The News & What it Means – Up Trending Wheat Yields & A Struggling US Farm Economy

By John DePutter & Dave Milne – August 29, 2017

 

The news:

“Wheat yields trending up. An uptick in wheat yields the past 20-plus years hasn’t gotten the same attention as boosts to corn and soybean output.”

– Farm Week Now, Aug. 25, 2017

 

What it means:

Bigger yields mean bigger production, and that is certainly true today.

 

One big story the past few years for ag markets has been the persistent glut of worldwide wheat supplies and resulting pressure on prices.

 

Of course, most farmers will remember those heady days back in early 2008 when the benchmark Chicago futures shot to over US$13/bu, part of a general explosion in agricultural prices in the wake of years of deficit production.

 

Although wheat experienced another spike in mid-2012, the market eventually did its job of encouraging more production and prices have trended mostly lower since – apart from this summer’s short-lived weather market.

 

But it hasn’t been a larger seeded area that has gotten us to this point of surplus production. Higher and higher wheat yields get much of the credit (or blame).

 

Consider that in 2016, US all-wheat production amounted to 2.3 billion, up about 250 million from a year earlier, despite the fact American farmers slashed wheat planted area by about 5 million acres.

 

Yields hit new highs

In fact, the 2016 average all-wheat yield in the US of 52.6 bu/acre was up 9 bu from a year earlier and a new record.

 

The weather was obviously a factor in that 2016 bumper crop, but prior to the 2000s, it was a rarity for the US average yield to hit 40 bu/acre. Since then, only on rare occasions has average yield dropped below 40 bu.

 

Here in Canada, farmers are getting yields they never dreamed of 10 or 15 years ago. For example, in Ontario, the 2016 winter wheat yield cracked the 90 bu/acre barrier for the first time. It might happen again in 2017. The DePutter team has talked with some Ontario farmers who reaped 110 bu.

 

Weak prices the result

Farmers all want to reap the best possible yields. But with wheat yields climbing both in the US and all over the world – including in the Black Sea region, where farmers this year are expected to harvest record crops, the result is surplus supplies and low prices.

 

You can’t have one without the other. The sweetness of strong yields is accompanied by the sourness of weak prices.

 

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The news:

“US Farm Economy Still Struggling, says Federal Reserve”

DTN, Aug. 28, 2017

 

What it means:

A sluggish US farm economy has been getting headlines in America for about three years. This comment about it from the Federal Reserve is really nothing new.

 

What’s more interesting is what’s ahead. And although economic conditions seem to be levelling out, they’re not improving much. A big chuck of American agriculture remains in the grip of a severe recession, which started to bite in 2014.

 

It was in 2016 when the impact of three previous years of falling prices really hit home. Bankers began seeing more farmers with carryover debt. There were tougher conversations during loan-renewal season about cash flow. Record large corn and soybean crops helped offset low prices in 2016 but didn’t haul up total gross or net income.

 

The DTN story mentions that one “saving grace right now is that farmland values have not fallen as dramatically as expected. However, an economist cites that farmland in Iowa is roughly 25% lower than its peak, and that is probably similar to eastern Nebraska and Illinois.

 

The story states: “Iowa farmland values actually bumped up 2% in the first quarter of 2017. Nebraska and northern Illinois held steady while land values fell 8% in Kansas and 10% in South Dakota.”

 

It’s not as if we didn’t see this downturn coming for the US

 

Commodities were just too high to last in 2008 and again in 2012. The DePutter service has been monitoring the macro-cycles for years and foretold of the downturn for US profits and land prices.

 

Do things look a lot different in Canada?

 

Sure do.

 

If there’s been a surprise to us the past three years it’s that Canadian farm income data and farmland prices haven’t displayed anything remotely resembling what’s happening stateside. Canadian ag economic data has been painting a very strong income picture over the past several years.

 

That doesn’t mean there won’t be ups and downs in Canadian farm income in the years ahead.

 

Our services will be monitoring the Canadian ag economic situation closely the coming six to eight months. Some new factors and forces are poised to take effect in certain ag sectors in certain areas of the country.

 

We’ll have commentaries on the subject in the DePutter Market Advisory Service (for westerners) and Ag-Alert (for Ontario).

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