Where Did All the Acres Go?

April-02-09

The March 31 Prospective Plantings report and the Grain Stocks report both suggest that the bottom has been established for crop prices.

The past winter was one of grave uncertainty for crop prices. The world economic slowdown had reduced consumption of grains and concern was growing that 2009 crop production would rebuild inventories to levels that would keep prices depressed. But, the March 31 reports said those thoughts were all wrong. How?

First, stocks levels were smaller than expected: corn by 42 million bushels, soybeans by 18 million bushels and wheat by 23 million bushels. The implication was that usage, at least so far this marketing year, may have been higher than expected. Thus, while the weak world economy has cut into use, the reductions may not be as severe as previously thought.

The second and more important report was the planting intentions. Expected acres for both corn and wheat were at expectations, but soybean intentions were about 4 million acres below. The implication is that soybean inventories will not be building for the 2009 crop as had been anticipated and that corn inventories will be shrinking for the 2009 crop.

But, the question remains, where did all those acres go, and could they possibly return when farmers finish planting this spring?
Looking across the entire crop base in the U.S. and accounting for changes in CRP land, total crop base acres increased about 7 million in 2007 and 2008 when crop prices were high, and have now dropped back that 7 million acres with the dismal prospects for crop returns in 2009.

Looking at 2009 acreage in the five major crops: corn, soybeans, wheat, sorghum, and cotton; USDA reported that planted acreage will be down 7.2 million acres from 2008. The largest reductions were: wheat (-4.5 million), sorghum (-1.3 million) and corn (-1.0 million). The locations of those reductions were in three primary areas of the country: the Northern Plains (-1.5 million), the Delta (-1.4 million) and the Southeastern U.S. (-.9 million). So, my hypothesis is that much of this land is low yielding acres that were brought into production with the high crop prices in 2007 and 2008, and has now moved out of production with poor return prospects in 2009.

This reduction in the acreage base will reduce the national production potential, although yields on these acres are much lower than the national average. But, there will also be less intensive application of inputs this year that will somewhat lower yield potential on the planted acres.

Reduced acres and less input intensity will lower production potential in the U.S., but will also lower potential worldwide, as producers around the globe respond to much weaker financial incentives this year.

This means the prospects of overproduction in a period of weak demand have been reduced and provided a price strengthening tone for grains and soybeans. In addition, it increases the upward price movement that will occur if growing season weather should turn adverse this spring/summer, or world economic activity is not as weak as anticipated.

However, do not expect a return to the record prices of the spring of 2008. There are at least four important reasons. First, the U.S. dollar is about 20% stronger than a year ago. This makes it more expensive for our foreign customers to buy from us. Secondly, the world economy is not expected to quickly recover. Third, the rapid growth phase of corn use for ethanol is over, and finally, crude oil prices are not expected to return to the $70 to $75 per barrel range where ethanol can compete with cheap gasoline. In fact, the current crude oil futures market does not expect crude prices to return to $75 until 2013.

These reports restore the possibilities for $4.00 per bushel new crop corn and $9.00 new crop soybeans, both levels that come much closer to allowing producers to cover total costs in 2009 than looked possible all winter.

Chris Hurt
April-02-09
Purdue University