Southern Ag Today

Author: Francisco Abello

Prospects for Sorghum Premiums in the Upcoming Season: A Forecast Analysis

Sorghum prices generally follow corn prices. Since 2006/07, the biofuel era, the largest discount of sorghum to corn was -$0.74 per bushel; the largest sorghum premium to corn was +$0.79; and the average price relationship was -$0.11. (Figure 1).

Figure 1. Monthly Average Sorghum and Corn Prices Paid to Farmers by Marketing Year

The level of sorghum premium or discount is largely contingent upon demand, predominantly influenced by exports. Figure 2 shows the relationship between the sorghum exports-to-domestic-use ratio and the premium or discount received by U.S. farmers.

During the 2020/21 season, we witnessed a significant increase in sorghum premiums due to increased export demand. These premiums occurred because of the US-China Phase One Trade Agreement (U.S. sorghum exports are not subject to tariff-rate quotas like corn), the recovery of the Chinese swine sector, and high corn prices that supported high exports of U.S. sorghum to China. The export ratio over domestic consumption during 2020/21 increased to 2.68 (Figure 2). Exports during this season totaled 279 million bushels, while domestic consumption totaled 104 million bushels. After 2020/21, the ratio of exports over domestic consumption decreased due to lower yields, drought, and fewer exports, reaching a low level of 1.08 in the 2022/23 season and a discount in the price of sorghum to corn of -$0.16 per bushel.

Figure 2: Sorghum to Corn (Premium or Discount) and the Ratio of Sorghum Exports to Domestic Use

Source (Dr. M. Welch, USDA February WASDE, USDA, NASS Agricultural Prices)

During the 2023/24 season, the level of exports increased along with higher production and lower domestic consumption. Production in 2023/24 increased to 318 million bushels from the previous year of 188 million bushels, a result of significantly larger harvested acreage and better yields. The exports-over-domestic-consumption ratio also increased to 3.00 alongside better premiums over corn.

Looking forward to next season, production for 2024/25 is expected to increase again, given USDA’s February WASDE projections and projections from the Ag Outlook Conference on February 15, 2024. Planted acres are expected to decrease by 2.8% from the previous season, but the area harvested projection is unchanged with a return to more normal growing conditions. The projected yield in 2024 of 69.2 bushels per acre is much better than the drought impacted yields of the last two years, up 33% compared to 2023.

Domestic use and exports are expected to increase next season. Domestic use is projected to be 115 million bushels (+35 million bushels), while exports are expected to be around 295 million bushels (+55 million bushels). This level of exports and domestic consumption results in a ratio of sorghum exports to domestic use of 2.57. The sorghum premium over corn price at this ratio would be around $0.26/bu using Dr. Welch’s model to calculate sorghum-to-corn premium or discount as a function of the ratio of sorghum exports to domestic use (Figure 3). While this price relationship is not exact, the ratio of sorghum exports to domestic use in the 2024/25 marketing year is projected to be the 4^th highest of the biofuel era, suggesting a better-than-average sorghum price relationship to corn.

Figure 3: Sorghum-to-Corn Premium/Discount as Function of the Ratio of Sorghum Exports to Domestic Use

Source: Dr. Mark Welch, USDA February 2024 WASDE and 2024 Ag Outlook Conference.

Abello, Francisco Pancho. “Prospects for Sorghum Premiums in the Upcoming Season: A Forecast Analysis.” Southern Ag Today 4(12.1). March 18, 2024. Permalink

March 18, 2024
Producers Embrace USDA’s Livestock Risk Protection Program

Producers across the United States and the Southern States are increasingly adopting the Livestock Risk Protection Program, commonly known as LRP. This program, which is designed to protect ranchers against falling cattle prices, has witnessed a remarkable surge. From a mere 71 thousand head covered in 2017, the usage of LRP has increased rapidly to 5.2 million head by October 2023. In 2022, ranchers insured 3.4 million head, up from 1.8 million in 2021. Ranchers’ use of LRP in the Southern region has contributed significantly to this growth (Figure 1). As of October 2023, ranchers have insured approximately 1 million head annually through the LRP program, with Texas and Oklahoma insuring 56% and 34% of this total, respectively.

Figure 1: LRP Usage in the Southern States

This increase occurs alongside increases in subsidy levels and other changes to LRP and the significant improvement in the market feeder and live cattle prices (Figure 2). During 2019 and 2021, the USDA introduced several modifications to the LRP program. These changes not only reduced the producers’ portion of premium payments but also allowed them to defer premium payments until the end of the endorsement period. The option to pay premiums at the ending date offers ranchers a considerable cash-flow advantage. Another benefit of the LRP program is it doesn’t require a minimum number of cattle to be insured, meaning cow-calf or stocker producers with just a few head can use it.

Additionally, the rise in cattle prices has emphasized the importance of implementing a solid price risk management plan. LRP can help minimize financial losses, secure profit margins, and reduce the risk of business failure, particularly in the face of higher investment levels. The increased adoption of LRP reflects a growing number of ranchers who are utilizing risk management plans in their operations.

Figure 2: LRP Head per Year and Feeder and Live Prices per Month

Source: USDA – RMA. Livestock Risk Protection Participation. https://www.rma.usda.gov/Information-Tools/Summary-of-Business/Livestock-and-Dairy-Participation

Abello, Pancho. “Producers Embrace USDA’s Livestock Risk Protection Program.” Southern Ag Today 3(44.2). October 31, 2023. Permalink

October 31, 2023
Supporting Sorghum Prices in the 2023/24 Season: Exports and Basis

In recent weeks there has been a noticeable surge in the demand for sorghum. This is seen through robust sorghum export sales over the past two months, around 25% above the previous two seasons (Graph 1). A corresponding increase in the average basis offered on the Gulf Coast of Texas is also observed, with the sorghum basis currently standing at $1 per bushel above the price for positions with delivery from this month through December, 80 cents higher than last year by this time. These prices are expected to benefit producers significantly, especially in a year marked by anticipated higher production (393 million bushels) and better yields (66 bushels per acre).

According to the August 2023 report from the United States Department of Agriculture’s World Agricultural Supply and Demand Estimates (WASDE), there is an increase in U.S. sorghum exports projected for the 2023/24 season. USDA export projections have reached 255 million bushels, marking a 155% increase over the previous season (Graph 2), even though projected exports are still lower than the levels in 2020/21 or 2021/22. In 2022/23, the U.S. exported 100 million bushels of sorghum, 67% lower than the recent peak in the 2021/22 season due to the low production from last year’s drought.

Source: USDA/NASS/ERS/WASDE

China will continue to be the primary importer of sorghum from the United States, primarily driven by the demand for feed from its livestock industry. USDA projections forecast a steady market for hogs, sustained growth in aquaculture and ruminants, and a resurgence in poultry feed demand. Consequently, China’s imports are anticipated to increase by 125.7 million bushels, fueled by higher U.S. production and competitive prices.

The 2023/24 sorghum season presents promising sorghum export opportunities. This export surge will likely result in better sorghum premiums over corn, as evidenced by the positive basis farmers are currently experiencing on the Gulf Coast of Texas. All of these factors taken together will likely result in the United States retaining its position as the top producer and exporter of sorghum.

September 11, 2023
Effect of Interest Rates on Beef Cow Bid Price

Determining the appropriate bid price for beef cows is important for buyers and sellers in the ranching industry. The Bid Price for Beef Cows decision aid is a practical and valuable tool that simplifies the bid price calculation and enables insightful “what if” analysis based on your financial expectations and productivity projections. This tool employs a net present value (NPV) approach, factoring in the desired return or discount rate.

Several variables play a significant role in determining the bid price for a cow, including: the total debt of your operation, operating costs per cow, estimated future calf prices, cull cow prices, required loan amount, interest rate, number of calves per cow, weaning weight, weaning rate, and more. In this example, we focused on the effect of higher interest rates in the bid process.

The amount of debt required for cow purchases and the interest rates directly affect the bid price. The higher the debt and interest rates, the lower the amount a buyer can afford to pay. For instance, an interest rate of 11% will reduce the bid price by $367 per head (Graph 1) compared to the 6% interest rate we may have seen a couple of years ago.

Figure 1: Beef Cow Bid Prices vs Interest Rates

In conjunction with operating costs, future calf prices are crucial in determining the bid price. Calf prices have increased in recent years as well as operating expenses. For the example bid prices in Fig.1, we assume an initial increase in calf prices for the next three years, followed by a slight decline. We expect prices to decline when the US cow inventory grows and US beef production increases. We also included a variable discount rate that rose to 7% with higher interest rate scenarios.

Using the Bid Price for Beef Cows tool will allow ranchers to analyze different scenarios and understand how much they should pay to restock their operations. Find the tool here (https://agecoext.tamu.edu/resources/decisionaids/beef/ ) and give it a try. Estimating reasonable future prices for your cattle and operating costs is imperative to better assess how much you can afford to pay for a replacement cow. By carefully considering these variables, you can make informed decisions and ensure the financial viability of your operation.

https://agecoext.tamu.edu/resources/decisionaids/beef/

Abello, Francisco. “Effect of Interest Rates on Beef Cow Bid Price.” Southern Ag Today 3(33.3). August 16, 2023. Permalink

August 16, 2023
Sorghum Exports and Production Expectations for the 2023/24 Season

Current expectations indicate an increase in global and U.S. sorghum production and U.S. exports during the 2023/24 marketing year. Projections indicate 62.18 million metric tons of production globally, surpassing last year’s production of 57.34 million tons. According to USDA forecasts, the United States is anticipated to contribute significantly to the growth in sorghum production as the country rebounds from last year’s drought.

USDA’s May 2023 World Agricultural Supply and Demand Estimates (WASDE) report projects a substantial increase in U.S. sorghum production for the 2023/24 growing season, estimating a 91.5% increase from the previous year, which moves production from 188 to 360 million bushels (Table 1).

Table 1: U.S. Grain Sorghum Supply and Demand

Source: USDA/NASS/ERS/WASDE

The U.S. is currently projected to regain its position as the leading global sorghum producer and exporter. Projections indicate that the U.S. will export approximately 6.00 million metric tons of  the 9.75 million metric tons exported globally.

While domestic consumption is projected to remain the same as last year, export projections suggest an increase in sorghum exports (Figure 1). The U.S. 2023/24 marketing year exports are expected to reach 235 million bushels, a substantial increase to the 90 million bushels exported last year. According to USDA data, China will continue to be a significant importer of U.S. sorghum.  Chinese demand is driven largely by the country’s livestock industry and has made up the largest share of U.S. grain sorghum exports since 2013/14, with the exception of 2018/19.

Figure 1. US Grain Sorghum Exports

Note: 2022/23 marketing season includes export data up to March 2023.
Source: USDA WASDE

Ending stocks are also expected to increase from 25 to 30 million bushels, a 20% increase from the previous year. The average farm price of sorghum is projected to mirror the corn price in the upcoming 2023/24 marketing year, with current estimates indicating an average price of $4.80/bu, a sharp decline from the $6.90/bu estimated for 2022/23 (Table 1). Although a lower price is expected compared to the last three marketing seasons, prices are expected to be above pre-pandemic values. The last season with prices lower than the expected 2023/24 price was in 2019/20, when the average price was $3.34/bu.

In summary, the 2023/24 season presents opportunities for sorghum production and exports, with the U.S. expected to regain its position as the top global producer and exporter.  However, this comes at lower expected prices.

Abello, Francisco Pancho, and Samuel Zapata. “Sorghum Exports and Production Expectations for the 2023/24 Season.” Southern Ag Today 3(22.1). May 29, 2023. Permalink

May 29, 2023