Tobacco, grain forecast announced

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By Rick Greenwell


Here is the forecast for 2012 tobacco and grain crops from the University of Kentucky College of Agriculture Economic Department.

2011 Burley Review: Kentucky burley farmers entered 2011 with many of the same adverse market conditions they experienced in recent  years – declining domestic cigarette sales, excess world burley supplies, slumping exports, and regulatory uncertainty on both the domestic and international front. As a result, aggregate burley contract volume was likely reduced again in 2011, but some buyers actually boosted contract volume for some growers in response to tight high-quality burley stocks following subpar-quality crops in recent years.
In addition, some traditional burley tobacco farmers opted to exit production on their own given better returns anticipated in alternative ag enterprises. Consequently, Kentucky farmers reduced their burley acreage by more than  10% (U.S. burley acreage off 9%). While some growers experienced timely moisture, burley yields were below average in response to excessive heat and dry conditions in parts of the burley belt. According to the USDA, the U.S. burley crop is expected to total 173 million pounds in 2011– 8% below last year.
On the demand side, the decline in U.S. cigarette sales slowed in 2011 as consumers adjusted to recent price/tax hikes, which may boost/stabilize domestic U.S. burley demand given existing inventory levels.
Limited high quality stocks on the world market combined with a continued weak U.S. dollar enabled U.S. burley exports to stabilize in 2011, following a drop of more than 50% since 2007 due to excessive foreign burley supplies of lower-quality leaf. Lower production, tight quality stocks, stabilizing use, and a decent quality crop will likely cause top-quality contracted U.S. burley prices to rebound back into the $1.70s and $1.80s per pound for the 2011-12 marketing season after the extremely poor quality 2010 crop averaged $1.50 per pound. Limited auction offerings of good-quality burley should also sell well in this marketing environment.
2012 Outlook: Demand for burley tobacco in 2012 may show signs of stability as the domestic  cigarette market easing slows, the international market rebounds in response to competitive U.S. burley prices (assuming the U.S. dollar remains weak), and quality burley stocks available to manufacturers and dealers worldwide remain tight. But burley acreage may continue to decline (unless growers receive additional  price incentives) in the midst of better income opportunities from other enterprises, expanded contract requirements, escalating labor costs, and regulatory challenges/uncertainty.
Dark tobacco prices and acreage should stay relatively constant in response to anticipated strong domestic sales of smokeless tobacco products amidst increasing supplies from the 2011 crop. Accounting for the anticipated drop in burley acres, the total value of tobacco production in Kentucky may struggle to exceed $300 million in the coming years, following an average of $340 million during the 2005-2010 post-buyout era.

2011 Review: Corn, soybean, and wheat prices all continue to trend upward (up 29 percent, 16 percent, and 30 percent, respectively) compared to last year. Kentucky producers responded to these higher prices by increasing planted acreage. State average yields were also higher for all three commodities in 2011. Higher prices, increased acreage, and higher yields resulted in a significant increase in revenue.
The November 2011 World Agricultural Supply and Demand (WASDE) report placed the 2011 U.S. corn crop at 12.31 billion bushels, down 1 percent from 2010. U.S. acreage was up more than 4 percent over last year, but yields were down by 4 percent.  Corn use (feed, exports, food, seed, and industrial) is expected to decrease more than 3 percent from 2010, to a total of 12.61 billion bushels.
The largest decrease in use is expected in exports, dropping almost 13 percent from a year ago.
With use exceeding production, ending stocks are expected to decrease by about 25 percent from the previous year, coming in at 843 million bushels. On the global market, ending stocks are expected to drop by a little less than 5 percent.  USDA is projecting a 3.28 billion bushel soybean crop in 2011, which will be about 8.5 percent smaller than 2010. US acreage was down over 3 percent from 2010, and yields were down a little more than 5 percent from last year.  
Soybean use for crushing, exports, seed, and residual are all expected to decrease for a total use of 3.08 billion bushels, a decrease of over 6 percent percent from 2010. The largest expected decrease is in exports, estimated to be down nearly 13 percent from 2010.
Ending stocks are expected to decrease by more than 9 percent to 195 million bushels. Global ending stocks are expected to decrease 8 percent, primarily due to decreases in both U.S. and Brazilian ending stocks.
2011 U.S. wheat production was more than 9 percent lower than 2010. Use is expected to be lower by almost 11 percent, primarily driven by a sharp decrease in exports of 24 percent. As for the world balance sheet, ending stocks are expected to increase by about 3 percent.
2012 Outlook: Revenue streams from crop production will hinge on crop price dynamics.
Given lower stocks-to-use ratios in U.S. and world markets (slight increase in wheat), it is almost certain that as new information enters the market, prices will change significantly.
Given the expectation that corn ending stocks will be the lowest since 1995, it could very well be the price direction leader for all three commodities.
Increases in price volatility make it more important to have a marketing plan, because when prices hit pre-determined goals they may not stay there long. Prices could very well go higher than expectations and this risk can be handled by selling in smaller percentages, not being overrun with emotion from selling at lower prices when prices keep rising, and being ready to make additional sales as prices rise.
Higher volatility implies higher highs and lower lows. Producers need an exit plan to handle lower prices by using decision dates in making sales. If price expectations are not met by a certain date, producers should make sales at the current cash prices.