Author: Hunter Biram

The risk faced by producers in the 2022 growing season was unprecedented. As farmers were in the field preparing to plant their crop, Russia invaded Ukraine fueling uncertainty across the world and in agricultural input markets. A few months later, rain fell across the midsouth causing a great deal of yield losses stemming from late planting and prevented planting (Figure 1). Of the $1.4 billion in rain-related losses across the U.S., $0.4 billion were primarily in the midsouth states (USDA-RMA, 2022). In the summer, drought struck the entire United States which resulted in significant crop losses in Texas, Oklahoma, and parts of the east coast (Figure 2). Of the $3.9 billion in total drought-related losses across the U.S., $2.4 billion were in the southeast (USDA-RMA, 2022).

In addition to the production losses stemming directly from weather, many farmers experienced indirect price losses stemming from the low water levels in the Mississippi River. These price losses at the local grain elevator came in the form of extremely weak basis during arguably the most unfortunate time: harvest. During the usual harvest window, basis, or the local cash price less the relevant futures price, fell from about 40 over to 125 under (Figure 3). Once the river levels increased, basis strengthened to about 50 over and has stayed relatively consistent at this level even though most new crop delivery from the 2022 harvest is finished. However, farmers with on-farm grain storage may want to take advantage of the strong basis and deliver either grain from the 2021 old crop or newly stored grain from the 2022 new crop.

While measuring crop yield losses generally occurs throughout the growing season, USDA-RMA harvest prices are determined in the months of August through November depending on the state and crop. In the southeast, the harvest price was greater than the projected price, except for cotton and a few soybean exceptions (Figure 4). While corn, sorghum, and rice experienced a 10-21 percent increase in the harvest price relative to the projected price, cotton experienced between a 20-21 percent decrease in the harvest price over the projected price. Harvest prices for soybeans experienced between a 4 percent decrease and a 5 percent increase over the projected price. 

Using the information on production losses and finalized harvest prices, it is useful to consider options to managing risk in the 2023 growing season. One option is to construct a marketing plan by pricing bushels and inputs which will reduce uncertainty revolving around tight margins (Maples, 2022). Another option is to begin considering alternative plans for crop insurance. The product which comprises most insured acres is Revenue Protection (RP) crop insurance which insures against price and production risks, both of which have been prominent in the 2022 growing season. RP provides one layer of protection against low prices and another layer of protection against crop losses which is best represented by the 2022 cotton crop characterized by significant yield and price losses. Another option is to use both strategies jointly which will allow a producer to be more aggressive in pricing bushels to be delivered at a later specified date (Biram et al., 2022). Using forward contracting in addition to RP crop insurance will provide one layer of price protection in the cash market, another layer of protection in the futures market, and third layer of protection from yield losses resulting from drought and early-season rains. 

While the southeast saw a relatively quiet hurricane season, excess rainfall and drought still caused significant yield losses across the southeast and caused some farmers to lose out on cash prices at a critical time. Having a risk management plan which covers multiple layers of protection will help provide financial certainty greater peace of mind.

Figure 1. Rain-Related Losses as a Percentage of Total Liability (2022)

Figure 2. Drought-Related Losses as a Percentage of Total Liability (2022)

Figure 3. Daily Soybean Basis (ZSX) at Helena, Arkansas (2018-2022) (September 17th through November 14th)

Figure 4. Percent Changes in Projected Prices and Harvest Prices

References

Biram, H.D., J.D. Anderson, S. Stiles, and A.M. McKenzie. “Risk Management Tools and     Strategies for Arkansas Corn and Soybean Producers: Implications of Mississippi River          Transport Disruptions.” Fryar Price Risk Management Center of Excellence. Technical Report No. FC-2022-05. October 2022. (Link)

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

Cause of Loss Historical Data Files | USDA Risk Management Agency. November 21, 2022. (Link)

Report-Arkansas Daily Grain Bids | MARS. November 21, 2022. (Link)

Author: Hunter Biram

Assistant Professor

hbiram@uada.edu

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Biram, Hunter. “Risk Management Considerations for the 2023 Growing Season.” Southern Ag Today 2(49.1). November 28, 2022. Permalink

Low water levels in the Mississippi River have caused grain barge rates to increase, which causes grain buyers at local grain elevators to reduce their bids for grain delivered. When water levels drop in the marine highway system, barge drafts are reduced (U.S. Army Corps of Engineers, 2022). A barge draft is the distance between the waterline and boat, or the barge hull structure, and increases with the amount of weight present on the barge. The average barge with a draft of 9 feet can hold 1,500 tons of grain which equates to about 59,000 bushels of corn, 55,000 bushels of soybeans, and 53,500 bushels of rice (USDA-AMS, 2022). Each reduced foot of draft results in 150-200 fewer tons, or anywhere between 5,500 to 7,500 bushels depending on the crop, of grain capacity on a barge (Iowa Soybean Association, 2022). If barge drafts decrease for vessels carrying grain, this means the cost to transport grain downriver, or the grain barge rate, increases since it takes more barges to move the same amount of grain.

Barge freight rates are established by the U.S. Inland Waterway System using a percent of tariff system. Barge freight rates for the Mississippi River at New Madrid, Missouri near Memphis, Tennessee have skyrocketed since the beginning of September (USDA-AMS, 2022). The 3-year average percent of tariff rate indicates weekly barge freight rate tends to oscillate around 400 percent of tariff, or about $12.56/ton. In October 2022, the barge freight rate averaged 2400 percent of tariff, or $75.36/ton, which means the cost to transport grain from Memphis to the port of New Orleans was roughly six times higher than average. The increase in transportation cost is usually reflected in lower cash grain bids at country grain elevators which results in a weakened basis, which is the local cash price received by farmers at the country elevator less the futures price established by the Chicago Board of Trade.

In a technical report recently published by the Fryar Price Risk Management Center of Excellence, Biram, et al. (2022) provide a detailed analysis of how increased barge freight rates weaken basis. Here, we provide a snapshot of how soybean basis has fluctuated in typical harvest months for Helena^[1], Arkansas for the previous five years and show how significant the impact of the low water levels in the Mississippi River has been in recent weeks (Figure 1). As of October 18, 2022, new crop soybean basis at Helena, Arkansas is abnormally low at 90 cents under the front month soybean futures contract (ZSX2) which is nearly 200% below the five-year average during the months of September and October (i.e. 30.4 under). Additionally, basis is relatively more volatile than the five-year average with the strongest basis in this time frame of 100 cents over ZSX2 on September 6, 2022, to the weakest basis of 125 cents under the week of October 5, 2022. The strong basis in early September is primarily due to tight pre-harvest stocks.

We now provide immediate and near-term implications for risk management. In the immediate term, a producer should consider storing grain until the winter months where current cash bids for delivery appear to have stronger basis and to consider the benefit of higher prices at a future delivery date relative to storage costs. Based on historical USDA-AMS data, basis typically improves by 50 cents between harvest months and winter months. Looking to the 2023 growing season, producers should consider revenue insurance such as RP and RP-HPE or to engage in forward contracting which allows a producer to take advantage of stronger basis in the summer months prior to harvest. While revenue crop insurance provides price protection based on futures market prices, it can allow a producer the opportunity to be more aggressive with their forward contracting as they can price more bushels confidently with an additional layer of non-production risk protection (i.e. elevator fees and non-delivery). These tools may be used independently or jointly, and the best risk management strategy for a producer considering these tools may differ across farms.

Figure 1. Daily Soybean Basis (ZSX) at Helena, Arkansas (2018-2022) (During Harvest Months of Sep. – Oct.)

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^[1] Basis in Helena, Arkansas is representative of basis for other country elevators along the Mississippi River in other states on October 18, 2022. According to USDA-AMS Daily Grain Bids reports, basis was 111 under ZSX2 in Greenville, Mississippi and 95 under ZSX2 in West Central, Tennessee.

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References

Biram, H.D., S. Stiles, A.M. McKenzie, and J.D. Anderson. “Risk Management Tools and        Strategies for Arkansas Corn and Soybean Producers: Implications of Mississippi River            Transport Disruptions.” Fryar Price Risk Management Center of Excellence. Technical Report No. FC-2022-05. October 2022. (Link)

Grain Transportation Report | Agricultural Marketing Service, Oct. 2022,     https://www.ams.usda.gov/services/transportation-analysis/gtr. 

Hutton, Jeff. “Waterway Woes.” Iowa Soybean Association, Sept. 2022,      https://iasoybeans.com/newsroom/article/waterway-woes. 

“Navigation.” U.S. Army Engineer Institute for Water Resources (IWR),           https://www.iwr.usace.army.mil/Missions/Coasts/Tales-of-the-Coast/Corps-and-the-Coast/Navigation/.

Report-Arkansas Daily Grain Bids | MARS,      https://mymarketnews.ams.usda.gov/viewReport/2960.

Hunter Biram

Assistant Professor and Extension Agricultural Economist

hbiram@uada.edu

John Anderson

Director, Fryar Price Risk Management Center of Excellence

jda042@admin

Scott Stiles

Instructor and Extension Economist

sstiles@uada.edu

Andrew McKenzie

Professor

mckenzie@uark.edu

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Biram, Hunter, John 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

Producers face risks every growing season. Production risks, such as extreme weather and drought, affect yield. Marketing risks, including price direction and volatility, is affected by global supply and demand. Developing strategies that use crop insurance in conjunction with options can be an effective way to manage marketing and production risks within the growing season for row crop producers. 

Annually, Federal crop insurance provides over $100 billion in total liability protection (RMA, 2022). Many crop insurance products and features are available to producers; however, three popular crop insurance types are yield protection (YP), revenue protection (RP), and revenue protection with harvest price exclusion (RP-HPE). YP offers protection against declines in yield, whereas RP and RP-HPE offer protection against declines in revenue (yield and price). To calculate the insurance guarantee, RP policies use the greater of the projected or harvest crop insurance price while RP-HPE utilizes only the projected price. It is important for producers to consider the in-season price protection offered by the type of crop insurance policy and buyup coverage level as well as the price risk exposure throughout the growing season. Considering price risk exposure throughout the growing season introduces the opportunity for using crop insurance products in conjunction with other risk management tools such as futures and options.

Options can be used during the growing season to establish a futures price floor greater than the projected price in the crop insurance policy. Buying options allows producers to obtain the right, but not the obligation, to establish a position in the futures market at a specified strike price. The cost to purchase the option is the premium. As such, the strike price minus the premium establishes a futures price floor for the bushels protected. Figures 1, 2, and 3 show the daily December corn futures contract closing price, the projected crop insurance price (for Arkansas the projected price discovery period is January 15 to February 14 (Table 1); projected price discovery periods vary by state), and the put option floor (strike price minus the premium) that could have been established when the market peaked during the 2020, 2021, and 2022 growing seasons. In 2021 and 2022, purchasing a put option was an effective method to establish a futures market price floor above the projected price provided by crop insurance. In both years, the price floor established with the option contract also exceeded the harvest crop insurance price (Table 1). However, each year presents different market opportunities. In 2020, no opportunity was presented to establish a futures market price floor through put option purchases above the crop insurance projected price – the December corn contract declined after the projected price determination period and remained flat through most of the growing season.

Take Aways

1. Producers should consider utilizing marketing tools that work in conjunction with crop insurance during the growing season.
2. In-season marketing opportunities can be short lived, so action should be considered when opportunities are presented.
3. Each marketing year is different, presenting unique challenges and opportunities. Knowing how to use numerous marketing tools (options, futures, hedge-to-arrive (HTA’s), forward contracts, basis contracts etc.) allows producers to select the tool that is best suited to provide in-season price protection.

Figure 1. Projected Crop Insurance Price, December Corn Price, and May 20^th Option Floor, 2022

Figure 2. Projected Crop Insurance Price, December Corn Price, and May 7^th Option Floor, 2021

Figure 3. Projected Crop Insurance Price, December Corn Price, and February 21^st Option Floor, 2020

Table 1. Projected and harvest crop insurance prices for corn (Arkansas), 2020-2022

Year	Project Price Discovery Period	Projected Price	Harvest Price Discovery Period	Harvest Price
2020 2021 2022	01/15 – 02/14 01/15 – 02/14 01/15 – 02/14	$3.95 $4.48 $5.75	08/15 – 09/14 08/15 – 09/14 08/15 – 09/14	$3.54$ 5.36 TBD

Resources and References

USDA Risk Management Summary of Business. (August 2022). USDA Risk Management Agency. https://www.rma.usda.gov/SummaryOfBusiness

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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