Category: Crop Marketing

Producers can keep track of their price risk protection through revenue insurance in a given growing season by comparing the Harvest Price to the Projected (Spring) Price determined by USDA-RMA. This article examines the price protection offered by Revenue Protection (RP), Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) crop insurance for corn and rice. 

The liability covered under an RP insurance policy is based on the product of the farm-level Actual Production History (APH), a futures price, and a coverage level. The futures price is based on the higher of the Projected Price and the Harvest Price determined by USDA-RMA. Please visit the RMA Price Discovery Tool to find current Projected and Harvest Prices by location. RP has eight coverage level options to choose from, ranging from 50-85% in 5% increments.

Area-based (i.e., county-level) crop insurance products like SCO and ECO can be paired with Yield Protection (YP), RP, or RP with Harvest Price Exclusion (RP-HPE). The liability insured by SCO and ECO is calculated using the same parameters as RP (e.g., APH and futures prices), with the notable exception being that SCO offers a coverage level of 86%, and ECO offers coverage levels of 90% and 95%.  Unlike RP – which triggers indemnities based on farm-level losses – SCO and ECO trigger indemnities based on county-wide losses. ECO will trigger a full indemnity when county-level revenue losses fall to 86%, and SCO will trigger a full indemnity once county-level revenue falls to the coverage level of the underlying RP or RP-HPE policy.

Consider implications for rice price risk protection in 2023 for the Louisiana Harvest Price at $15.84/cwt. Expressing this price as a proportion of the Projected Price for the same futures contract (i.e., $16.90/cwt) gives us 94%, which implies ECO would begin to trigger assuming harvest yield does not increase. However, assuming average yields, neither SCO nor any coverage level of RP would trigger at the current Harvest Price. Producers might consider purchasing area-based insurance next year, such as SCO or ECO, in addition to their underlying RP or RP-HPE policy since yield risk is not as prevalent in rice compared to other crops grown in the southeast (Biram and Mills, 2023).

Doing the same exercise of finding the proportion of the Harvest Price to Projected Price for corn in Arkansas would give us a percentage of 81% which is found by taking the ratio of the Harvest Price of $4.83/bu and the Projected Price of $5.94/bu (i.e., $4.83/$5.94 = 81%). Under this scenario, ECO at both 90% and 95%, SCO, and RP at 85% would all trigger an indemnity assuming average yields. Extending this exercise to all southeastern states producing corn shows that this pattern continues (Figure 1). Since southern corn producers face more yield risk relative to rice, one might consider adding area insurance to a risk management strategy in 2024.

Implications for marketing unsold grain near harvest depend on the local cash prices being offered in a specific delivery window. Producers with crop insurance can decide to forward contract with delivery in a specific month based on the exercise outlined above. This can be done by taking the ratio of the cash price being offered in the desired month of delivery to the Projected Price and comparing the percentages. If the percentage found using the local cash price is lower than the percentage found using the RMA Harvest Price, then producers can forward contract knowing there is a price guarantee which can be used to offset any non-delivery fees. For example, if the local cash price for corn with September delivery in Arkansas is $4.72/bu, then the ratio would be 80% (i.e., $4.72/$5.94 = 80%), which falls within the 81% ratio found above. This implies that even if there are unexpected harvest losses resulting in non-delivery, there will be an added layer of protection provided by the underlying revenue crop insurance.

Figure 1. RMA Corn Harvest Price as a Percentage of the Projected Price (Sales Closing Date: February 28th and March 15th)

References

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

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Biram, Hunter. “Comparing the Harvest Price and Projected Price in Revenue Protection Crop Insurance for Rice and Corn.” Southern Ag Today 3(35.1). August 28, 2023. Permalink

U.S. cotton is historically in relatively poorer shape this year. According to the USDA Crop Progress report, only 41% of cotton acreage is rated to be in good or excellent condition as of the first week of August, which ranks 5^th worst over the past twenty years. This is driven by Texas – the largest producing cotton state – which has 55% of its acreage in poor or very poor condition. Therefore, it is not a huge surprise that the USDA lowered its cotton production forecast this year. As of the August Crop Production report, U.S. average upland cotton yield for 2023 is projected at just 773 lb. per acre, which if realized would be the fourth lowest yield in the last twenty years. The USDA also forecasts 8.5 million upland cotton acres to be harvested, which would suggest the abandonment rate – or percentage of planted acres that go unharvested – to equal 22%. Let’s look into the accuracy of the USDA’s August cotton acreage and yield forecasts in recent years to further understand where cotton production might end up.

Figure: Final Cotton Yield and Abandonment Rate with August Forecast Errors by Year

a) Final Cotton Yield and August Forecast Error

b) Final Abandonment Rate and August Forecast Error

Where is cotton production likely to end up? The above figure (panel a) shows annual ending cotton yield and the difference between the final yield and the August forecast, or the August forecast error. Cotton yields have been within 10% of the August prediction in fourteen of the past nineteen years, averaging a miss of just 2%. On average, cotton yield has ended up 20.9 lb. per acre higher than what was forecast in August. Abandonment was more difficult to predict, with the average year seeing the abandonment rate two percentage points higher than forecast in August, an 11% miss (panel b). Abandonment rates ended up higher than predicted in fifteen out of nineteen years, meaning that harvested acreage wound up lower than forecast.

Now what can history tell us about where production might end up in 2023? Let’s consider some low- and high-production scenarios from the previous nineteen years. Consider storm-plagued 2020 as a low-production year, which forecast 929 lb. per acre yields and a 24% abandonment rate in August but wound up with 841 lb. per acre and a 33% abandonment rate. As a result, production fell over 3 million bales short of what was forecast. An identical error to 2020 would result in yields 11% lower and an abandonment rate 6 percentage points higher, resulting in 11.0 million bales of production in 2023 (see table below). On the other hand, two years (2005 and 2022) both saw one-percentage point decreases in the abandonment rate and 11% increases in yield over what was forecast, and 2 million bales of unexpected production. A similar scenario this year would result in 15.4 million bales of production. This large range in potential outcomes could lead to additions or reductions to the forecast 2.99 million bale ending stocks, ultimately affecting the 79 cent per lb. marketing year price forecast. However, it is important to note that cotton use would likely be adjusted downward primarily through exports in a low-production scenario which would prevent cotton stocks from cratering.  

Table 2: 2023/24 Cotton Production Scenarios Given Recent Forecast History

	2022/23E	2023/24F
		August WASDE	Low Production	High Production
Planted Acres	13.6	11.1	11.1	11.1
Harvested Acres	7.1	8.5	7.6	8.7
Yield per Harvested Acre (lb. per acre)	942.0	773.0	695.7	858.0
Production (million bales)	14.0	13.7	11.0	15.4

Sources

USDA-NASS. Crop Production. August 11, 2023.  Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/2227p6419/w3764r31w/crop0823.pdf

USDA-NASS. Crop Progress. August 7, 2023. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/8336h188j/f7624v982/ff366p28b/prog3123.pdfUSDA. World Agricultural Supply and Demand Estimates. August 11, 2023. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/3t945q76s/8c97n5538/6w925t710/wasde0823.pdf

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Sawadgo, Wendiam. “How is the Cotton Crop Looking in 2023?” Southern Ag Today 3(34.1). August 21, 2023. Permalink

The Kentucky Derby is always fun to watch – lots of anticipation, a big build up, and you are never sure what is going to happen. A similar pleasure for many commodity market analysts is to watch the futures markets react on USDA report release dates. What commodities will break out? Which commodities will be the day’s winners and losers? Fortunes can change in seconds. August 11^th was an interesting day for USDA report watchers. The USDA released Crop Production and WASDE reports at 11 am CST and FSA Crop Acreage Data at 12 pm CST.   The 11 am release precipitated soybean markets increasing 10.75 cents (Figure 1); cotton markets increasing 1.92 cents (Figure 2); and corn markets increasing 0.25 cents, before moving up 0.75, down 2.5, up 2.75, down 2.25, and down 1.25 cents in the next five minutes (1-minute intervals) (Figure 3).

Figure 1. November soybean futures chart on August 11, 2023, in 1-minute intervals (CST)

Figure 2. December cotton futures chart on August 11, 2023, in 1-minute intervals (CST)

Figure 3. December corn futures chart on August 11, 2023, in 1-minute intervals (CST)

The movement in December cotton futures price is the easiest to explain. A projected average national upland cotton yield of 773 lbs/acre and harvested acres of 8.51 million, resulted in a projected decline in US production of 2.51 million bales and lowered ending stocks 700,000 bales compared to last month. Additionally, foreign stocks decreased 2.22 million bales. The result was December cotton, opened at 9:00 am at 85.1 cents and closed the day at 87.8 cents.  

November soybean futures also received a report bump in prices but were unable to hold the majority of the initial price gains. Soybean prices reacted positively to the 1.1 bu/acre reduction in national average yield and the 55-million-bushel decline in US ending stocks. However, conspicuously absent from USDA estimates were modifications to Brazil and Argentina production, exports, and domestic use. A lack of modifications to South America likely assisted in the reduction of prices throughout the rest of the trading day.

As mentioned above, December corn futures had a more muddled reaction. US national average yield was within pre-report expectations at 175.1 bu/acre. Compared to last month, US ending stocks were down 60 million bushels and foreign ending stocks were down 62 million bushels. US feed and residual use, exports, and food, seed & industrial use decreased a combined 95 million bushels. The national average yield created some consternation in markets. This was USDA’s first survey-based yield estimate for 2023.  There remains a great deal of uncertainty due to the uneven distribution of drought geographically and over time during the growing season. As of August 8^th, 49% of corn production was in drought, however extreme or exceptional drought was limited to 6% of the production area. The national average corn yield remains an enigma, and that is reflected in Friday’s market movements.

References and Resources

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

USDA Agriculture in Drought. https://www.usda.gov/sites/default/files/documents/AgInDrought.pdf

USDA FSA Crop Acreage Data. https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index

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

USDA WASDE Report: https://www.usda.gov/oce/commodity/wasde/wasde0823.pdf

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Smith, Aaron. “The Fast Two Minutes in Crop Markets.” Southern Ag Today 3(33.1). August 14, 2023. Permalink

Peanut farmers in the post-quota era have historically had limited marketing opportunities.  There is no futures market for peanuts, and the market is defined as relatively thin with a high concentration by two major buyers, Golden Peanut Company and Birdsong Corporation (Adjemian, Saitone, and Sexton 2016).  In economics, this is known as an oligopsony – a market that is dominated by a very few disproportionately large buyers.   Sellers in an oligopsony market have little ability to influence the price they receive for their product.  Here the seller is the peanut farmer looking to market their crop who often must just accept what shellers will pay.

The agricultural cooperative model allows farmers to work together to sell their product, achieve greater bargaining power, and provide profit sharing opportunities.  Grower-owned peanut shellers provide member peanut farmers an opportunity to share in the downstream profit that is otherwise not passed through to the farmer.  Over the past decade, there has been considerable growth in grower-owned peanut shellers.  A few examples include Premium Peanut that was formed in 2014 in Georgia, Delta Peanut that was founded in 2018 in Arkansas, and Coastal Growers that came together in 2021 in Alabama.

The table below shows the current USDA approved peanut warehouse storage capacity in the United States.  While the top two firms control 47.2% of the storage capacity, we see five grower-owned shellers (listed in bold) that combine for 28.3% of the storage capacity.  Furthermore, that share of grower-owned capacity has more than doubled since 2017 from both increases by existing grower-owned shellers and the entry of Delta Peanut and Coastal Growers.  While storage capacity is not fully reflective of market share, it represents a reasonable approximation and is indicative of marketing opportunities that farmers are leveraging through agricultural cooperatives.

References:

Adjemian, M.K., Saitone, T.L. and Sexton, R.J. (2016), A Framework to Analyze the Performance of Thinly Traded Agricultural Commodity Markets. American Journal of Agricultural Economics, 98: 581-596. 

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Rabinowitz, Adam, and Festus Attah. “Peanut Farmers Find Marketing Opportunities through Agricultural Cooperatives.” Southern Ag Today 3(32.1). August 7, 2023. Permalink

Many factors influence commodity prices. Recently, movements in commodity prices have been driven by U.S. acreage estimates and weather concerns across a large portion of the Corn Belt, and this is likely to remain the principal focus of markets into August. As of July 11, 2023, the percentage of soybeans in Moderate Drought (D1), Severe Drought (D2), Extreme Drought (D3), and Exceptional Drought (D4) was 1%, 6%, 20%, and 30%, respectively (USDA-Ag in Drought). However, there are always numerous factors impacting price direction simultaneously. An interesting trend that has potential repercussions for soybean exports has been the movement in currency exchange rates in 2023. 

Soybean exports are largely a three-country game. For the 2023/2024 marketing year, the majority of global soybean exports are expected to come from Brazil (56%) and the U.S. (31%), while China is projected to account for 59% of global soybean imports (USDA-PSD). As such, the prevailing currency exchange rates between the three countries are important. Figure 1 shows the number of Chinese Yuan Renminbi (CNY) and Brazilian Reais (BRL) required to purchase one United States Dollar (USD). Since the start of 2023, the BRL has increased by 11.6% compared to the USD, and the USD has appreciated by 3.3% compared to the CNY (Figure 1). For example, on January 3, a bushel of soybeans worth 14.50 USD would be 78.67 BRL. On July 14, that same bushel of soybeans at 14.50 USD would be 69.58 BRL. From a Chinese buyer’s perspective, due to changes in the value of currencies, a bushel of U.S. soybeans increased 3.3% from January 3 to July 14 and a bushel of soybeans from Brazil increased 15.4% over the same time. Over this time, the change in currency values would support Chinese purchases of U.S. soybeans over Brazilian soybeans, all else being equal. However, supplies of soybeans in Brazil and the U.S. largely minimize this potential effect. Brazil has record supplies, and based on current prices, could have record plantings this fall. The U.S. has lower acreage (83.5 million acres planted) than initially anticipated, lower potential yields due to drought, and limited endings stocks (230 million bushels) for the 2022/2023 marketing year. Moving forward, trends in exchange rates could influence the quantity of soybeans purchased, by China, from the U.S. and Brazil. If the USD appreciates in value, relative to BRL, it makes U.S. exports relatively more expensive for foreign buyers. If the USD depreciates in value, it makes U.S. exports less expensive for foreign buyers.

Figure 1. Brazilian Reais and Chinese Yuan Renminbi to 1 United States Dollar, January 3, 2023, to July 14, 2023

References

St Louis Federal Reserve. CNY and BRL to USD Exchange Rates. (https://fred.stlouisfed.org/series/DEXCHUS and https://fred.stlouisfed.org/series/DEXBZUS).  

U.S. Department of Agriculture -Ag In Drought. https://www.usda.gov/sites/default/files/documents/AgInDrought.pdf.

U.S. Department of Agriculture Foreign Agricultural Service. Production, Supply and Demand Estimates. https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery.