The May World Agricultural Supply and Demand Estimates is the highlight of spring reports and it gives the first look at the 2020/2021 marketing year since projections were announced in February at the USDA Agricultural Outlook Forum. Farmer planting decisions are incorporated from the March Prospective Planting report and planting progress reports are updated weekly throughout the spring. Top of marketers’ and analysts’ minds is how commodity markets will react to the COVID-19 uncertainty. Changes made to supply and demand in both the 2019/2020 and the 2020/2021 marketing years for many crops resulted in modified outlooks for farm programs, particularly the popular Price Loss Coverage program.
Farm Program Selections
Farmers had the opportunity to make a one-time election to enroll base acres on a commodity-by-commodity basis in either Agricultural Risk Coverage-County Option or Price Loss Coverage for the 2019/20 and 2020/21 crop years (What’s in Title I of the 2018 Farm Bill for Field Crops? and ARC-County, A Bird in The Hand for Some in 2019). If a farmer chose Agricultural Risk Coverage-Individual, all base acres on the farm, regardless of commodity, were enrolled in ARC-IC. Farmers enrolled a total of 253 million acres in Title I commodity safety net programs for 2019, 2020 and 2021 program years. Of that total, 177 million acres, or 70%, are covered under PLC. There are 66.5 million acres, or 26%, enrolled in ARC-CO and 9.8 million acres enrolled in ARC-IC, which is 4% of the total acres. Figure 1 displays the breakdown of all U.S. base acres enrolled by each program.
Crop Price Outlooks Change Price Loss Coverage Payment Potentials
The PLC program delivers a deficiency payment when the effective price of a covered commodity is less than the effective reference price, i.e., when the price of a commodity falls below a specific price floor. The effective price equals the higher of the marketing year average or the national average loan rate for the covered commodity. PLC program payments are made on 85% of the farm’s base acres and the farm’s PLC program yield.
For old crop year corn in 2019, USDA has reduced estimated ethanol corn demand by 475 million bushels since COVID-19 stay-at-home orders went into effect in the United States; overall, ethanol corn demand is down 12% compared to 2018. The large reduction in demand pushes the supply of corn above 2 billion bushels for the end of the 2019/2020 marketing year. The higher supply and lower demand compelled USDA to adjust the corn marketing year average price to $3.60 per bushel, down from the $3.80 per bushel the department estimated in March.
As it stands for the 2020/2021 marketing year, USDA is projecting record corn planting and record supplies totaling 18 billion bushels. A return in ethanol demand and a slight increase in exports helps boost corn demand. However, the demand estimates do not use up enough expected corn supplies, leaving ending stocks for 2020/2021 at 3.3 billion bushels. This puts even more downward pressure on the price of corn, which USDA estimates to be $3.20 per bushel for 2020/2021.
The effective reference price of corn is $3.70. For the 2019/2020 marketing year, the expected payment rate for corn is 10 cents per bushel. In 2020/2021, the expected payment rate increases to 50 cents per bushel.
2019/2020 soybean production was down 20% compared to 2018, which helped reduce ending stocks while trade wars slowed the pace of soybean use. These parallel reductions and lack of trade deals moved the marketing year average price of soybeans from $8.70 in March to $8.50 per bushel in May for 2019/2020. Demand in 2020/2021 is expected to increase compared to 2019 as trade relations get back on track. With rebounding supplies also expected but no publicly available data indicating trade deals occurring, USDA lowered the 2020/2021 soybean marketing year average price to $8.20 per bushel.
With an effective reference price of $8.40 per bushel, soybeans farmers are not anticipating a PLC payment in 2019/2020 but the average farm marketing price of $8.50 per bushel stands. In the 2020/2021 marketing year, when soybeans are $8.20 per bushel, the anticipated PLC payment is 20 cents per bushel.
Wheat production was slightly lower in 2019/2020 than the previous year, while wheat demand in 2019/2020 had an unexpected uptick due to COVID-19-driven consumer purchases. Revisions in 2019/2020 wheat demand pushed ending stocks 8 million bushels higher for the 2019/2020 marketing year. The unexpected favorable changes have also helped boost price estimates for wheat as USDA changed the marketing year average price of wheat from $4.55 per bushel in March 2019 to $4.60 per bushel in May for 2019/2020. Wheat is anticipated to have a similar year in 2020/2021 in regards to supply and demand expectations. USDA is maintaining the $4.60 per bushel estimate for the 2020/2021 marketing year average price.
The anticipated PLC payment rate for wheat is the same for both the 2019/2020 and the 2020/2021 marketing years as USDA predicts an average marketing year price of $4.60 per bushel. The effective reference price for wheat is $5.50 per bushel and the expected PLC payment is 90 cents per bushel.
These changes to the average marketing year price for crops change the outlook for the PLC payment rate farmers anticipate receiving in October. Figure 2 displays the projected PLC payment rates of select crops following the May WASDE changes.
The May WASDE is the long-awaited first look at the upcoming marketing year and while COVID-19 impacts continue to ripple through the farm economy, the projected outlook for farm programs, like PLC, is changing based on some of the market fluctuations. Some possible revisions to demand could still be in store for the 2019/2020 marketing year as stay-at-home orders and COVID-19 precautions remain in place. Additionally, more supply changes could occur for the upcoming marketing year if farmers change planting intentions or weather infringes on regular planting and growing conditions. Title I commodity programs like PLC were designed to help farmers manage the risks of unexpected market fluctuations, and while it is still too early to fully understand all the ramifications of COVID-19, PLC payments could help mitigate some of these immediate impacts.