Category: Crop Marketing

Interest rates have become an important consideration for row crop producers. From December 2008 until March 2022, interest rates were historically low with the bank prime rate between 3.25% and 5.5%. Low interest rates allowed producers to borrow money at minor costs to cover the cost of production and capital expenditures. Additionally, low interest rates muted the costs of carrying crops in storage. Over the past year, rising interest rates have required additional scrutiny for producers making management and marketing decisions. 

From March 16, 2022, to May 1, 2023, the bank prime rate increased 4.75 points (3.25% to 8.0%). The rapid interest rate increase has impacted production costs, capital investment, and marketing for producers. This article examines the impact of interest rates and basis on net cash selling price for corn. Producers holding grain in storage should estimate interest costs as well as other storage costs.  Here we only show the impact of interest costs at the bank prime lending rate. For producers that do not have outstanding operating loans, they should consider the forgone investment interest rate.  The rapid increase in interest rates makes this analysis even more critical as the Federal Reserve contemplates further interest rate increases.

The daily interest cost for corn in storage can be estimated as the nearby futures price plus basis multiplied by the interest rate divided by 365 days (Figure 1). Movements in the nearby futures market, changes in basis, and changes in the interest rate will impact the daily interest cost. Daily interest expenses can be summed from one date to another to estimate the accumulated interest cost over the period that grain is held in storage. For example, in Figure 1, the accumulated interest from September 23 to May 1 was $0.30/bu. Accumulated interest cost is less at the start and increases the longer corn is held. 

Figure 1. Bank Prime Rate and Daily and Accumulated Interest for Unsold Corn

Futures prices and basis prices change daily, affecting cash prices producers receive. Using nearby corn futures prices, basis prices from USDA AMS for Northwest Tennessee, and daily accumulated interest costs, a net price was estimated from September 23, 2022, to May 1, 2023 (Figure 2). The net price can be compared to the nearby futures price. In September and October, basis was weak due to the large quantity of available corn at harvest and transportation challenges, due to low water levels on the Mississippi River. The accumulated interest cost was less than 5 cents per bushel through the end of October. The net price peaked on December 27 at $7.06 per bushel when accumulated interest was $0.12 per bushel, and the basis was 35 cents per bushel over the March futures contract. Based on Figure 2, the best time to make sales at elevators and barge points in Northwest Tennessee occurred between November 3 and February 21. Since the end of February, declines in futures markets and increased accumulated interest costs have resulted in substantially lower net prices for producers. Higher interest rates have necessitated a more stringent accounting of interest costs.  Producers should regularly evaluate these costs along with future expected prices when making marketing decisions to find the optimal time to sell stored grain.

Figure 2. Nearby Corn Futures Price and Net (Futures + Basis – Interest) Price 

References:

Barchart.com. Nearby Corn Historical Daily Nearby Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCK23/historical-download

Board of Governors of the Federal Reserve System (US), Bank Prime Loan Rate [DPRIME], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DPRIME, May 1, 2023.

U.S. Department of Agriculture Agricultural Marketing Service (USDA – AMS). AMS Livestock, Poultry and Grain Market News. Tennessee Daily Grain Bids.  Accessed at: https://www.ams.usda.gov/mnreports/ams_3088.pdf

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Smith, Aaron, and William “Bill” Johnson. “The Impact of Interest Rates and Basis on Net Cash Price for Corn.” Southern Ag Today 3(23.1). June 5, 2023. Permalink

Photo by Tom Fisk: https://www.pexels.com/photo/drone-shot-of-a-combine-harvester-harvesting-corn-10213238/

Current expectations indicate an increase in global and U.S. sorghum production and U.S. exports during the 2023/24 marketing year. Projections indicate 62.18 million metric tons of production globally, surpassing last year’s production of 57.34 million tons. According to USDA forecasts, the United States is anticipated to contribute significantly to the growth in sorghum production as the country rebounds from last year’s drought. 

USDA’s May 2023 World Agricultural Supply and Demand Estimates (WASDE) report projects a substantial increase in U.S. sorghum production for the 2023/24 growing season, estimating a 91.5% increase from the previous year, which moves production from 188 to 360 million bushels (Table 1). 

Table 1: U.S. Grain Sorghum Supply and Demand

The U.S. is currently projected to regain its position as the leading global sorghum producer and exporter. Projections indicate that the U.S. will export approximately 6.00 million metric tons of  the 9.75 million metric tons exported globally.

While domestic consumption is projected to remain the same as last year, export projections suggest an increase in sorghum exports (Figure 1). The U.S. 2023/24 marketing year exports are expected to reach 235 million bushels, a substantial increase to the 90 million bushels exported last year. According to USDA data, China will continue to be a significant importer of U.S. sorghum.  Chinese demand is driven largely by the country’s livestock industry and has made up the largest share of U.S. grain sorghum exports since 2013/14, with the exception of 2018/19.

Figure 1. US Grain Sorghum Exports

Ending stocks are also expected to increase from 25 to 30 million bushels, a 20% increase from the previous year. The average farm price of sorghum is projected to mirror the corn price in the upcoming 2023/24 marketing year, with current estimates indicating an average price of $4.80/bu, a sharp decline from the $6.90/bu estimated for 2022/23 (Table 1). Although a lower price is expected compared to the last three marketing seasons, prices are expected to be above pre-pandemic values. The last season with prices lower than the expected 2023/24 price was in 2019/20, when the average price was $3.34/bu.

In summary, the 2023/24 season presents opportunities for sorghum production and exports, with the U.S. expected to regain its position as the top global producer and exporter.  However, this comes at lower expected prices.

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Abello, Francisco Pancho, and Samuel Zapata. “Sorghum Exports and Production Expectations for the 2023/24 Season.” Southern Ag Today 3(22.1). May 29, 2023. Permalink

Grain and oilseed producers in the Midsouth experienced record low soybean basis, which is the cash price less futures price, in October 2022 due to reduced barge traffic and record high barge freight rates along the lower Mississippi River. These factors were associated with soybean basis as weak as 125 cents under the harvest time futures contract which was nearly one dollar below the 5-year average of 28 cents under for the month of October.  In a previous Southern Ag Today article, Biram et al. (2022) noted the primary reason soybean basis values fell to historic lows was because grain buyers at local elevators were pushed to bid lower cash prices for soybeans to compensate for the additional cost to transport grain from the elevator to the port of New Orleans for export. Further, grain buyers essentially had no place to store the grain even if they wanted to buy it which supports the principle of offering lower cash prices to disincentivize farmers from making delivery.

While we witnessed the association of record-low basis with record-low river levels in the lower Mississippi River last fall, we are now witnessing an association of relatively lower basis and record-high river levels in the upper Mississippi River due primarily to snow melt. As the Mississippi River level increases to flood-level stages, barge traffic is limited as locks and dams along the river are closed, preventing the transportation of grain downriver or empty barges upriver. On April 16th, the Mississippi River gauge height at McGregor, IA, reached 16 feet which is considered a minor flood stage by the United State Geological Survey (USGS, 2023). On April 20th, the gauge height measured at the same location reached a moderate flood stage of 19 feet. On April 28th, the gauge height was measured at 23 feet, above major flood stage of 22 feet, which is the greatest gauge height reported since April 26, 2019, when it measured 22 feet. 

Soybean basis reported in locations along the lower Mississippi River began to diverge from historical trends on April 10th and continue throughout the month of April. Consider the case of soybean basis at Elaine, AR, which is representative of basis reported in other southern states in the region (Figure 1). In this example, I consider the basis for 2023 delivery at harvest time which is the difference of the forward cash price and the November 2023 soybean futures contract (ZSX23). The first reported drop in this specific soybean basis was on April 10th with a fall from 25 cents over to 18 cents over which suggests a local response to the rising upper Mississippi River levels (Figure 1). This weakening of basis is associated with the increase in river gauge height throughout the month of April despite the relatively strong 4-year average basis for years in which the gauge height at McGregor, IA, did not reach moderate or major flood stage (i.e., 2018, 2020, 2021, and 2022). The most recent period basis fell below zero in April was in 2019 when it consistently stayed near 40 cents under which is another period in which the upper Mississippi River experienced record-high levels.

The river level in the upper Mississippi River is starting to fall and with it will most likely come relatively stronger soybean basis in the Midsouth if the historical association between these two variables continues. Additionally, forward cash prices typically reach their strongest in early summer before declining as we approach the harvest months. One implication for a grain marketing plan would be to consider holding off on the May forward contracting decision for 2023 harvest-time delivery until the latter part of the month in anticipation of recovery in the  soybean basis.

Figure 1. Spring Soybean Basis at Elaine, AR and Mississippi River Gauge Height at McGregor, IA (2018-2023)

Note: The Nonflood Four-Year Average is calculated using the years when the gauge height at this location did not reach moderate or major flood stage.

References

Biram, Hunter, John 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

Report-Arkansas Daily Grain Bids | MARS, https://mymarketnews.ams.usda.gov/viewReport2960

Mississippi River at Mcgregor, IA – 05389500, United States Geological Survey. May 3, 2023.https://waterdata.usgs.gov/monitoring-location/05389500/#parameterCode=00065&timeSeriesId=43560&startDT=2023-04-01&endDT=2023-04-30

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Biram, Hunter. “Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth.” Southern Ag Today 3(21.1). May 22, 2023. Permalink

Photo by Tom Fisk: https://www.pexels.com/photo/mississippi-river-during-golden-hour-14819622/

On May 12^th, USDA released the latest World Agricultural Supply and Demand Estimates (WASDE) report. The May WASDE is significant as it provides USDA’s first official projections for the 2023 marketing year. The report provides annual forecasts for the supply and use of various crops based on marketing years, which start August 1 for cotton and rice and September 1 for corn and soybeans. It should also be noted that projections for production are based on the acreage reported in the March 31^st USDA Prospective Plantings report and yield forecasts based on trend models or historical yields depending on the crop. Thus, the projections in Table 1 and discussed below will change as the growing season and marketing year advance. 

U.S. corn production is projected at 15,265 million bushels, based on 84.1 million harvested acres and a national average yield per harvested acre of 181.5 bushels. If realized, this would be a record yield and level of corn production. Combined with carryover stocks from last year, the total U.S. corn supply is projected to be 10% higher than in 2022. This supply increase is offset by a 5% increase in total use. Feed use is projected to increase by 375 million bushels, and ethanol to increase by 50 million bushels. Exports are projected to be up 18%, at 2,100 million bushels. Corn ending stocks are projected at 2,222 million bushels, a 57% increase from 2022. The average farm price is projected at $4.80 per bushel. 

Like corn, U.S. soybeans are projected to see higher supplies and lower prices in 2023. U.S. soybean production is projected to be 4,510 million bushels, a 5% increase from 2022. Most of the production increase is due to a higher expected yield of 52 bushels per harvested acre – also a record if realized. On the demand side, domestic crushings are projected to increase by 90 million bushels from 2022, but exports are projected to decrease by 40 million bushels. With supplies outpacing demand, ending stocks are projected at 335 million bushels, a 56% increase. 

U.S. cotton is projected to plant less acreage in 2023 but will see higher production than in 2022. The 2022 cotton crop saw a record level of abandonment, with 13.76 million acres planted but only 7.31 million acres harvested, mainly due to dry conditions in Texas. Currently, USDA projects 11.26 million acres planted with 8.71 million acres harvested. It will be important to keep an eye on acres abandoned as the year advances, with growing conditions in West Texas remaining dry. In the May WASDE, U.S. cotton production is projected at 15.50 million bales, a 7% increase from 2022. On the demand side, exports are expected to increase by 0.9 million bales to 13.5 million bales. With higher exports, cotton ending stocks are projected to decrease by 0.20 million bales to 3.30 million bales. The average farm price is projected to weaken to 78 cents per pound. 

Lastly, the carryover of long-grain rice from 2022 is low at 16.8 million hundredweight but is more than offset by higher production. Long-grain rice production is projected to increase by 11% to 142 million hundredweight. Exports are expected to increase by 4.0 million hundredweight to 52 million, but any further expansion is expected to be challenged by competition from South America. Ending stocks are projected to remain flat at 16.8 million hundredweight, the same as in 2022. Like other crops, the average farm price is projected lower to $15.00 hundredweight. Unlike other crops, though, the long-grain rice price is projected to remain above its 2021 price. 

Overall, the USDA WASDE report projects a bearish supply and demand picture and lower prices compared to last year. There remains a large amount of uncertainty for the 2023 crop; however, USDA’s initial projections indicate lower prices for many southern row crops. Actual planted acreage, weather, and crop growth are some of the main factors that will determine if lower prices becomes a reality.

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Maples, William E. “Higher Supplies and Lower Prices Projected for U.S. Crops in 2023.” Southern Ag Today 3(20.1). May 15, 2023. Permalink

USDA’s Prospective Plantings report on March 31 showed U.S. farmers intend to increase corn acres from 88.6 million in 2022 to 92.0 million in 2023. Of the 3.4-million-acre national increase, 865,000 acres or about 25%, are in the South: Alabama, Arkansas, Georgia, Florida, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee, Texas, and Virginia.   Of these 13 states, 10 show increases of 10 percent or more (Figure 1). Only Texas and Florida show a decrease in corn acres year to year.  One influence for an increase in corn across the South in 2023 was that the harvest futures price of corn this winter and early spring was high relative to the harvest futures price of cotton. The 10 states with an increase in corn acres decreased cotton acres by 789,000.  Texas farmers indicated they intend to plant 100,000 fewer acres of corn, 1.650 million fewer acres of cotton but 1.4 million more acres of wheat and increase hay harvested area by 610,000 acres.  

The South planted 9.370 million acres of corn in 2022. The prospective plantings survey showed intentions to plant 10.235 million in 2023.

Figure 1. 2023 Corn Planted Acreage, “Prospective Plantings”

In 2000, the average corn yield in the South was 120.8 bushels per acre compared to 136.9 bushels per acre nationally. Since that time, corn yield increases in the South have kept pace with the rate of corn yield increases nationally, both about 1.8 bushels per year (Figure 2). Notable is the greater degree in yield variability in the South compared to the national average.  In the 23 years since 2000, corn yields in the South have been above or below the trendline yield by more than 10% seven times: -14%, 2002; +11 %, 2004; -15%, 2011; -12%, 2012; +13%, 2013; +11%, 2014; -11%, 2022. The national corn yield has only been above or below trend by 10% or more twice in that same period of time: +11% in 2004; -22% in 2012.

Figure 2. Corn Yields: South and U.S. with trendlines and projections to 2023 (bushels r acre)

Trendline yield growth in 11 southern states has exceeded the national average, three below average – NC, OK, and TX (Figure 3). Texas, the state with the largest corn acreage in this region, has essentially had  no change in average yields since 2000. 

Figure 3. Trendline Yield Increase, 2000 to 2022 (bushels per acre)

Based on the prospective plantings survey, 10-year average percent harvested calculations, and the trendline yield projection, corn production in the South would increase by 308 million bushels in 2023 compared to 2022.  

Table 1. 2022 Corn Production in the South with Projections for 2023

Since 2000, corn production in the South has averaged 8.9 percent of total U.S. corn production, with a low of 7.5 percent in 2006 to a high of 11.0 percent in 2013 (USDA, NASS, 2023c) (Figure 4). As a share of total U.S. production, corn in the South increases from 8.3 percent in 2022 to 9.7 percent projected for 2023.  This percentage is consistent with the increasing importance of southern corn production to the U.S. corn supply. However, the broad range of growing conditions across the South means yield variability in that supply is more likely year to year.

Figure 4. South’s Share of U.S. Corn Production

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References

USDA, NASS (a), “Grain Stocks, “Prospective Plantings, Rice Stocks Agricultural Statistics Board Briefing”, March 31, 2023, https://www.nass.usda.gov/Newsroom/Executive_Briefings/2023/03-31-2023.pdf

USDA, NASS (b), “Prospective Plantings”, March 31, 2023, https://downloads.usda.library.cornell.edu/usda-esmis/files/x633f100h/rv044597v/gx41nz573/pspl0323.pdf

USDA, NASS (c), Quick Stats, accessed April 18, 2023,  https://quickstats.nass.usda.gov/.

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Welch, Mark. “The Importance of Corn Production in the South to the U.S. Corn Supply.“ Southern Ag Today 3(19.1). May 8, 2023. Permalink

Photo by David Dibert: https://www.pexels.com/photo/corn-plantation-during-daytime-5001990/