Author: Grant Gardner

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

Although the Russian war with Ukraine has been pinpointed as the leading cause of high fertilizer prices, the price of nitrogen fertilizer began to increase in May of 2021, long before Russia invaded Ukraine on February 24, 2022. The increases in fertilizer prices in 2021 were caused by supply and demand factors. On the supply side, increases in natural gas prices and shipping costs likely influenced fertilizer prices (Smith, 2022). Additionally, corn futures prices increased drastically in May 2021, incentivizing farmers to apply more nitrogen per acre. Following nitrogen application, fertilizer prices dropped slightly before increasing again in February of 2022 due to the Russian invasion of Ukraine, which caused supply chain disruptions in nitrogen fertilizer exports. Since September, fertilizer prices have dropped significantly. In this article, we reframe fertilizer prices to look more closely at the recent declines in fertilizer prices. Specifically, we focus on the fertilizer price to new crop corn futures ratio. Using this ratio, we can frame fertilizer prices in a form allowing us to account for fertilizer and corn prices.

Figures 1, 2, and 3 show the plotted ratio of fertilizer price to new corn futures ratio for NH3, urea, and UAN from 2020 to early March of 2023, respectively. Unsurprisingly for all three commodities, the lowest ratios occurred before the price increases in 2021. Following the 2021 price increases, the impact of the Russian-Ukrainian war sustained an already high nitrogen price. The red line in each graph depicts the 2023 nitrogen price relative to the price of corn. For UAN and urea, the ratio of fertilizer to new crop corn price has fallen below the 5-year average levels, whereas the price of NH3 is still slightly above the 5-year average. These results may indicate that ammonia fertilizers are still unreasonably high due to Russia being the second largest NH3 exporter, behind Trinidad and Tobago (World Bank, 2021). 

Figure 1. NH3 (Anhydrous Ammonia) Price Relative to New Crop Corn Futures

Figure 2. Urea Price Relative to New Crop Corn Futures

Figure 3. UAN Price Relative to New Crop Corn Futures

As the ratio for NH3 remains above the five-year average, it may be time to look at alternative nitrogen sources. One nitrogen source of interest is urea, the nitrogen source furthest under the 5-year average. The average price of nitrogen/pound of urea is historically higher than that of NH3. However, this season, the current price per pound of nitrogen from both sources is similar, making the switch from NH3 to urea more appealing. If in-season nitrogen application is needed, the relative price of urea is historically lowest in June. However, it is worth noting that an escalation in Ukraine or a discontinuation of the Black Seas Grain Deal would likely cause the price of each nitrogen source to increase.

Sources:

Smith, Aaron. “The Story of Rising Fertilizer Prices.” Aaron Smith, March 2, 2022. https://asmith.ucdavis.edu/news/story-rising-fertilizer-prices.

World Integrated Trade Solution. “Ammonia; Anhydrous Exports by Country |2021.” World Bank. Accessed March 20, 2023. https://wits.worldbank.org/trade/comtrade/en/country/All/year/2021/tradeflow/Exports/partner/WLD/product/281410.

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Gardner, Grant, and Hunter Biram. “Rethinking Fertilizer Prices.” Southern Ag Today 3(15.1). April 10, 2023. Permalink

Photo by Todd Trapani: https://www.pexels.com/photo/corn-field-1382102/

At the Agricultural Outlook Forum in late February, the USDA released its first supply and demand projections for the 2023 crop year. In the March 20^th issue of Southern Ag Today, we looked at how changes in corn exports could change the stocks-to-use (STU) ratio and, thus, price. In this article, we perform a similar analysis for soybeans. Specifically, we find that the soybean STU is much more sensitive to changes in demand than corn. Results indicate that a miss-projection of domestic crush levels could significantly affect soybean STU and price. Although we focus on soybean crush in this article, results would be the same for other increases in demand, such as exports or other domestic products. 

 As mentioned in our previous article, STU is a fundamental indicator in commodity marketing, as it compares commodity ending stocks to commodity demand. The impact of missed projections on STU provides insight into each commodity’s supply and demand dynamics (Gardner and Smith, 2023). Plot A of Figure 1 shows the year and soybean marketing year average price at various levels of STU. Generally, we would expect a larger STU to indicate more supply than demand which would cause a lower price and vice versa. From 2011 to 2013, supply was short due to below trend line yields or lower harvested acres, thus causing a shortage relative to demand that resulted in higher prices. Lower STUs and prices occurred in 2014 and 2015 due to increased acres (5 million acres more were harvested in 2014 and 2015 than in 2013) and a return to trend line yields. Since 2016, domestic crush capacity has increased substantially (CME Group).

Figure 1. Stocks-to-Use (STU) Ratio and Price by Year and Impact of Missed Soybean Crush Projections on STU

Plot B of Figure 1 displays the potential impact of an under-projection of soybean crush on STU, holding other factors constant. The American Soybean Association projects U.S. soybean crush capacity in 2023 to increase by close to 64 million bushels in 2023 (460 million bushels of increased capacity by 2025); however, the EPA is only assuming an increase in crush demand of close to 45 million bushels (Gerlt, 2023). This difference between increased crush capacity and crush demand could result in an underestimation of projected soybean crush in 2023. If soybean crush is underestimated, an increase in crush numbers of 5 million bushels lowers soybean STU by 0.12%, indicating that soybean STU is more sensitive to demand shocks than corn. If crush expansion and demand are met, soybean STU could quickly move lower than 6%, indicative of 2022, in which the soybean price was $14.30. 

Changes in projected supply and demand will impact soybean STU and, consequently, the marketing year average price. The USDA current marketing year average soybean price for 2023 is projected to be $12.90, but if biodiesel capacity expansion increases soybean demand, the marketing year average price could be higher in 2023. Soybean prices could also increase with a rise in export demand or a supply shortage. Producers and traders should be mindful of projected changes in STU and use this information as one factor that could influence price expectations for the upcoming crop. 

Sources:

CME Group. “US Soybean Crush.” Accessed March 21, 2023. https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/soybean-reports.html.

Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Corn Exports.” Southern Ag Today, March 20, 2023. https://southernagtoday.org/2023/03/20/sensitivity-of-usdas-agricultural-outlook-forum-projections-to-changes-in-corn-exports/.

Gerlt, Scott. “Economist’s Angle: EPA’s Proposed Blending Levels Threaten Ongoing Industry Growth.” American Soybean Association (blog). Accessed March 14, 2023. https://soygrowers.com/news-releases/economists-angle-epas-proposed-blending-levels-threatens-ongoing-industry-growth/.

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

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Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Soybean Crush Demand.” Southern Ag Today 3(13.1). March 27, 2023. Permalink