Author: Aaron Smith

There is no statistical relationship between the wheat stocks-to-use ratio and the U.S. Marketing Year Average (MYA) price. From 2000 to 2022, the linear relationships between U.S. and world stocks-to-use and price indicated an R-squared of 0.0138 and 0.0024, respectively (Figure 1).  R-squared (R²) is a measure that represents the proportion of the variance for a dependent variable (MYA price) that’s explained by an independent variable (stocks-to-use) in a regression model. Simply stated, U.S. stocks-to-use explains 1.38% of the variance in the MYA wheat price. For comparison, a simple linear regression for U.S. corn price and stocks-to-use ratio results in an R² of 0.56. Wheat provides many unique challenges for projecting prices. Different classes exist – hard red spring, hard red winter, soft red winter, hard white, soft white, and durum – that influence the USDA wheat MYA price. Additionally, wheat is one of the most geographically dispersed crops, with production in both hemispheres and six continents. U.S. wheat production is a small percentage of global production. From 2000 to 2022 the U.S. has accounted for 5.7% (2022) to 11.5% (2003) of global production. Thus, international forces have a greater impact on U.S. wheat prices compared to corn and soybeans. 

However, there is a statistical relationship between stocks held by major exporters (Argentina, Australia, Canada, European Union, Russia, Ukraine, and U.S.), world wheat imports, and the U.S. MYA wheat price (Figure 2). This relationship has an R² of 0.4198 – meaning stocks held by major exporters divided by world imports explains less than half the variance in MYA wheat prices. For the 2022/23 marketing year, the seven major exporters held ending stocks of 60.5 million metric tons (MMT) and total world imports were estimated at 207.2 MMT, a ratio of 0.29:1. The 2022/23 USDA estimated MYA price is $8.85/bu. Using the linear relationship between this ratio and MYA price would have predicted a price of $6.67/bu for the 2022/23 marketing year, or $2.17/bu under the USDA’s May estimate. However, using the linear relationship, this is the largest under estimation of price from 2000 to 2022, and the average miss of MYA price compared to the estimated relationship trendline over this time period is +/- $1.13/bu.  This larger-than-average discrepancy between the predicted price and MYA price can partially be explained by Russia’s invasion of Ukraine which created chaos in global wheat markets in 2022 and skewed prices due to concerns over production and access to supplies in both countries. 

What does this relationship mean for the wheat MYA price for the 2023/24 marketing year? Currently, USDA projects ending stocks for the seven major wheat exporters at 52.8 MMT and world wheat imports at 207.5 MMT, a ratio of 0.255:1. Using the simple linear relationship in Figure 2, this would predict a U.S. MYA price of $7.06/bu.  However, using plus and minus the average miss, we can obtain a price range of $5.93/bu to $8.19/bu. This projection seems reasonable given the current futures market prices for wheat. However, it should be restated that this relationship has limitations (R² of 0.4198), meaning that other factors strongly influence wheat MYA prices. An escalation of the Ukraine-Russia conflict or other geopolitical / global events could have a dramatic influence on U.S. MYA wheat prices in 2023/24. 

Figure 1. The Relationship between U.S. Wheat Marketing Year Average Price and U.S. and World Stocks-to-Use Ratio, 2000/01 to 2022/23

Figure 2. U.S. Marketing Year Average Price and Stocks held by Major Exporters divided by World Imports, 2000/01 to 2022/23 

References:

U.S. Department of Agriculture Foreign Agricultural Service (USDA – FAS). Production, Supply, and Distribution (PS&D) Accessed at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home  

U.S. Department of Agriculture National Agricultural Statistics Service (USDA – NASS). Quick Stats Accessed at: https://www.nass.usda.gov/Quick_Stats/

Interest rates have become an important consideration for row crop producers. From December 2008 until March 2022, interest rates were historically low with the bank prime rate between 3.25% and 5.5%. Low interest rates allowed producers to borrow money at minor costs to cover the cost of production and capital expenditures. Additionally, low interest rates muted the costs of carrying crops in storage. Over the past year, rising interest rates have required additional scrutiny for producers making management and marketing decisions. 

From March 16, 2022, to May 1, 2023, the bank prime rate increased 4.75 points (3.25% to 8.0%). The rapid interest rate increase has impacted production costs, capital investment, and marketing for producers. This article examines the impact of interest rates and basis on net cash selling price for corn. Producers holding grain in storage should estimate interest costs as well as other storage costs.  Here we only show the impact of interest costs at the bank prime lending rate. For producers that do not have outstanding operating loans, they should consider the forgone investment interest rate.  The rapid increase in interest rates makes this analysis even more critical as the Federal Reserve contemplates further interest rate increases.

The daily interest cost for corn in storage can be estimated as the nearby futures price plus basis multiplied by the interest rate divided by 365 days (Figure 1). Movements in the nearby futures market, changes in basis, and changes in the interest rate will impact the daily interest cost. Daily interest expenses can be summed from one date to another to estimate the accumulated interest cost over the period that grain is held in storage. For example, in Figure 1, the accumulated interest from September 23 to May 1 was $0.30/bu. Accumulated interest cost is less at the start and increases the longer corn is held. 

Figure 1. Bank Prime Rate and Daily and Accumulated Interest for Unsold Corn

Futures prices and basis prices change daily, affecting cash prices producers receive. Using nearby corn futures prices, basis prices from USDA AMS for Northwest Tennessee, and daily accumulated interest costs, a net price was estimated from September 23, 2022, to May 1, 2023 (Figure 2). The net price can be compared to the nearby futures price. In September and October, basis was weak due to the large quantity of available corn at harvest and transportation challenges, due to low water levels on the Mississippi River. The accumulated interest cost was less than 5 cents per bushel through the end of October. The net price peaked on December 27 at $7.06 per bushel when accumulated interest was $0.12 per bushel, and the basis was 35 cents per bushel over the March futures contract. Based on Figure 2, the best time to make sales at elevators and barge points in Northwest Tennessee occurred between November 3 and February 21. Since the end of February, declines in futures markets and increased accumulated interest costs have resulted in substantially lower net prices for producers. Higher interest rates have necessitated a more stringent accounting of interest costs.  Producers should regularly evaluate these costs along with future expected prices when making marketing decisions to find the optimal time to sell stored grain.

Figure 2. Nearby Corn Futures Price and Net (Futures + Basis – Interest) Price 

References:

Barchart.com. Nearby Corn Historical Daily Nearby Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCK23/historical-download

Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate [DPRIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DPRIME, May 1, 2023.

U.S. Department of Agriculture Agricultural Marketing Service (USDA – AMS). AMS Livestock, Poultry and Grain Market News. Tennessee Daily Grain Bids.  Accessed at: https://www.ams.usda.gov/mnreports/ams_3088.pdf

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Smith, Aaron, and William “Bill” Johnson. “The Impact of Interest Rates and Basis on Net Cash Price for Corn.” Southern Ag Today 3(23.1). June 5, 2023. Permalink

Photo by Tom Fisk: https://www.pexels.com/photo/drone-shot-of-a-combine-harvester-harvesting-corn-10213238/

Fertilizer prices have come down from the peak in April 2022 (Figure 1), however fertilizer prices remain elevated compared to 2017 through 2020. In 2021 and 2022, high fertilizer prices coincided with high corn prices, resulting in positive profit margins for many producers, especially those that were not affected by adverse weather. Since August 2022, Henry Hub Natural Gas Prices have declined sharply. Natural gas is a key input in the production of nitrogen fertilizer accounting for 70-90% of variable production costs (Outlaw et al. 2022). Two important questions for many producers are how related are these prices and how does this relationship potentially impact profitability in 2023? To examine this, we look at the historical relationship between corn, urea, and natural gas prices.

Figure 1. Weekly Urea, Natural Gas, and Nearby Corn Futures Price, January 2, 2017, to March 27, 2023

Nitrogen, natural gas, and corn prices are positively correlated (correlation describes the strength of an association between two variables, positive correlation indicates that prices move in the same direction, negative correlation indicates prices move in opposite directions; correlation coefficients have values between -1 and 1). Examining weekly price data from January 2017 to March 2023, natural gas and urea prices were positively correlated (0.738), natural gas and corn prices were positively correlated (0.668), and urea and nearby corn futures prices were positively correlated (0.906).  All three variables are strongly positively correlated. However, there are event-based anomalies in the data that create temporary deviations in the relationship between prices. For example, natural gas prices briefly spiked in February 2021 during a winter storm that strained natural gas and electricity markets in Texas and Oklahoma (USEIA, 2022). It is also important to note that correlation does not indicate causation. In other words, a higher natural gas or urea price does not necessarily cause higher corn prices, and vice versa.  However, the takeaway from this figure and correlations for natural gas, corn, and urea prices are they tend to move in the same direction. 

Over the past year, natural gas and urea prices have decreased substantially from recent highs. Urea prices have fallen from $1,031/ton to $626/ton (down 39%) and natural gas prices have fallen $9.56 to $2.01 (down 79%). Nearby corn prices have decreased from $8.13 ½ to $6.60 ½ (down 19%). Based on the realized decline in natural gas prices, the downward trend in urea prices, and the historical correlations above, further weakness in corn futures prices may occur in 2023. There are many factors that will influence corn (and other commodity) prices, such as weather and geopolitical uncertainty, however decreased prices for natural gas and urea provides some indication that weaker corn prices may occur in the not-too-distant future. 

From a profitability standpoint for the 2023 crop year, many producers locked in fertilizer prices last fall or early in 2023. In general, those that priced earlier will have higher fertilizer costs than those that priced later. Producers that have locked in fertilizer prices for the 2023 crop may want to consider locking in futures prices for a portion of their crop to avoid a margin squeeze should corn prices decline.

References:

Barchart.com. Nearby Corn Historical Weekly Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCK23/historical-download

Outlaw, J.L., B.L. Fischer, H.L. Bryant, and J.M. Roulston. 2022. “Economic Impact of Nitrogen Prices

on U.S. Corn Producers”.https://fj-corp-pub.s3.us-east-2.amazonaws.com/inline-files/Economic%20Impact%20of%20Nitrogen%20Markets%20on%20U%20HB-1.pdf

U.S. Energy Information Administration. 2023. Natural Gas. Data. Henry Hub Natural Gas Prices. Accessed online at: https://www.eia.gov/dnav/ng/hist/rngwhhdW.htm

U.S. Energy Information Administration. 2022. TODAY IN ENERGY. Accessed online at: https://www.eia.gov/todayinenergy/detail.php?id=50778

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Smith, Aaron, and Christopher Boyer. “Urea, Natural Gas, and Corn Price Correlations.” Southern Ag Today 3(18.1). May 1, 2023. Permalink

Each year, USDA’s Office of the Chief Economist holds the Agricultural Outlook Forum. The event discusses important agricultural topics and provides supply and demand projections for the upcoming year. This article examines the 2023 Agricultural Outlook Forum projections and compares historical Agricultural Outlook Forum projections and final USDA estimates for corn, soybeans, and wheat for the 2010 to 2022 crop years. 

Historical Projections compared to Final USDA Estimates

From 2010-2022, USDA’s February projected production for corn, soybeans, and wheat averaged 655 million bushels higher, 518 million bushels lower, and 15 million bushels higher than final estimates, respectively (Figure 1; production). The difference between February production projections and final estimates can be partially explained by yield or acreage changes, due primarily to weather events. For example, in 2019, floods in the Midwest dramatically reduced planted and harvested acres (Figure 1; acres planted and harvested); and in 2012, severe drought caused final corn yields to be 40.9 bu/acre below the February projection (Figure 1; national average yield). Considering the tremendous amount of uncertainty this time of year (February), USDA has been reasonably accurate with initial projections. On average, the difference (overestimated or underestimated) between projected and final production estimates has been 6.8% for corn, 5.7% for soybeans, and 6.4% for wheat.

Domestic consumption projections have also been accurate with an average discrepancy of 2.8% for corn, 2.6% for soybeans, and 6.0% for wheat. Exports have been more challenging to project, primarily due to the relationships between domestic production, foreign production, substitution, and global demand. On average, USDA has missed export projections by 23.4%, 11.7%, and 12.6% for corn, soybeans, and wheat, respectively.  For corn, from 2010-2022, on average, the USDA February total use projection was 290.4 million bushels higher than the final estimate. Total projected wheat use was 31.4 million bushels higher, and soybean use was 11.4 million bushels lower than the final estimate, on average (Figure 2; exports and domestic use).

USDA has had challenges with projecting ending stocks and prices. Projected ending corn stock estimates have ranged from 1.4 billion bushels more to 316 million bushels less than the final USDA estimate, with an average projection of 342 million bushels higher than the final estimate (Figure 2; ending stocks). Soybean ending stocks have, on average, been projected 51 million bushels higher in February than final estimates, with a range of 320 million bushels higher to 449 million bushels lower than the February projection. Wheat ending stocks have, on average, been projected 47 million bushels lower in February than the final estimate, with a range of 239 million bushels higher to 213 million bushels lower than the February projection.

On average, USDA missed corn, soybean, and wheat marketing year average (MYA) prices by 17.4%, 12.7%, and 13.5%, respectively. In 8 out of 13 years, the February MYA price projection has been lower than the final MYA price for corn, soybeans, and wheat (Figure 2; marketing year average price). For corn, projected prices were under final prices by over 30% in 4 out of 13 years (2010, 2012, 2021, and 2022). The largest projected miss, among years where the February projected MYA price was higher than the final MYA price, was 7.1% in 2013. 

2023 Projections

Initial expectations from the 2023 Agricultural Outlook Forum point to a 3% projected increase in planted crop acres for corn, soybeans, and wheat relative to 2022 plantings. Corn acreage is projected to increase from 88.6 million acres in 2022 to 91.0 million acres in 2023. In 2022, planted corn acreage was affected by weather delays, which prevented plantings in various regions of the United States. Soybean acreage is projected to stay the same as 2022 at 87.5 million acres. Soybean acreage projections are driven by strong demand for domestic crush and growth in biofuel production capacity. Of the three crops, wheat acreage is projected to incur the largest increase in planted acreage, up to 49.5 million acres in 2023 from 45.7 million planted acres in 2022. Increases in projected wheat plantings are driven by tight U.S. stocks and continued high global prices, caused in part by the war in Ukraine. 

Prices for all three crops are projected to be lower in 2023 than 2022 but are projected to remain above their respective 10-year historical averages. Season average per-bushel prices for corn, soybeans, and wheat are projected to fall from $6.70, $14.30, and $9.00 in 2022 to $5.60, $12.90, and $8.50 in 2023. The price projections are driven by low beginning stocks and growth in projected acreage and yield, which will facilitate higher projected exports and ending stocks for the 2023/24 crop year. The decline in 2023 projected prices is driven by record expected soybean and corn crops in South America, which will increase competition in export markets. Additionally, estimates of the impact of increased biodiesel production capacity on soybean prices have been uncertain due to the United States’ ability to adapt planted acres to meet increased feedstock demand. 

There remains a tremendous amount of uncertainty in production, use, stocks, and prices for the 2023 corn, soybean, and wheat crops. However, the current USDA projections have prices softening, compared to last year for all three commodities. As such, producers may want to consider using marketing strategies that protect against downside price movements while maintaining flexibility (such as options). This will allow producers to evaluate and modify pricing decisions when additional information is known about the 2023 crop. USDA will revise projections throughout the year with the next key report being the Prospective Plantings report at the end of March.

Figure 1. USDA – February Outlook Conference Projections Less Final USDA Estimates (Supply), 2010-2022*

Figure 2. USDA – February Outlook Conference Projections Less Final USDA Estimates (demand, stocks, and price), 2010-2022*

References

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/commodity/wasde

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/ag-outlook-forum/commodity-outlooksU.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). Quick Stats. Available on-line at: https://quickstats.nass.usda.gov/

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Smith, Aaron, and Grant Gardner. “February USDA Agricultural Outlook Forum Projections Compared to USDA Final Estimates.” Southern Ag Today 3(10.1). March 6, 2023. Permalink

For corn and soybean producers, activity in futures markets in February is very important. For many producers, projected crop insurance prices and volatility factors are determined from February 1-28. The projected price will set revenue guarantees and potentially affect planting decisions. At the start of February 2023, December 2023 corn futures ($5.94) were slightly above last year’s projected crop insurance price of $5.90 per bushel and November 2023 soybean futures ($13.65) were well below last year’s futures price of $14.40. The direction of prices from now until the end of February will be key for producers when examining risk management and marketing strategies for the 2023 crop.

Every year, during winter producer meetings, when discussions turn to risk management and marketing strategies, someone inevitably states that December corn and November soybean futures tend to fall during the projected crop insurance price determination period (February 1-February 28, in Tennessee and numerous other Mid-South states). This statement usually coincides with the assertion that external forces (government and/or global grain companies) are moving markets to reduce premium expense or foster utilization of other price risk management tools to boost profits. 

Does a simple analysis support this? No. From 2010 to 2022, the data does not back this claim (Figures 1 and 2). Instead, the data shows prices follow the month-over-month price trend. For example, December corn average monthly prices from December to April declined in 2010, 2013, 2015, 2019, and 2020. For 2011, 2014, 2018, 2021, and 2022, December corn futures prices increased. The remaining years 2012, 2016, and 2017, showed no trend and moved mostly sideways over the five-month interval. For the November soybean contract, average monthly prices from December to April declined in 2013, 2015, 2017, 2019, and 2020. For 2011, 2012, 2014, 2016, 2018, 2021, and 2022, November futures contract price increased. The remaining year, 2010, had no trend and moved mostly sideways over the five-month interval.

What does this mean for the 2023 crop insurance price determination period? Not much. This is a backward-looking metric; the trend is not revealed until the trend has occurred. However, a small month-over-month average decline occurred between December and January for both corn and soybean harvest futures. The final projected crop insurance prices for corn and soybeans will be important to producer marketing and risk management decisions moving forward.

Figure 1. Monthly average December corn futures prices from December to April, 2010-2023

Figure 2. Monthly average November soybean futures prices from December to April, 2010-2023

References

Barchart.com. December Corn and November Soybean Historical Daily Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCZ23/historical-download and https://www.barchart.com/futures/quotes/ZSX23/historical-download

USDA – Risk Management Agency (RMA). Price Discovery. https://prodwebnlb.rma.usda.gov/apps/pricediscovery

Author: S. Aaron Smith

Associate Professor, Crop Marketing Specialist

University of Tennessee

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Smith, S. Aaron. “Do Corn and Soybean Harvest Futures Rise or Fall During the February Projected Crop Insurance Price Determination Period?” Southern Ag Today 3(6.1). February 6, 2023. Permalink