Category: Crop Marketing

On May 10^th, USDA released the latest World Agricultural Supply and Demand Estimates (WASDE) report. The May WASDE provides the first official projections for the 2024 marketing year from USDA and annual marketing year forecasts for the supply and use of various crops. Projections for production are based on the acreage reported in the March 28^th USDA Prospective Plantings report, and yield forecasts are based on trend models or historical yields, depending on the crop. Thus, the USDA projections discussed below are subject to change as the growing season and marketing year progress. 

U.S. corn production is projected at 14,860 million bushels, a 3% decline from the 2023 record of 15,342 million bushels. For 2024/25, U.S. corn production is based on 82.1 million harvested acres (5.1% decline from 2023) and a national average yield per harvested acre of 181.0 bushels. Combined with 2,022 million bushels of carryover stocks from last year and 25 million bushels of imports, the total U.S. corn supply is projected to be 1.1% higher than in 2024 at 16,907 bushels. Similar to 2023, the supply increase is slightly offset by a 0.6% increase in total use. Feed use is projected to increase by 50 million bushels, and ethanol use remains unchanged from 2023 at 5,450 million bushels. Exports are projected to increase by 50 million bushels to 2,200 million bushels, partially due to reduced expectations in exports for Brazil and Russia in 2024. Corn ending stocks are projected at 2,102 million bushels, a 4% increase from 2023. The average farm price is projected to continue the downward trend, at $4.40 per bushel, compared to $4.65 in 2023 and $6.54 in 2022. 

U.S. soybeans are also projected to see higher supplies and lower prices in 2024. U.S. soybean production is projected to be 4,450 million bushels, a 6.8% increase from 2023. Some production increases are due to a higher expected yield of 52 bushels per harvested acre (compared to 50.6 in 2023) – also a record if realized. The 2024 average farm price is projected at $11.20 per bushel, an 11% decrease from 2023. Demand and exports are expected to improve from 2023, with domestic crushing and exports each projected to increase by 125 million bushels. However, supplies continue to outpace demand, with 2024 ending stocks projected at 445 million bushels, a 31% increase. 

U.S. cotton producers are projected to plant 0.44 million more acres  in 2024, an increase that more than offsets the 6% drop in the national average yield, resulting in nearly 4.0 million more bales of production compared to the 2023 production estimate. The 2023 cotton crop saw 3.79 million acres of abandonment, with 10.23 million acres planted but only 6.44 million acres harvested. Drought plagued Texas again with abandoned acres in Texas accounting for 90% of U.S. abandoned acres. Currently, USDA projects 10.67 million acres planted with 9.13 million acres harvested in 2024. Drought conditions in Texas are not as severe as this time last year which may slightly alleviate the magnitude of abandonment. In the May WASDE, U.S. cotton production is projected at 16.0 million bales, a 33% increase from 2023. On the demand side, exports are expected to increase by 0.7 million bales to 13.0 million bales. Despite higher exports, cotton ending stocks are projected to increase by 1.3 million bales to 3.7 million bales on higher production. The average farm price is projected to weaken to 74 cents per pound, the lowest farm price since 2020. 

Lastly, the carryover of long-grain rice from 2023 is relatively low compared to the last two marketing years at 18.0 million hundredweight, but increased production in 2024 will nearly eclipse the carryover. Long-grain rice production is projected to increase by 10% to 169.3 million hundredweight. Exports are expected to increase to 75 million hundredweight, which is largely driven by increased competitiveness in price and regaining the Mexico market lost to Brazil in 2023. Ending stocks are projected to be up 46% at 26.3 million hundredweight. Like other crops, the average farm price is projected lower to $14.50/cwt.

Overall, the May 2024 USDA WASDE report projects a bearish supply and demand picture and lower prices compared to 2023. Figure 1 provides a snapshot of typical month-over-month movements in the five-year average of the Marketing Year Average (MYA) cash price received by farmers. This can provide an expectation of movements in a relatively more current window. The last pre-harvest price upside movement for long grain rice has recently been in August while the last pre-harvest upside price movement for cotton happens in July. Corn and soybeans follow a similar pattern with downward price movement in July through harvest in October. Taking advantage of upward price movement through a crop marketing plan as described by previous Southern Ag Today articles (Maples, 2022; Maples and Gardner, 2023; and Maples, 2024) is of the utmost importance.

Figure 1. Month-over-Month Change in Five-Year Average MYA Price for Rice, Cotton, Corn, and Soybeans: 2019-2023

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References

United States Department of Agriculture, Agricultural Marketing Service. (2023). World Agricultural Supply and Demand Estimates (WASDE-63). Retrieved May 10, 2024 from https://downloads.usda.library.cornell.edu/usda-esmis/files/3t945q76s/8910m7465/0p097p24j/wasde0523.pdf.

United States Department of Agriculture, Agricultural Marketing Service. (2024). World Agricultural Supply and Demand Estimates (WASDE-64). Retrieved May 10, 2024, from https://www.usda.gov/oce/commodity/wasde/wasde0524.pdf

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

Maples, William E., and Grant Gardener. “Using Historical Price Movements to Inform Marketing Decisions.” Southern Ag Today 3(51.1). December 18, 2023. 

Maples, William E. “Cash Grain Contracts and When to Use Them.” Southern Ag Today 4(18.1). April 29, 2024. 

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Biram, Hunter, and Ryan Loy. “May WASDE Projects Higher Supplies and Lower Prices Again in 2024.” Southern Ag Today 4(20.1). May 13, 2024. Permalink

During April, the USDA National Agricultural Statistics Service (NASS) announced the suspension of selected statistical reports and processes, including the annual objective yield sampling effort for U.S. cotton.  The latter was a process of field sampling of squares and bolls in major cotton producing states, from which an objective estimate of yield was calculated.  This estimate presumably informed the monthly U.S. cotton production forecasts, beginning with the August forecast, with potential to confirm or contradict the earlier (May, June, July) forecasts that are traditionally based on historical average yield and abandonment, along with subjective opinion.  It should be noted that in 2019, the start date for objective yield sampling for most of the U.S. was moved from August to September. 

The delaying of the objective yield survey process, followed by its announced elimination, has potential for increasing the forecasting error of U.S. cotton production, which has implications for market planning and even price volatility.  Figure 1 provides a description of the variability of USDA NASS monthly forecasts of U.S. cotton, by crop year.  For example, the year 2012 in Figure 1 graphs the standard deviation (roughly 200,000 bales) around the average of forecasted cotton production from the May 2012 initial monthly forecast through the following April (2013) forecast of 2012 cotton production.  

The graphed points in Figure 1 represent the variation associated with revised production estimates.  Through 2018, the public data collection and publication of information to inform the production estimates was the same.  Over this period, the variability of those monthly estimates within a given crop year fluctuated between 200,000 and one million bales around the average production for that year.  This appears as a fairly narrow, sideways pattern.  

Since 2019, there has been a marked increase in variability of the monthly production forecasts around average crop year production for the last five years.  This variability reached 1.7 million bales in 2020, and 1.6 million in 2023. The increase in production forecast variability since 2019 is visually correlated with the delay of objective field sampling for most of the U.S. Cotton Belt until September.  It is unknown whether there is any causal influence.  However, the complete elimination of cotton objective yield sampling represents an even larger disruption of previously available information.  Our hypothesis is that confirming information on the size of the U.S. crop will have to wait until data from NASS surveys of ginning, as well as bale counts from USDA classing offices, are finalized in the winter. The absence of in-season, objective yield information adds to market uncertainty with likely price implications. 

Figure 1. Standard Deviation of Monthly U.S. Cotton Production Forecasts (May to April), By Crop Year.

Robinson, John. “Public Information and the Variability of U.S. Cotton Production Forecasts.” Southern Ag Today 4(19.1). May 6, 2024. Permalink

As planting begins, it is an excellent time to review the various cash grain contracts available for producers to incorporate into their crop marketing plan. When considering contracts, the producer must understand the special features of each contract and the type of risk it is managing. Producers must also consider the effects of market movement on the contract outcome. This article outlines some common types of grain contracts and how the market can affect the contract results. Producers should speak with their local grain purchaser about the availability of the following contracts and associated fees. 

Cash Market Sales – A cash market sale is simply selling grain at the prevailing market price. A producer may choose to sell in the cash market if they deem it appropriate to sell at the market price or if they need to move old crop grain from storage to create space for the new crop. Cash market sales are risky as a marketing strategy because the market price might not be acceptable when the producer is forced to sell, especially if no other strategy is in place.

Forward Contract – A grain farmer may enter into a forward contract with a grain buyer, requiring the producer to deliver a specific quantity and quality of grain at a certain time, place, and price. This type of agreement can be made before planting or anytime during the growing season.

Minimum Price Contract – A minimum price contract is an agreement between the producer and elevator in which a producer is guaranteed either a minimum agreed upon price or the current cash price. Under this contract, a producer must pay a premium, which is relatively high in volatile markets, and any transaction charges. A minimum price establishes a price floor and allows for upside price potential without the direct use of futures and options. Additionally, the contract can provide some leverage in obtaining credit.   

Basis Contract – Basis is defined as the local cash price minus the futures price. A basis contract is an agreement in which a producer and elevator establish a basis but not the futures price. The producer can select the day on which the futures price is set. A basis contract is useful when the basis is stronger than normal or when one thinks the basis will weaken before a sale is made. Since a basis contract does not set a price, this contract does not provide price upside potential and exposes a seller to downside price risk since futures prices may move lower. A delivery obligation is established, so a producer is exposed to the production risk of fulfilling the contract.

Hedge-to-Arrive Contract  – A hedge-to-arrive contract is the opposite of a basis contract and is an agreement that allows the producer to set the futures price but leaves the basis to be set at a later date and prior to delivery. Once the basis is established, the producer will receive the futures price less the basis. 

Price Later (Delayed Pricing) Contract – A price later contract allows the producer to deliver grain and establish the sale price at a later date. Upon delivery, the title of the grain passes to the buyer. The price a producer receives will be the elevator cash price on the day the producer decides to establish the price minus any service charges. This contract allows the producer to move grain despite a relatively low price environment, but the producer is still open to downward price risk if the market moves against them since the grain is unpriced. 

Which tool should a producer use?

            Figure 1 provides a guide on when to consider using the different types of contracts. The top right quadrant of Figure 1 represents ideal market conditions. In this quadrant, futures prices are expected to rise, and basis is expected to strengthen. Contracts that provide upside price potential are attractive in this scenario. These include minimum price contracts or price later contracts. The bottom left quadrant of Figure 1 represents the worst-case scenario for market conditions. Futures prices are expected to decrease, and the basis is expected to weaken. This scenario suggests that current market conditions are better than expected. Producers will want to consider selling at current price levels with either cash sales or a forward contract. 

            The top left and bottom right quadrants represent market conditions that are somewhere in between the best- and worst-case scenarios. The top left quadrant represents expected higher futures prices but with the risk of the basis weakening. A basis contract would allow producers to limit basis risk in this scenario by locking in a basis and providing upside potential for the price. The bottom right quadrant represents the expectation of increasing basis but a lower futures price. A hedge-to-arrive contract would allow producers to lock in a futures price and limit price risk but still be able to take advantage of a strengthening basis.  

Figure 1. Best Fit Alternatives for Grain Contracts by Market Conditions*

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Maples, William E. “Cash Grain Contracts and When to Use Them.” Southern Ag Today 4(18.1). April 29, 2024. Permalink

A key component of any market outlook for agricultural commodities is the production forecast for the upcoming year. Estimates of crop area and yield are important market drivers. The 2024 March Prospective Plantings report (survey of producers’ acreage intentions for the upcoming season taken in late-February to early March) showed a decline in both wheat and sorghum acres compared to 2023. However, several other factors may come into play in 2024 that significantly impact the final production numbers.

First, final planted acreage numbers can deviate substantially from planting intentions (Table 1). Even in wheat, where the planted acreage number for winter wheat is pretty well known by early March, spring wheat acres account for about a quarter of the U.S. all-wheat planted area. Over the last 10 years, the final planted number for wheat compared to the prospective plantings survey has ranged from +1 million acres (2014) to -1.6 million acres (2022), and sorghum has ranged from +1.2 million (2023) to -500,000 (2016).  

Another factor impacting the production estimate is the percentage of crop planted that is harvested for grain. This is especially important in wheat and sorghum where major production regions are in the Southern Plains, areas prone to significant drought and weather impacts.  Over the last two years of drought, the harvested percentages of wheat and sorghum have been well below average. A return to average harvested percentage levels could result in planted acres being lower but harvested area increasing.

Related to the harvested area question is the yield potential of the upcoming crop. So far in 2024, national winter wheat crop condition ratings are well above last year and well above average(USDA, Crop Progress) . Better crop condition ratings bode well for an increase in harvested percentage as well as overall yield. This is notably the case in Kansas, the top wheat producing state.  The last time we saw wheat ratings this good in Kansas was 2016. That year set a record high wheat yield for Kansas (57 bushels) and the U.S. wheat crop (52.7 bushels).  The harvested percentage of acres planted that year was 88%.    

The 2016 crop season was under the influence of the El Nino weather phenomenon, as is 2024 (Figure 1).  The current El Nino is the second strongest event since the winter of 2015/16.  With current favorable crop condition ratings, wheat production in 2024 could be up significantly compared to 2023 despite a lower planted acres number.  

Interestingly, 2016 was also a record setting year for U.S. grain sorghum (Kansas is the number one producing state). The final yield that year was 77.9 bushels per acre on a harvested percentage of 93%.  

Using the planted acreage number from the Prospective Plantings report, average percent harvested over the last 10 years, and trend line yields, we project production increases for U.S. wheat and sorghum in 2024 despite a decrease in planted area (Table 2).  For wheat, production is projected to be up 120 million bushels (+7%) and sorghum up 75 million bushels (+24%) compared to 2023.

The decline in planted acres was a major headline in media and market reports following the release of the Prospective Plantings report. The final production impact of that number is far from settled. 

Table 1. Acreage (millions) and yield (bushels/acre) for U.S. wheat and sorghum, 2014-2023

	2014	2015	2016	2017	2018	2019	2020	2021	2022	2023
WHEAT
Prospective Plantings	55.8	55.4	49.6	46.1	47.3	45.8	44.7	46.4	47.4	49.9
Final Acreage	56.8	55.0	50.1	46.0	47.8	45.5	44.5	46.7	45.8	49.6
Difference	1.0	(0.4)	0.5	(0.1)	0.5	(0.3)	(0.3)	0.3	(1.6)	(0.3)
Harvested	46.4	47.3	43.9	37.5	39.6	37.4	36.8	37.1	35.5	37.3
Percent Harvested	82%	86%	88%	82%	83%	82%	83%	79%	78%	75%
Average Yield	43.7	43.6	52.7	46.3	47.6	51.7	49.7	44.3	46.5	48.6
SORGHUM
Prospective Plantings	6.7	7.9	7.2	5.8	5.9	5.1	5.8	6.9	6.2	6.0
Final Acreage	7.1	8.5	6.7	5.6	5.7	5.3	5.9	7.3	6.3	7.2
Difference	0.4	0.6	(0.5)	(0.2)	(0.2)	0.2	0.1	0.4	0.1	1.2
Harvested	6.4	7.9	6.2	5.0	5.1	4.7	5.1	6.5	4.6	6.1
Percent Harvested	90%	93%	93%	89%	89%	89%	86%	89%	73%	85%
Average Yield	67.6	76.0	77.9	72.1	72.1	73.0	73.2	69.0	41.1	52.0

Table 2. U.S. wheat and sorghum production (millions of bushels) in 2023 and a projection for 2024

	Wheat				Sorghum
	2023	2024PP	Change		2023	2024PP	Change
Planted	49.6	47.5	(2.1)		7.2	6.4	(0.8)
Harvested	37.3	39.0	1.7		6.1	5.6	(0.5)
Percent Harvested	75%	82%	7%		85%	88%	3%
Yield	48.6	49.6	1.0		52.0	69.8	17.8
Production	1,812	1,932	120		318	393	75

Figure 1. El Nino winters since 2000

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Resources

NOAA, Climate Prediction Center, ENSO: Recent Evolution, Current Status, and Predictions, April 15, 2024

USDA, NASS Office of the Chief Economist, WASDE April 2024

USDA, NASS, Prospective Plantings, March 28, 2024

USDA, NASS, Quickstats, April 17, 2024

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December 2024 corn futures declined 10% from October 5, 2023, to April 9, 2024 ($5.20/bu to $4.68/bu; Figure 1). As expected over the same period, call option premiums have declined and put option premiums have increased. For example, on October 20^th, a $5.50 call option traded for 32 cents/bu and a $4.20 put option traded for 8 cents/bu (Figure 1). On April 9^th, put and call option premiums, for those same strike prices, traded for 12 cents per bushel. The change in December corn options premiums indicates the markets have factored in less upside potential and slightly more downside risk in December 2024 corn futures than six months ago. Part of the change can be attributed to markets digesting additional information over the past six months, such as South American corn production, U.S. planted acreage estimates, export sales, and projected United States (US) and global corn carryover into next year (USDA WASDE Report). 

Figure 1. December Corn $5.50 Call and $4.20 Put Option Premiums and Daily Futures Contract Close, October 5, 2023- April 9, 2024

The change in call and put option premiums over the past six months indicates the importance of timing when looking at implementing a price risk management strategy. Figure 2 shows scenarios for a hypothetical strategy of fencing in a corn futures price using the sale of a $5.50 call option and the purchase of a $4.20 put option at different points in time (approximately 30-day increments). The difference in the seven lines in Figure 2 is the change in the price of the sold call option premium and the price of the purchased put option premium. The strike prices for both the call and put options do not change; only the net premium received changes (the premium collected from selling the call option less the premium paid for the put). For example, on October 9^th the $5.50 call option could have been sold for 30 cents/bu and the $4.20 put option purchased for 8 cents/bu. This would have resulted in a net premium gain of 22 cents/bu, shifting the fenced in futures price to $4.42 to $5.72 (Figure 2). On April 9^th, a call option could have been sold for 12 cents/bu and a put option purchased for 12 cents/bu, resulting in a net premium of 0 cents/bu, setting the fenced in futures price at the put and call strike prices of $4.20 and $5.50. This example illustrates the importance of timing when executing an option strategy to mitigate futures price risk.  It is important to note that this example does not consider the increased risk of entering the strategy on October 9^th versus on April 9^th when more information is known about the December corn futures underlying fundamentals and associated price direction. 

This article is for information and education purposes and does not constitute a trading recommendation.     

Figure 2. A December Corn Futures Fence Example: Selling a $5.50 Call Option and Purchasing a $4.20 Put Option at Seven Points in Time from October 5, 2023, to April 9, 2024.

References

Barchart.com. December Corn Futures Contract Close. Accessed at: https://www.barchart.com/futures/quotes/ZCZ24/price-history/historical

Barchart.com. December Corn Options Prices, Option Price History. Accessed at:  https://www.barchart.com/futures/quotes/ZCZ24/options?futuresOptionsView=split

USDA World Agricultural Supply and Demand Estimates (WASDE). Accessed at https://www.usda.gov/oce/commodity/wasde

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Smith, Aaron. “December 2024 Corn Option Premium Movement from October 2023 to April 2024.” Southern Ag Today 4(16.1). April 15, 2024. Permalink