Dynamic soya market stomps on USDA's long-term projections

US soyabean fundamentals are not getting any easier to predict, at least judging by the government's annual long-term forecasts. Market participants will soon take their first peek at US supply and demand figures for the 2018/19 crops, and a sizable revision could be in store for soyabeans given last year's missed forecast.
The US Department of Agriculture publishes its 10-year outlook for the agriculture sector each February, but key tables from that report are unveiled in the final days of November. This year's tables are expected November 28 at noon EST (1700 GMT). Planted area is typically the first item under discussion when considering the next marketing year, and USDA's year-ago miss on 2017 soyabean area is particularly glaring. This spring, US farmers planted nearly 5 million more bean acres than USDA had initially pegged.
While things are undoubtedly prone to change over a 10-year period, the projections are useful in illustrating where USDA sees each market heading based on the current governing factors. The estimates take into account such factors as macroeconomics, domestic and international policies, farm legislation, and growth rates of US productivity. They also operate under "normal" weather assumptions and typical production levels for competing foreign crops.
The agency uses its November estimates for world agricultural supply and demand as the baseline for the projections while the macroeconomic assumptions are prepared in October. Over the past decade, USDA has had an increasingly difficult time predicting planted soyabean acres 10 years in advance. This has been especially true for the last three seasons, likely a function of a rapidly changing and somewhat unpredictable global soyabean market.
In early 2008, the agency initially slated 68 million acres of soyabeans to be planted in 2017, significantly fewer than the realized 90.2 million. Early this year - or in the key tables from November 2016 - USDA pegged 2017 plantings at 85.5 million acres, a relatively large jump from the previous year's record 83.4 million. Government analysts also projected that bean plantings would stay stable around 85 million for the next decade.
Clearly USDA needs to rethink the acreage picture. The agency found itself in a similar position heading into the 2014/15 cycle and it ultimately made the wrong call. Bean acres surged 8.4 percent on the year to an all-time high of 83.3 million acres in 2014, despite the 78 million pegged in the long-term projections earlier that year.
In its long-term forecast in 2015, USDA said acres would remain at similarly high levels for the 2015 harvest but would fall back down to 78 million or 79 million in the years after, citing expectations of lower prices and producer returns. So now the question is whether USDA sees soyabeans at the 90 million-acre level in the years ahead, or if the 2017 surge was a one-off event.
The Chicago futures market certainly does not suggest that US farmers must drastically scale back soyabean plantings in 2018. The new-crop soyabean-to-corn futures price ratio - near 2.6 as of Monday - is at historically high levels, similar to a year ago and late 2013. The ratio, which in this case compares the November 2018 soyabean contract with December 2018 corn, is a key indicator of producers' profit potential. Farmers tend to favor planting soyabeans when the soyabean-to-corn ratio is above 2.5.
The government's next view on 2018 US plantings will come at USDA's annual Agricultural Outlook Forum at the end of February, and these numbers can sometimes vary from the long-term projections. At this year's outlook forum, soyabean plantings came in 3 percent higher than the long-term target. In 2014, outlook forum plantings came in 2 percent higher than the earlier peg. In both years, the acreage figure surged again by roughly 2 percent into USDA's prospective plantings at the end of each respective March.
US soyabean exports are another curious item on USDA's balance sheet as a revision there may also be warranted. Even though some analysts might argue that USDA is too high on 2017/18 exports, the current forecast of 2.25 billion bushels is larger than any number penciled in by the agency one year ago for the next decade. USDA's general low-side bias may have delighted producers in terms of the price forecast, though. The average farm price during the 2016/17 year came in 27 cents per bushel higher than USDA had slated a year ago.
However, the current target for 2017/18 is 5 cents a bushel lower than the original number from a year ago. Yields for both soyabeans and corn are often a stand-out item in early forecasts as they more or less represent USDA's view of trend-line. The yields published in the long-term projection tables this month should not materially change into the Agricultural Outlook Forum, and they will be the starting point for the 2018 corn and soya yield conversations.
Unlike soyabean plantings, 2017 corn acres were actually well-predicted a decade out. The early 2008 forecast called for 92 million acres, and US farmers planted 90.4 million last spring. The 2015 and 2016 corn plantings each came within 4 percent of the earliest pegs, which were much smaller margins than in the several prior seasons. In terms of the overall supply and demand picture, USDA's year-ago forecast showed a path toward cutting down the burdensome domestic wheat supply over the next decade.
Stocks-to-use, a ratio that measures supply against demand, hit 53 percent with a bumper wheat crop in 2016/17. USDA's current forecast reflects a sharp cut in 2017/18 to 44 percent, and this ratio in last year's projections was to be whittled to 29 percent within 10 years. Soyabean stocks-to-use was likely to hover between 7 and 8 percent over the next decade (current 2017/18 figure is 10 percent) and corn stocks-to-use would slim down to 13 percent by 2026/27 (current 2017/18 figure is 17 percent).