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.
Source: USDA/NASS/ERS/WASDE
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)
Source: USDA, NASS
Figure 2. Wheat production in the south, 2023, million bushels
Source: USDA, NASS
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.
[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.
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)
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 5th 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
Data source: USDA-NASS Crop Production Note: Forecast error = Final Yield minus August Yield Forecast
b) Final Abandonment Rate and August Forecast Error
Data source: USDA-NASS Crop Production Note: Forecast error = Final Yield minus August Yield Forecast
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
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 11th 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)
* Close is the ending value for the one-minute interval.
Figure 2. December cotton futures chart on August 11, 2023, in 1-minute intervals (CST)
* Close is the ending value for the one-minute interval.
Figure 3. December corn futures chart on August 11, 2023, in 1-minute intervals (CST)
* Close is the ending value for the one-minute interval.
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 8th, 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.
