Category: Crop Marketing

A key factor in the development of a new crop price forecast is how many acres farmers plant of each crop.  USDA surveys farmers each year and reports early season acreage intentions in the Prospective Plantings report, released at the end of March. Then at the end of June, the Acreage report from USDA details the area of each major crop planted.  Since 2006, U.S. farmers have planted about 244 million acres to corn, soybeans, wheat, cotton, sorghum, and rice.  Corn and soybeans account for the largest crop areas planted, reaching 181 million acres combined in 2021 (Figure 1).   

Figure 1. U.S. Planted Acres

From an economic standpoint, relative crop profitability is an important driver of planting decisions. One indicator of that profitability is the relative price of one 3.11commodity to another.^[1] Given the large area impacted and the typical rotation between these two crops, the soybean-to-corn price ratio is widely watched as providing insight into what farmers ultimately plant each spring. 

An aspect of how the price relationship between soybeans and corn impacts planting decisions can be seen in the relationship of the soybean-to-corn price ratio and the number of corn acres planted in excess of soybeans each year.  In general, when the price ratio of Risk Management Agency (RMA) soybean-to-corn projected prices, calculated each February^[2] is relatively low, corn acres increase at the expense of soybeans. At high ratios, soybean acres increase relative to corn (Figure 2).    

Figure 2. Corn Acres Minus Soybean Acres and RMA’s Soybean-to-Corn Projected Price Ratio

The average price ratio from 2006 to 2022 is 2.36 and the average number of corn acres over soybean acres is 10 million.  At the extreme, in 2007 the soybean-to-corn projected price ratio was 1.99 and farmers planted 93.5 million acres of corn and 64.7 million acres of soybeans, a difference of 28.8 million acres (Figure 2). When the price ratio has been at its highest, 2.57 to 2.59, we have seen plantings of corn and soybeans about equal (2017 and 2018). But the price ratio at this level is also associated with 6 million more acres of corn than soybeans in 2021.  Corn acres relative to soybean acres were much smaller than expected in 2022, a difference of only 1.1 million acres despite a price ratio of 2.43.  It is likely that risks associated with high fertilizer prices and product availability had an impact on farmers’ planting decisions last year given higher fertilizer requirements for corn compared to soybeans. 

The RMA soybean to corn base price ratio for 2023 is 2.33 ($13.76 soybeans, $5.91 corn). If the total planted area remains constant, that suggests an increase in corn acres and a decrease in soybean acres in 2023 compared to 2022.  In other years when the price ratio rounded to 2.3 (2010, 2013, 2015, and 2016), the range of corn acres over soybeans were 5.3 million to 15.6 million.  If corn and soybean acres again total about 180 million, the low estimate of corn acres for 2023 would be 92.7 million acres and the high estimate of soybean acres 87.4 million acres.  

Of course, other factors besides relative prices matter when farmers make their planting decisions. Among these are crop rotations that boost productivity and input efficiency, input costs, and of course, weather. And in the South, cotton is a major non-grain competing crop enterprise whose price and profitability are not part of this analysis.   But, the price ratio between major crops may provide a key piece of information in forming expectations of what upcoming acreage reports may reveal. 

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^[1] For more on relative price relationships between commodities, see Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023.

^[2] RMA Price Discovery, base prices for 2023, conventional practices with a March 15 sales closing date, RMA Price Discovery – Home (usda.gov).

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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

Each year, USDA’s Office of the Chief Economist holds the Agricultural Outlook Forum. The event discusses important agricultural topics and provides supply and demand projections for the upcoming year. This article examines the 2023 Agricultural Outlook Forum projections and compares historical Agricultural Outlook Forum projections and final USDA estimates for corn, soybeans, and wheat for the 2010 to 2022 crop years. 

Historical Projections compared to Final USDA Estimates

From 2010-2022, USDA’s February projected production for corn, soybeans, and wheat averaged 655 million bushels higher, 518 million bushels lower, and 15 million bushels higher than final estimates, respectively (Figure 1; production). The difference between February production projections and final estimates can be partially explained by yield or acreage changes, due primarily to weather events. For example, in 2019, floods in the Midwest dramatically reduced planted and harvested acres (Figure 1; acres planted and harvested); and in 2012, severe drought caused final corn yields to be 40.9 bu/acre below the February projection (Figure 1; national average yield). Considering the tremendous amount of uncertainty this time of year (February), USDA has been reasonably accurate with initial projections. On average, the difference (overestimated or underestimated) between projected and final production estimates has been 6.8% for corn, 5.7% for soybeans, and 6.4% for wheat.

Domestic consumption projections have also been accurate with an average discrepancy of 2.8% for corn, 2.6% for soybeans, and 6.0% for wheat. Exports have been more challenging to project, primarily due to the relationships between domestic production, foreign production, substitution, and global demand. On average, USDA has missed export projections by 23.4%, 11.7%, and 12.6% for corn, soybeans, and wheat, respectively.  For corn, from 2010-2022, on average, the USDA February total use projection was 290.4 million bushels higher than the final estimate. Total projected wheat use was 31.4 million bushels higher, and soybean use was 11.4 million bushels lower than the final estimate, on average (Figure 2; exports and domestic use).

USDA has had challenges with projecting ending stocks and prices. Projected ending corn stock estimates have ranged from 1.4 billion bushels more to 316 million bushels less than the final USDA estimate, with an average projection of 342 million bushels higher than the final estimate (Figure 2; ending stocks). Soybean ending stocks have, on average, been projected 51 million bushels higher in February than final estimates, with a range of 320 million bushels higher to 449 million bushels lower than the February projection. Wheat ending stocks have, on average, been projected 47 million bushels lower in February than the final estimate, with a range of 239 million bushels higher to 213 million bushels lower than the February projection.

On average, USDA missed corn, soybean, and wheat marketing year average (MYA) prices by 17.4%, 12.7%, and 13.5%, respectively. In 8 out of 13 years, the February MYA price projection has been lower than the final MYA price for corn, soybeans, and wheat (Figure 2; marketing year average price). For corn, projected prices were under final prices by over 30% in 4 out of 13 years (2010, 2012, 2021, and 2022). The largest projected miss, among years where the February projected MYA price was higher than the final MYA price, was 7.1% in 2013. 

2023 Projections

Initial expectations from the 2023 Agricultural Outlook Forum point to a 3% projected increase in planted crop acres for corn, soybeans, and wheat relative to 2022 plantings. Corn acreage is projected to increase from 88.6 million acres in 2022 to 91.0 million acres in 2023. In 2022, planted corn acreage was affected by weather delays, which prevented plantings in various regions of the United States. Soybean acreage is projected to stay the same as 2022 at 87.5 million acres. Soybean acreage projections are driven by strong demand for domestic crush and growth in biofuel production capacity. Of the three crops, wheat acreage is projected to incur the largest increase in planted acreage, up to 49.5 million acres in 2023 from 45.7 million planted acres in 2022. Increases in projected wheat plantings are driven by tight U.S. stocks and continued high global prices, caused in part by the war in Ukraine. 

Prices for all three crops are projected to be lower in 2023 than 2022 but are projected to remain above their respective 10-year historical averages. Season average per-bushel prices for corn, soybeans, and wheat are projected to fall from $6.70, $14.30, and $9.00 in 2022 to $5.60, $12.90, and $8.50 in 2023. The price projections are driven by low beginning stocks and growth in projected acreage and yield, which will facilitate higher projected exports and ending stocks for the 2023/24 crop year. The decline in 2023 projected prices is driven by record expected soybean and corn crops in South America, which will increase competition in export markets. Additionally, estimates of the impact of increased biodiesel production capacity on soybean prices have been uncertain due to the United States’ ability to adapt planted acres to meet increased feedstock demand. 

There remains a tremendous amount of uncertainty in production, use, stocks, and prices for the 2023 corn, soybean, and wheat crops. However, the current USDA projections have prices softening, compared to last year for all three commodities. As such, producers may want to consider using marketing strategies that protect against downside price movements while maintaining flexibility (such as options). This will allow producers to evaluate and modify pricing decisions when additional information is known about the 2023 crop. USDA will revise projections throughout the year with the next key report being the Prospective Plantings report at the end of March.

Figure 1. USDA – February Outlook Conference Projections Less Final USDA Estimates (Supply), 2010-2022*

Figure 2. USDA – February Outlook Conference Projections Less Final USDA Estimates (demand, stocks, and price), 2010-2022*

References

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/commodity/wasde

U.S. Department of Agriculture –Office of the Chief Economist (USDA-OCE). WASDE report. Available on-line at: https://www.usda.gov/oce/ag-outlook-forum/commodity-outlooksU.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). Quick Stats. Available on-line at: https://quickstats.nass.usda.gov/

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Smith, Aaron, and Grant Gardner. “February USDA Agricultural Outlook Forum Projections Compared to USDA Final Estimates.” Southern Ag Today 3(10.1). March 6, 2023. Permalink

Monthly average Rough Rice futures prices broke $16/cwt in March 2022 and have remained well above this price (Barchart.com, 2023). In fact, the monthly average has not been at this level since July 2013, when the monthly average closing price was $16.04/cwt. This spike in prices is most likely driven by the lowest global ending stocks reported in five marketing years due to below trend production in 2022/2023 with a steady increase in consumption since the 2015/2016 marketing year (USDA-FAS, 2023). These historically high rice prices provide an opportunity to lock in higher revenue guarantees for Revenue Protection (RP) crop insurance to help manage downside price risk, which is likely if global production bounces back to trend in the upcoming marketing year.

RP is a risk management tool administered by USDA’s Risk Management Agency (RMA) and provides an indemnity when farm-level revenue for a crop falls below a revenue guarantee. The revenue guarantee is found by taking the product of the farm-level yield expectation given by the actual production history (APH), the projected price determined by USDA-RMA, and the coverage level chosen. The projected price is a 30-day average (prior to planting)^[1] of the harvest-month futures contract for a given commodity, which in this case is November Rough Rice (ZRX). USDA-RMA completed the projected price discovery period on February 14th for long-grain rice producing states in the South with a February 28th sales closing date and has determined the 2023 projected price for long grain rice to be $16.90/cwt (i.e. $7.61/bu^[2]). This price is $2.40/cwt (i.e. $1.08/bu) higher than last year’s projected price of $14.50/cwt ($6.53/bu).

As noted above, revenue guarantees depend on the farm-level APH, projected price, and the chosen coverage level. I illustrate the increase in the RP revenue guarantee for long-grain rice producing states using states in the Mississippi Delta, but the impact is generally applicable across southern states with a February 28th sales closing date. Figure 1 shows the year-over-year changes in the revenue guarantees for the 75% coverage level in 2023 relative to 2022 and assumes the APH yield is equal to the Reference Yield which USDA-RMA provides at the county-level. RP revenue guarantees in the Mississippi Delta are expected to increase by more than $100/ac in most counties and by more than $150/ac in a few others. 

It is not too late for farmers to contact their crop insurance agent to discuss enrolling their rice in RP insurance. The amount of coverage chosen largely depends on each farm’s financial condition and each farmer’s risk tolerance, but 75% tends to be the most popular coverage level chosen. The deadline to enroll is tomorrow, February 28th.

References

Barchart.com. November Rice Historical Monthly Average Closing Prices. Accessed via API.

USDA – Foreign Agricultural Service (FAS). Production, Supply, and Distribution Online. https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

USDA – Risk Management Agency (RMA). Actuarial Data Master. https://pubfs-rma.fpac.usda.gov/pub/References/actuarial_data_master/

USDA – Risk Management Agency (RMA). Commodity Exchange Price Provisions (CEPP). https://www.rma.usda.gov/Policy-and-Procedure/Insurance-Plans/Commodity-Exchange-Price-Provisions-CEPP

USDA – Risk Management Agency (RMA). Price Discovery. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

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^[1] The projected price discovery period depends on the sales closing date. For states with a February 28th sales closing date, the projected price discovery period is January 15 – February 14 (USDA-RMA CEPP, 2023). Therefore, the projected price will be the average of the daily closing prices for ZRX over January 15 – February 14.

^[2] One can find the dollars per bushel price of the Rough Rice futures contract, priced in dollars per hundredweight, by dividing the futures price by 2.22.

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Biram, Hunter. “One Last Thought on Revenue Insurance for Rice.” Southern Ag Today 3(9.1). February 27, 2023. Permalink

U.S. peanut production decreased in 2022, driven by both lower acres harvested and lower yields. Peanut acres planted were down by 8% nationwide, to 1.46 million acres. Yields dropped by 2.7% from 2021 to 4,019 lb. per acre nationwide. Georgia – the largest producing peanut state – saw yields fall to 4,250 lb. per acre, a 200 lb. per acre drop, as its crop was affected by the tomato spotted wilt virus. The main driver of the lower nationwide yields came from drought-stricken Texas, which had a 21.6% decline in yield to 2,800 lb. per acre, its lowest value since 2011. Furthermore, Texas saw 25% of its planted acreage go unharvested due to the drought. Total peanut production in the U.S. is estimated at 2.8 million tons, a 12% decrease from 2021 (orange line in Figure 1). 

On the demand side, peanut use is expected to decline by 4% this marketing year (bars in Figure 1). This is primarily due to a 7% forecasted decrease in exports. Food – which makes up the largest portion of peanut disappearance – is projected to increase by 1% from 2021. A 13% increase in peanut candy consumption kept peanut food use from falling much during the 2021-2022 marketing year, despite decreases in disappearance for peanut snacks, peanut butter, in-shell peanuts, and other edible peanut products. Over the first five months of the 2022-2023 marketing year (August through December), the quantity of peanuts used for peanut butter is at record levels, up 2.9% over the same period last year. This is crucial because over half the peanuts used for food end up as peanut butter. 

Peanut carryover at the end of the marketing year is expected to decrease by 8% to 1.1 million tons. While peanut supply and demand factors are not the main drivers of peanut prices, peanut prices are expected to remain high amid the projected lowered peanut stocks. The expected price for the 2022-2023 marketing year is at $540 per ton, which would be the highest level in ten years. This comes as high prices for several alternative crops boost competition for peanut acreage this Spring.

Figure 1. U.S. Peanut Production, Stocks, and Disappearance by Year

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Photo by Marina Leonova: https://www.pexels.com/photo/close-up-shot-of-peanuts-7717463/

Sawadgo, Wendiam. “2023 Peanut Market Outlook.” Southern Ag Today 3(8.1). February 20, 2023. Permalink

U.S. cotton production is typically uncertain in any given year, in part because roughly half the acreage is in Texas.  Still, the 2023 season is starting off with a more than usual degree of uncertainty.

First, the early season forecasts of U.S. cotton plantings vary by as much as two million acres, i.e., from 9.5 to 11.5 million acres.  Such a discrepancy puts a premium on the milestone planting intentions reports from the National Cotton Council (released February 12) and USDA (March 31 Prospective Plantings report and June 30 Acreage report).

The weather is a second major source of variability.  The National Oceanic and Atmospheric Administration’s Climate Prediction Center (CPC) is forecasting a transition from the hotter/drier La Niña condition to a neutral influence by late Spring.  CPC further predicts the onset of the cooler/wetter El Niño condition by early Fall.  That’s all well and good, but there is uncertainty around all weather forecasts.  Will the beginning dryness lead to above average early season abandonment?  Or will neutral El Niño-Southern Oscillation (ENSO) conditions by planting time surprise us with timely planting rains and good growing conditions?

The third consideration is whether the recent signs of improving cotton demand will continue.  There is plenty of uncertainty about whether the broader economy is recovering or entering a double dip recession.  

These three variable situations outline some possible extremes.  If, for example, U.S. cotton growers plant a low level of acreage, and it continues dry, and abandonment is above average, and demand continues to recover, the result could be ending stocks below 3 million bales.  Historically, it suggests that Dec’23 futures might follow the seasonal path of the green line in Figure 1, strengthening as the growing season goes on.  In the context of this year’s price levels, it suggests a march back up through the 90s towards a dollar.

On the other hand, what if 11+ million acres are planted and receive timely rains?  That could lead to three million more bales of production than the first scenario.  If demand doesn’t recover enough to absorb these bales, the carryover outcome could be five or six million bales.  In years of building excess stocks, the historical seasonal average of December ICE futures reflects weakening prices.  The pattern of the blue line in Figure 1 could push prices under 80 cents.

Figure 1’s red line reflecting “Stable Carryover” years is simply the in between scenario, with middling implications for ending stocks and prices. The level of these seasonal averages isn’t as important as the pattern itself.  Time will tell how all these variables play out.  

Figure 1. December Futures Seasonal Average Price in Stable, Larger and Smaller Carryover Years

Author: John Robinson

Professor and Extension Economist

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Cotton Photo by Mark Stebnicki: https://www.pexels.com/photo/plantation-of-cotton-in-a-cropland-10287687/

Robinson, John. “Possible Extreme Outcomes for 2023 Cotton.” Southern Ag Today 3(7.1). February 13, 2023. Permalink