Tag Archives: Agricultural Economic Insights

A few weeks ago, we noted Mother Nature made a large dent in projected 2019 production and ending stocks. A few readers asked about the global ending stocks situation. For this week’s post, we review the global ending stock situation for corn, wheat, and soybeans and, as you might have guessed, considered China’s role in global crop inventories.

(AUDIO) David Widmar discusses why we’re seeing global grain ending stock continue lower

 

Global Stocks

Figure 1 shows global ending stocks of corn, soybeans, and wheat relative to consumption since the 2000/2001 marketing year. The ending stock ratios are helpful as evaluating ending stocks in absolute terms (in total bushels or metric tons) gets messy as production and consumption have trended higher over time.

Overall, corn ending stocks (in blue) are generally the tightest among the three crops. Over the last 20 years, the corn ending stock to consumption ratio has averaged 22%. Note that for several years global corn stocks were near, or below, 15%. In recent years, corn inventories reached a high of 33% (2016/2017) before trending lower to an expected level of 26% for the current year.

Soybean ending stocks (in orange) have averaged 25% of consumption over the last two decades. Like corn, soybean stocks recently peaked (35% in 2017/2018), but have trended lower recently. Projected ending stocks for the current marketing year are 27%.

At an average of 30% of consumption, wheat stocks (in gray) are generally highest. Conditions in recent years have not improved, at least by this measure. For the current year, wheat inventories are at 38%, unchanged from 2017/2018, and 2018/2019 levels. Furthermore, current levels are at the highest in the 20 years, and one would have to search back to the 1980s to find as high as they are today.

 

2019 global grain ending stocks. ag economic insights. aei.ag, ag trends.
Figure 1. Global Stocks to Consumption Ratio for Corn, Soybeans, and Wheat, 2000/2001 to 2017/2018. Data Source: UDSA’s FAS (Nov. 2019).

The China Factor

Any conversation about global crop inventories should consider China. Figure 2 shows China’s share of total global ending stock. For all three crops, China has accounted for a growing share of global inventories over the last 15 years. In some cases, the numbers are hard to phantom. In recent years, China has accounted for around two-thirds of all world ending stocks of corn. This is up from about 30% of stocks in the mid-2000s. China also accounts for more than half of all wheat stocks (up from 30% in the mid-2000s) and 20% of global soybeans (up from 10% in the early-2000s).

Given the trends and magnitudes, especially for corn and wheat, one should also consider world crop inventory levels less China. This is especially the case as China does not participate in the global export market of these crops. In other words, grain stock in China, at least historically, behave differently than stocks in other counties.

Figure 3 shows global stocks to consumption ratio less China’s inventories. A quick comparison between figures 1 and 3 show a much tighter stocks situation. Furthermore, the sharp uptick in stocks since the mid-2000s isn’t observable in Figure 3. Since 2000, corn ending stocks less China averaged 10% of annual consumption. For the current marketing year, corn stocks are expected to fall below the average (9%). For 2019/2020, soybean stocks (22%) are slightly above the 20-year average of 21%, and wheat stocks are on par with the average (19%). Rather than above-average levels, conditions less China are at, or near, the 20-year average.

Conditions are perhaps most stark with wheat. While the data in figure 1 show wheat approaching burdensomely high levels, conditions less China (figure 2) show levels have trended lower since peaking at 23% in the mid-2000s.

 

2019/2020 global grain ending stocks. ag economic insights. aei.ag
Figure 2. China’s Share of Global Stock, Corn, Wheat, and Soybeans. 2000/2001 to 2019/2020. Data Source: UDSA’s FAS (Nov. 2019).

 

2019/2020 world grain ending stocks. ag trend. aei.ag, ag economic insights
Figure 3. Global Stocks to Consumption Ratio – Less China- for Corn, Soybeans, and Wheat, 2000/2001 to 2019/2020. Data Source: UDSA’s FAS (Nov. 2019).

Wrapping it Up

It’s often difficult to summarize any situation with a single graph. Global grain ending stocks are a good example of this. On the one hand, figure 1 shows global inventories have improved over the last few years but remain above the 20-year averages. However, it is worth pausing to consider a significant source of that increase in stocks, China. A large share of corn and wheat global inventories are actually tied up in China and not truly available to the global market. Considering the global grain situation less China, a much tighter stocks situation is observed.

In both cases, figures 1 and 3 show ending stocks for the three crops have trended lower in recent years; a welcome improvement. The difficulty is sizing up how tight, or burdensome, the current situation is.

China’s expanding impact on global agriculture has been a significant structural shift over the last two decades. We previously noted China’s overall reliance on trade to address the acreage-gap between what they produce and consume. Beyond trade, China has also amassed a large share of global grain inventories, potentially distorting the surface-level global ending stocks numbers. Looking ahead, one has to wonder how China’s grain inventories might trend over the next 10 to 20 years.

With farm income remaining depressed, managers are keenly focused on ways to improve their efficiency and cost competitiveness.  Examining their investment in farm equipment is undoubtedly one area that deserves attention.  Farm equipment generates a significant portion of the costs associated with farming.  In our experience, they are also one of the items that people have the most difficulty evaluating and managing.

AUDIO: David Widmar Talks Farmers Through Getting a Handle on Equipment Costs

 

Farm Machinery Expense

The investments associated with equipment are economically large, impact the farm for years, impact financial decisions, impact taxes, and influence the way in which the farm carries out its operations. In most cases, it is difficult to make wholesale changes in equipment in a short time frame.  As such it makes sense to have a coordinated and thoughtful plan that will result in the best economic outcome for each farm. As we wrote a few years ago:

“One thing is certain, if you visit many farms, you will observe a wide range of equipment investment decisions being implemented.  For instance, farmers can buy new or older equipment thereby likely trading off repair expenses and perhaps speed and efficiency for investment costs.  Farmers can outsource many field operations or choose to conduct these themselves.  Farmers have different amounts and sizes of equipment thereby likely trading off the speed with which they can conduct planting, tillage, and harvesting operations.  The result is a very wide range of potential equipment configurations that are observed on most farms.  These trade-offs make evaluating the equipment investment on a farm a difficult task.”

 

To get a handle on the magnitude of costs facing farmers we examined USDA’s estimates of the cost of corn production.  Summary data for the Heartland region of the U.S. are reported in Table 1.  The largest expense associated with equipment investment is capital recovery.  This is a charge designed to account for the depreciation of a farm’s machinery investment.  In 2018 this was estimated at $121 per acre.  Combined with repairs, these costs were $153 per acre.  These expenses are significant, accounting for 41% of all farm overhead costs.  The other major overhead expense, the opportunity cost of land was only slightly larger at $193 per acre.

farm equipment costs. farm equipment investments. aei.ag. ag trends.

 

Farm Machinery Cost Over Time

Like other expenses, the costs associated with machinery have grown significantly over time.  Figure 1 shows the nominal expenses on farm machinery estimated by USDA over the last 10 years.  The capital recovery charge has increased at an annual rate of 5.2% over that time. Most of the increase occurred from 2015 to 2016 when the charge was increased by 18%.  The large increase in 2015 to 2016 reflects the fact that the base survey used to estimate the costs changed in 2016.  Prior to that, the estimate reflected the equipment estimated in a 2010 survey. ERS explains this as follows:

“Estimates made in the survey year should be regarded as the most reliable because they reflect both prices and technologies used on the commodity. The reliability of estimates in non-survey years likely varies for each commodity by the degree of technical and structural change that has occurred since the last survey.”

 

farm machinery expense. farm machinery investment. aei.ag. ag trends.

Figure 1.  Capital Recovery of Machinery Investment, Heartland Region, Corn Production 2008-2018.

 

As we can see the costs have increased substantially over time.  Because they represent such a large portion of expenses, it is critical that they are evaluated carefully.  However, measuring these costs is complicated.  The biggest complicating factor is usually evaluating depreciation.  Although the ability to accelerate depreciation for tax purposes is valuable, for large pieces of equipment economic depreciation and tax depreciation usually bear little resemblance to one another.  Another factor that must also be considered are hidden costs associated with insurance and storage costs for equipment.

Wrapping it Up

So where does one start?  For those interested in a short but helpful discussion of evaluating equipment costs, this resource from Iowa State is a good place to start.  The typical advice is to begin with the depreciation, interest, repairs, taxes, and insurance or DIRTI costs.  We also recommend that producers carefully evaluate any costs and revenues associated with custom hire when evaluating their equipment costs.  The key is to measure and track these costs over time.  It also makes sense to focus on the largest of these expenses, which is typically depreciation and repairs.  While repairs are easier to track, depreciation will require more work and gathering data on the economic depreciation.

When evaluating these costs it is important to develop a capital expenditure plan for the next and subsequent years.  What equipment will need to be replaced in the coming years?  How will this impact the operation?  How do the costs of owning and operating equipment compare to the costs of custom hire?  Will the equipment complement chosen impact other factors, such as farm labor requirements?  How will equipment purchases be financed, and how does that impact the overall financial condition of the farm?  How do purchases impact taxes and how will cash flow be raised to make required principal payments on financed purchases?

All in all, choosing the equipment complement of the farm is one of the most important but most complicated decisions farmers will make.  Because the costs are high, the implications for these decisions are substantial.  Given the challenging times in agriculture, making wise equipment investment decisions can be the difference between profit and loss for years to come.