Category: Crop Marketing

World wheat production exceeded world wheat consumption for 7 out of 8 marketing years from the 2013/14 marketing year to 2019/20. The stocks-to-use ratio as measured by days of use on hand at the end of the marketing year increased from a 104-day supply to 146 days on hand over the same period.  Since 2020/21, we have seen four consecutive years of total use greater than production. Days on hand have subsequently fallen back to a 119-day supply.  During this period, Russia invaded Ukraine in February 2022, raising concerns over exportable wheat supplies from the critical Black Sea wheat producing region. 

As world wheat supplies tightened, cash wheat prices doubled from the summer of 2020 to the fall of 2021, from just under $4 per bushel to $8, then to over $12 in the months after the invasion. Prices have since fallen back to levels last seen in the summer of 2021 (the early stages of the 2021/22 marketing year). This price retracement has occurred even though world days of use on hand at the end of the marketing year are lower, and the conflict in Ukraine continues. 

Figure 1. Texas Cash Wheat Prices, weekly

A key factor behind prices moving lower despite tightening world wheat fundamentals is the continued movement of wheat from the Black Sea region. In the marketing year prior to the invasion, Russia and Ukraine exported 56 mmt of wheat, 28% of world wheat exports. Current estimates for the 2023/24 marketing year are for combined exports of 60 mmt, 29% of the world total. 

This export total is a result of record wheat exports from Russia and a 50% reduction in exports from Ukraine. Russia has gone from virtually no wheat exports in the 2000/2001 marketing year to a projected 49 mmt in the 2023/2024 marketing year. (Figure 2)  Export capability comes from a 50% increase in production over the last 10 years. Further, Russia has increased production by 10 million harvested acres since 2013, and increased yields from 33 to 47 bushels per acre. 

Figure 2. Russia Wheat Production, Exports, Consumption, and Ending Stocks

Russian wheat supplies are of increased importance to the world wheat market. Russia’s wheat exports have increased against a backdrop of tightening world wheat fundamentals. Wheat prices have fallen as wheat exports continue from the Black Sea region, even though the supply and demand situation for world wheat is tighter than before the Russian invasion of Ukraine. In the current world wheat supply and demand environment, any substantial limitation or reduction in exportable wheat supplies from Russia (e.g., due to reduced wheat production, export policy, or geopolitical forces) would likely result in a significantly amplified price response. 

References

USDA, Foreign Agricultural Service, Production, Supply, Distribution Database. Accessed October 5, 2023, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home.

USDA, Office of the Chief Economist, World Agricultural Supply and Demand Estimates, September 12, 2023. 

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Welch, J. Mark. “Russian Wheat Production and World Wheat Market Fundamentals.” Southern Ag Today 3(42.1). October 16, 2023. Permalink

The size of global soybean stocks is an important factor in determining global soybean prices, but the quantity held by different countries and annual use are also relevant to the market. In the 2018/19 marketing year (during the U.S.-China trade war), the U.S held 22% of global stocks compared to China (16%), Brazil (29%), Argentina (25%), and the rest of the world (8%). Since then, China has more than doubled its share of global stocks, while the U.S. ending stock has dropped to the lowest level in eight years. At the end of the 2023/24 marketing year, the U.S. is projected to hold 5% of global soybean stocks compared to China (33%), Brazil (32%), Argentina (21%), and the rest of the world (9%).  Even though U.S. ending stocks are projected to be tight for the current marketing year, global stocks are projected to be an all-time record (Figure 1). 

Figure 1. Projected Global Soybean Ending Stocks, by Country, at the End of the United States Marketing Year, 2012/2013 to 2023/2024

This analysis can be taken one step further by incorporating usage.  Days-on-hand can be used to estimate a country’s stocks relative to annual use (domestic consumption + exports). China is projected to have 120 days of soybeans on hand for the past and current marketing year (Table 1).  World days-on-hand are projected at 114 days, the second highest in the past 12 years. Argentina’s soybean days-on-hand are projected to increase from a 10-year low of 159 days to a high of 197 days, by the end of the current marketing year. Due to the abundance of global stocks and the projected days-on-hand, it may be challenging for U.S. soybean exports to achieve the current USDA projection of 48.7 million metric tons (MT). This would result in increased U.S. ending stock. Additional factors such as exchange rates, discussed in a prior Southern Ag Today article, will also play an important role in U.S. exports and ending stocks.

Based on current USDA projections, further weakness in soybean futures prices seems likely, unless a weather disruption in South America leads to reductions in projected production. A bounce back in Argentina’s drought reduced production (projected production was halved by last year’s drought) seems likely and Brazil is forecast to produce another record crop. January 2024 soybean futures have already decreased $1.49/bu since the July 24, 2023, high of $14.41/bu. A key level of support for the January contract is $12.60/bu-$12.80/bu. If prices fall below $12.60/bu, it is possible that prices test the contract low of $11.41/bu from May 31, 2023. For producers concerned with a decline in futures prices for unpriced soybeans that will be held in storage, an $11.70 put option could be purchased for 6 cents. This is cheap protection based on the large amount of uncertainty in the current South American soybean production year. 

Table 1. Soybean Days-on-Hand by Country, 2012/2013 to 2023/2024

References and Resources

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

USDA September WASDE. https://www.usda.gov/oce/commodity/wasde/wasde0923.pdf

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Smith, Aaron. “Who’s Holding Global Soybean Stocks?” Southern Ag Today 3(41.1). October 9, 2023. Permalink

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