Iowa and U.S. crop production, the three most common words he heard during last fall's harvest were "better than expected." He said Iowa's corn yields came in at 139 bushels per acre on average, and that soybeans produced an average of 44 bushels per acre.
Both commodities have seen long-term demand pull during the last five years, Hart said, and with the effects of the drought, it raised crop prices to record levels in 2012.
His information showed that national net farm income is expected to set records in 2012, with this past ag production year possibly being one of the best years financially.
"We're still at very profitable prices, but it's quite likely that the high prices we've seen are now in our rear-view mirror," Hart said. "The key word in the markets today is volatility.
"We've seen it over the past five years, and it's a precursor to what's ahead in 2013."
Thinking back to 2008, Harty said Iowa had record prices that year, but by December that year corn was back to $3.50, Hart said. "We're seeing pressures on both ends of the market, but which will be the dominant factor as we proceed ahead?
"My concern is that things could get tougher, but luckily we've prepared ourselves for volatility in corn."
The drought significantly reduced U.S. corn production, leaving the rest of the world to fill in the gaps, Hart said.
"Corn futures are flat from now until July, until the next big shot of corn will hit the market," he said. "China produces as much corn as we do, but they use everything they produce, so they can't fill in the shortfall."
He said that as of Sept. 1, 2012, the U.S. was 50 percent behind in corn exports compared to the year before.
Soybeans are the upside to the story, he said, with stronger demand in the world market. But there is also stronger competition in the world market for soybeans as well, he said. Hart said the U.S. is the largest producer of soybeans in the world, producing one quarter of the soybean crop worldwide.
He said Brazil and Argentina could fill in the gap produced by the U.S. drought. However, South America has received too much rain over the past several months, delaying planting. Still, he thinks the potential exists for record crops in Brazil because, "rain makes grain."
"The U.S. is now ahead of where we were last year in terms of soybean exports," Hart said. "China continues to buy soybeans even with the high prices because they need vegetable oil for their diets there."
He also said that with 1.3 billion people to feed in China, the hog industry is six times greater than that of the U. S., and since it doesn't grow a lot of soybeans, it must import it to feed its huge swine industry.
Hart said as production costs continue to rise and land values and cash rents increase, crop margins could become significantly tighter. The USDA's projections over the next year show lower demands for feed, ethanol, export and crush.
Those figures show projected corn demands down nearly 1.5 billion bushels, with projected soybean demands down roughly 150 million bushels.
Hart said the question now is how quickly demands could return if prices go lower.
"Some demands such as ethanol and poultry feeding, can be back and running within (a few) weeks, but in areas like cattle feeding, it may take years to rebound," he said.
Hart said livestock feed has traditionally been the biggest demand for U.S. corn and soybeans, but profitability with high prices for both commodities has swine producers cutting back herds on a national level.
He said hog producers have seen record low prices in 2012, but projections see profitability returning, but not until deep into 2013.
Production of all livestock, including poultry have declined in the last year, Hart said.
"I'm watching the birds. If the market rebounds, I see it happening with the birds first, followed by pork and then beef," he said.
Hart said the market also hovers over the lingering effects of the drought and the ability to keep crop acreage that was pulled into production in 2012.
He said the U.S. planted more than 10 million more acres than in 2011, much of that coming from the Dakotas. His concerns also lie in the question of whether or not soils will receive enough rain between now and spring planting to recharge again.
Biofuels enter into the picture as well, Hart said, adding that there has been tremendous growth over the last few years in that area.
"It's pretty much stalled out now," he said, saying that more than 99 percent of ethanol comes from corn. "Because of the drought, that has pulled back, and has not come back up."
He said the trend line for corn demand for ethanol is also flat, with ethanol plants suffering because of high corn prices.
"We've become the world's largest exporter of ethanol over the last few years, but we've filled it now," Hart said, adding that E-15 has not proven to be the boon to the corn industry that ethanol officials had hoped. Hart said figures show steady growth in gasoline consumption in the U.S., and that there will need to be more blended fuels on the market in order to keep the ethanol industry strong.
Hart said the fall 2012 futures market called for early estimates for the 2013/2014 growing season-average in the $6 range for corn and in the $12 range for soybeans.
But, he said, there are a few things for which to watch. They include South American crop conditions (especially for soybeans); China's demand for soybeans, ethanol plant and blender margins, USDA's crop production report numbers and weather conditions.
National Weather Service maps indicates western Iowa and into South Dakota and Nebraska are in a "persistence" category, meaning the drought will probably not break in the next three months.