Category: Crop Marketing

Low water levels in the Mississippi River have caused grain barge rates to increase, which causes grain buyers at local grain elevators to reduce their bids for grain delivered. When water levels drop in the marine highway system, barge drafts are reduced (U.S. Army Corps of Engineers, 2022). A barge draft is the distance between the waterline and boat, or the barge hull structure, and increases with the amount of weight present on the barge. The average barge with a draft of 9 feet can hold 1,500 tons of grain which equates to about 59,000 bushels of corn, 55,000 bushels of soybeans, and 53,500 bushels of rice (USDA-AMS, 2022). Each reduced foot of draft results in 150-200 fewer tons, or anywhere between 5,500 to 7,500 bushels depending on the crop, of grain capacity on a barge (Iowa Soybean Association, 2022). If barge drafts decrease for vessels carrying grain, this means the cost to transport grain downriver, or the grain barge rate, increases since it takes more barges to move the same amount of grain.

Barge freight rates are established by the U.S. Inland Waterway System using a percent of tariff system. Barge freight rates for the Mississippi River at New Madrid, Missouri near Memphis, Tennessee have skyrocketed since the beginning of September (USDA-AMS, 2022). The 3-year average percent of tariff rate indicates weekly barge freight rate tends to oscillate around 400 percent of tariff, or about $12.56/ton. In October 2022, the barge freight rate averaged 2400 percent of tariff, or $75.36/ton, which means the cost to transport grain from Memphis to the port of New Orleans was roughly six times higher than average. The increase in transportation cost is usually reflected in lower cash grain bids at country grain elevators which results in a weakened basis, which is the local cash price received by farmers at the country elevator less the futures price established by the Chicago Board of Trade.

In a technical report recently published by the Fryar Price Risk Management Center of Excellence, Biram, et al. (2022) provide a detailed analysis of how increased barge freight rates weaken basis. Here, we provide a snapshot of how soybean basis has fluctuated in typical harvest months for Helena^[1], Arkansas for the previous five years and show how significant the impact of the low water levels in the Mississippi River has been in recent weeks (Figure 1). As of October 18, 2022, new crop soybean basis at Helena, Arkansas is abnormally low at 90 cents under the front month soybean futures contract (ZSX2) which is nearly 200% below the five-year average during the months of September and October (i.e. 30.4 under). Additionally, basis is relatively more volatile than the five-year average with the strongest basis in this time frame of 100 cents over ZSX2 on September 6, 2022, to the weakest basis of 125 cents under the week of October 5, 2022. The strong basis in early September is primarily due to tight pre-harvest stocks.

We now provide immediate and near-term implications for risk management. In the immediate term, a producer should consider storing grain until the winter months where current cash bids for delivery appear to have stronger basis and to consider the benefit of higher prices at a future delivery date relative to storage costs. Based on historical USDA-AMS data, basis typically improves by 50 cents between harvest months and winter months. Looking to the 2023 growing season, producers should consider revenue insurance such as RP and RP-HPE or to engage in forward contracting which allows a producer to take advantage of stronger basis in the summer months prior to harvest. While revenue crop insurance provides price protection based on futures market prices, it can allow a producer the opportunity to be more aggressive with their forward contracting as they can price more bushels confidently with an additional layer of non-production risk protection (i.e. elevator fees and non-delivery). These tools may be used independently or jointly, and the best risk management strategy for a producer considering these tools may differ across farms.

Figure 1. Daily Soybean Basis (ZSX) at Helena, Arkansas (2018-2022) (During Harvest Months of Sep. – Oct.)

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^[1] Basis in Helena, Arkansas is representative of basis for other country elevators along the Mississippi River in other states on October 18, 2022. According to USDA-AMS Daily Grain Bids reports, basis was 111 under ZSX2 in Greenville, Mississippi and 95 under ZSX2 in West Central, Tennessee.

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References

Biram, H.D., S. Stiles, A.M. McKenzie, and J.D. Anderson. “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)

Grain Transportation Report | Agricultural Marketing Service, Oct. 2022,     https://www.ams.usda.gov/services/transportation-analysis/gtr. 

Hutton, Jeff. “Waterway Woes.” Iowa Soybean Association, Sept. 2022,      https://iasoybeans.com/newsroom/article/waterway-woes. 

“Navigation.” U.S. Army Engineer Institute for Water Resources (IWR),           https://www.iwr.usace.army.mil/Missions/Coasts/Tales-of-the-Coast/Corps-and-the-Coast/Navigation/.

Report-Arkansas Daily Grain Bids | MARS,      https://mymarketnews.ams.usda.gov/viewReport/2960.

Hunter Biram

Assistant Professor and Extension Agricultural Economist

hbiram@uada.edu

John Anderson

Director, Fryar Price Risk Management Center of Excellence

jda042@admin

Scott Stiles

Instructor and Extension Economist

sstiles@uada.edu

Andrew McKenzie

Professor

mckenzie@uark.edu

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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

While the 2022 harvest season is not complete, it is a good time for producers to consider price risk management strategies for the 2023 crop. Agricultural commodities have a tremendous amount of uncertainty due to global and U.S. economic weakness, elevated input prices, weather, competition from South America, exchange rates, interest rates, and inflation.  With uncertainty comes greater price volatility, which is expected to continue in 2023. Additionally, many producers will be making input purchase decisions before the year’s end. With high input prices continuing into 2023, producers should consider establishing a price (or price range) for their crop when inputs are purchased. High input costs and uncertain commodity prices necessitate producers prioritizing price risk management. 

Figure 1. Example of two December corn options fence strategies that are premium neutral

For producers wanting to establish a price range in the futures market, consideration should be afforded to options fence strategies. In other words, how much upside potential are you willing to sacrifice to secure a minimum price? An options fence sets a minimum futures price and maximum futures price. To execute an options fence, a producer buys a put option with a strike price below the targeted futures price, sells a call option with a strike price above the targeted futures price, and maintains the option positions until the cash commodity is sold. For example, consider the following two option fence strategies (for reference, on October 20, December 2023 corn was trading at $6.24):

Strategy #1: A producer buys a $5.60 put option for $0.30 and sells a $7.20 call option for $0.30 (Figure 1). The producer has “fenced” in a price between $5.60 and $7.20 using options in the futures market, or simply stated the producer will not receive a futures market price below $5.30 or above $7.20, assuming execution of the options contracts and sale of the cash commodity.

Strategy #2: A producer buys a $6.00 put option for $0.50, sells a $6.50 call option for $0.50 (Figure 1). The producer has “fenced” in a price between $6.00 and $6.50 using options in the futures market, or simply stated will not receive a futures market price below $6.00 or above $6.50, assuming execution of the options contract and sale of the cash commodity.

Similar to a short hedge, when using an option fence, it is imperative to have offsetting transactions in the cash market. If the December futures market price is above the call option, strike price money is made in the cash market at the same rate as the losses in the futures market (without accounting for basis). Similarly, if the December futures contract is below the put option strike price, losses in the cash market are offset by gains in the put option position. Thus, the net return to the producer remains between the put option strike price and the call option strike price (assuming no changes in basis). 

Option fences can be set in a narrow (Strategy #2) or expanded range (Strategy #1), depending on the producer’s risk tolerance and the strike prices selected. An options fence is one of many strategies that can assist producers in managing their price risk. Obtaining professional advice to weigh risks and rewards when utilizing futures or options strategies is strongly recommended.

Important considerations:

• Fences do not need to be premium neutral.
• Selling options require margin, so liquidity or access to credit is essential.
• Options strategies do not protect against basis movements, this can be a positive or negative depending on your location and production season.
• Premium neutral strategies carry transaction fees and finance charges.
• Formulating reasonable price expectations are key.
• Fences do not protect against production risk and require an offsetting transaction in the cash market.

Resources and ReferencesBarchart.com. December 2023 Corn Options Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCZ23/options?moneyness=20

The Southern region of the United States is more associated with cotton production than wheat. Yet, from 2005 to 2022, a time of high grain prices associated with increased production of biofuels, wheat planted acres in the South, on average, have exceeded that of cotton (Figure 1).  Wheat acres and production in the region are dominated by Oklahoma and Texas (Figure 2); Texas also leads cotton planted acres, by far, followed by Georgia (Figure 3). In 2022, the South will account for about 20 percent of total U.S. wheat production (USDA, NASS, Crop Production, August 2022). 

The year with the most wheat acres in the South in this ‘biofuel era’ is 2013 at 17.3 million. That year saw the highest plantings in seven of the fourteen states in the region for this period of time: Alabama, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, and Virginia. Oklahoma and Texas are not on this list. Acreage increases across multiple states can add up to make a significant difference in total wheat area in the region.  

Wheat is a crop with relatively high yield potential across the South. This becomes especially important when drought impacts major producing states.  With drought lowering harvested acres and yields, Oklahoma and Texas are projected to produce about 109 million bushels of wheat in 2022 from 4 million harvested acres and 9.8 million acres planted (Figure 4).  The states of Kentucky, Tennessee, North Carolina, Maryland, and Virginia combined to plant about 2 million acres of wheat for 2022 and will match the production total in Oklahoma and Texas. Kentucky’s production alone is 90 percent of that of Texas.  

Years with high wheat acres in the South tend to be associated with years of relatively low cotton acres (Figure 5).  Crop acres are positively correlated with the price received in the previous season (Figures 6 and 7). Wheat acres are negatively correlated to higher cotton prices (Figure 8).  Additionally, wheat acres tend to go up following years of high abandonment of cotton in Texas and Oklahoma (abandonment rates in other Southeastern states are minimal) (Figure 9).  In 2022, Texas and Oklahoma farmers planted 8.6 million acres of cotton, only to harvest 2.8 million (a harvested-to-planted percentage of 33 percent). 

Looking ahead to 2023, what are wheat acreage prospects in the South given:

• record high wheat prices^[*]
• record high cotton prices^*, and
• high cotton abandonment in Texas and Oklahoma? 

A regression model composed of these independent variables and recent trends in wheat planted acres shows that wheat planted area:

• is trending lower,
• goes up when the price of wheat the previous year goes up,
• goes down when the price of cotton the previous year goes up,
• goes up when percent of cotton harvested in Texas and Oklahoma the previous year goes down.   

Based on these variables, the model estimate of wheat acres in the South for 2023 is 14.4 million, up from 12.7 million acres planted in 2022 (Figure 10). Many factors will shape farmers’ planting decisions in 2023, among them persistently high input costs, lingering drought, returns from other crops such as corn and soybeans, and price prospects given global economic and geopolitical turmoil and uncertainty. This model suggests that significant factors are in place for an increase in wheat acres in 2023, maintaining wheat as an important crop enterprise in the South. 

Figure 1. Southern region planted wheat and cotton acres, 2005-2022

Figure 2. High, low, and average winter wheat acres in the South, 2005-2022

Figure 3. High low, and average cotton acres in the South, 2005-2022

Figure 4. Southern region wheat production 2022, million bushels

Figure 5. Wheat acres and cotton acres in the South, 2005-2022

Figure 6. Wheat acres in the South and the previous year’s wheat price, 2006-2022

Figure 7. Cotton acres in the South and the previous year’s cotton price, 2006-2022

Figure 8. Wheat acres in the South and the previous year’s cotton price, 2006-2022

Figure 9. Wheat acres in the South and percent cotton acres harvested the previous year in Texas and Oklahoma, 2006-2022

Figure 10. Southern region wheat acreage model

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^[*] U.S. Season Average Farm Price, World Agricultural Supply and Demand Estimates, September 2022

Welch, J. Mark. “Wheat Acres in the South“. Southern Ag Today 2(43.1). October 17, 2022. Permalink

On average, sorghum prices received by U.S. farmers have followed corn prices, albeit generally at a discount compared to corn over the last 20 years. However, since May 2020, sorghum prices have paid a significant premium over corn (Figure 1). An increase in export demand improved the U.S. sorghum-over-corn premiums from an average discount of $0.14/bu from 2014-19 to an average premium of $0.44/bu for 2020-21. The U.S.-China Phase One Trade Agreement (U.S. sorghum exports are not subject to tariff-rate quotas, like corn), the recovery of the Chinese swine sector, and high corn prices that supported high exports of U.S. sorghum to China were considered the causes for the change in sorghum/corn price ratios.

Figure 1: Sorghum Minus Corn Price Received by U.S. Farmers

Unexpectedly, sorghum premiums over corn declined sharply during the second quarter of 2022. In July 2022, the average sorghum price received by U.S. farmers was at a discount of $1.70/bu compared to corn. The sorghum/corn ratio dropped to 0.76. 

Many factors are contributing to the decline. In the past, years with strong exports of sorghum have been associated with higher sorghum premiums over corn. According to the USDA Foreign Agricultural Service (FAS), estimated sorghum exports for the 2022/23 marketing year have been reduced by 2.4 million metric tons (MT) compared to the previous marketing year (5 million MT in 2022/23 compared to 7.4 million MT in 2021/22). 

Historically, the U.S. has been the world’s leading sorghum exporter, accounting for 73% of all international exports in the last 30 years. For the 2021/22 marketing year, U.S. sorghum exports represented 61% of world exports. Considering current USDA estimated exports, U.S. sorghum exports will only represent 51.4% of world exports for the 2022/23 marketing year. 

China, the primary buyer of U.S. and worldwide sorghum is projected to cut its imports this season due to lower feed grain demand expectations. Total coarse grain imports from China are expected to decrease by 15% in 2022/23. The USDA estimated a reduction in China’s sorghum imports of 2.4 million MT (23.8%). During 2020/21, China imported 94% of total U.S. sorghum exports and about 85.5% of world sorghum exports. 

In addition, sorghum production in the U.S. has been severely affected by drought, significantly reducing the amount of sorghum available to be exported. In fact, USDA estimates a reduction of 43.7% in U.S. production for 2022 compared to the 2021 season. Estimated yields and harvested acreage are 23% and 17% lower than last season, respectively. Ending stocks are estimated to drop back to 2020-21 levels of 0.517 million MT.  

High sorghum discounts over corn generally result in a retraction of the planting area in the next growing season. FAPRI’s August Baseline Update for U.S. Agriculture Markets estimates 8% less sorghum planting area than last season. FAPRI estimates 5.8 million acres in the 2023/24 season, within the historic planting range before the 21/22 and 22/23 seasons. 

References

USDA Foreign Agricultural Service, Production, Supply, and Distribution. https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery

FAPRI, Baseline Update for U.S. Agricultural Markets https://www.fapri.missouri.edu/wp-content/uploads/2022/08/2022-Baseline-Outlook-August-Update.pdf

Abello, Francisco “Pancho”. “U.S. Sorghum-Corn Premium Prices Sharply Fell During this Quarter“. Southern Ag Today 2(42.1). October 10, 2022. Permalink

The picture painted by the U.S. Department of Agriculture (USDA) of U.S. cotton production has been reframed several times this year already.  In August, USDA cut a historically large three million bales off of their previous month’s forecast.  The direction of that adjustment was not a surprise to anybody, but the size of it surely was.  Then, in September, USDA’s National Agricultural Statistics Service (NASS) reversed themselves and added a million and a quarter bales back to their estimate of U.S. cotton production^[1], now at 13.83 million bales of all cotton (i.e., upland and pima combined).   

Hopefully, and happily, we can expect the forecast to get more accurate going forward.  The reason for this is rooted in three sources of future information.  First, as we saw in USDA’s September forecasts, available USDA Farm Service Agency (FSA) certified acreage data were used to revise forecasted planted acreage.  This was the main reason for the September upward revision to U.S. cotton production this year.  New data on certified acres from FSA sometimes arises later in the fall or winter, so this remains a possible source of refinement.

Second, NASS surveyed more than 7,000 U.S. producers, including major cotton producing states.  This survey process includes what they call “objective yield surveys” for major crops.  For cotton, this means boll counts from randomly selected field samples in September, October, November, and December.  So again, this data flow suggests a more accurate forecast of U.S. cotton production over time.

Third, NASS also reports monthly on cumulative bales ginned, which is another independent (albeit lagged) measure of U.S. cotton production.  Altogether, we can expect fewer surprises and an increasingly clearer production picture.  This expectation is supported by historical data in Figure 1.   Figure 1 shows the percent deviations of USDA’s U.S. cotton production forecasts in August, September, November, and December, relative to the final production estimate at the end of the marketing year (i.e., the following July).  As expected, the spread of the percent deviations shrink across the fall season, presumably informed by the previously described data flow.  It is also apparent from Figure 1 that USDA tends to overestimate the crop size, at least in the September through December time period.

The marketing implication of this refinement is a fading production risk premium in U.S. cotton prices, all other things being equal. 

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^[1] https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/qr46s7546/kd17f282m/crop0922.pdf

Robinson, John. “Refinement of U.S. Cotton Production Forecasts“. Southern Ag Today 2(41.1). October 3, 2022. Permalink