Category: Crop Marketing

Feed and residual use has long been the largest consumption category in the USDA supply and demand tables for U.S. corn (Figure 1)^[1]. That began to change with the passage of the Renewable Fuel Standard Program in 2005^[2]. Corn for fuel increased over the next several years, from under two billion bushels in the 2005/2006 marketing year to over five billion bushels in 2011/2012 when it overtook corn for feed as the number one use category.  Since then, fuel and feed have competed for the top spot for corn consumption.   

Additionally, the price of corn has been increasing in the biofuel era. From the increased planting flexibility in the Freedom to Farm Act in 1996 to the passage of the Renewable Fuel Standard in 2005, prices averaged $2.15 per bushel with a low of $1.82 in 1999 and a high of $2.71 in 1996. From 2006 to 2021, the average price more than doubled to $4.33 per bushel with a low of $3.04 in 2006 and high of $6.89 in 2012. Currently, the price estimate for the 2022 corn crop is $6.65, reflective of a 54% increase in one year alone.

The peak in corn for feed consumption came in the 2004/2005 marketing year at just over six billion bushels. After the passage of the Renewable Fuel Standard in 2005, feed use began to fall, and the price of corn began to increase (Figure 2). From 2013 to 2019, the price of corn appears to be associated with an increase in feed use. Since 2020, feed use has fallen with increases in corn price.

There is more to the corn story than the inverse relationship between feed input demand and prices, and the implications of relatively higher corn prices are always looming. In spite of the fall in corn for feed use in 2006 associated with the RFS, an ethanol fuel co-product became available known as distiller’s dried grains with solubles (DDGS).  Each bushel of corn (56 pounds) used for fuel produces about 16 pounds of DDGS which adds to feed grain production, providing some price relief to cattle, pork, and poultry producers.  In addition, the size of the livestock and poultry industries, measured by grain consuming animal units (GCAUs), has grown from about 75 million in the 1980s to 101.7 million GCAUs in 2019 (Figure 3). Another trend in the feed use category we can draw from GCAUs is the inverse relationship between corn prices and feed use. There was a rebound in use as prices fell from their record highs in 2012 with a peak in 2014. Even with relatively low and stable prices, energy feed plus DDGS per GCAU has been on a downward trend. That points to an increasingly efficient meat sector producing more pounds of protein on fewer pounds of feed.  

What does this mean for corn prices moving forward? From the demand side of the balance sheet, the feed use category near term looks to be limited by lower overall GCAUs and declining feed use per GCAU. As livestock and poultry numbers increase and as grain prices go down, we may not return to previous levels of use. Improved feeding efficiencies may dampen the feed use response in future supply and demand balance sheets.   

Figure 1. U.S. Corn Use

Figure 2. U.S. Corn Feed and Residual Use and Season Average Farm Price

Figure 3. Grain Consuming Animal Units (GCAU) and Energy Feed per GCAU

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^[1] For an explanation of the feed and residual use category used by USDA in their supply and demand tables, see “Implications of an Early Corn Crop Harvest for Feed and Residual Use Estimates”, FDS-12f-01, Economic Research Service/USDA July 2012.

^[2] Details of the Renewable Fuel Standard Program authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 can be found at https://www.epa.gov/renewable-fuel-standard-program.

On-farm grain storage can provide multiple benefits to producers. One of the major benefits is increased marketing flexibility. Grain storage allows producers to take advantage of the seasonal nature of grain prices. Typically, grain prices are at the lowest point shortly after harvest when supplies are the greatest, and then prices increase as supplies draw down throughout the rest of the marketing year. Figure 1 shows this seasonal change in grain prices in the Mid-South Delta for corn and soybeans. On average, from 2014-2021, corn prices were nearly 25% higher in the month of June compared to October, and soybean prices were nearly 15% higher in June compared to October. While the idea of seasonal grain prices holds, on average, each year is different. For example, in 2019, June corn prices were 19% lower than October, and June soybean prices were 3% lower. The next year, 2020, saw large returns to storage — corn prices increased by 79%, and soybean prices increased by 43% from October to June. Having the ability to include storage in a marketing plan provides the possibility for higher returns for most years.

Figure 1. Monthly Delta Corn and Soybean Cash Price Indexes as a Percent of October Prices, 2014-2021 Average

On-farm grain storage also provides greater flexibility where grain can be sold. Many southern states have large poultry, distilling, ethanol, and livestock industries that buy grain throughout the year but may not have substantial on-site storage. Having on-farm storage allows producers to take advantage of these on-demand markets. It is important for producers to know the on-demand markets in their area and be on contact lists for those purchasers. 

Harvest can also be completed faster with the addition of on-farm storage. Given harvest risks, such as hurricanes in the Southeast, valuable time can be saved by not having to transport grain to an off-farm storage facility or wait in lines at elevators, barge points, or other end users. 

While on-farm storage provides greater flexibility, it does come with some disadvantages. The biggest disadvantage is the size of the initial investment needed to build a storage facility. Additional considerations must be given to the cost of extra drying, shrinkage, quality deterioration, and increased handling costs.    

Since 2000, southern states have added 28.5 million bushels of on-farm storage capacity. Figure 2 shows the on-farm storage capacity as of December 2021, and the average total corn, soybean, and wheat production from 2017-2021 for each southern state. Kentucky has the highest on-farm capacity with 240 million bushels, which is 66% of the state’s average corn, soybean, and wheat production. Georgia has the highest percentage of on-farm storage capacity as a percent of production at 87% followed by Arkansas at 81%, likely driven by historically well-established poultry industries in each state. On-farm storage capacity is not reported for Florida, Louisiana, and South Carolina. Overall, many southern states have room to expand on-farm storage opportunities given the current level of grain production. 

Figure 2. 2021 On-Farm Storage Capacity and Average Total Corn, Soybean, and Wheat Production from 2017-2021 by State

Maples, William E.. “On-Farm Grain Storage in Southern States“. Southern Ag Today 2(38.1). September 12, 2022. Permalink

Every year, the U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service (NASS) releases its projected harvest acres for U.S. cotton starting in August. The report provides updated information about expected U.S. cotton production. In 2022, the U.S. planted 12.3 million acres of upland cotton, the highest in 3 years, which was mainly due to historically high cotton prices during the decision-making and planting window. 

However, in 2022, the overall U.S. abandonment rate for upland cotton is estimated at 43.4%, which is the highest on record since 1953. The abandonment rate, which measures the percentage of unharvested acres compared to total planted acres, provides an estimate of the number of failed acres versus the number of acres that will be harvested. Severe drought conditions hit the largest cotton production regions in the Southwest (Texas, Oklahoma, and Kansas) and the West (California, Arizona, and New Mexico). The abandonment rate for Texas (Figure 1A) reached 69%. Texas planted 7.1 million acres of cotton in 2022 –  by far the largest of any state – representing 57.6% of total U.S. planted acres (Figure 1B). By contrast, drought impacts were less severe in the Delta (Missouri, Arkansas, Louisiana, Mississippi, and Tennessee) and Southeast (Alabama, Georgia, Florida, South Carolina, North Carolina, and Virginia). 

As a result of the drought conditions this year, upland cotton harvested acreage in the U.S. is projected at 7.0 million acres, which is the lowest amount of harvested acreage in over 150 years. The projected high abandonment rate in the U.S. reduced expected cotton production to 12.2 million bales, compared to the 10-year average of 16 million bales, according to USDA’s Foreign Agricultural Service. If realized, it would also be the smallest U.S. crop since 2009. U.S. cotton demand (mill use plus exports) for the 2022 crop is forecast at 14.3 million bales, exceeding production. As a result, ending stocks in the U.S. are expected to decline to 1.8 million bales, the lowest on record since 1960. The low supply of U.S. cotton provides support for domestic cotton prices. For the 2022/2023 marketing year, upland cotton prices are forecast at 97 cents per pound. If realized, it would be the highest price on record since 1909. 

Figure 1A. Abandonment rate for cotton-producing states in the U.S. in 2022

Figure 1B. Planted acres and harvested acres of the cotton-producing states in the U.S. in 2022 Abandonment Rate = 1 – Harvested Acre/Planted Acre

References and Resources:

U.S. Department of Agriculture. 2022a. Production, Supply, and Distribution Database. Washington, DC: U.S. Department of Agriculture, Foreign Agricultural Service. Available online: https://apps.fas.usda.gov/psdonline/

U.S. Department of Agriculture. 2022b. Quick Stats. Washington, DC: U.S. Department of Agriculture, National Agricultural Statistics Service. Available online: https://quickstats.nass.usda.gov/

Liu, Yangxuan. “High Abandonment Acres for U.S. Cotton Projected Due to Drought“. Southern Ag Today 2(37.1). September 5, 2022. Permalink

With the peanut harvest set to begin, USDA-NASS released the first set of forecasts for this year’s crop in the August Crop Production report. U.S. peanuts are expected to yield 4,129 lb. per acre, which would about equal the value from 2021. Predictions for the top-four peanut states are mixed, with record or near-record yields projected in three states. Georgia – the leading peanut producer – is expected to yield 4,500 lb. per acre, which would be its highest value since 2012. Alabama and Florida are forecast to yield 4,000 lb. and 4,300 lb. per acre, respectively. If realized, this would tie Alabama’s 2012 record and beat Florida’s 2014 mark of 4,000 lb. per acre. On the other end of the spectrum, Texas – mired in severe drought – has a forecasted yield of just 2,100 lb. per acre, which would be its lowest value since 1995. 

One question to consider is whether the August forecast will equal the yield calculated at the end of the year. As shown in the figure, the August forecast has exceeded the final calculated yield in each of the past eight years, amounting to an average overestimate of 172 lb. per acre per year. Peanut crops with high yield potential have often seen their fortunes turn due to tropical storms and other weather-related issues across the South. Therefore, it is important to remember that these yield estimates could change before harvest.

If the current yield estimates are realized, total U.S. production would fall by 3% this year to 3.1 million tons driven by the lower planted (and expected harvested) acreage, as shown in the table. In total, 97% of the 1.54 million planted acres in the U.S. are expected to be harvested this year. Among the top-producing states, only Alabama is expected to see an increase in harvested acres, with the top-four states projected to see forty thousand fewer acres harvested than last year. Overall, this slight decline in production should not have too much of an impact on the peanut market. It would likely take larger abandonment or a sizeable yield decline to see a significant effect on the market given the existing peanut stocks.

Forecasted Peanut Production and Harvested Area for Top-producing States and U.S. Total, 2022 vs. 2021

Sources:

USDA National Agricultural Statistics Service. 2022. “Crop Production.” August 12, 2022. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/n5840309g/2n49v849f/crop0822.pdfUSDA National Agricultural Statistics Service. 2022. “Acreage.” June 30, 2022. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/j098zb09z/0z70b374s/w9506686w/acrg0622.pdf

Sawadgo, Wendiam. “2022 Peanut Production Projections“. Southern Ag Today 2(36.1). August 29, 2022. Permalink

Producers face risks every growing season. Production risks, such as extreme weather and drought, affect yield. Marketing risks, including price direction and volatility, is affected by global supply and demand. Developing strategies that use crop insurance in conjunction with options can be an effective way to manage marketing and production risks within the growing season for row crop producers. 

Annually, Federal crop insurance provides over $100 billion in total liability protection (RMA, 2022). Many crop insurance products and features are available to producers; however, three popular crop insurance types are yield protection (YP), revenue protection (RP), and revenue protection with harvest price exclusion (RP-HPE). YP offers protection against declines in yield, whereas RP and RP-HPE offer protection against declines in revenue (yield and price). To calculate the insurance guarantee, RP policies use the greater of the projected or harvest crop insurance price while RP-HPE utilizes only the projected price. It is important for producers to consider the in-season price protection offered by the type of crop insurance policy and buyup coverage level as well as the price risk exposure throughout the growing season. Considering price risk exposure throughout the growing season introduces the opportunity for using crop insurance products in conjunction with other risk management tools such as futures and options.

Options can be used during the growing season to establish a futures price floor greater than the projected price in the crop insurance policy. Buying options allows producers to obtain the right, but not the obligation, to establish a position in the futures market at a specified strike price. The cost to purchase the option is the premium. As such, the strike price minus the premium establishes a futures price floor for the bushels protected. Figures 1, 2, and 3 show the daily December corn futures contract closing price, the projected crop insurance price (for Arkansas the projected price discovery period is January 15 to February 14 (Table 1); projected price discovery periods vary by state), and the put option floor (strike price minus the premium) that could have been established when the market peaked during the 2020, 2021, and 2022 growing seasons. In 2021 and 2022, purchasing a put option was an effective method to establish a futures market price floor above the projected price provided by crop insurance. In both years, the price floor established with the option contract also exceeded the harvest crop insurance price (Table 1). However, each year presents different market opportunities. In 2020, no opportunity was presented to establish a futures market price floor through put option purchases above the crop insurance projected price – the December corn contract declined after the projected price determination period and remained flat through most of the growing season.

Take Aways

1. Producers should consider utilizing marketing tools that work in conjunction with crop insurance during the growing season.
2. In-season marketing opportunities can be short lived, so action should be considered when opportunities are presented.
3. Each marketing year is different, presenting unique challenges and opportunities. Knowing how to use numerous marketing tools (options, futures, hedge-to-arrive (HTA’s), forward contracts, basis contracts etc.) allows producers to select the tool that is best suited to provide in-season price protection.

Figure 1. Projected Crop Insurance Price, December Corn Price, and May 20^th Option Floor, 2022

Figure 2. Projected Crop Insurance Price, December Corn Price, and May 7^th Option Floor, 2021

Figure 3. Projected Crop Insurance Price, December Corn Price, and February 21^st Option Floor, 2020

Table 1. Projected and harvest crop insurance prices for corn (Arkansas), 2020-2022

Year	Project Price Discovery Period	Projected Price	Harvest Price Discovery Period	Harvest Price
2020 2021 2022	01/15 – 02/14 01/15 – 02/14 01/15 – 02/14	$3.95 $4.48 $5.75	08/15 – 09/14 08/15 – 09/14 08/15 – 09/14	$3.54$ 5.36 TBD

Resources and References

USDA Risk Management Summary of Business. (August 2022). USDA Risk Management Agency. https://www.rma.usda.gov/SummaryOfBusiness

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Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor“. Southern Ag Today 2(35.1). August 22, 2022. Permalink