Author: Grant Gardner

In the March 13, 2023, Southern Ag Today article, Mark Welch discussed the soybean-to-corn price ratio and its implications for 2023 planting decisions. This article uses the same methods to examine the ratio and its impacts on 2024/25 new crop prices in the next few months, prior to USDA’s Ag Outlook Forum, which releases the first crop estimates for the 2024/25 marketing year and could have an impact on nearby futures prices. It additionally gives a way-too-early projection on corn/soybean acreage for next year. 

At last year’s Ag Outlook Forum on February 23, 2023, USDA projected an extra million acres of corn for 2023. This forecast resulted in a drop in the May Corn Futures price by nearly $0.37 in the four days following the report. As we progressed through the marketing year, corn acreage continued to increase, pushing the corn price lower and lower. The near-record acreage and high yields resulted in record corn production in 2023. As U.S. producers typically follow a corn/soybean rotation, this raises the question of whether the United States is primed for expanded soybean acreage in 2024. If the USDA projects expanded soybean acreage at this year’s Ag Outlook Forum, similar price declines to 2023 corn futures could occur in soybeans in 2024. 

Another indicator for soybean acreage is the soybean-to-corn price ratio, which is the November soybean futures price divided by the December corn futures price. Typically, a ratio higher than 2.5 results in soybean acreage closer to the number of corn acres. On the contrary, a ratio lower than 2.5 indicates that there will be a larger amount of corn acreage in the United States. Figure 1 shows the corn/soybean ratio on January 15 plotted against the difference in corn and soybean acres, described here as excess corn acreage. The past ten years of ratios on January 15 explain nearly 35% of the variation in excess corn acreage (corn acreage typically exceeds soybean acreage with the exception of 2018). Current ratios indicate that we will have more soybean acreage than last year; however, the simple estimation in this study does not account for other factors that affect corn and soybean prices, such as fertilizer prices and previously planted acreage. Considering both of these factors, the number of soybean acres is still likely to expand due to planted acreage, but how much expansion occurs remains a question.

This simple analysis indicates we could have 6.6 million more corn acres than soybeans in the United States compared to 11 million acres last year. Depending on how things play out, the Ag Outlook Forum reports released February 15-16 could greatly impact soybean prices, which should be kept in mind when marketing old crops in the near future. Soybean prices have been falling lately, and corn prices have yet to rebound. It remains possible that corn will try to buy some acres back in the near future, pushing corn futures slightly higher as soybean prices decline. 

Sources

Barchart.com. Historical Corn and Soybean Futures Charts. Accessed January 17, 2024.

USDA, NASS Quickstats, accessed January 17, 2024.

Welch, Mark. “The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions.” Southern Ag Today 3(11.1). March 13, 2023. Permalink

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Gardner, Grant. “A Way-Too-Early Soybean-to-Corn Price Ratio Analysis: Price Implications and Planting.” Southern Ag Today 4(5.1). January 29, 2024. Permalink

This article examines how low river levels impacted off-farm storage utilization last year for the five Southern states bordering the Mississippi River (Kentucky, Missouri, Tennessee, Arkansas, and Louisiana). In particular, we look at changes in corn held in off-farm storage. USDA-NASS (2023) reports off-farm stock numbers quarterly, including bushels stored on and off-farm. Net off-farm storage disbursement can be calculated by subtracting off-farm stocks in the previous quarter. For 2022/23, corn disbursements trailed the 5-year average in the five southern states bordering the Mississippi River. Lower net disbursement was likely caused by low river levels, which increased barge freight and caused the corn basis to widen (Gardner, Biram, and Mitchell, 2023). Once river levels returned to normal, elevators tended to barge soybeans as they have a higher value on a per-bushel basis, further delaying corn shipments (USDA-NASS, 2023). Figure 1 shows aggregate corn disbursement rates for all five states compared to the 5-year average. Figure 2 further breaks down the data by state. Typically, most corn is put in off-farm storage in Quarter 1 (Q1) of the marketing year, which consists of September, October, and November. Corn is then disbursed as the marketing year progresses. 

Figure 1 indicates that in Q2 of last year, negative disbursement occurred. Negative disbursement percentages indicate that corn was added to off-farm storage. Additional corn storage in Q2 was likely driven by river level declines, which slowed corn shipments through the Mississippi River. The bulk of corn added to off-farm storage in Q2 occurred in Louisiana and Mississippi (Figure 2). As elevators in Mississippi could not move corn downriver, they filled their storage space and stopped taking delivery, causing producers to delay harvest and “store” corn in the field. Louisiana could still utilize the river for transport. Thus, the increase in off-farm supplies in Q2 was likely driven by producers in surrounding states delivering to Louisiana from more northern states. In Q3, the basis neared normal. On a percentage basis, the states disbursed 40% (-1% less 39%; figure 1) of the corn stored in Q1, the same as the 5-year average (10% less 50%). In Q4, producers disbursed 5% (39% compared to 34% on average) more off-farm corn than average, likely allowing some producers to capture the high June prices induced by drought fears on new crop supply. Q4 disbursement rates trailed 6% below the average, indicating that close to 23.5 million bushels were carried into the new marketing year. 

Looking ahead to the 2023/24 marketing year, river levels have again caused the basis to decline, and off-farm storage will be an important risk management tool in these five states. As river levels improve, the basis should rise to normal levels. However, slow disbursement in the first quarter of the 2023/24 marketing year may hinder basis improvement. 

Figure 1. Aggregate Net Off-Farm Storage Disbursement for Mississippi River Bordering Southern States by Marketing Year Quarter (2022/23 vs. 5-Year average)

Figure 2: Net Off-Farm Storage Disbursement for Mississippi Bordering Southern States by Marketing Year Quarter (2022/23 vs. 5-Year Average)

Sources:

Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink.

USDA-NASS. 2023. Washington, DC  

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Gardner, Grant, and William E. Maples. “River Levels and Off-Farm Storage Disbursement.” Southern Ag Today 3(43.1). October 23, 2023. Permalink

Dry weather has again caused the Mississippi River levels to fall to near-record lows. This is a problem for row crop producers and grain elevators in the Lower Mississippi River area, who rely on barges as the primary mode of transportation for grain. For example, during 2015-2019, approximately 53 percent of U.S. corn exports were moved by barge (Chang, Caffarelli, and Gastelle, 2021). When the Mississippi River is low, barge traffic slows, causing barge freight prices to increase (McKenzie, 2005; Biram et al., 2022). Crop basis, defined as the difference between local cash prices and futures prices, is impacted by local market fundamentals, including the cost of transportation. When barge rates increase, crop basis weakens (becomes more negative or less positive) at grain elevators near the Mississippi River. Figure 1 shows river barge freight rates for the 2022-23 marketing year compared to the three-year average. The three-year average indicates that we typically see small fluctuations in barge freight rates; thus, barge rates likely have a small effect on local commodity basis when river levels are sufficient. However, in 2022, the river level at Memphis hit a historic low of -10.81 feet, nearly stopping all barge traffic and sending barge freight rates to a record high of nearly $90/ton of grain. As of September 5^th, the river level declines have caused barge rates to increase to $30/ton. Although data is not included in the graph, the September 18^th river level at Memphis is -9.56 feet. Current weather forecasts look dry, and without sufficient rainfall, barge freight rates may increase similar to last year, causing another situation in which commodity basis drops. 

Figure 1: Recent River Level height and Recent Barge Freight Rates compared to the Three-Year Average Freight Rate (September 2022-September 2023)

Figure 2 indicates the weakest corn basis in 2022 compared to the 5-year average for southern agricultural districts bordering the Mississippi River. As the river levels were lowest during harvest season, producers without storage were forced to deliver and could not avoid basis risk. Producers unlikely to avoid the risk included those taking the spot price, hedging through futures, or using hedge-to-arrive contracts where the basis is set near or at delivery. At the minimum basis, hedging producers in southern agricultural districts bordering the Mississippi River, excluding southern Mississippi, could have experienced realized prices of $0.40-$1.03/bushel under their expected price, which is estimated when the hedge is set.

Figure 2: Weakest 2022/23 Marketing Year Corn Basis relative to the 5-Year-Average in Southern Ag Districts Bordering the Mississippi River  

Figure 3 indicates that as river levels continue to drop and barge freight prices increase, the 2023 basis has started to widen again in the districts bordering the Mississippi. The impacts vary drastically by region; however, as of September 12^th, the average weekly basis is between 3 and 21 cents under the 5-year average which contains basis for marketing years 2017/2018 through 2021/2022. If heavy rainfall does not cause river levels to improve, southern producers could again face unexpected losses due to the effects of falling river levels on barge freight rates and, thus, basis. If the basis continues to drop, hedging producers will likely experience prices below their expected price, which could have huge implications on farm profitability and cash flow for Southern producers bordering the Mississippi River.

Figure 3: Current Corn Basis Relative to 5-Year Average in Southern Ag Districts Bordering the Mississippi River

Producers have limited options for managing basis risk. Hedging or HTA contracts are typically used to minimize futures price risks; however, they leave the producer susceptible to basis risk, which is usually more stable than commodity futures prices. However, last year and currently, lower river levels have caused unpredictable basis patterns. If we continue to experience dry summers and low river levels, Southern producers bordering the Mississippi may need to rely on forward contracts, which lock in price and basis pre-delivery, or basis contracts, which lock basis in before river levels can decline. Compared to hedging, a pitfall of these contracts is that they limit the flexibility of when and where grain is delivered. Entering into a forward pricing contract also exposes a producer to production risk which may result in a fee from the elevator if agreed-upon bushels are not delivered in the specified window. In the short term, if available, producers should consider utilizing on- or off-farm storage until basis improves.

References

Biram, H.D., J.D. Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink 

Chang, K., P. Caffarelli, and J. Gastelle. 2021. Transportation of U.S. Grains: A Modal Share Analysis. U.S. Department of Agriculture, Agricultural Marketing Service. Available at: https://www.ams.usda.gov/sites/default/files/media/TransportationofUSGrainsModalShare1978_2019.pdf 

McKenzie, A. M. (2005). The effects of barge shocks on soybean basis levels in Arkansas: A study of market integration. Agribusiness: An International Journal, 21(1), 37-52.

Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink

Throughout the year, the United States Department of Agriculture (USDA) updates its estimates of U.S. supply and demand factors for selected crops. This article explores projection updates, via the USDA Acreage Report (AR), released on June 30, 2023, and marketing and risk management implications. The initial estimates for the 2023/24 growing season planted acreage were released in February at the USDA Agricultural Outlook Forum (AOF) (Smith and Gardner, 2023). The estimates were then updated in March via the Prospective Planting Report (PPR) (Biram and Maples, 2023). Projected acreage for five crops (corn, soybeans, wheat, rice, and cotton) and the percentage change in acreage estimates can be found in Table 1.

The initial estimate for corn acreage was 91 million acres in February, which was increased to 92 million in March, and now sits at 94 million in June. This is the third-highest number of acres planted to corn since 1944 (USDA-NASS, 2023). It is worth noting that corn harvested for grain makes up a smaller number of acres at 86.3 million acres but is still up 9% from last year (USDA-NASS, 2023). Estimated soybean acreage dropped 4.6% to 83.5 million acres in the most recent acreage report, whereas wheat acreage has been similar in all three reports. Rice acres have increased sequentially by month and are up 7.5% from the initial February projection. Cotton acres increased from 10.9 million acres to 11.3 million acres in March before finding common ground at an estimated 11.1 million planted acres in June. 

Looking at the possible price impacts in the acreage report, we take a close look at corn and soybeans, which have experienced the largest acreage changes. Recent upticks in the prices of both commodities have been driven by drought throughout major crop-producing states, causing a weather induced “crop scare event.” During this crop scare, the drought impacted corn and soybean supply expectations which caused market and futures prices to increase drastically. Prices peaked on June 21^st and began to fall due to rainfall in key production states such as Indiana, Illinois, and Iowa. The large increase in corn acreage in the June acreage report will make the corn market price less susceptible to future supply shocks, causing a lower price environment. However, the opposite may hold true for soybeans which have dropped 4 million acres. As there are fewer soybean acres than previously projected, soybean prices could be more susceptible to further price increases due to detrimental weather, which causes deterioration in crop conditions and expected yield.

Corn and soybeans had complete opposite price responses to the June Acreage Report, with the corn price decreasing 33 cents to $4.95/bu and soybeans increasing 77 cents to $13.42/bu. Rough rice and cotton futures had essentially no response to the June acreage report with rough rice remaining flat at $15.25/cwt and cotton only increasing to 80.37 cents/lb from 79.04 cents/lb. A marketing tool  available to producers that could be considered is buying a put option to place a floor on the futures price. A put option gives the right but not the obligation to sell a futures contract at the strike price specified in the put option contract, so long as the futures price is below the strike price at the time the option is exercised (i.e., “in the money”). Producers can use this strategy to protect against futures market price declines while allowing them to benefit if prices rally. See Biram and Smith (2022) for an explanation of using options to augment one’s risk management plan. Additionally, producers can manage price risk in their local cash market by locking in prices received at harvest at a local grain elevator or grain purchaser through forward contracting (see Maples, 2023). 

Lastly, we take a look at the potential price protection a producer has if they purchased crop insurance by considering the futures price as of the afternoon of June 30, 2023, relative to the Projected Crop Insurance Price released by USDA-RMA in the winter (Table 2). Harvest month futures contracts for corn, soybeans, rice, and cotton are lower relative to their respective Projected Price with corn having a substantially lower price. Notably, if the 2023 growing season were to end today, holding 2023 harvest yield the same as APH yield, 85% Revenue Protection would already trigger an indemnity for corn with ZCZ23 being 83% of the Projected Price. The current harvest month corn futures price would also trigger an indemnity under Enhanced Coverage Option (ECO) and Supplemental Coverage Option (SCO), assuming no difference in the county expected harvest yield and established APH. This is because ECO and SCO  trigger an indemnity once county-level revenue falls below 95% and 86% of the county-level revenue guarantee, respectively. We also see ECO would trigger an indemnity for rice, assuming no change in the expected harvest yield.

Table 1: Acres Planted by USDA Report and Percentage Change

Report	AOF	PPR	AR	% Change from February	% Change from March
Month	February	March	June
Corn Acres (Millions)	91	92.0	94.1	3.4%	2.3%
Soybean Acres (Millions)	87.5	87.5	83.5	-4.6%	-4.6%
Wheat Acres (Millions)	49.5	49.9	49.6	0.3%	-0.5%
Rice Acres (Millions)	2.5	2.6	2.7	7.5%	4.0%
Cotton Acres (Millions)	10.9	11.3	11.1	1.7%	-1.5%

Table 2. Current Futures Price as a Percentage of RMA Projected Crop Insurance Price

Crop	Futures Price	Projected Price	Futures Price as % of Projected Price
Corn (ZCZ23)	$4.95/bu	$5.94/bu	83%
Soybeans (ZSX23)	$13.42/bu	$13.65/bu	98%
Rough Rice (ZRX23)	$15.25/cwt	$16.90/cwt	90%
Cotton (CTZ23)	80.31 ¢/lb	85.00 ¢/lb	95%

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References:

Biram, Hunter, and William E. Maples. “Key Takeaways and Reliability of the 2023 Prospective Plantings Report.” Southern Ag Today 3(14.1). April 1, 2023. Permalink

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

Maples, Will. “Considerations for Developing a Pre-Harvest Marketing Plan.” Southern Ag Today 2(47.1). November 14, 2022. Permalink

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

United States Department of Agriculture. “Cotton Outlook,” 2023. https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf.

United States Department of Agriculture. “Grain and Oilseeds Outlook,” 2023. https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf.

USDA-NASS. “Acreage” 2023. https://downloads.usda.library.cornell.edu/usda-esmis/files/j098zb09z/hh63v8465/zg64w269x/acrg0623.pdf

USDA-NASS. “Prospective Plantings Report” 2023. https://downloads.usda.library.cornell.edu/usda-esmis/files/x633f100h/rv044597v/gx41nz573/pspl0323.pdf

For the 2023/24 marketing year, higher interest rates will negatively impact producers’ costs for holding grain in storage, especially for producers utilizing operating loans. This article expands on the recent Smith and Johnson Southern Ag Today article to examine operating loan interest costs of storing grains at different interest rates and lengths of time and how to calculate operating loan interest costs when grain is stored. The article also provides charts to depict the change in operating loan interest cost of storing corn, soybeans, and wheat. For example, an increase in interest rate from 4% to 8% will increase the storage costs of corn stored for five months by 112.5% or $0.09/bushel. 

The Federal Reserve began increasing the Federal Funds rate in February 2022 to combat inflation. When the Federal Reserve raises the Federal Funds rate, the prime rate increases. The prime rate is used as a reference interest rate for many types of loans, including operating, term, and credit card loans. On May 4, 2023, the prime rate reached 8.25%, the highest since 2006/07. Higher interest rates impact every aspect of a farming operation, including marketing strategies, especially producers using operating loans to hold grain in storage. Typically, operating loans are variable interest rate, meaning they are not fixed but increase when the prime rate changes; however, some lenders have started offering fixed-rate operating loans to provide customers with cost certainty. Operating loans are used to pay for inputs until grain can be sold and the operating loan paid back. There is an interest cost for holding grain in storage compared to selling at harvest and paying down operating loans. Grain in storage typically allows producers to increase profit through marketing strategies which utilize market or basis carry. However, the operating loan interest costs need to be accounted for when interest rates are elevated. 

The operating loan interest cost on a dollar-per-bushel basis can be calculated by multiplying the harvest price by the interest rate and dividing the number of months the crop is stored by 12. For example, a producer that holds corn harvested in October until March (5 months), has an operating loan interest rate of 8% and is expecting a harvest price of $5.00/bushel would have operating loan interest costs of storage of $5.00 × 0.08 × (5/12). 

Figures 1, 2, and 3 show the impact of the number of months of storage and interest rates on corn, soybeans, and SRW wheat operating loan storage costs. Harvest prices are assumed to be $5.00/bu for corn, $12.00/bu for soybeans, and $6.00/bu for SRW wheat. The storage costs increase the longer grain is stored. Additionally, costs increase as the price of the commodity increase, i.e., interest costs are higher for soybeans than corn or SRW wheat. 

The table at the bottom of each chart can be used to estimate increased operating loan interest costs for grain held in storage due to climbing interest rates. Following our previous example, if corn is harvested in October for March delivery (5 months) and the interest rate is 4%, operating loan interest costs of storage for $5 corn would have been $0.08/bu. When the rate increases to 8%, closer to current rates, the operating loan interest costs of storage are $0.17 per bushel. This result indicates an increased operating loan interest cost of $0.09/bu ($0.17 minus $0.08), a 112.5% increase due to a 4% increase in interest rates. 

In conclusion, high-interest rates increase the storage costs for producers holding grain via an operating loan, affecting each operation’s bottom line and potentially negating the price benefits of storage. Storage costs are rising with interest rates and should be accounted for in your grain marketing decisions. 

Figure 1: Impact of Interest Rates Increases on Corn Storage Costs

Figure 2: Impact of Interest Rate Increases on Soybean Storage Costs

Figure 3: Impact of Interest Rate Increases on SRW Wheat Storage Costs

References

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.

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Gardner, Grant. “Interest Rates and Grain Storage.” Southern Ag Today 3(26.1). June 26, 2023. Permalink