Category: Crop Marketing

This article examines the daily closing price frequency for the November soybean and December corn futures contracts from November 1^st to contract expiration for soybeans and December 1^st to contract expiration for corn for the 2010 to 2023 (to September 22, 2023) crop years. Figures 1 and 2 show the frequency of closing prices by price range (bars) and cumulative price frequency (line). The total number of daily closing prices are 3,600 for soybeans (Figure 1) and 3,629 for corn (Figure 2). Figure 1 shows that 14.0% of the daily closing futures prices for the November soybean contract were between $9.50/bu and $10.00/bu. Figure 2 shows 21.1 % of the daily December corn futures price closings were between $3.75 and $4.00. The November soybean futures daily closing price was below $14.00/bu 92.1% of the time and the December corn futures daily closing price was below $6.00/bu 85.1% of the time over the period considered.

As of September 22, 2023, the December 2024 corn futures price was $5.07/bu and November 2024 soybean futures price was $12.56/bu. This is down substantially from recent highs, but at the mid to higher price in terms of historical price frequency. Weak US soybean export demand from China paired with record Brazilian soybean production has resulted in relatively lower futures contract prices for 2024. Corn has also had downward price pressure given a 15.13-billion-bushel 2023 U.S. crop, estimated US ending stocks of 2.22 billion bushels, and no indicators for significantly stronger corn demand in 2024.

So how can these data guide a risk management decision? Consider a simple options fence strategy.  On September 22, an $11.40/bu November 2024 put option could be purchased for 31 ½ cents, and a $14.00/bu November 2024 call option could be sold for 35 ½ cents (net premium gain of 4 cents). This strategy sets a futures market price floor of $11.40/bu by setting a lower fence removing approximately 55% of the historical downside futures price risk at the cost of forgoing 7.9% (i.e., 100% – 92.1%) of the historical upside in futures prices by setting the upper fence (Figure 1).  Similarly, for corn, buying a $4.50/bu December 2024 put option for 16 ½ cents and selling a $6.00/bu December 2024 call option for 15 ½ cents (net premium expense of 1 cent) would set the lower fence at $4.50/bu – removing 55% of the historical downside futures price risk at the cost of forgoing 14.9% (100% – 85.1%) of the historical upside in futures prices due to the upper fence. Producers may want to examine risk management strategies that protect against downside futures market price risk at the cost of some upside potential. 

Figure 1. November soybean closing futures price frequency, 11/1/09 to 9/15/23.

Figure 2. December corn closing futures price frequency, 12/01/09 to 9/15/23. 

References and Resources

Barchart.com. https://www.barchart.com/futures/grains?viewName=main

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Smith, Aaron. “Corn and Soybean Harvest Futures Contract Price Frequency.” Southern Ag Today 3(40.1). October 2, 2023. Permalink

Dry weather has again caused the Mississippi River levels to fall to near-record lows. This is a problem for row crop producers and grain elevators in the Lower Mississippi River area, who rely on barges as the primary mode of transportation for grain. For example, during 2015-2019, approximately 53 percent of U.S. corn exports were moved by barge (Chang, Caffarelli, and Gastelle, 2021). When the Mississippi River is low, barge traffic slows, causing barge freight prices to increase (McKenzie, 2005; Biram et al., 2022). Crop basis, defined as the difference between local cash prices and futures prices, is impacted by local market fundamentals, including the cost of transportation. When barge rates increase, crop basis weakens (becomes more negative or less positive) at grain elevators near the Mississippi River. Figure 1 shows river barge freight rates for the 2022-23 marketing year compared to the three-year average. The three-year average indicates that we typically see small fluctuations in barge freight rates; thus, barge rates likely have a small effect on local commodity basis when river levels are sufficient. However, in 2022, the river level at Memphis hit a historic low of -10.81 feet, nearly stopping all barge traffic and sending barge freight rates to a record high of nearly $90/ton of grain. As of September 5^th, the river level declines have caused barge rates to increase to $30/ton. Although data is not included in the graph, the September 18^th river level at Memphis is -9.56 feet. Current weather forecasts look dry, and without sufficient rainfall, barge freight rates may increase similar to last year, causing another situation in which commodity basis drops. 

Figure 1: Recent River Level height and Recent Barge Freight Rates compared to the Three-Year Average Freight Rate (September 2022-September 2023)

Figure 2 indicates the weakest corn basis in 2022 compared to the 5-year average for southern agricultural districts bordering the Mississippi River. As the river levels were lowest during harvest season, producers without storage were forced to deliver and could not avoid basis risk. Producers unlikely to avoid the risk included those taking the spot price, hedging through futures, or using hedge-to-arrive contracts where the basis is set near or at delivery. At the minimum basis, hedging producers in southern agricultural districts bordering the Mississippi River, excluding southern Mississippi, could have experienced realized prices of $0.40-$1.03/bushel under their expected price, which is estimated when the hedge is set.

Figure 2: Weakest 2022/23 Marketing Year Corn Basis relative to the 5-Year-Average in Southern Ag Districts Bordering the Mississippi River  

Figure 3 indicates that as river levels continue to drop and barge freight prices increase, the 2023 basis has started to widen again in the districts bordering the Mississippi. The impacts vary drastically by region; however, as of September 12^th, the average weekly basis is between 3 and 21 cents under the 5-year average which contains basis for marketing years 2017/2018 through 2021/2022. If heavy rainfall does not cause river levels to improve, southern producers could again face unexpected losses due to the effects of falling river levels on barge freight rates and, thus, basis. If the basis continues to drop, hedging producers will likely experience prices below their expected price, which could have huge implications on farm profitability and cash flow for Southern producers bordering the Mississippi River.

Figure 3: Current Corn Basis Relative to 5-Year Average in Southern Ag Districts Bordering the Mississippi River

Producers have limited options for managing basis risk. Hedging or HTA contracts are typically used to minimize futures price risks; however, they leave the producer susceptible to basis risk, which is usually more stable than commodity futures prices. However, last year and currently, lower river levels have caused unpredictable basis patterns. If we continue to experience dry summers and low river levels, Southern producers bordering the Mississippi may need to rely on forward contracts, which lock in price and basis pre-delivery, or basis contracts, which lock basis in before river levels can decline. Compared to hedging, a pitfall of these contracts is that they limit the flexibility of when and where grain is delivered. Entering into a forward pricing contract also exposes a producer to production risk which may result in a fee from the elevator if agreed-upon bushels are not delivered in the specified window. In the short term, if available, producers should consider utilizing on- or off-farm storage until basis improves.

References

Biram, H.D., J.D. 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 

Chang, K., P. Caffarelli, and J. Gastelle. 2021. Transportation of U.S. Grains: A Modal Share Analysis. U.S. Department of Agriculture, Agricultural Marketing Service. Available at: https://www.ams.usda.gov/sites/default/files/media/TransportationofUSGrainsModalShare1978_2019.pdf 

McKenzie, A. M. (2005). The effects of barge shocks on soybean basis levels in Arkansas: A study of market integration. Agribusiness: An International Journal, 21(1), 37-52.

Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink

For spring planted crops like cotton, a key market influence in the fall season is the refinement of the national production forecast.  U.S. cotton production forecasts are published monthly by USDA’s National Agricultural Statistics Service (NASS).  For example, the current U.S. cotton production forecast is 13.13 million bales.^[1]  The forecast is expressed in standard 480-pound bale equivalents (or statistical bales).  Actual physical bales (or running bales) tend to weigh closer to 500 pounds, so analysts typically use conversion factors following USDA, e.g., 1.0275 statistical bales for every running bale.

Acreage and Production Data. Between May and July, NASS’s forecast of cotton production is based on surveyed planted acreage and assumed historical averages for yield and abandonment. Beginning in August, the production forecast incorporates grower survey data on acreage, yield, and abandonment.  Also beginning in August, the South Texas cotton forecast incorporates data from “objective yield surveys” which involve field sampling of boll counts and weights.  In September, this field sampling expands to include all of Texas, Arkansas, Georgia, and Mississippi, with repeat monthly sampling through December.  Lastly, the production forecast is occasionally adjusted in the fall months based on crop insurance information (USDA Risk Management Agency) and/or certified acres data (USDA Farm Service Agency).

Ginnings Data.  All U.S. cotton is ginned following harvest.  Surveys of gins are performed by USDA NASS who then publishes a monthly forecast of cumulative bales ginned as of that month.  For example, the number of actual U.S. bales ginned as of September 1 was forecasted at 484,450 running bales.^[2]  This converts to 497,772 statistical bales, which is 4% of USDA’s September production forecast for this year’s crop.  This is a seasonally normal percentage of the total U.S. crop.  

Classing Data.  All U.S. cotton bales are sampled for fiber quality.  It follows that the most accurate, albeit unfolding, measure of cotton production is the cumulative count of bales classed by USDA’s Agricultural Marketing Service (AMS).  These data are reported weekly as running bales.  Through the week ending September 8, 2023, AMS reports cumulative classings of 531,866 running bales of upland cotton and no pima cotton.^[3]  This converts to 546,492 statistical bales of all cotton which, unexpectedly, exceeds NASS’s ginned bale forecast.  It is assumed that the weekly count of classed bales is always the more accurate measure.

Reconciliation/Refinement.  The ginnings and classings data are published until the conclusion of ginning season, typically in the first quarter of the year following harvest. NASS will then reconcile their production forecast with final cumulative ginning and classing numbers (the latter two being converted to statistical bales).  The effect of this reconciliation is the refining of NASS’s production forecast to its final estimate.  Figure 1 shows that August production estimates have been between 15% below and almost 20% over final estimates with a lot of variation.  Each monthly refinement in production estimates occurred until final estimates were achieved by May for the last twelve crop years (2011 through 2022).  The refinement concluded by April in eight out of the twelve crop years and was finished in March in six out of the twelve crop years.  In general, the tightening pattern of percent deviations from the final production forecast reflects the influence of the updated USDA data flow.

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^[1]  USDA-NASS.  2023.  Crop Production 09/12/2023.

^[2]  USDA-NASS.  2023.  Cotton Ginnings 09/12/2023.

^[3]  USDA-AMS.  2023.  Cotton Weekly Quality Report by State 9/8/2023.

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Robinson, John. “USDA Refining of Forecasted U.S. Cotton Production.” Southern Ag Today 3(38.1). September 18, 2023. Permalink

In recent weeks there has been a noticeable surge in the demand for sorghum. This is seen through robust sorghum export sales over the past two months, around 25% above the previous two seasons (Graph 1). A corresponding increase in the average basis offered on the Gulf Coast of Texas is also observed, with the sorghum basis currently standing at $1 per bushel above the price for positions with delivery from this month through December, 80 cents higher than last year by this time. These prices are expected to benefit producers significantly, especially in a year marked by anticipated higher production (393 million bushels) and better yields (66 bushels per acre).

According to the August 2023 report from the United States Department of Agriculture’s World Agricultural Supply and Demand Estimates (WASDE), there is an increase in U.S. sorghum exports projected for the 2023/24 season. USDA export projections have reached 255 million bushels, marking a 155% increase over the previous season (Graph 2), even though projected exports are still lower than the levels in 2020/21 or 2021/22. In 2022/23, the U.S. exported 100 million bushels of sorghum, 67% lower than the recent peak in the 2021/22 season due to the low production from last year’s drought.

China will continue to be the primary importer of sorghum from the United States, primarily driven by the demand for feed from its livestock industry. USDA projections forecast a steady market for hogs, sustained growth in aquaculture and ruminants, and a resurgence in poultry feed demand. Consequently, China’s imports are anticipated to increase by 125.7 million bushels, fueled by higher U.S. production and competitive prices.

The 2023/24 sorghum season presents promising sorghum export opportunities. This export surge will likely result in better sorghum premiums over corn, as evidenced by the positive basis farmers are currently experiencing on the Gulf Coast of Texas.  All of these factors taken together will likely result in the United States retaining its position as the top producer and exporter of sorghum.

When we talk about wheat production in the south, we often think of the top wheat planting states of Texas and Oklahoma. Yet, in the last two years, with drought plaguing the Southern Plains, wheat production in other southern states has played an important role in the overall supply of U.S. wheat^[1]. In 2022, winter wheat production in the south accounted for 20% of total U.S. winter wheat production. That increased to 23% in 2023.

This relationship was highlighted in USDA’s August Crop Production Agricultural Statistics Board Briefing on August 11, 2023.  Updated yield information for the 2023 winter wheat crop showed record wheat yields in eight states, five of them in the south: Kentucky, Maryland, North Carolina, Tennessee, and Virginia.  

Compared to 2022, U.S. winter wheat production in 2023 is up 124 million bushels with an additional 2.036 million acres harvested. Of these numbers, the south accounts for 55 million bushels (45% of the increase in U.S. production) on an increase in harvested acres of 1.015 million (50% of the increase in U.S. harvested area).  Strong crop insurance prices and favorable futures market offerings supported an increase in U.S. wheat acres in 2023 compared to 2022.  The Risk Management Agency’s (RMA) base insurance contract price for soft winter wheat increased from $7.14 in 2022 to $8.40 in 2023. For hard winter wheat, the price increase was from $7.08 to $8.79 (USDA, RMA, 2023).

Outstanding yields in southern states outside of Texas and Oklahoma drove the production increase in 2023. Production was 139 million bushels, up 24 million bushels from 2022. Harvested acres in these states were up from 1.630 million to 1.845 million acres, an increase of 215,000.  This is a 21% increase in production on a 13% increase in harvested acres.  

Wheat production numbers struggled again in 2023 in Oklahoma and Texas. While harvested acres in Oklahoma were up 100,000 in 2023 compared to 2022, the average yield per acre was down 1.0 bushel to 27.0, the lowest average reported by USDA for wheat states in the August Crop Production report.  Wheat planted acres in Texas increased sharply in 2023 (5.3 million to 6.7 million, the highest in over 30 years) but the area harvested was only 30% of the planted total. In a normal year, about half of the wheat acres planted in Texas are harvested for grain. 

In the last five years, compared to production in Texas and Oklahoma, winter wheat production from Arkansas, Kentucky, Maryland, Mississippi, North Carolina, Tennessee, and Virginia, has increased from about 75 million bushels, just over 40% of that produced in Texas and Oklahoma, to over 130 million bushels, on par with Texas and Oklahoma production (Figure 1 and Figure 2). 

Figure 1. Wheat production in the south: Texas and Oklahoma compared to other southern states (Arkansas, Kentucky, Maryland, Mississippi, North Carolina, Tennessee, and Virginia)

Figure 2.  Wheat production in the south, 2023, million bushels

The south is well suited for wheat production in that the longer growing season in the region allows for planting wheat after traditional spring planted crops like soybeans and then back to spring crops the following year without missing a growing season or disrupting rotations. 

This is not to say that wheat produced in one region of the south can always substitute for the other. Texas and Oklahoma produce primarily hard red winter wheat while soft red winter wheat is the dominant class in the rest of the south.  Each has particular baking and milling characteristics that make it well suited for particular uses and products.  But in terms of overall U.S. wheat production, and the influence that number has on prices, the south as a whole plays an important role. 

Wheat is a crop with a relatively high yield potential in the south. This becomes especially important to the U.S. wheat supply when drought impacts other major producing wheat states.  In addition, wheat in rotation with other crops can aid in controlling weeds, disease, and insects. Wheat can serve as a cover crop to improve soil health and in many areas, can be double cropped for added income potential.  All important issues for southern agriculture.

References

USDA, August Crop Production Agricultural Statistics Board Briefing, August 11, 2023, https://www.nass.usda.gov/Newsroom/Executive_Briefings/2023/08-11-2023.pdf.

USDA, NASS, Crop Production, August 2023, https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/2227p6419/w3764r31w/crop0823.pdf.

USDA, NASS, Quick Stats, accessed August 25, 2023, https://quickstats.nass.usda.gov/.     

USDA, Risk Management Agency (RMA). Price Discovery, accessed August 31, 2023, https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/.                 

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^[1] Southern wheat production includes these states reported by USDA in the August Crop Production report: Arkansas, Kentucky, Maryland, Mississippi, North Carolina, Oklahoma, Tennessee, Texas, and Virginia. 

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Welch, Mark. “The Importance of Wheat Production in the South.” Southern Ag Today 3(36.1). September 4, 2023. Permalink