Southern Ag Today

Author: Hunter Biram

  • Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth 

    Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth 

    Grain and oilseed producers in the Midsouth experienced record low soybean basis, which is the cash price less futures price, in October 2022 due to reduced barge traffic and record high barge freight rates along the lower Mississippi River. These factors were associated with soybean basis as weak as 125 cents under the harvest time futures contract which was nearly one dollar below the 5-year average of 28 cents under for the month of October.  In a previous Southern Ag Today article, Biram et al. (2022) noted the primary reason soybean basis values fell to historic lows was because grain buyers at local elevators were pushed to bid lower cash prices for soybeans to compensate for the additional cost to transport grain from the elevator to the port of New Orleans for export. Further, grain buyers essentially had no place to store the grain even if they wanted to buy it which supports the principle of offering lower cash prices to disincentivize farmers from making delivery.

    While we witnessed the association of record-low basis with record-low river levels in the lower Mississippi River last fall, we are now witnessing an association of relatively lower basis and record-high river levels in the upper Mississippi River due primarily to snow melt. As the Mississippi River level increases to flood-level stages, barge traffic is limited as locks and dams along the river are closed, preventing the transportation of grain downriver or empty barges upriver. On April 16th, the Mississippi River gauge height at McGregor, IA, reached 16 feet which is considered a minor flood stage by the United State Geological Survey (USGS, 2023). On April 20th, the gauge height measured at the same location reached a moderate flood stage of 19 feet. On April 28th, the gauge height was measured at 23 feet, above major flood stage of 22 feet, which is the greatest gauge height reported since April 26, 2019, when it measured 22 feet. 

    Soybean basis reported in locations along the lower Mississippi River began to diverge from historical trends on April 10th and continue throughout the month of April. Consider the case of soybean basis at Elaine, AR, which is representative of basis reported in other southern states in the region (Figure 1). In this example, I consider the basis for 2023 delivery at harvest time which is the difference of the forward cash price and the November 2023 soybean futures contract (ZSX23). The first reported drop in this specific soybean basis was on April 10th with a fall from 25 cents over to 18 cents over which suggests a local response to the rising upper Mississippi River levels (Figure 1). This weakening of basis is associated with the increase in river gauge height throughout the month of April despite the relatively strong 4-year average basis for years in which the gauge height at McGregor, IA, did not reach moderate or major flood stage (i.e., 2018, 2020, 2021, and 2022). The most recent period basis fell below zero in April was in 2019 when it consistently stayed near 40 cents under which is another period in which the upper Mississippi River experienced record-high levels.

    The river level in the upper Mississippi River is starting to fall and with it will most likely come relatively stronger soybean basis in the Midsouth if the historical association between these two variables continues. Additionally, forward cash prices typically reach their strongest in early summer before declining as we approach the harvest months. One implication for a grain marketing plan would be to consider holding off on the May forward contracting decision for 2023 harvest-time delivery until the latter part of the month in anticipation of recovery in the  soybean basis.

    Figure 1. Spring Soybean Basis at Elaine, AR and Mississippi River Gauge Height at McGregor, IA (2018-2023)

    Note: The Nonflood Four-Year Average is calculated using the years when the gauge height at this location did not reach moderate or major flood stage.

    References

    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

    Report-Arkansas Daily Grain Bids | MARS, https://mymarketnews.ams.usda.gov/viewReport2960

    Mississippi River at Mcgregor, IA – 05389500, United States Geological Survey. May 3, 2023.https://waterdata.usgs.gov/monitoring-location/05389500/#parameterCode=00065&timeSeriesId=43560&startDT=2023-04-01&endDT=2023-04-30

    Biram, Hunter. “Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth.” Southern Ag Today 3(21.1). May 22, 2023. Permalink

    Photo by Tom Fisk: https://www.pexels.com/photo/mississippi-river-during-golden-hour-14819622/

  • Analyzing the Relative Riskiness of Rice Yields

    Analyzing the Relative Riskiness of Rice Yields

    Two of the primary risks faced by any producer at any point in time are production and price risk. In agricultural crop production, farmers must deal with the risk of crop yield losses due to several causes of loss such as excess rainfall, drought, and pest pressure via parasitic insects or weed populations. While all crops grown in the U.S. are exposed to these risks, the effect that these risks have on crop yield is not the same for all crops. Understanding the differences in the production of each crop and the risks faced by each crop is important for risk management as this information informs which tools a producer will need to select to minimize losses and stabilize their farm income year-to-year. In this article, we evaluate the relative riskiness of rice to other principal crops grown in the midsouth region to better inform a producer’s risk management strategy and provide implications for policymakers evaluating risk protection programs in the upcoming farm bill.

    We compare the relative yield risk of rice production to corn, soybean, and cotton production by considering the state-specific coefficient of variation (CV) for the yield of each crop as a measure of relative yield risk. Put simply, the CV is a measure of how much yield across a given state varies relative to the average yield of that state. The CV allows us to make comparisons between different crops and counties to assess if one crop is more or less risky to grow than another crop in a specific state. We used state-level data[1] from 2007-2022 (USDA-NASS, 2023) and removed a linear time trend from each crop yield in each state to account for changes in technology and production practices in each state over time.

    Figure 1 gives the state-specific ratio of the CV for corn relative to the CV for rice. This ratio of two CVs tells us how much more, or less, risky corn yield is relative to rice yield. For example, in Arkansas the ratio of 1.62 implies that it is about twice as risky to grow corn relative to rice in that state.  Figure 2 gives the state-specific ratio of the CV for soybeans relative to the CV for rice. Using Mississippi as an example, the ratio of 4.92 implies it is nearly 5 times riskier to grow soybeans than rice in that state. Finally, Figure 3 gives the ratio comparing CVs for upland cotton to CVs for rice with ratios ranging from nearly 2 to a little over 5 indicating it is nearly 2-5 times more risky to grow cotton than it is rice in the states considered.  

    There are several other levels of relative riskiness across rice-producing counties in the midsouth, but the same message generally holds: rice yield risk is relatively lower than the yield risk of its competing crops in the midsouth. This becomes important when deciding between risk management strategies that focus on production risk or price risk. Due to the lower rice yield risk, programs such as the Price Loss Coverage (PLC) may be more advantageous to rice producers than programs like the Agriculture Risk Coverage (ARC) program, which also helps explain why rice producers have overwhelmingly favored PLC. 

    Figure 1. Ratio[1] of the CV for Corn Yield to the CV for Rice Yield (2007-2022)

    [1] The Coefficient of Variation (CV) is the ratio of the Standard Deviation to the Mean of each state and crop yield distribution. The plots in Figures 1-3 gives the ratio of two CVs. The state-specific values plotted are not CVs. 

    Figure 2. Ratio of the CV for Soybean Yield to the CV for Rice Yield (2007-2022)

    Figure 3. Ratio of the CV for Upland Cotton Yield to the CV for Rice Yield (2007-2022)

    [1] We note that while we are unable to distinguish between irrigated and nonirrigated yields across time, USDA-NASS provides a breakdown of the shares of irrigated and nonirrgated acres in Table 34 of the 2017 Agricultural Census. The portions of acres irrigated in Arkansas for corn, soybeans, and cotton is 93%, 85%, and 93%, respectively. The same irrigated portions in Mississippi are 81%, 74%, 74%. The irrigated portions for Louisiana are 78%, 68%, 60%. The irrigated portions for Texas are 84%, 83%, and 52%.

    References

    USDA-NASS. (2023, May 10). USDA-NASS 2017 Agricultural Census. Retrieved from https://www.nass.usda.gov/Publications/AgCensus/2017/Full_Report/Volume_1,_Chapter_1_State_Level/

    USDA-NASS. (2023, April 20). USDA-NASS QuickStats. Retrieved from https://quickstats.nass.usda.gov/

    Biram, Hunter, and Brian E. Mills. “Analyzing the Relative Riskiness of Rice Yields.” Southern Ag Today 3(19.4). May 11, 2023. Permalink

    Photo by Polina Tankilevitch: https://www.pexels.com/photo/close-up-photo-of-assorted-rice-4110255/

  • Key Takeaways and Reliability of the 2023 Prospective Plantings Report

    Key Takeaways and Reliability of the 2023 Prospective Plantings Report

    On Friday, March 31st, USDA released the Prospective Plantings report. These acreage estimates are based primarily on surveys conducted by the National Agricultural Statistics Service (NASS) during the first two weeks of March. Principal crop acres planted were projected nationally at nearly 312 million acres, up roughly six million acres compared to last year. Corn acres are estimated at 92.0 million, up 3.42 million from last year. Soybean planted acres are estimated at 87.5 million, up slightly from last year by 55 thousand acres. Cotton acres are projected to be down 18% from last year, at 11.3 million acres. Peanut acreage is projected at 1.55 million acres, up 7% from last year, and rice area is projected at 2.58 million acres, up 16% from last year. All wheat acreage is projected at 49.86 million, up 9% from last year. Projections from the Prospective Planting results are comparable to recent projections released at the February USDA Outlook Forum which had March projections calling for 1 million more acres of corn, no difference in soybean acres, and 500,000 fewer acres of cotton. 

    The market expected more corn acres in 2023 compared to last year. Corn plantings were held back in 2022 due to high fertilizer prices, which have been alleviated slightly, allowing for a rebound in acreage.  Cotton was expected to struggle to retain acres this year due to struggling demand and lower prices compared to other commodities. Every state, besides Arizona, is projected to remain steady or see a decrease in cotton acreage from last year. Rice acres are seeing a rebound on higher prices, but a forecast of wet weather in the Midsouth over the next couple of weeks could lower plantings. Price reaction from the report was mixed, with harvest contract corn unchanged, soybeans 10-15 cents higher, cotton 0.40 cents lower, and rice unchanged.

    How reliable are the March prospective planting numbers? The NASS planted acreage projections across the U.S. generally hold well with low predictive error and hold especially well for corn and soybeans (Figure 1). There appears to be a larger error, albeit still quite small, when predicting planted acreage for cotton and rice. This is likely for two reasons stemming from the fact that cotton and rice are grown primarily in southern states.  The larger variance can be due to (1) the smaller sample size of farms and (2) the alternative crops available to plant in place of corn and soybeans. Most of the U.S. corn and soybean acreage is grown in the upper Midwest but tends to take up acreage across the entire U.S. which allows for a larger sample of farmers and less variance. In the south, farmers rotate corn and soybean crops with cotton, peanuts, and even some vegetables.  This makes it more difficult to project acres that may shift based on rotational needs, commodity prices, input costs, and weather.  

    One way to investigate the difficulty in projecting acreage is by choosing the subsample of southern states to see if 1) there is more variance across the changes in corn and soybean acreages given a smaller sample and 2) the pattern of acreage changes across cotton and rice still holds in the subsample. We find this to be true (Figure 2). We see more differences each year between prospective and actual planted acreages in corn and soybeans across southern states, and the general pattern of differences each year for cotton and rice still holds between the full U.S. sample and the southern subsample. This implies that we should generally not expect any significant changes in harvest price expectations driven by differences in planted acreages but rather look to future market-moving events.

    Figure 1. Comparison of Prospective vs. Actual Planted Acreage across the U.S. (2014-2023)

    Source: USDA-NASS Prospective Plantings Report (2023)
     

    Figure 2. Comparison of Prospective vs. Actual Planted Acreage across Southern[1] States (2014-2023)

    Source: USDA-NASS Prospective Plantings Report (2023)

    [1] States included are Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, Virginia.

    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

  • One Last Thought on Revenue Insurance for Rice in 2023

    One Last Thought on Revenue Insurance for Rice in 2023

    Monthly average Rough Rice futures prices broke $16/cwt in March 2022 and have remained well above this price (Barchart.com, 2023). In fact, the monthly average has not been at this level since July 2013, when the monthly average closing price was $16.04/cwt. This spike in prices is most likely driven by the lowest global ending stocks reported in five marketing years due to below trend production in 2022/2023 with a steady increase in consumption since the 2015/2016 marketing year (USDA-FAS, 2023). These historically high rice prices provide an opportunity to lock in higher revenue guarantees for Revenue Protection (RP) crop insurance to help manage downside price risk, which is likely if global production bounces back to trend in the upcoming marketing year.

    RP is a risk management tool administered by USDA’s Risk Management Agency (RMA) and provides an indemnity when farm-level revenue for a crop falls below a revenue guarantee. The revenue guarantee is found by taking the product of the farm-level yield expectation given by the actual production history (APH), the projected price determined by USDA-RMA, and the coverage level chosen. The projected price is a 30-day average (prior to planting)[1] of the harvest-month futures contract for a given commodity, which in this case is November Rough Rice (ZRX). USDA-RMA completed the projected price discovery period on February 14th for long-grain rice producing states in the South with a February 28th sales closing date and has determined the 2023 projected price for long grain rice to be $16.90/cwt (i.e. $7.61/bu[2]). This price is $2.40/cwt (i.e. $1.08/bu) higher than last year’s projected price of $14.50/cwt ($6.53/bu).

    As noted above, revenue guarantees depend on the farm-level APH, projected price, and the chosen coverage level. I illustrate the increase in the RP revenue guarantee for long-grain rice producing states using states in the Mississippi Delta, but the impact is generally applicable across southern states with a February 28th sales closing date. Figure 1 shows the year-over-year changes in the revenue guarantees for the 75% coverage level in 2023 relative to 2022 and assumes the APH yield is equal to the Reference Yield which USDA-RMA provides at the county-level. RP revenue guarantees in the Mississippi Delta are expected to increase by more than $100/ac in most counties and by more than $150/ac in a few others. 

    It is not too late for farmers to contact their crop insurance agent to discuss enrolling their rice in RP insurance. The amount of coverage chosen largely depends on each farm’s financial condition and each farmer’s risk tolerance, but 75% tends to be the most popular coverage level chosen. The deadline to enroll is tomorrow, February 28th.

    References

    Barchart.com. November Rice Historical Monthly Average Closing Prices. Accessed via API.

    USDA – Foreign Agricultural Service (FAS). Production, Supply, and Distribution Online. https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

    USDA – Risk Management Agency (RMA). Actuarial Data Master. https://pubfs-rma.fpac.usda.gov/pub/References/actuarial_data_master/

    USDA – Risk Management Agency (RMA). Commodity Exchange Price Provisions (CEPP). https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Commodity-Exchange-Price-Provisions-CEPP

    USDA – Risk Management Agency (RMA). Price Discovery. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

    [1] The projected price discovery period depends on the sales closing date. For states with a February 28th sales closing date, the projected price discovery period is January 15 – February 14 (USDA-RMA CEPP, 2023). Therefore, the projected price will be the average of the daily closing prices for ZRX over January 15 – February 14.

    [2] One can find the dollars per bushel price of the Rough Rice futures contract, priced in dollars per hundredweight, by dividing the futures price by 2.22.

    Biram, Hunter. “One Last Thought on Revenue Insurance for Rice.” Southern Ag Today 3(9.1). February 27, 2023. Permalink

  • Risk Management Considerations for the 2023 Growing Season

    Risk Management Considerations for the 2023 Growing Season

    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)

    Source: USDA-AMS MyMarketNews Data Query (2022)

    Figure 4. Percent Changes in Projected Prices and Harvest Prices

    USDA-RMA, 2022

    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

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