Category: Crop Marketing

Following two consecutive years of decline (see Figure 1), United States (U.S.) rice production increased to roughly 2.9 million acres in 2023 (USDA-ERS, 2024). In 2022 and 2023, the world was consuming more rice which showed up in the long grain rice Marketing Year Average Prices (MYAP) of $16.70/cwt and $15.7/cwt, respectively (USDA-NASS, 2024).  Production increases in 2023 (see Figure 1) followed 2022 high prices that were last seen around harvest of 2013. Fast forward to March 2024, where the current November rough rice futures contract is trading at $14.66/cwt. The November contract price decline has been steady since late December 2023 but has recently begun to increase again ($0.44/cwt since February 27, 2024). 

Figure 1. U.S. Rice Production, Exports, and Stocks. Source: USDA-FAS, 2024

There was an extreme multi-year drought in California during the 2022 growing season. During this time, California rice producers could not plant nearly 300,000 acres, due to a lack of water for irrigation (Smith, 2023). Arkansas (a state that almost exclusively grows long-grain varieties) responded by increasing its acreage of medium-grain rice by 55,000 acres in 2023 (USDA-NASS, 2023). However, California rebounded in 2023 and surpassed 500,000 acres of medium-grain rice (Farm Progress, 2024). An abundance of medium-grain rice could hinder any upside price potential if the demand for medium-grain remains at normal levels.

An Eastern Pacific El Nino has also disrupted off-season rice production for Thailand, Burma, and Indonesia. These countries rely on off-season production to improve their stocks and export amounts. Now, they face extreme drought, impacting yields and production, and may not have enough carry-over and ending stocks to bring rice to the global economy (Reuters, 2023). The USDA forecasts that global rice production for 2023/24 will exceed 2022/23 by only 0.1% (583,000 metric tons). Thus, the El Nino conditions are poised to further tighten global rice supplies in these major exporting countries. 

Global rice supplies are also strained from India’s July 2023 export ban on non-basmati rice (Glauber and Mamun, 2024). The ban was implemented to help lower domestic rice prices and to ensure rice availability in India. On a global scale, India accounted for nearly 40% of all rice exports in 2022, further showing the global impact of India’s exports (USDA-FAS, 2023). Referring to Figure 2, the ban forced a 93% decline in non-basmati rice exports between August and November of 2023 (Glauber and Mamum, 2024). Importing countries are now forced to turn to alternative suppliers to meet their rice demands. It’s worth noting that India is currently in an election year and it’s doubtful the ban would be lifted before a general election in April or May. If the ban is lifted post-election, watch for Indian rice to flood the market, and put further downward pressure on global rice prices. 

Figure 2. India Rice Exports. Source: International Food Policy Research Institute, 2024

Overall, the 2024 rice market will be extremely sensitive to ongoing global conflicts, weather, government policies, and shipping issues such as low water levels in the Panama Canal, a potential return to low water levels in the Mississippi River, and conflicts in the Red Sea. There could continue to be opportunities in the export market should Mississippi River levels stabilize during harvest and if India’s export ban continues. With planting around the corner, it’s worth highlighting that on a per-bushel basis, the current soybean-to-rice price ratio for November 2024 delivery is 1.78 ($11.73/$6.60). This ratio has continued to decline since 2021, when the ratio was 2.41. All to say that the relative prices of other commodities, such as soybeans, are in a similar declining price environment as rice.  

References

Barchart.com. (2024, February). Rough Rice Nov ’24 (ZRX24). Retrieved February 29, 2024, from https://www.barchart.com/futures/quotes/ZRX24/profile.

Fitchette, T. (2023). How will Rice and Soybeans Compete for Acreage in 2024? Farm Progress. Retrieved February 21, 2024, from https://www.farmprogress.com/rice/how-will-rice-and-soybeans-compete-for-acreage-in-2024-.

Glauber, J. and Abdullah, M. (2024). India’s Export Restrictions on Rice Continue to Disrupt Global Markets, Supplies, and Prices. International Food Policy Research Institute. Retrieved February 25, 2024, from https://www.ifpri.org/blog/indias-export-restrictions-rice-continue-disrupt-global-markets-supplies-and-prices.

Reuters (2023, November). Dry Soil to Curb Asia’s Early 2024 Rice output, Pressure Supply. Retrieved February 29, 2024, from https://www.reuters.com/markets/commodities/dry-soil-curb-asias-early-2024-rice-output-pressure-supply-2023-12-01/.

Smith, A.D. (2023). California Rice is Back. Ag Data News. Retrieved February 28, 2024, from https://asmith.ucdavis.edu/news/california-rice-back.

USDA-FAS. (2024, February). Grain: World Markets and Trade. Retrieved February 12, 2024, from https://apps.fas.usda.gov/psdonline/app/index.html#/app/downloads

USDA-FAS. (2023, September). Rice Export Prices Highest in More Than a Decade as India Restricts Trade. Retrieved January 8, 2024, from https://fas.usda.gov/data/rice-export-prices-highest-more-decade-india-restricts-trade

USDA-NASS (2023, March). Arkansas Prospective Plantings. Retrieved January 14, 2024, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/Crop_Releases/Prospective_Plantings/2023/arplant23.pdf.

USDA-ERS. (2024, January). Rice Outlook: January 2024. Retrieved January 26, 2024, from https://www.ers.usda.gov/webdocs/outlooks/108291/rcs-24a.pdf?v=5101.6.

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Loy, Ryan. “A Quick Look at the 2024 Rice Market.” Southern Ag Today 4(11.1). March 11, 2024. Permalink

Most of the milling, spinning, and textile manufacturing supply chain has moved from the Western world to developing countries, primarily Southeast Asia. U.S. textile manufacturing peaked in the 1994/95 marketing year with domestic use of cotton estimated at 11.198 million 480-pound bales. Since the 1994/95 marketing year, U.S. domestic cotton use has steadily declined to a projected record low of 1.75 million bales in the 2023/24 marketing year. As a result, exports are a significant source of demand for U.S. cotton. Since the early 2000s, exports, as a proportion of U.S. cotton production, have been on an upward trend, increasing from 39% in 2000 to a high of 112% in 2020. For the past decade, the U.S. exported, on average, 85% of the cotton produced domestically. The export market has been the driving force for U.S. cotton demand. 

The highest quantity of U.S. cotton exports was achieved in 2005, with 17.7 million bales, and the second highest total U.S. cotton exports were achieved in 2020, with 16.4 million bales exported. Since 2020, U.S. cotton exports have been declining. For the 2023/24 marketing year, U.S. cotton exports are projected to be 12.3 million bales, the second-lowest quantity in the past decade. 

The quantity of U.S. cotton exports is impacted largely by total U.S. cotton production. When production is large, exports typically rise, and with lower production, U.S. cotton exports decline. In 2023, the United States planted 10.2 million acres of upland cotton, the lowest since 2016. The harvested area for upland cotton in 2023 was estimated at 7.06 million acres, down from 7.29 million acres the previous year, the second lowest harvested acres on record since 1866. U.S. cotton production is projected at 12.4 million bales for the 2023 crop, nearly 2 million bales below the 2022 crop and the lowest since 2009. In 2023, due to lower production, U.S. ending stocks were projected at 2.8 million bales. The U.S. stocks-to-use ratio is forecast at 19.9 percent for the 2023/24 marketing year. 

As a result of lower production and increased competition, the United States is losing global market share, declining from a peak of 39% in both 2016 and 2017 to 29% in 2023. The last time the U.S. market share was below 30% was in 2015, when the Unites States planted the second-fewest annual cotton acres in more than 100 years. After that, the U.S. market share recovered quickly with a rebound in production. However, it could be different for 2023, with more competition in the global cotton export market. Brazil has become a significant global cotton producer and exporter. In 2023, Brazil surpassed the United States and became the third-largest cotton-producing country after China and India. Brazil has become the second largest cotton exporting country and is projected to export 11.2 million bales of cotton in 2023, only 1.1 million bales lower than the United States. Increased competition will make it difficult for the United States to recover global market share. Supply and demand for U.S. cotton determines the prices for U.S. cotton producers. Even though there is a smaller global market share, U.S. production was low in the 2023/24 marketing year, leading to a high percentage of U.S. production being exported and cotton prices staying stable in the low 80s.  This was prior to the bump in the last month in cash prices into the 90-cent range. However, with the increase in global production, a lot will depend on whether U.S. production rebounds, resulting in lower cotton prices.  Lower cotton prices might then result in a decline in future cotton acreage in the United States.

Figure 1. U.S. cotton exports, market share in the global market, and export as a proportion of U.S. production. 

References and Resources:

USDA Foreign Agricultural Service. Production Supply and Distribution. Exports, Production, and Domestic Use.  Available at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery.

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On February 15-16, 2024, the USDA held its 100^th Annual Agricultural Outlook Forum. During the forum, USDA revealed its outlook for the domestic agricultural economy and trade for 2024. The outlook included 2024/25 crop year supply and demand projections for grains, oilseed, and cotton. USDA is forecasting lower prices for most major crops this year and growing export competition. Complete outlook reports by commodity can be found at AOF Commodity Outlooks | USDA. An important projection provided at the Outlook Forum is planted acres for major row crops as it serves as an early data point for markets to consider. This article examines planted acreage projections and what they might mean as we look ahead to the March USDA-NASS Prospective Plantings report, which is a comprehensive survey of producer planting intentions and provides a more accurate pre-planting picture of the upcoming year.

 During the USDA Outlook Forum, 2024/25 corn planted acreage was projected at 91.0 million, and soybean planted acreage at 87.5 million. If realized, this would mean 3.6 million fewer acres of corn and 3.9 million more acres of soybeans than last year. Corn acreage is expected to be reduced due to declining prices and elevated production costs. While production costs are lower than the previous year, lower corn prices will result in tighter margins. Domestic crush demand in the United States largely drives the increase in soybean acreage, even though exports are expected to face continued pressure from South American competition. Planted cotton acreage is projected to be 11.0 million acres, compared to 10.3 million acres last year. The relative prices of cotton versus corn and soybeans indicate that cotton is more competitive this year than last. 

 The Outlook Forum projections rely on model estimates and do not include a survey of producers. The USDA’s first survey of producer planting intentions will be conducted in early March and released on March 28^th in the Prospective Plantings report. Figures 1-3 compare the Outlook Forum predictions and the historic Prospective Plantings reports for corn, soybeans, and cotton. Based on an average of the past ten years, the USDA Outlook Forum has done a decent job predicting acreage compared to the Prospective Plantings report. On average, corn planted acres were under-predicted by 290,000 acres, soybeans by 200,000, and cotton by 115,000. In some individual years, corn and soybeans have experienced significant differences. For example, in 2022, the Outlook Forum over-predicted corn acres by 2.5 million acres and under-predicted soybeans by 3 million. Interestingly, the 2024/25 projections match the Outlook Forum projections for corn and soybeans in 2023. Even though the Outlook Forum projection was the same as the Prospective Plantings report for soybeans in 2023, the final panted acres still ended up being 3.9 million less. These projections are preliminary, and market and environmental conditions going forward can change producer planting intentions. Producers should closely monitor these conditions when making marketing decisions over the next month. 

Maples, William E., and Spencer J. Sanderson. “USDA Outlook Forum and Planted Acres.” Southern Ag Today 4(9.1). February 26, 2024. Permalink

Since the start of 2024, soybean futures prices have declined dramatically (Figure 1). The March and November contracts have declined 88 cents and 57 cents, respectively. The primary reason for the decline in soybean prices has been the projected large crop in South America. The February USDA WASDE report estimated soybean production in Argentina and Brazil at 1.84 and 5.73 billion bushels, respectively, compared to last year’s record Brazilian crop of 5.95 billion bushels and Argentina’s drought-stricken crop of 0.92 billion bushels. In aggregate, the two South American soybean production powerhouses are projected to increase year-over-year production by 700 million bushels. Increased production with moderate global demand will continue to weigh on futures market prices in 2024. Prices could be pushed higher if China increases soybean purchases or drought impacts US soybean production.

Figure 1. Daily Closing Futures Prices for March (ZSH24) and November (ZSX24) Soybeans, January 2 to February 13, 2024

Producers may want to consider using options to help mitigate price risk during the production or marketing year. Options can be a useful tool to manage price risk during specific time intervals. Past articles have examined mitigating price risk between the time when inputs were purchased and projected crop insurance prices were determined (Duncan, 2024). This article examines two option strategies for the start of the 2024 crop.

Strategy #1: Purchase a put option. Purchasing a put option establishes a futures price floor for the selected strike price (Table 1). For example, a producer could purchase a $10.20 put option for 16.5 cents and set a $10.03 ½ futures floor. Strike prices and premiums can be selected to reflect the purchaser’s risk preference. No margin is required for strategies that purchase put options.

Table 1. Strike price and premium for November soybean put options, February 14, 2024

Strike (cents/bu)	Premium (cents/bu)
1000-0P	12.9
1020-0P	16.5
1040-0P	20.9
1060-0P	26.0
1080-0P	32.1
1100-0P	39.1
1120-0P	47.0
1140-0P	55.9
1160-0P	65.8
1180-0P	76.5
1200-0P	88.1

Strategy #2: Purchase a $10.60 November put option for 26 cents and sell a $13.00 November call option for 26 cents. This strategy fences in a futures price between $10.60 and $13.00 for a net zero premium. The strategy protects against futures prices declining below $10.60 at the cost of forgoing price increases above $13.00. This strategy relies on maintaining margin requirements.

There are two primary concerns that producers voice when examining options 1) premiums are too high and 2) options often expire worthless. These two factors are interrelated as options should be used for a defined period of risk and then the position liquidated if the option is out-of-the-money, before the option expires. This avoids having the option expire worthless and can assist in recouping part of the premium. If options are in the money, then the position can be exercised, and financial gains realized. For experienced users of options, there are near infinite variations in strategy to consider (contract month, strike price, buy/sell puts or calls). Developing knowledge on using options adds another tool producers can use to manage their price risk.

References and Resources

Barchart.com. November Soybean Options Price Quotes.   https://www.barchart.com/futures/quotes/ZSX24/options.  

Duncan, W.H. 2024. “Bridging the Price Risk Gap.” Southern AgToday. https://southernagtoday.org/2023/11/27/bridging-the-price-risk-gap/

USDA World Agricultural Supply and Demand Estimates (WASDE) Report. Office of the Chief Economist. February 2024. https://www.usda.gov/oce/commodity/wasde

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Smith, Aaron. “Soybean Option Strategies.” Southern Ag Today 4(8.1). February 19, 2024. Permalink

Two of the most prominent risks faced by all agricultural producers are production risk (i.e., yield) and marketing risk (i.e., price). Rice is somewhat unique in that its relative yield risk is lower than that of its competing crops (Biram and Mills, 2023). According to the article, corn, cotton, and soybean production risk in southern states can be anywhere from 2 to nearly 11 times higher than that of rice production risk. This is primarily driven by the fact that most all rice production is flood irrigated which provides risk protection against weeds, drought, and wind. With such a low relative production risk, this begs the question of how rice producers should protect themselves against price risk.

Historically, most rice producers in the U.S. have utilized target price programs authorized by the farm bill. The latest target price program is the Price Loss Coverage (PLC) coverage program which triggers a payment rate based on the difference between the national Marketing Year Average Price (MYAP) and the Effective Reference Price (ERP), whenever the MYAP is below the ERP. While some crops are expected to see an increase in the ERP driven by a higher Olympic Average MYAP (e.g., corn and soybeans), the ERP for rice is expected to remain at the Statutory Reference Price of $14.00/cwt. The 2024/2025 MYAP price will likely not fall below $15.00/cwt based on the average of the November 2024, January 2025, and March 2025 Rough Rice futures contracts, suggesting the PLC program will likely not trigger a payment for rice in the 2024/2025 marketing year.

However, there is an opportunity to lock in higher price guarantees through area crop insurance administered by the Federal Crop Insurance Program. In a previous Southern Ag Today article, Fischer and Outlaw (2024) suggest leveraging area crop insurance products such as the Supplemental Coverage Option (SCO) and Enhanced Coverage Option (ECO) with PLC for winter wheat. One price risk management strategy for rice producers would be to leverage a Revenue Protection plan of insurance with SCO, ECO, and PLC. Assuming RMA County yields for rice remain the same or fall compared to their historical average, SCO can provide additional price protection from your individual coverage level up to 86% and ECO can cover from 86% up to 95%. It is worth noting that SCO and ECO will come at a premium cost additional to any underlying Yield Protection or Revenue Protection premium cost.

In Figure 1 below, I provide a visual example of the downside price risk protection SCO and ECO insurance products can provide with an RP policy at the 80% coverage level using an RMA Projected Price of $15.50/cwt. While a rice producer can opt to only choose PLC and forego the crop insurance coverage, PLC faces a maximum payment rate of $7.00/cwt, it provides no farm-level yield risk protection (which is a key feature of all RP crop insurance policies), and it is unlikely to trigger in the 2024/2025 marketing year, as noted above.

Figure 1. Using RP with SCO and ECO crop insurance products to provide a price guarantee for rice. 

References

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

Fischer, Bart L., and Joe Outlaw. “Making the ARC/PLC Election for 2024.” Southern Ag Today 4(3.4). January 18, 2024. Permalink

Biram, Hunter. “The Coordinated Decision of PLC and Federal Crop Insurance in Managing Price Risk in Rice.” Southern Ag Today 4(7.1). February 12, 2024. Permalink