Southern Ag Today

Author: Francisco Abello

  • U.S. Sorghum-Corn Premium Prices Fell Sharply During this Quarter

    U.S. Sorghum-Corn Premium Prices Fell Sharply During this Quarter

    On average, sorghum prices received by U.S. farmers have followed corn prices, albeit generally at a discount compared to corn over the last 20 years. However, since May 2020, sorghum prices have paid a significant premium over corn (Figure 1). An increase in export demand improved the U.S. sorghum-over-corn premiums from an average discount of $0.14/bu from 2014-19 to an average premium of $0.44/bu for 2020-21. The U.S.-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 were considered the causes for the change in sorghum/corn price ratios.

    Figure 1: Sorghum Minus Corn Price Received by U.S. Farmers

    Unexpectedly, sorghum premiums over corn declined sharply during the second quarter of 2022. In July 2022, the average sorghum price received by U.S. farmers was at a discount of $1.70/bu compared to corn. The sorghum/corn ratio dropped to 0.76. 

    Many factors are contributing to the decline. In the past, years with strong exports of sorghum have been associated with higher sorghum premiums over corn. According to the USDA Foreign Agricultural Service (FAS), estimated sorghum exports for the 2022/23 marketing year have been reduced by 2.4 million metric tons (MT) compared to the previous marketing year (5 million MT in 2022/23 compared to 7.4 million MT in 2021/22). 

    Historically, the U.S. has been the world’s leading sorghum exporter, accounting for 73% of all international exports in the last 30 years. For the 2021/22 marketing year, U.S. sorghum exports represented 61% of world exports. Considering current USDA estimated exports, U.S. sorghum exports will only represent 51.4% of world exports for the 2022/23 marketing year. 

    China, the primary buyer of U.S. and worldwide sorghum is projected to cut its imports this season due to lower feed grain demand expectations. Total coarse grain imports from China are expected to decrease by 15% in 2022/23. The USDA estimated a reduction in China’s sorghum imports of 2.4 million MT (23.8%). During 2020/21, China imported 94% of total U.S. sorghum exports and about 85.5% of world sorghum exports. 

    In addition, sorghum production in the U.S. has been severely affected by drought, significantly reducing the amount of sorghum available to be exported. In fact, USDA estimates a reduction of 43.7% in U.S. production for 2022 compared to the 2021 season. Estimated yields and harvested acreage are 23% and 17% lower than last season, respectively. Ending stocks are estimated to drop back to 2020-21 levels of 0.517 million MT.  

    High sorghum discounts over corn generally result in a retraction of the planting area in the next growing season. FAPRI’s August Baseline Update for U.S. Agriculture Markets estimates 8% less sorghum planting area than last season. FAPRI estimates 5.8 million acres in the 2023/24 season, within the historic planting range before the 21/22 and 22/23 seasons. 

    References

    USDA Foreign Agricultural Service, Production, Supply, and Distribution. https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery

    FAPRI, Baseline Update for U.S. Agricultural Markets https://www.fapri.missouri.edu/wp-content/uploads/2022/08/2022-Baseline-Outlook-August-Update.pdf

    Abello, Francisco “Pancho”. “U.S. Sorghum-Corn Premium Prices Sharply Fell During this Quarter“. Southern Ag Today 2(42.1). October 10, 2022. Permalink

  • Peer Advisory Groups

    Peer Advisory Groups

    Agricultural producers use various resources to continue learning and implementing new practices and technologies. Peer advisory groups are an essential tool for progressive and business-minded farmers or ranchers who seek continuous growth and improvement of their ag businesses.

    Like most family businesses, agricultural managers make most business decisions alone. The lack of challenging and diverse ideas often means that producers miss business opportunities or fail to implement beneficial changes for their operations. A peer advisory group serves as a reciprocal advisory board that helps farm businesses generate knowledge and improve management strategies that can impact their operation. 

    A peer advisory group is formed by ranchers and farmers willing to share their experiences and make the most of each member’s talents to solve problems and make business decisions. They constantly exchange information, knowledge, ideas, experiences, and opinions. Each group usually consists of 8-12 producers who periodically meet on each member’s operation. This group size helps maintain the intimacy and trust necessary to obtain the best results from each group member.

    There are several peer group systems with methodologies for agricultural producers to achieve their goals. Argentina’s CREA groups are among the oldest and most experienced peer group associations (Regional Consortiums of Agricultural Experimentation). This association has more than 2,000 members and 60 years of using and perfecting the peer group methodology. CREA members have continuously improved their productivity and are at the forefront of new technologies and management practices. Thanks to the business management mindset generated within these groups, its members are among the top 20% of their country. 

    Although not as popular as in Argentina, a few agricultural companies use this methodology in the U.S. and several private consulting companies offer these services. Through the leadership of the Texas A&M AgriLife Extension Service and funding from Southern Risk Management Education, a peer advisory group has been developed with ranchers from North Texas and Oklahoma, using a similar methodology as CREA groups. This peer advisory group focuses on the production risk associated with new production systems and the business’s economic, financial, and organizational aspects.

    Abello, Francisco “Pancho”. “Peer Advisory Groups“. Southern Ag Today 2(40.3). September 28, 2022. Permalink

  • Producers have Significantly Increased the use of LRP

    Producers have Significantly Increased the use of LRP

    Incorporating a price risk management plan into our operation has been difficult for many ranch businesses, even considering larger sized operations. Ranchers face many risks associated with cattle pricing, as we have seen these last years after disruptions in supply chains. Past events emphasize the importance of incorporating a price risk management plan as one of our management strategies to minimize economic losses, lock margins, or reduce the risk of business failure.  

    The USDA Livestock Risk Protection Feeder Cattle (LRP) program is an important tool to reduce price risk in our operations by setting a floor price for our cattle. An analysis made with the last ten years of data for stocker prices shows that this tool provides floor prices and, in many cases, above the October market value (Premium purchased in May, 30 weeks endorsement, at a 98% price level coverage). Producers can choose between different price coverage levels and buy the insurance up to 52 weeks before selling their cattle.  

    During the summer of 2019 and winter of 2021, the USDA made a few changes to the program. These modifications reduced the premium paid by producers, delayed the premium payment to the end of the endorsement period, and made it available in all states and counties. Payments due at the end of the period are a cash-flow advantage compared to buying a Put Option in the futures market.

    The LRP program is available for most ranchers since it does not require a minimum number of cattle to be insured. Small ranchers with even one cow could make use of it. Most importantly, both cow-calf and stockers operations can benefit from this program. 

    Producers from the southern region have significantly increased the use of LRP as a price risk management tool compared to 2020, as shown in Table 1. In 2022, producers will have insured 1.4 million head through the LRP program. For more information on LRP, please check the USDA Fact Sheet (Livestock Risk Protection Fed Cattle | RMA (usda.gov)). If you are interested in buying the insurance, the USDA website lists approved livestock agents and insurance companies. 

    Table 1. LRP – Quantity of Cattle Insured in the Southern States (Heads). Source: USDA – RMA

    Abello, Francisco “Pancho”. “Producers have Significantly Increased the use of LRP“. Southern Ag Today 2(35.3). August 24, 2022. Permalink

  • PRF Adoption Rate to Mitigate Drought Impact

    PRF Adoption Rate to Mitigate Drought Impact

    This summer’s drought is affecting a large part of the western half of the South, producing unfortunate losses for many ranchers and farmers in our area. The most affected States are Texas, Oklahoma, Arkansas, Louisiana, Mississippi, and Tennessee within the Southern Region. The last U.S. Drought Monitor reported that 92% of this area is abnormally dry, and about 64% is in severe drought.

    U.S. Drought Monitor – South Region. July 26, 2022.

    Unfortunately, droughts always have a negative financial and economic effect on our business. The USDA’s Pasture, Rangeland, and Forage Insurance (PRF) has shown to be an essential tool to support ranchers during these times. PRF showed a positive net benefit, indemnities over premiums, in many cases. Still, most importantly, it generated significant payments in drought years when needed most.

    USDA created the Pasture, Rangeland, Forage (PRF) insurance program in 2007 as a tool for livestock and forage producers to reduce the risk of forage loss associated with lower precipitation. The program is available in 48 states and policies covered over 247 million acres in 2022. In southern states, the adoption of this program has nearly doubled since 2007. During the program’s first year, the total enrolled acres in this area was 20.8 million. Producers from these states have insured about 41 million acres for 2022.

    Ranchers in Texas and Oklahoma have adopted the PRF insurance most quickly within the Southern region and are better prepared when compared to the 2011 drought. The percentage of enrolled acres of total ​​pasture and rangeland in Texas and Oklahoma is 36% and 18%, respectively. The rest of the southern states had an adoption rate between 1 and 4% over their total grassland and rangeland. Texas has 71% more acres enrolled in the PRF program than in 2011, while Oklahoma has almost 990% more.

    PRF Enrolled Acres as a Percent of Total Grassland Pasture and Rangeland in Selected Southern States.

    Comparison of PRF Coverage in 2011 Compared to 2022 for Selected Southern States

    Abello, Francisco “Pancho”. “PRF Adoption Rate to Mitigate Drought Impact“. Southern Ag Today 2(32.2). August 2, 2022. Permalink

  • Wheat Production of Major Exporters in the Southern Hemisphere

    Wheat Production of Major Exporters in the Southern Hemisphere

    In the latest WASDE report, USDA projected lower world wheat production than last season. This lower projection was primarily a result of lower expected wheat production in Ukraine, although partially offset by higher spring wheat production in Canada. 

    The southern hemisphere represents 6-10% of annual global wheat production, 45-72 MMT over the past 10-years (USDA-PSD). The two dominant producers in the southern hemisphere are Australia and Argentina, contributing 75-82% of total southern hemisphere production. An increase in winter wheat acreage for the two main exporters from the southern hemisphere, Argentina and Australia, would have been expected given soaring prices. On the contrary, USDA projects lower wheat production for the upcoming 2022-23 season in Argentina and Australia (Graph 1) which are both coming from record high production levels in their previous seasons. The effect of La Niña and high production costs have reduced 2022-23 wheat projections, compared to last year’s records. 

    The lack of moisture in the soil has decreased planting progress in much of the Pampas region of Argentina. Total acreage projections have also decreased below USDA estimates (20 MT) during the last month (Rosario Stock Exchange). High production costs, high breakeven prices, high breakeven yields, and uncertainty in government policies discourage wheat planting in areas with a lack of moisture and higher production risk. According to the Rosario Stock Exchange, 2022-23 winter wheat planting projections decreased to 15.32 million acres (10% less than last season). Wheat estimated production in Argentina could reach 18.5 MT if assuming an average yield of 46 bu/acre. 

    The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) projects winter wheat production below last year in Australia. Weather conditions were reported favorable for wheat planting in most of the country. ABARES production projections are similar to the USDA’s (30 MT) and 16.5% lower than last season. High fertilizer prices have decreased yield projections for the next campaign, especially considering last season’s record high production of 36 MT. 

    High costs and non-favorable weather have primarily offset the influence of high prices to increase wheat production in the southern hemisphere this season, reduce the chances of increasing worldwide ending stocks, and support prices in the short term.

    Abello , Francisco Pancho . “Wheat Production of Major Exporters in the Southern Hemisphere“. Southern Ag Today 2(28.1). July 4, 2022. Permalink