For planning purposes, it is never too early to think about next season’s opportunities and risks. To start with, we’re still not settled on the size of the 2022 cotton crop. USDA forecasted the latter back in May at over 16 million bales, and their November forecast is two million fewer. Many in the southern plains expect more downward revision. If the old crop carry-out is the currently-forecasted three million bales or fewer, this will be the first contribution to what is shaping up as a tight new crop situation for the 2023/24 marketing year.
The second consideration is new crop planting. Relative prices of competing crops like feedgrains and wheat may induce fewer cotton acres being planted in 2023. For example, if you take Dec’23 corn futures trading over $6 per bushel and Dec’23 cotton under 80 cents per pound, the result is a historically high ratio of corn futures prices to cotton futures prices. History suggests that when pre-plant corn futures prices are this high in relation to cotton futures (presently around 8.0), we could expect cotton planted acres around nine million acres, all other things being equal (see Figure 1 below).
Obviously, there are other competing crop prices to consider such as soybeans, peanuts, and wheat. However, the corn:cotton model reflected in Figure 1 does a decent job incorporating the influences of those other competing crops.
The third consideration is the lingering drought impact of the fading La Niña. A relatively dry looking drought map implies at least average, if not above average, abandonment of cotton acreage in the southern plains for the 2023 crop, which will increase U.S. average cotton abandonment. Nine million planted acres of cotton with average abandonment implies potentially very tight supplies for the 2023/24 marketing year. It might imply an in-season weather market, with market volatility in anticipation of (or reaction to) milestone supply reports from USDA.
In short, there may be stronger new crop prices, but they may gyrate sharply between planting and harvest, which is typically volatile weather market behavior.
Figure 1. U.S. All Cotton Planted Acreage and Ratio of New Crop Corn:Cotton Futures Ratio.
The risk faced by producers in the 2022 growing season was unprecedented. As farmers were in the field preparing to plant their crop, Russia invaded Ukraine fueling uncertainty across the world and in agricultural input markets. A few months later, rain fell across the midsouth causing a great deal of yield losses stemming from late planting and prevented planting (Figure 1). Of the $1.4 billion in rain-related losses across the U.S., $0.4 billion were primarily in the midsouth states (USDA-RMA, 2022). In the summer, drought struck the entire United States which resulted in significant crop losses in Texas, Oklahoma, and parts of the east coast (Figure 2). Of the $3.9 billion in total drought-related losses across the U.S., $2.4 billion were in the southeast (USDA-RMA, 2022).
In addition to the production losses stemming directly from weather, many farmers experienced indirect price losses stemming from the low water levels in the Mississippi River. These price losses at the local grain elevator came in the form of extremely weak basis during arguably the most unfortunate time: harvest. During the usual harvest window, basis, or the local cash price less the relevant futures price, fell from about 40 over to 125 under (Figure 3). Once the river levels increased, basis strengthened to about 50 over and has stayed relatively consistent at this level even though most new crop delivery from the 2022 harvest is finished. However, farmers with on-farm grain storage may want to take advantage of the strong basis and deliver either grain from the 2021 old crop or newly stored grain from the 2022 new crop.
While measuring crop yield losses generally occurs throughout the growing season, USDA-RMA harvest prices are determined in the months of August through November depending on the state and crop. In the southeast, the harvest price was greater than the projected price, except for cotton and a few soybean exceptions (Figure 4). While corn, sorghum, and rice experienced a 10-21 percent increase in the harvest price relative to the projected price, cotton experienced between a 20-21 percent decrease in the harvest price over the projected price. Harvest prices for soybeans experienced between a 4 percent decrease and a 5 percent increase over the projected price.
Using the information on production losses and finalized harvest prices, it is useful to consider options to managing risk in the 2023 growing season. One option is to construct a marketing plan by pricing bushels and inputs which will reduce uncertainty revolving around tight margins (Maples, 2022). Another option is to begin considering alternative plans for crop insurance. The product which comprises most insured acres is Revenue Protection (RP) crop insurance which insures against price and production risks, both of which have been prominent in the 2022 growing season. RP provides one layer of protection against low prices and another layer of protection against crop losses which is best represented by the 2022 cotton crop characterized by significant yield and price losses. Another option is to use both strategies jointly which will allow a producer to be more aggressive in pricing bushels to be delivered at a later specified date (Biram et al., 2022). Using forward contracting in addition to RP crop insurance will provide one layer of price protection in the cash market, another layer of protection in the futures market, and third layer of protection from yield losses resulting from drought and early-season rains.
While the southeast saw a relatively quiet hurricane season, excess rainfall and drought still caused significant yield losses across the southeast and caused some farmers to lose out on cash prices at a critical time. Having a risk management plan which covers multiple layers of protection will help provide financial certainty greater peace of mind.
Figure 1. Rain-Related Losses as a Percentage of Total Liability (2022)
Figure 2. Drought-Related Losses as a Percentage of Total Liability (2022)
Figure 3. Daily Soybean Basis (ZSX) at Helena, Arkansas (2018-2022) (September 17th through November 14th)
Source: USDA-AMS MyMarketNews Data Query (2022)
Figure 4. Percent Changes in Projected Prices and Harvest Prices
USDA-RMA, 2022
References
Biram, H.D., J.D. Anderson, S. Stiles, and A.M. McKenzie. “Risk Management Tools and Strategies for Arkansas Corn and Soybean Producers: Implications of Mississippi River Transport Disruptions.” Fryar Price Risk Management Center of Excellence. Technical Report No. FC-2022-05. October 2022. (Link)
Maples, Will. “Considerations for Developing a Pre-Harvest Marketing Plan.” Southern Ag Today 2(47.1). November 14, 2022. (Link)
Cause of Loss Historical Data Files | USDA Risk Management Agency. November 21, 2022. (Link)
Report-Arkansas Daily Grain Bids | MARS. November 21, 2022. (Link)
Producers face the challenge of when to sell or manage price risk during the growing season. Each growing season is different, but part of marketing and risk management is examining past data to improve the likelihood of making a decision that will increase the selling price received. Prices react to numerous factors. This article examines corn futures prices for years with above and below trendline national average yields. From 1980 to 2021, trendline yields have increased nearly two bushels per acre per year (Figure 1). In recent years, corn trendline yields have flattened, increasing less than one bushel per acre per year from 2013 to 2022. In general, actual national average yields above trendline indicate a mostly agreeable production year whereas below trendline yields indicate more widespread production challenges.
Figure 1. NASS Estimated National Average Corn Yield and Linear National Trendline Yield, 1980-2022.
Data Source: USDA NASS
What does trendline yield tell us about how corn futures prices react during and after the production year? Using the 1980-2021 trendline from 2010 to 2021, in years with annual estimated yields above trendline yields, December futures prices, on average, peak in May and June and decrease to a harvest low in September (Figure 2). In years with below trendline yields, the December futures price, on average, establishes a low in May / June before peaking in October (Figure 2). This time period coincides with when new crop production estimates, such as the USDA WASDE in May, are released. New crop estimates contribute to movements in the futures market as information is revealed and estimates are refined. Intuitively price movements in Figure 2 makes sense—lower yields contribute to prices increasing and higher yields contribute to declines in prices (all else being equal). Based on Figure 2, prices tend to break higher or lower in June / July, this is due to a greater likelihood of knowing whether the production year (or yield) has been mostly beneficial or has presented challenges to corn producers in the United States.
Figure 2. Monthly Average Daily Closing Price for the December Futures Contract in Years with Above and Below Trendline Yields, 2010-2021
*Below trendline years included 2010, 2011, 2012, 2013, 2019, and 2020. Above trend line yields occurred in 2014, 2015, 2016, 2017, 2018, 2021. Data Source: Barchart
Moving outside of the preharvest through harvest interval, from 2010-2021, average March futures prices moved the same direction regardless of whether national average estimated yields were above or below trendline (Figure 3). On average, futures prices increased monthly from December through March. Years with below trendline yields had greater increases from December to March than years with above trendline yield.
As mentioned above, all years are unique in the challenges that producers and markets face. So, how has 2022 compared to averages? Currently, USDA projects 2022 national average corn yield at 5.8 bushels per acre below the 1980-2021 trendline yield of 178.1 bushels per acre (2.4 bushels per acre below the 2013-2021 trendline). In 2022, monthly average closing prices for the December contract peaked in May, established a low in July before rebounding in the Fall (Figure 4). The spike in May can be partially attributed to the challenging start to the 2022 production year when national average planting progress was two to three weeks behind normal levels. The slow start to the corn production season combined with persistent drought later in the summer caused prices to rebound in the Fall. There are two key takeaways from this basic analysis: 1) producers need to be aware of factors affecting national yield (production) estimates and incorporate it in to price risk management decisions; and 2) while each year is unique, examining price trends for years with comparable yields can help inform producers’ decisions in corn futures markets.
Figure 3. Average Monthly Futures price for the March Contract from December to March following a production year with above or below trendline yield, 2010-2021 crop years
*Below trendline years included 2010, 2011, 2012, 2013, 2019, and 2020. Above trend line yields occurred in 2014, 2015, 2016, 2017, 2018, 2021. Data Source: Barchart
Figure 4. Monthly Average Daily Closing Price for the December Futures Contract, 2022
U.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). Quick Stats. Available on-line at: https://quickstats.nass.usda.gov/
The upcoming winter months provide an opportunity for row crop producers to review their marketing plans. A marketing plan is a valuable tool that helps producers manage emotions when making marketing decisions. A marketing plan is an outline of price, date, and quantity objectives used to generate a reasonable return given the existing market conditions. A producer should, in practice, have two separate marketing plans—a pre-harvest and post-harvest plan—as marketing decisions in both instances offer different challenges. This article will discuss developing pre-harvest plans. A pre-harvest marketing plan allows producers to take advantage of the normally higher spring and summer prices as seen in Figure 1. When developing a pre-harvest plan, producers should consider some basic items.
A common question when developing a pre-harvest marketing plan is how much should be sold. A good rule of thumb is to not sell more than crop insurance covers. For example, if a producer has an expected production of 100,000 bushels of corn protected by revenue protection insurance at the 75% coverage level, then the maximum amount that the producer should sell pre-harvest is 75,000 bushels. The amount of expected production a producer sells pre-harvest will be influenced by their risk tolerance level, with risk-averse producers making fewer sales. Once a producer has determined the amount of pre-harvest sales, they will want to split sales into smaller more manageable units of 1,000 or 5,000 bushels. Splitting sales into smaller units will provide the producer with greater flexibility in marketing decisions.
A pre-harvest marketing plan should also include price targets and sale dates for the smaller sales units mentioned above that will force the producer to be proactive about pricing. The most important price target is the minimum price target, which is the lowest price at which the producer would make a pre-harvest sale. A common suggestion is to set the minimum price at the cost of production. The maximum price target should be a realistic price, determined by historical price movements and data, that producers can sell for. The maximum price is less important than the minimum price because as you will see below, sales dates will force a sale if the price is not reached. Sales units should then be split between price targets, varying between the minimum and maximum price, which reduces the price volatility faced by the producer and hence the volatility of expected income.
Along with a price target, each sale unit in the marketing plan should have a pre-determined sale date. The sale date implies if a price target for a sale is not reached by the sale date, the producer will still make the sale. When selecting sale dates, producers should consider the price seasonality of the commodity. Higher price targets should be coupled with sale dates that correspond to the time of year the commodity price is typically the highest.
The U.S. has been the world’s fourth-largest peanut producer over the past five years, averaging 3.1 million tons produced annually. Over that time, the U.S. has exported over one-fifth of its total produced peanuts, making it the third-highest exporter of peanuts globally. However, the magnitude of U.S. peanut exports and the quantity sent to its primary export partners have fluctuated year-to-year.
While the main peanut export destinations from the U.S. have been its North American neighbors, Canada and Mexico, China has played an increasing role in recent years. After accounting for just 5% to 19% of U.S. peanut exports during the 2017/18 and 2018/19 marketing years, 2019/20 and 2020/21 saw China increase to receive 43% and 40% of U.S. peanut exports, respectively. In particular, China bought a large portion of in-shell peanuts which were used to produce peanut oil during those high-import years. However, China’s imports of U.S. peanuts dropped during the 2021/22 marketing year as China saw overall imports decrease, and Mexico once again overtook China as the largest importer of U.S. peanuts. Increased opportunities could remain to export lower quality peanuts for oil as has occurred recently.
U.S. Peanut Exports by Destination and Marketing Year
Data Source: U.S. Census Bureau Trade Data
Now, what should we expect this marketing year? One month into the 2022/23 marketing year, U.S. peanut exports are down 8% relative to the same period last year. While China’s imports of U.S. peanuts might not return to the levels seen in 2019/20 and 2020/21, it is worth mentioning that the USDA projects China to increase its peanut imports during the 2022/23 marketing year by 350 thousand tons over its 2021/22 level. Peanut demand in China had fallen in part because consumers switched to cheaper vegetable oils instead of the more-expensive peanut oil as they cut food expenditures during the COVID-19 pandemic. Another factor at play this year is the drought in China, which has raised concerns over how large their peanut and overall oilseed crop will be at harvest. In addition, insufficient or excess precipitation across different regions in India – a major peanut exporter to China – could subdue yields in a country that already saw decreased planted acreage this marketing year, potentially further reducing its production. These factors could increase opportunities for U.S. peanut exports to China this marketing year.
