Washington Insider- Thursday

Oats Shortage Looms

Here’s a quick monitor of Washington farm and trade policy issues from DTN’s well-placed observer.

USDA Revises 2016 Net Farm, Net Cash Farm Income Downward

Profitability in the U.S. farm sector is forecast at the lowest level since 2009 in 2016, with net cash farm income forecast at $90.1 billion, down 14.6% from the 2015 estimate while net farm income is forecast to be $66.9 billion in 2016, down 17.2% from 2015, according to USDA's 2016 Farm Sector Income Forecast.

Both forecasts mark a downward revision compared to USDA's prior forecasts when they pegged 2016 net cash farm income at $90.9 billion and net farm income at $71.5 billion.

Overall, cash receipts are forecast to fall $23.4 billion (6.2%) in 2016 due to a $23.4-billion (12.3%) drop in animal/animal product receipts; crop receipts are forecast essentially unchanged from 2015. Nearly all major animal specialties, including dairy, meat animals, and poultry/eggs, are forecast to have lower receipts, including a 14.8% drop ($11.6 billion) in cattle/calf receipts.

Direct government farm program payments are forecast to increase in 2016 by $2.1 billion, or 19.1%, to $12.9 billion. Increases were primarily in price- and revenue-contingent farm programs.

A 2.6% drop in overall production expenses forecast for 2016, on top of an 8.1% decline in 2015, partly offsets the forecast decline in cash receipts. "Reduced input costs are expected to ease, but not eliminate, some of the pressure from lower cash receipts," USDA noted.

USDA Ups Forecast FY Ag Exports to $134 Billion

U.S. agricultural exports are forecast at $134.0 billion with imports at $112.5 billion for a trade surplus of $21.5 billion, according to USDA's Outlook for US Agricultural Trade.

The forecast for Fiscal 2017 agricultural exports is up $1 billion from USDA's August forecast "largely due to expected increases in dairy and livestock byproduct exports." USDA has upped forecast dairy exports by $500 million, at $5.3 billion.

"Grain and feed exports are forecast up $300 million, to $29.6 billion, driven primarily by stronger wheat volumes and unit values as well as by corn volumes, helping to offset expected declines in rice exports," USDA detailed. "Cotton exports are forecast at $4.4 billion, a $200 million increase, due to a poor harvest in Brazil and production uncertainty in India."

Soybean exports are also forecast higher, as USDA noted "export volumes continue to set records, raising the soybean forecast $500 million, which is countered by expected declines in soybean meal, soybean oil and other oilseed products. Overall, the oilseed and product forecast remains unchanged at $31 billion."

China still forecast as the lead destination. Forecasts to China and Mexico received the largest upward adjustments, each increasing $300 million. China continues to be forecast as the top market for fiscal year 2017 at $21.8 billion, followed by Canada ($21.3 billion) and Mexico ($18.3 billion).

U.S. agricultural imports in Fiscal 2017 are forecast down $1 billion from the August outlook. "Reduced imports of horticultural, sugar, and tropical products are leading the forecast decline," USDA said.

The U.S. agricultural trade surplus is expected to increase to $21.5 billion in Fiscal 2017 compared to $19.5 billion forecast in August.

Washington Insider: Oat Shortage Looms

Oats were once an important crop on U.S. farms, used for food and feed, mainly for the national horse herd. Now, there are far fewer horses and oats do not compete well as a feed for fattening livestock so U.S. production has declined steadily for years. These markets are still important, but users now turn to Canada for more than half of U.S. needs.

Still the commodity is receiving unusual press attention as Canadian output is down and prices rising. This week, Bloomberg focused on oat markets for the first time in a while.

Bloomberg went so far as to advise consumers of granola and oatmeal to prepare for some sticker shock. The reason is rain and snow harvest delays across the Prairie Provinces in Canada. In addition, Bloomberg says, Canadian crop quality is poor, so there will be less food-quality grain available.

The good news for producers is that since the end of September, as the extent of the damage began to emerge, prices have rebounded from seven-year lows to stage the biggest harvest-season rally in a decade. More than 90% of Canada’s oat exports end up in the United States where companies including General Mills Inc. and Quaker Oats Co. use them in everything from snack bars to cereals.

“You can’t make a Cheerio out of barley,” said Randy Strychar, the president of oatinformation.com, an industry researcher based in Vancouver. “It’s going to be tight.”

Production likely will drop 13% to under 3 million metric tons, Agriculture and Agri-Food Canada said. Strychar says the decline may be even greater since farmers are so far behind the normal harvest pace.

As of Nov. 21, farmers in Saskatchewan still hadn’t collected 6% of their crop, according to the province’s agriculture ministry. Alberta had 27% unharvested as of Nov. 15, the provincial government says. Last year, the oat harvest was mostly complete by early November.

Oat futures on the Chicago Board of Trade were up 25% from the end of September through Nov. 24. Before the harvest delays, prices on Sept. 13 touched $1.71 a bushel, the lowest since February 2009. The most active futures contract closed last Wednesday at $2.23 1/4.

Canada oat exports will drop to a four-year low of 1.5 million tons in the year that began Oct. 1, down from 1.6 million tons a year earlier, USDA says. And, even if farmers manage to complete the harvest this week, much of that late grain won’t be usable for food and manufacturers may have to import more even higher-cost grain from northern Europe to manage the shortage, according to oatinformation.com.

The higher prices will take some time to work their way into retail stores, said Dave Sanders, a Vancouver, Washington-based vice president for Cereal Byproducts Co. The company, which gets about 80% of its oats from Canada, markets 10,000 tons annually for use by food makers and producers of pet food.

“After the first of the year, we’ll start seeing some increases,” Sanders said. “It will be a significant change in the market.” Bloomberg thinks that there are still inventories in the Midwest…perhaps enough for five months, but not all of that is food-grade quality, so millers may try to purchase more to make sure they don’t run out, said Ryan McKnight of Linear Grain Inc. “Mills ran out in 2014, and they don’t want that to happen again,” he said.

In the United States, the current oat crop was harvested earlier than usual and was generally better quality, Frayne Olson, an agricultural economist at North Dakota State, told Bloomberg. Still, because American food makers rely heavily on imports now, quality oats will bring a premium, he said.

Canada’s production is especially important for American food companies because most other oat-producing countries consume most of what they grow, said Tregg Cronin, a South Dakota-based analyst for Halo Commodity Co.

Food and seed use account for about half of U.S. use and won’t be available for feed use. And makers of horse feed, another big source of demand, aren’t likely to switch to other grains. So, Bloomberg expects tightly focused demand to translate so significant price increases.

It is interesting to see a crop that has been competing poorly for U.S. acreage encounter a tight supply period and to watch whether the price shocks prove sufficient to pull additional acreage into oats in the future. At this time, this seems like a short-term weather event that will have little structural effect on North American agriculture — but, which producers should watch closely as they plan for future crops, Washington Insider believes.

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