Category: Crop Marketing

For the 2023/24 marketing year, higher interest rates will negatively impact producers’ costs for holding grain in storage, especially for producers utilizing operating loans. This article expands on the recent Smith and Johnson Southern Ag Today article to examine operating loan interest costs of storing grains at different interest rates and lengths of time and how to calculate operating loan interest costs when grain is stored. The article also provides charts to depict the change in operating loan interest cost of storing corn, soybeans, and wheat. For example, an increase in interest rate from 4% to 8% will increase the storage costs of corn stored for five months by 112.5% or $0.09/bushel. 

The Federal Reserve began increasing the Federal Funds rate in February 2022 to combat inflation. When the Federal Reserve raises the Federal Funds rate, the prime rate increases. The prime rate is used as a reference interest rate for many types of loans, including operating, term, and credit card loans. On May 4, 2023, the prime rate reached 8.25%, the highest since 2006/07. Higher interest rates impact every aspect of a farming operation, including marketing strategies, especially producers using operating loans to hold grain in storage. Typically, operating loans are variable interest rate, meaning they are not fixed but increase when the prime rate changes; however, some lenders have started offering fixed-rate operating loans to provide customers with cost certainty. Operating loans are used to pay for inputs until grain can be sold and the operating loan paid back. There is an interest cost for holding grain in storage compared to selling at harvest and paying down operating loans. Grain in storage typically allows producers to increase profit through marketing strategies which utilize market or basis carry. However, the operating loan interest costs need to be accounted for when interest rates are elevated. 

The operating loan interest cost on a dollar-per-bushel basis can be calculated by multiplying the harvest price by the interest rate and dividing the number of months the crop is stored by 12. For example, a producer that holds corn harvested in October until March (5 months), has an operating loan interest rate of 8% and is expecting a harvest price of $5.00/bushel would have operating loan interest costs of storage of $5.00 × 0.08 × (5/12). 

Figures 1, 2, and 3 show the impact of the number of months of storage and interest rates on corn, soybeans, and SRW wheat operating loan storage costs. Harvest prices are assumed to be $5.00/bu for corn, $12.00/bu for soybeans, and $6.00/bu for SRW wheat. The storage costs increase the longer grain is stored. Additionally, costs increase as the price of the commodity increase, i.e., interest costs are higher for soybeans than corn or SRW wheat. 

The table at the bottom of each chart can be used to estimate increased operating loan interest costs for grain held in storage due to climbing interest rates. Following our previous example, if corn is harvested in October for March delivery (5 months) and the interest rate is 4%, operating loan interest costs of storage for $5 corn would have been $0.08/bu. When the rate increases to 8%, closer to current rates, the operating loan interest costs of storage are $0.17 per bushel. This result indicates an increased operating loan interest cost of $0.09/bu ($0.17 minus $0.08), a 112.5% increase due to a 4% increase in interest rates. 

In conclusion, high-interest rates increase the storage costs for producers holding grain via an operating loan, affecting each operation’s bottom line and potentially negating the price benefits of storage. Storage costs are rising with interest rates and should be accounted for in your grain marketing decisions. 

Figure 1: Impact of Interest Rates Increases on Corn Storage Costs

Figure 2: Impact of Interest Rate Increases on Soybean Storage Costs

Figure 3: Impact of Interest Rate Increases on SRW Wheat Storage Costs

References

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.

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Gardner, Grant. “Interest Rates and Grain Storage.” Southern Ag Today 3(26.1). June 26, 2023. Permalink

There is no statistical relationship between the wheat stocks-to-use ratio and the U.S. Marketing Year Average (MYA) price. From 2000 to 2022, the linear relationships between U.S. and world stocks-to-use and price indicated an R-squared of 0.0138 and 0.0024, respectively (Figure 1).  R-squared (R²) is a measure that represents the proportion of the variance for a dependent variable (MYA price) that’s explained by an independent variable (stocks-to-use) in a regression model. Simply stated, U.S. stocks-to-use explains 1.38% of the variance in the MYA wheat price. For comparison, a simple linear regression for U.S. corn price and stocks-to-use ratio results in an R² of 0.56. Wheat provides many unique challenges for projecting prices. Different classes exist – hard red spring, hard red winter, soft red winter, hard white, soft white, and durum – that influence the USDA wheat MYA price. Additionally, wheat is one of the most geographically dispersed crops, with production in both hemispheres and six continents. U.S. wheat production is a small percentage of global production. From 2000 to 2022 the U.S. has accounted for 5.7% (2022) to 11.5% (2003) of global production. Thus, international forces have a greater impact on U.S. wheat prices compared to corn and soybeans. 

However, there is a statistical relationship between stocks held by major exporters (Argentina, Australia, Canada, European Union, Russia, Ukraine, and U.S.), world wheat imports, and the U.S. MYA wheat price (Figure 2). This relationship has an R² of 0.4198 – meaning stocks held by major exporters divided by world imports explains less than half the variance in MYA wheat prices. For the 2022/23 marketing year, the seven major exporters held ending stocks of 60.5 million metric tons (MMT) and total world imports were estimated at 207.2 MMT, a ratio of 0.29:1. The 2022/23 USDA estimated MYA price is $8.85/bu. Using the linear relationship between this ratio and MYA price would have predicted a price of $6.67/bu for the 2022/23 marketing year, or $2.17/bu under the USDA’s May estimate. However, using the linear relationship, this is the largest under estimation of price from 2000 to 2022, and the average miss of MYA price compared to the estimated relationship trendline over this time period is +/- $1.13/bu.  This larger-than-average discrepancy between the predicted price and MYA price can partially be explained by Russia’s invasion of Ukraine which created chaos in global wheat markets in 2022 and skewed prices due to concerns over production and access to supplies in both countries. 

What does this relationship mean for the wheat MYA price for the 2023/24 marketing year? Currently, USDA projects ending stocks for the seven major wheat exporters at 52.8 MMT and world wheat imports at 207.5 MMT, a ratio of 0.255:1. Using the simple linear relationship in Figure 2, this would predict a U.S. MYA price of $7.06/bu.  However, using plus and minus the average miss, we can obtain a price range of $5.93/bu to $8.19/bu. This projection seems reasonable given the current futures market prices for wheat. However, it should be restated that this relationship has limitations (R² of 0.4198), meaning that other factors strongly influence wheat MYA prices. An escalation of the Ukraine-Russia conflict or other geopolitical / global events could have a dramatic influence on U.S. MYA wheat prices in 2023/24. 

Figure 1. The Relationship between U.S. Wheat Marketing Year Average Price and U.S. and World Stocks-to-Use Ratio, 2000/01 to 2022/23

Figure 2. U.S. Marketing Year Average Price and Stocks held by Major Exporters divided by World Imports, 2000/01 to 2022/23 

References:

U.S. Department of Agriculture Foreign Agricultural Service (USDA – FAS). Production, Supply, and Distribution (PS&D) Accessed at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home  

U.S. Department of Agriculture National Agricultural Statistics Service (USDA – NASS). Quick Stats Accessed at: https://www.nass.usda.gov/Quick_Stats/

It is frequently challenging to forecast crop production because of varying local weather and crop conditions.  In the case of upland cotton, the situation is further complicated by plant biology. The major row crop substitutes to U.S. cotton include corn, sorghum, wheat, soybeans, and peanuts. The first three of these are annual grasses, while the latter are annual legumes. The reproductive strategy of these annuals is to produce as much seed (yield) as allowed by weather and soil conditions. As a result, aggregate yields of annual crops are often thought to be well correlated with weekly crop condition rates. 

In contrast, upland cotton is relatively more complicated in its growth habits and resulting predictability.  The reason is that cotton is a perennial in its native tropical environment, akin to a crepe myrtle bush.  When grown as an annual crop in temperate regions, cotton plants can still shift back and forth between vegetative and reproductive growth.  This mixed and indeterminate growth habit is illustrated by a poor visual inspection of the weekly cotton crop condition and the resulting Texas average cotton yield (Figure 1).  The Texas aggregate situation is even further complicated by the range of planting dates, from March-April in southern Texas to May-June in northwestern Texas.  Such phenomena in Texas can have a major influence on U.S. production estimates since Texas represents over half of U.S. planted acreage (USDA NASS). 

The situation in 2023 is further complicated by a mid-year shift in the weather.  The first quarter of 2023 saw severe drought conditions over much of Texas (Figure 2, left panel).  Widespread and repeated rains since April have reportedly helped developing crops in southern Texas while complicating planting in northwestern Texas.  How much the latter will contribute to more or less cotton production is unknown. It is possible that the State will realize prevented planting from drought preceding prevented planting from too much rain.  With much of the growing season still ahead, further shifts in weather may also occur.  It may not be until early fall before we have reliable forecasts of the resulting production outcome.

Figure 1. Texas Cotton Crop Condition Index

Figure 2. U.S. Drought Monitor Maps from March 7, 2023, and June 6, 2023

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Robinson, John. “Difficulty in Forecasting 2023 U.S. Cotton Production.” Southern Ag Today 3(24.1). June 12, 2023. Permalink

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/