PRX Analysis: Blue Sky Model vs. USDA Baseline for Corn and Soybeans, 2016 to 2025

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Produced by Bill Hudson

The Excel sheets for USDA's 2016 issue of its annual ten-year Baseline Forecast came out last December, and I have previously shared the main tables with clients, setting opposite our own Blue Sky numbers. The analysis here is my most complete analysis yet, using the reports issued by USDA at its Outlook Forum last Thursday and Friday.

For reference, see Chief Economist Rob Johansson Global Outlook slides and also the full version of all supply-demand tables for new crop 2016-17.

Note that there are slight variations for crop year 2016-17 from the Excel sheets of last December, as the USDA's Chief Economist and his senior staff have made a number of (small) updates based on recent world weather and other economic conditions.

The comparison of PRX Blue Sky and USDA 2016 Baseline is striking, if not somewhat sensational. However, note that if you look only at the "final result," the forecast farm prices for corn and soybeans out ten years, you will miss the whole point! Oddly, the PRX forecast prices and the USDA prices are very, very close--with corn in the $3.50 to below $4.00 per bushel range, and with soybeans in the $9.00 range by 2025. The PRX prices, however, are substantially lower in the most nearby years.

Furthermore, the main assumptions are decidedly different, most notably on crop area planted, corn ethanol production, feed/residual use, and exports. The fact that the two series of corn and soybean prices look "close" is purely accidental.

The main difference is with regard to area planted for corn, other feedgrains, soybeans, and wheat. USDA assumes that some 16 million acres of the major crops can be withdrawn from production by 2025, PRX does not. We know of no policy mechanism that would prevent farmers from not using their full acreage assets. We count on some money being transferred as a result of the current farm bill, but by no means on the scale of previous land diversions and set-asides.

The second big difference is on ethanol, where USDA predicts an overall decline in corn ethanol production by 2025, and PRX predicts a modest (but important) increase. The USDA, at the same time, forecasts crude oil moving steadily back up to $80/barrel in 2025--which in PRX terms would mean a significant growth in ethanol EXPORTS over this period, with corn remaining basically "cheap." USDA acknowledges no connection between crude price and ethanol volume.

The third difference is in domestic feed use, as the USDA's corn feed/residual number is forecast to increase by over 15 percent by 2025, versus PRX at closer to only 5%. One look at current overall meat consumption in the United States seems to deny much possibility for resuming the old per capita trend of meat use which was broken and turned down during the 2008-09 economic crisis.

And the last main difference is on exports of whole corn, which USDA sees as much stronger than PRX, in our view because of new competition from the Black Sea and Brazil-Argentina. The impact of a strengthening US dollar is downplayed by USDA.

One component of the forecast on which we agree with USDA is the trend yield forecast for corn and soybean yields--though here we must make an important comment. USDA owns two views about US crop yields, the first by the economists on the World Agricultural Outlook Board (WAOB) and the second by the researchers in the ERS who support the Department's Climate Change Office (directly attached to the Chief Economist's Office).

The WAOB takes the view, as shown in the plot of their published forecast, that corn yield goes up in a "straight-line trend," with a technological growth of about 2 bushels per acre per year--given "normal weather," which in the forecast is assumed to be forthcoming. "Until the trend yield of corn changes," one of the team told me, "it doesn't change." That's the PRX view precisely!

But in November 2015, the USDA-ERS issued a report, "Climate Change, Water Scarcity, and Adaptation in the US Fieldcrop Sector".

This study selected its own long-term climate models among the dozens available from UNIPCC and adapted them to the small region of the United States. Furthermore, this study did not make comparable changes to other world regions, most notably to our main export competitors of the Black Sea, Brazil, and Argentina. Thus ERS achieves a not too surprising result: Under the assumption of declining climate quality, US crops have declining yields and higher prices. If you hold the rest of the world constant and penalize US crops, what else would you expect?

One other argument was made by the ERS climate researchers, namely that "Corn, a C4 crop, does not photosynthesize more efficiently as a result of increased atmospheric CO2." But many accredited agronomists dispute this, and cite vast bodies of experimental evidence the other way. For instance, Dr. Craig Idso of CO2science.org answered my query on the ERS report as follows: "You could also point your audience to our plant growth data tables in which 27 experimental analyses show a 25.7% increase in corn biomass for a 300 ppm increase in CO2. Or, the plant growth data table that shows the photosynthetic response for corn at 24% for a 300 ppm increase in CO2."

We will have to watch carefully the future of USDA Baselines, and whether or not the Obama Administration's policy on climate change ("the debate is over") begins to affect the forecasts.

But for 2016, using almost identical corn and soybean trend-lines, the net-net difference between the PRX Blue Sky for 2016-2025 and the USDA Baseline is as mentioned above: Similar prices but completely dissimilar main assumptions. The result is most notable in terms of the net income for the US corn-soybean sector, which turns negative in the nearby and rises weakly longer turn--putting enormous pressure on all input costs to decline. (See last page of analysis.)

There is a prefect set-up for questioning this disharmony on March 20 at the PRX Annual Seminar. We start with a skeptical climatologist, move to the USDA's Outlook, and then to my own!

Change in USDA keynote speaker at PRX Seminar. The current USDA Chief Economist, Rob Johansson, recently informed me that due to a Washington schedule conflict he would be sending the Deputy Chief Economist, Warren Preston, in his place. (Rob confirmed himself "100%" at our August Seminar instead, and separately we have been told by the USDA's Senior China Economist, Fred Gale, that he will attend our May Roundtable meeting, hopefully bringing with him a member of China's National Grain and Oil Information Center.)

Revised March Seminar Agenda here. Register here.

Bill
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Bill Hudson
The ProExporter Network

The analysis above is not intended as a trade recommendation. The analysis and forecasts are based on available public data and on the best judgment of PRX, but cannot be guaranteed to conform to future reality.