Category: Crop Marketing

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

The first step to forecasting new crop supply and demand involves focusing on planted acreage. Economists emphasize the influence of price, i.e., that of cotton as well as the prices of competing spring-planted crops.  For example, the average new crop corn:cotton price ratio in the first quarter of the year (currently 6.1)  suggests between 10.5 and 11.0 million acres of U.S. all cotton planted in 2024.

We can be a little more quantitatively precise than just eyeballing Figure 1.  A simple regression of cotton acreage as a function of the new crop corn:cotton ratio would predict 10.8 million acres of cotton planted.  This is based on more observations, going back through the Fall.

But even with a presumably accurate point estimate, there are reasons to believe that number might be too high. First, general inflation has created a new threshold for input prices. While the cotton price is higher than the long-term average, the cost of inputs has accelerated faster than the output price, meaning that even at 80 cents with typical yields, many producers will be at or below their total cost of production. Even though 80 cents will often cover variable costs, that level of potential loss is unattractive. Who would have thought that 80-cent cotton would not be profitable? Not many. But the elevation of costs of production has brought us to a point where historical relationships are probably not nearly as accurate for predicting future behavior.

Additionally, the insurance price for contracts this year are currently in the 80-cent range, which means that the revenue floor provided by insurance will not cover costs of production either (assuming 65-75% coverage levels). This fact will likely cause financers to demure on providing high levels of production loans. For those that self-finance, this locks in modest losses should a crop failure happen. Again, this makes planting less attractive. 

Taken together, these facts suggest that simple models of planted acres are likely overstating intentions. It could be that cotton “loses least” in many producer portfolios, and they go ahead and plant cotton. But, producers with other alternatives may find cotton is not the best alternative.  

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Hudson, Darren, and John Robinson. “Cotton Acreage and Relative Prices.” Southern Ag Today 4(6.1). February 5, 2024. Permalink

In the March 13, 2023, Southern Ag Today article, Mark Welch discussed the soybean-to-corn price ratio and its implications for 2023 planting decisions. This article uses the same methods to examine the ratio and its impacts on 2024/25 new crop prices in the next few months, prior to USDA’s Ag Outlook Forum, which releases the first crop estimates for the 2024/25 marketing year and could have an impact on nearby futures prices. It additionally gives a way-too-early projection on corn/soybean acreage for next year. 

At last year’s Ag Outlook Forum on February 23, 2023, USDA projected an extra million acres of corn for 2023. This forecast resulted in a drop in the May Corn Futures price by nearly $0.37 in the four days following the report. As we progressed through the marketing year, corn acreage continued to increase, pushing the corn price lower and lower. The near-record acreage and high yields resulted in record corn production in 2023. As U.S. producers typically follow a corn/soybean rotation, this raises the question of whether the United States is primed for expanded soybean acreage in 2024. If the USDA projects expanded soybean acreage at this year’s Ag Outlook Forum, similar price declines to 2023 corn futures could occur in soybeans in 2024. 

Another indicator for soybean acreage is the soybean-to-corn price ratio, which is the November soybean futures price divided by the December corn futures price. Typically, a ratio higher than 2.5 results in soybean acreage closer to the number of corn acres. On the contrary, a ratio lower than 2.5 indicates that there will be a larger amount of corn acreage in the United States. Figure 1 shows the corn/soybean ratio on January 15 plotted against the difference in corn and soybean acres, described here as excess corn acreage. The past ten years of ratios on January 15 explain nearly 35% of the variation in excess corn acreage (corn acreage typically exceeds soybean acreage with the exception of 2018). Current ratios indicate that we will have more soybean acreage than last year; however, the simple estimation in this study does not account for other factors that affect corn and soybean prices, such as fertilizer prices and previously planted acreage. Considering both of these factors, the number of soybean acres is still likely to expand due to planted acreage, but how much expansion occurs remains a question.

This simple analysis indicates we could have 6.6 million more corn acres than soybeans in the United States compared to 11 million acres last year. Depending on how things play out, the Ag Outlook Forum reports released February 15-16 could greatly impact soybean prices, which should be kept in mind when marketing old crops in the near future. Soybean prices have been falling lately, and corn prices have yet to rebound. It remains possible that corn will try to buy some acres back in the near future, pushing corn futures slightly higher as soybean prices decline. 

Sources

Barchart.com. Historical Corn and Soybean Futures Charts. Accessed January 17, 2024.

USDA, NASS Quickstats, accessed January 17, 2024.

Welch, Mark. “The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions.” Southern Ag Today 3(11.1). March 13, 2023. Permalink

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Gardner, Grant. “A Way-Too-Early Soybean-to-Corn Price Ratio Analysis: Price Implications and Planting.” Southern Ag Today 4(5.1). January 29, 2024. Permalink

Recent reports from USDA provide insight into the supply prospects for the 2024 winter wheat crop. The Winter Wheat and Canola Seedings publication on January 12, 2024, showed U.S. farmers planted 34.425 million acres of winter wheat for 2024, down about 6 percent from the 36.699 million planted for 2023. This is still the second-highest winter wheat seedings number in the last eight years. Texas planted 5.9 million acres compared to 6.4 million last year; Oklahoma planted 4.3 million compared to 4.6 million. Kansas, the top winter wheat producing state in the nation, planted 7.5 million acres for 2024, down from 8.1 million last year. 

Winter wheat crop condition ratings are well above last year, raising prospects for better winter wheat yields and a better harvested-to-planted ratio in 2024 compared to 2023.  The last USDA report available for the U.S. and specific states was November 26. Kansas updated its wheat crop condition ratings on December 31. The USDA has since suspended weekly crop condition rating reports until the first of April.

Over the last three years, the average harvested-to-planted percentage for winter wheat is about 71 percent.  With a trendline yield of about 51 bushels per acre and 34.425 million planted acres, an early estimate of 2024 winter wheat production is 1.246 billion bushels, around last year’s production and a little lower than the 10-year average production. Winter wheat production in 2023 was 1.248 billion bushels. The 10-year average production level is 1.286 billion bushels. A higher expected yield and harvested-to-plated ratio are expected to compensate for this season’s lower acreage. 

References

USDA, NASS Crop Progress, November 27, 2023 and January 2, 2024

USDA, NASS Quickstats, accessed January 17, 2024.

USDA, NASS Small Grains Summary, September 30, 2023

USDA, NASS Winter Wheat and Canola Seedings, January 12, 2024

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Welch, J. Mark. “2024 Winter Wheat Production Prospects.” Southern Ag Today 4(4.1). January 22, 2024. Permalink

Most prices over time are displayed as nominal prices, indicating the numeric value of the item. This, however, can be misleading due to the declining purchasing power of money over time leading to increases in price, or inflation. Inflation can easily be conceptualized in the housing market. In 1980, the average price of a home in the United States was $80,000, while in 2023 the average house price was estimated at $513,000. The function of the home has not changed, but the numerical value has changed dramatically. To compare values over time, economists will transform nominal values into real values. The nominal price is the value of an item in dollars that are not adjusted for the value of the dollar over time. Real prices are an item’s nominal value adjusted for inflation and thus measure that value in terms of other items, over time. In the housing price example, the $80,000 average price in 1980 would be $238,320 in 2023 dollars.  This article adjusts nominal nearby corn futures prices from 1980 to 2023 to real prices. The baseline month for real prices for this analysis is November 2023 (for November 2023, nominal price = real price = $4.83; figures 1 & 2).

Figure 1. Monthly Nominal Nearby Corn Futures Prices, 1980-2023

Figure 2. Monthly Real Nearby Corn Futures Prices, 1980-2023 (Base = November 2023)

Since 1980, the monthly average corn futures price (nominal price) has averaged $2.89/bu. The highest monthly average price was in April 2022 at $8.14/bu, and the lowest monthly average price was $1.47/bu in January 1987. So, comparing the current price of corn – $4.83/bu – would indicate that although prices are down from the recent high, prices are still nearly $2.00 above the long-term average. 

Examining real monthly nearby corn futures prices provides a very different comparison. The current price is the same $4.83/bu; however, this is $0.50/bu below the 1980 to 2023 real average price of $5.33/bu. The current price is near the price range from 2014 to 2020, a period that few corn farmers would associate with high prices. For real prices (in November 2023 dollars), the high and low occurred October 1980 at $10.73/bu and September 2005 at $3.00/bu. 

So, are corn prices high or low? Like all good economic questions, it depends. Analyzing real prices can be beneficial to provide historical context and allow for a comparison considering the same purchasing power.  Decisions can then be based on longer-term price cycles and trends.

References and Resources

Barchart.com. Monthly Nearby Corn Futures Interactive Chart.  https://www.barchart.com/futures/quotes/ZCH24/interactive-chart. 

U.S. Bureau of Labor Statistics, Producer Price Index by Commodity: All Commodities [PPIACO], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PPIACO, January 10, 2024. 

Smith, Aaron. “Real and Nominal Corn Futures Prices.” Southern Ag Today 4(3.1). January 15, 2024. Permalink