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DAVID KRUSE

By Staff | Nov 9, 2018

Vice President Mike Pence and Ag Secretary Sonny Perdue were in Georgia assuring farmers there that the Federal government would help them with an estimated $3 bln in “staggering” losses from Hurricane Michael. This loss was concentrated in the path of the hurricane but the loss of $3 billion was just a small down-payment relative to the really staggering losses that the Ag sector is suffering from Trump trade and RFS policies.

FAPRI says that Trump RIN waivers will cost the biofuel industry $20 bln and the E-15 vapor waiver is a shiny ball thrown up to take the attention away from the real damage done to the RFS. When you add up all of the cumulative trade losses to the soybean, sorghum, apple, milk, cranberry, pork and other export markets it is billions and billions and billions. The little bit that we get back in tariff aid and deregulation is proportionately a small token of reimbursement.

You can call me a pessimist but we pessimists have been dead right so far but what I see coming is not the recovery of the soybean market but the potential destruction of the corn market. I think that it is very unlikely that China and the U.S. will untangle their worsening disagreements that are on a current trajectory to grow into something bigger than just a trade war. Unless there is a resolution of the trade war between the U.S. and China there will be no recovery in the soybean market.

I don’t know about you but I cannot afford to grow $8 soybeans. I think that means that we will shift millions of acres away from soybeans as the forward-looking soybean carryover projects toward a billion bushel and even $8 soybeans is too high. I am set up to grow corn and under the market circumstances will plan to grow 100 percent corn next year. I am sure others will shift acres to corn too.

2018 soybean production is currently estimated to be 4.693 bln bushels and consumption is forecast at 4.268 bln bushel. That is 425 mln bushels difference. To reduce 2019 soybean production so that it matches consumption so that it does not add further to the 885 mln bushel projected soybean carryover it requires a reduction of 8 million harvested acres of soybeans in 2019. So, we split those acres between corn and wheat. I modeled 5.5 mln acres going to corn. Using this year’s 180.7 bpa yield times 5.5 million more acres would boost corn production by nearly another billion bushel. El Nino conditions are returning. Both South America and the U.S. have a 70 percent chance of above trendline yields during El Nino’s. We obviously need a real weather problem somewhere to improve the balance sheet and instead, the El Nino is positive for yields.

The USDA says that net farm income is near a 15-year low made worse by tariffs. Costs are also going up, also in part due to tariffs. Tariffs have lowered the value of what we sell and raised the price of inputs we buy. It is going to get better though right? Most farmers are looking for soybean prices to recover and the dip in net farm income to end. I expect very few think that net farm income will get worse than it is.

Here is how that could happen. I don’t know that without Chinese soybean demand that we can cut soybean acres enough to save the soybean market to allow its recovery to profitability, but I am pretty sure that with more acres that we can ruin the wheat and corn markets trying to grow something that makes money. This is going to make pricing 2019 corn very important to survival again next year. Given a dramatic acreage shift, we could end up with $2.50 corn to go along with $7 soybeans. Wouldn’t that be fun.

E-15 is not going to materially impact the 2019 corn balance sheet. The Brazilian soybean crop is setting a record for early planting. That will bring new crop Brazilian soybeans to market early in 2019 for China. It will also allow early planting of the Safrinha second corn crop. The El Nino has historically foretold a 70 percent chance of trend/above trendline yields for both South America and the U.S. crops next season. They are likely to produce a record corn crop and with a lot more acres and an El Nino so could we.

Do I really have to tell you the rest?

Trump immigration policy is a hit with the GOP and most farmers are Republicans. Hereto we need another “however”…Trump’s immigration policy will exacerbate an already very difficult labor situation in the ag sector. Unless resolved it will increase food costs for U.S. consumers to a degree that will surprise them. The bottom line is when Trump talks about the fantastic U.S. economy, we in the ag sector are being left out.

I don’t see anything really good happening with China. They are never going to trust us with their food dependence as they were doing ahead of the trade war.

They will have found and made new commitments elsewhere. Hurricane Michael did devastate Georgia Agriculture….cotton, pecans, vegetables, cantaloupe, timber, poultry and cattle to name a few. They will need government aid as the existing safety net will not save them.

The other historic storm however, the trade war, is man-made and unlike a hurricane which does its damage and is gone, can protract so that losses pile on top of one another. The damage from this trade war will last a long time at an enormous cumulative cost…back to those billions and billions…a lot costlier than a hurricane. A hurricane will not lower farmland values but Trump’s trade war will.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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