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Can Yield Upside Risk Eclipse Price Downside Risk Protection in ECO Crop Insurance?

Hunter Biram · November 20, 2024 · Leave a Comment

Producers can keep track of their price risk protection through revenue insurance in a given growing season by comparing the Harvest (Fall) Price to the Projected (Spring) Price determined by USDA-RMA. In the broader picture of a marketing plan, revenue crop insurances provide a form of price guarantee at a premium expense similar to locking in a price guarantee using a put option contract (Biram and Smith, 2022). A previous article examined the price protection offered by Revenue Protection (RP), Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) crop insurance for corn and rice (Biram, 2023). That article only considered the change in prices and did not consider the potential change in yield. This article builds on the previous one by considering both the price and yield protection offered by ECO, and providing a snapshot of how changes in county yields can also trigger indemnities.

ECO is an area-based crop insurance product and must be paired with farm-level insurance like Yield Protection (YP) or RP. The liability insured by ECO is calculated using the same parameters as RP (e.g., APH farm yield and futures prices) at coverage levels of 90% and 95%. The futures price used is based on the higher of the Projected Price and the Harvest Price determined by USDA-RMA. Unlike RP – which triggers indemnities based on farm-level losses –ECO triggers an indemnity based on county-wide losses and will trigger a full indemnity when county-level revenue losses fall to 86%.

A county-level map is provided in Figure 1, which shows the extent that the final county yield can change relative to the expected county yield and still trigger an indemnity for corn that is equal to the producer paid premium (i.e., breakeven indemnity). In other words, this map answers the question of how much the county yield must change to trigger an indemnity that will at least cover the producer-paid premium. The producer premium was determined for RP at the 75% coverage level (RP-75) under optional units paired with ECO at the 95% coverage level (ECO-95) with the associated premium subsidy rate applied. Projected and Harvest Prices reported by the RMA Price Discovery Tool are used with theassociated price volatility.

As an example, a county shaded in the darkest green shows that the final county yield may increase at least 21-26% for an indemnity to trigger which covers the producer premium. This suggests the price decline in the futures market was severe enough to allow for yield upside risk that would offset indemnities triggered on price alone. Conversely, a county shaded in the darkest red indicates that the final county yield must decline at least 6-11% before a large enough indemnity to cover producer premium is triggered. This implies that the price decline was not severe enough to trigger an indemnity on price alone. Most counties have experienced severe enough price declines in corn that yield can increase in comparison to the expected yield and potentially obtain a net indemnity above zero (e.g., yellow and green shaded counties).

A similar pattern exists for cotton and soybeans (Figures 2-3). Nearly all counties insuring cotton under ECO-95 and RP-75 allow for yield upside risk, or favorable potential, to determine an indemnity equal to producer premium with most counties allowing for 7-10% yield upside risk. The same story holds for soybeans with potential yield upside risk of 9-14% for most counties which indicates the extent of futures price declines for both cotton and soybeans in 2024. Rice is the exception with no counties allowing for yield upside potential in determining an indemnity equal to producer premium (Figure 4). This is expected given there was virtually no change (i.e., $0.002/lb) in the rough rice futures price between planting and harvest.

This analysis shows that price risk protection, which does not require a crop insurance premium, could be provided through ECO-95 if yields do not increase by more than 5% across most counties. However, given the potential for record yields across most of the U.S., this potential may be largely eclipsed. While this yield upside could be beneficial, it only considers one half of the profit equation, gross revenue. Further, price declines, paired with elevated production expenses, have not been met by risk protection from other farm bill programs, such as Price Loss Coverage and Agriculture Risk Coverage. This underscores the lack of price risk mitigation provided by current farm policy tools and the need for an updated farm safety net.

Figure 1. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Corn)

This map shows the percentage change in the final county yield relative to the expected yield required to trigger an ECO indemnity that will be equal to producer paid premium. This assumes RP and ECO coverage levels of 75% and 95%, respectively. Click here for an interactive version of this map showing county-specific percentages.

Figure 2. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Cotton)

Figure 3. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Soybeans)

Figure 4. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Rice)

References

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor“. Southern Ag Today 2(35.1). August 22, 2022. Permalink

Biram, Hunter. “Comparing the Harvest Price and Projected Price in Revenue Protection Crop Insurance for Rice and Corn.” Southern Ag Today 3(35.1). August 28, 2023. Permalink

Biram, Hunter. “Can Yield Upside Risk Eclipse Price Downside Risk Protection in ECO Crop Insurance?” Southern Ag Today 4(47.3). November 20, 2024. Permalink

A Look at the Hog Market

David Anderson · November 19, 2024 · Leave a Comment

The Fall is often an interesting time to look at hog and pork markets because production typically increases seasonally, and prices decline. Holiday ham demand usually kicks in to partially offset supply driven lower prices. This year has some notable differences happening.

The hog industry has had a 7-month run of profits according to Iowa State University’s estimated farrow-to-finish returns. Profits have been generated by much lower feed costs in recent months. But, those profits are following huge financial losses in 15 of the preceding 17 months. Losses have led to a reduction in the breeding herd and in sows farrowing. USDA’s September 1 hogs and pigs report indicated the smallest breeding herd since 2016. About 18 percent of the nation’s breeding herd are in the South. June through August farrowings were estimated to be the smallest since 2013. Only increasing numbers of pigs per litter, hitting 11.72 in the third quarter of the year, supported slaughter numbers. Over the last month hog slaughter and pork production have been almost equal to a year ago.

While pork production has increased seasonally this Fall, supplies appear to be tightening compared to a year ago. Hog prices are enjoying a counter-seasonal increase. Iowa-Southern Minnesota barrow and gilt carcass prices have increased from about $75 per cwt to $84 per cwt over the last month. The cutout is up about $7 per cwt over the same time. Wholesale prices are higher for pork bellies, trimmings, ribs, and hams. Bellies are up about $30 per cwt over the last month to $2.02 per pound. They were $1.24 per pound a year ago. Trimmed pork spareribs hit $1.75 per pound last week compared to $1.18 a year ago.

In the meantime, more retail pork features and specials are occurring compared to a year ago. Retail prices for boneless hams are a little higher than a year ago while bone-in hams are a little cheaper than a year ago in the week leading up to Thanksgiving according to USDA’s retail price report.

It’s going to take some sustained higher hog and pork prices to boost profitability enough to increase production in the coming year. It’s likely that higher pork prices are ahead for 2025.

Anderson, David. “A Look at the Hog Market.” Southern Ag Today 4(47.2). November 19, 2024. Permalink

Profitability According to Farmers

Kelli Russell · November 18, 2024 · Leave a Comment

On October 10^th, Joe Outlaw, Bart Fischer, and Natalie Graff’s SAT article of the day highlighted the need to understand USDA’s net farm income projection. They noted that while the overall projection for farms across the country is down slightly, that masks the commodity-specific variability, where most crop farmers are losing money, and many livestock producers are relatively better off.

In a time of low commodity prices, we often look at economic indicators to help us pin down the extent of the problem. Another approach is to talk to farmers directly about the economic conditions and document their thoughts. This qualitative data gives a much richer description of the issues that underlie the downturn in economic conditions. In July and August of 2024, we held 11 focus groups in Alabama with 115 farmers, producers, growers, agribusiness owners and employees, agricultural processors and manufacturers, and agricultural lenders. The focus groups were intentionally representative of the agricultural commodities produced in the southeast. The goal of the focus groups was to gather their perspectives on agriculture and economic development in Alabama. In the process, we heard an earful about profitability overall and many of the driving factors that affect profitability in the state and region.

One focus group participant stated, “I think the biggest thing is profitability is the leading factor in growing most anything. If it’s not worth doing, you know, why are you going to spend the resources and all your energy just to be at a breakeven point or just barely pay the bills? You know what I’m saying? I think that’s figuring out how to become more profitable, whether it be a niche market or something like that. But I think that’s the main driver.” This sentiment was echoed across all the focus groups. Participants’ central concern for the agricultural sector was profitability. They identified a myriad of factors that contribute to their concerns, and the most common are listed below:

Rising input costs and decreasing commodity prices
Participants noted that the high cost of production coupled with low commodity prices for row crops and lack of markets for catfish, fruit, and vegetables affects the overall profitability of agriculture. Livestock producers discussed the increase in input costs eating away at profits. The inverted relationship between input prices and commodity prices and the subsequent impact on profitability is a critical stressor for farmers.

Equipment costs are skyrocketing with inflation
Participants remarked that the high cost of specific, necessary equipment limits them from diversifying crops as their equipment purchases tie them to particular commodities. The inability to easily diversify crops causes significant stress when specific commodity prices plummet, and producers have to make decisions regarding equipment sunk costs and expected future profitability.

Increasing transportation costs and freight charges
This sentiment was shared by producers across commodities indifferent to the mode of transportation. The escalation in costs related to shipping commodities has had a negative impact on the profitability of producers already impacted by low commodity prices.

Rising farmland values and rental rates
Participants emphasized the growth in metro areas in the southeastern U.S. and the resulting increase in land values. This has caused the growing inability to find land to purchase or rent that is economically viable for a farming operation. While expenses related to land are existing concerns now for profitability, focus group participants expect land values to continue to increase and have an even greater impact on profitability in the future.

Labor availability and costs
Participants discussed the (un)availability and high cost of labor, particularly for labor-intensive operations such as poultry, fruit, vegetable, nursery, and greenhouse production. Regardless of commodity, though, all producers stated that labor issues directly impacted profitability.

These issues all affect profitability, and while some will improve with upswings in commodity prices, others are systematically affecting the profitability of the ag sector. Documentation of these issues is the first step in informing decision-makers of what is unique about agriculture and how those in the industry perceive the likelihood of continuing their operations with the next generation of producers.

References:

Outlaw, J., B. Fischer, and N. Graff. USDA Farm Income Projections… Misused and Abused. Thursday, October 10, 2024. Available at: https://southernagtoday.org/2024/10/10/usda-farm-income-projections-misused-and-abused/

Russel, Kelli, and Mykel Taylor. “Profitability According to Farmers.” Southern Ag Today 4(47.1). November 18, 2024. Permalink

Urban Agriculture in the South: Addressing Food Insecurity and Social Inequality through Community Gardens

Liqing Li · November 15, 2024 · Leave a Comment

With the trend of increasing urbanization, Urban Agriculture (UA) has emerged as a key strategy to address challenges like food insecurity and social inequality in urban development. The COVID-19 pandemic underscored the importance of UA by exposing weaknesses in the food supply chain and emphasizing the need for local food security (Clark et al., 2021). Community gardens, a common and impactful form of UA, provide spaces for residents to grow fresh produce in the community while offering environmental and economic benefits (Guitart et al., 2012; Kirby et al., 2021). In 2009, the U.S. Department of Agriculture (USDA) initiated the “People’s Garden” program to connect gardens across the U.S. that produce local food to address food insecurity and bring people together in their communities. Community gardens have become central to UA policies to enhance food security and environmental sustainability, particularly in low-income urban neighborhoods.

The need for such initiatives can be critical in the southern U.S., where food insecurity levels are significantly higher than in other regions. For example, although the South has less than half (45%) of the country’s total counties, it disproportionately represents areas with high food insecurity. Specifically, 84% of counties that experience high rates of food insecurity are located in the South (Feeding America, 2024). Community gardens and other UA efforts could play an essential role in alleviating food insecurity in these areas. The density of existing community gardens varies widely by region (Figure 1). Based on self-reported data from the American Community Garden Association, the Northeast has 7.8 community gardens per 1,000 square miles (green bar), while the South has fewer than 2 per 1,000 square miles (turquoise bar).

Figure 1: Distribution of Community Gardens by Region

Data source: American Community Garden Association https://www.communitygarden.org/garden

However, there is growing interest in developing urban gardens in the South, particularly in Texas. For instance, Dallas was recently selected by the USDA as one of 17 cities for urban agriculture investment. The Houston Health Department recently launched the “Get Moving Houston Urban Gardens” initiative to promote healthy eating. Houston currently has over 160 community gardens, mostly in lower-income communities. While community gardens offer many benefits and can help address food insecurity and social inequality—especially in low-income, minority communities in the South—careful planning is essential to ensure these communities fully benefit.

There are important challenges to address when establishing community gardens in low-income, minority communities. First, it is essential to understand residents’ preferences for community gardens in these neighborhoods. Some studies indicate that the culture surrounding local and healthy food from UA is often associated with communities that have higher education levels and incomes (Bellemare and Dusoruth, 2021), while others find no significant differences in preferences for community gardens across income and racial groups (Li & Long, 2024). This variability highlights the need for community-specific assessments to tailor UA initiatives. Engaging residents in planning ensures that the gardens align with the needs of the neighborhood, promoting greater utilization and sustainability. Second, the impact of community gardens on these communities requires further examination. While these gardens can improve access to fresh food and green space, they may also contribute to rising property values (Voicu and Been, 2008), attracting more affluent households and potentially leading to gentrification and displacement of existing residents. Therefore, it is important for city planners to balance the benefits of community gardens with proactive measures to mitigate the potential displacement risks.

Reference:

Bellemare, M. F., & Dusoruth, V. (2021). Who participates in urban agriculture? An empirical analysis. Applied Economic Perspectives and Policy, 43(1), 430-442.

Clark, J. K., Conley, B., & Raja, S. (2021). Essential, fragile, and invisible community food infrastructure: The role of urban governments in the United States. Food Policy, 103, 102014.

Feeding America. (2024.). Map the Meal Gap: Executive Summary. Feeding America. Retrieved October 25, 2024, from https://www.feedingamerica.org/research/map-the-meal-gap/overall-executive-summary

Guitart, D., Pickering, C., & Byrne, J. (2012). Past results and future directions in urban community gardens research. Urban forestry & urban greening, 11(4), 364-373.

Kirby, C. K., Specht, K., Fox-Kämper, R., Hawes, J. K., Cohen, N., Caputo, S., … & Blythe, C. (2021). Differences in motivations and social impacts across urban agriculture types: Case studies in Europe and the US. Landscape and Urban Planning, 212, 104110.

Li, L., & Long, D. (2024). Who values urban community gardens and how much?. Food Policy, 126, 102649.

Voicu, I., & Been, V. (2008). The effect of community gardens on neighboring property values. Real Estate Economics, 36(2), 241-283.

Li, Liqing. “Urban Agriculture in the South: Addressing Food Insecurity and Social Inequality through Community Gardens.” Southern Ag Today 4(46.5). November 15, 2024. Permalink

What to Expect from India’s Removal of the Export Ban on White Non-Basmati Rice

Alvaro Durand-Morat · November 14, 2024 · Leave a Comment

On September 28, India lifted its export ban on non-basmati white rice and replaced it with a minimum export price (MEP) policy of $490/metric ton. On October 20, India announced the removal of the MEP policy on non-basmati white rice and the removal of export duties on other rice products (e.g., parboiled, husked, and paddy rice), effectively freeing rice exports. While this measure was expected anytime and the global rice market was already factoring in the change to some extent, the announcement is creating shockwaves throughout the global rice market.

India implemented the export ban on July 20^th, 2023 (see https://southernagtoday.org/2023/07/27/shaking-the-global-rice-market-india-bans-exports-of-white-non-basmati-rice/) amid fears of a short rice crop due to the projected dry Monsoon that never materialized. India harvested a record rice crop (137.8 million metric tons) in 2023/24, but the export ban remained in place. Fast-forwarding to the current year 2024/25, the weather has been beneficial, and India is projected to harvest a new record crop (estimated at 142 million metric tons in October according to USDA) and carry record-high stocks. In summary, India’s production performance has been outstanding, which undermined the rationale for keeping the export ban for so long.

Since late September when India started easing exports, Asian rice prices have been under downward pressure despite the strong import demand, primarily from Indonesia and the Philippines. For instance, the export price of Thai 5% rice dropped below $500/metric ton in mid-October for the first time since July 2023 (Creed Rice Market Report, 2024; USDA, 2024a), while that of Pakistani 5% rice dropped more drastically as Pakistan competes more directly with India in many African markets. The latest Creed Rice Market Report (November 6^th) suggests India’s export price for non-basmati white 5% rice is around $465/metric ton.

In contrast, rice prices in the Western hemisphere are still at a much higher level than those in Asia, and the downward pressure has not been felt so hard, at least not yet. For example, the average export price for Southern 4% long-grain rice average $779/metric ton in 2023/24 and has hovered around $800/metric ton since August. Export prices out of Mercosur have also fluctuated between $770-790/metric ton in the last few weeks. While Western hemisphere long-grain rice has historically enjoyed a price premium relative to Asian long-grain rice, we should expect an increasing downward price pressure in the coming weeks and months as India’s rice harvest and the Mercosur’s rice crop advances.

The million-dollar question for the U.S. rice industry is how will prices adjust this coming year, and the answer is: it depends. First, it will depend on the (most likely) downward adjustment in Asian export prices, which in turn depends (among other things) on how much rice India exports. A quick analysis using the Arkansas Global Rice Model (AGRM) and assuming India exports according to USDA projections in October (21 million metric tons) bring prices to $450/metric ton. However, if India decides to liquidate some stocks as well further increasing exports, prices may drop even further. Second, it will depend on the level of market integration with Asia. While historically Asian rice has not been prominent in the Western hemisphere, its presence is growing. The more market integration, the more pressure we should expect to receive, and an increasing price gap between Asian and Western Hemisphere rice could fuel market integration. Third, it will depend on the rice crop in Mercosur (South American countries that compete with U.S. long grain rice). USDA projects a slight increase in planted area relative to last year, which could result in more competition in core U.S. export markets.

Finally, it is important to discuss how much room there is for price adjustments and profitability. The November WASDE report (USDA, 2024b) maintains long-grain farm prices unchanged at $14.50/hundredweight ($319/metric ton). Using that farm-price as a reference and the University of Arkansas Division of Agriculture 2025 Rice Enterprise Budgets (Figure 1), we estimate the average net returns to range from $22.25 to $103.28/acre for the different rice production systems, significantly lower than last year’s net returns, which ranged from $97.50 to $153.70/acre. We estimate the 2025 breakeven prices to range from $13.26 to $14.22/hundredweight (cwt) across production systems. The downward pressure on prices due to India’s liberalization of rice exports could push farm prices further down in the coming months, which could further decrease the economic returns and affect the 2025 rice planting intentions.

Figure 1. Arkansas: Projected 2025 Net returns and Breakeven Price.

References

Creed Rice Market Report. 2024. Several issues. Available at https://www.riceonline.com/

University of Arkansas Division of Agriculture. 2024. 2025 Arkansas Crop Enterprise Budgets. Available at https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

USDA. 2024a. Rice Outlook. October 2024. Available at https://www.ers.usda.gov/publications/pub-details/?pubid=110218

USDA. 2024b. WASDE Report. November 2024. Available at https://www.usda.gov/oce/commodity/wasde

Durand-Morat, Alvaro. “What to Expect from India’s Removal of the Export Ban on White Non-Basmati Rice.” Southern Ag Today 4(46.4). November 14, 2024. Permalink