Category: Crop Marketing

The 2023 winter wheat crop will soon be going in the ground.  As planning and preparations are under way, producers continue to struggle with the challenges of high input costs, volatile commodity markets, weather extremes (drought in the west, flooding in the east), and global geopolitical instability. 

As many input costs are being locked in, an important question is where do output prices go from here? A key tenet of economic theory provides insight into that question. In 1890, Lord Alfred Marshall told us where prices are going in the long run: prices will go to the cost of production (Marshall, 1890).  In a free market economy, a price above the cost of production will provide incentives for an increase in supply or entice other entrants into the market. Prices below the cost of production will cause supply to decrease or participants to exit the marketplace.  

Successful and sustainable financial performance in an economy where prices move to the cost of production implies two key components of management strategy that revolve around production and price:

1. Be the low cost/high quality producer. Input use efficiency is critical to achieve the lowest possible breakeven cost. Tools to achieve this goal include the use of crop rotations, hybrid and variety selection, conservation tillage, soil, and plant testing, and precision application of inputs.
2. Lock in profitable prices.  Tools of financial management include budgets and breakeven analyses, cash flow projections, crop insurance, marketing plans, and price safety net provisions. 

Does this management approach work?  Evidence of the impact of these management strategies can be found by looking at the financial performance of the top 20 percent of corn producers over the last several years.  This information can be found in the FINBIN database (FINBIN, 2022). This database summarizes actual farm data from thousands of agricultural producers.  

Sorting key production and price characteristics by financial performance shows that, compared to the overall average, the top 20 percent of corn growers in 2021 had higher yields, received higher prices, and had lower costs (Figure 1).  Looking back over the last several years, this group, the top 20 percent, outperformed the average every year in every category with one lone exception. In 2018, the average of all corn producers received a one percent higher price (Figure 2).  

As a farm management philosophy, consider the adoption of what Danny Klinefelter, retired professor in the Department of Agricultural Economics at Texas A&M University and founder of The Executive Program for Agricultural Producers (TEPAP), calls the ‘5% rule’ (Janzen, 2018).  In the upcoming crop year, where can I lower my costs by five percent? How can I increase my yields by five percent? How can I increase my average price received by five percent? Making relatively small changes in critically important areas over time can have a dramatic impact on financial performance.    

Figure 1. 2021 Corn on Cash Rent Summary Report

Figure 2. Corn on Cash Rent Summary Report Comparisons, High 20% to Overall Average, 2018-202

References

FINBIN. Center for Farm Financial Management, University of Minnesota. Accessed August 1, 2022 and available at https://finbin.umn.edu/. 

Janzen, Joseph. “The “5% rule of farm management shows how all the pieces matter”, Department of Agricultural Economics and Economics, Montana State University, Business and Finance posts, January 16, 2018.  Accessed August 2, 2022 and available at https://ageconmt.com/. 

Marshall, Alfred. Principles of Economics, London: Macmillan, 1890.  

Welch, J. Mark. “Key Farm Management Considerations in Turbulent Times: The 5% Rule“. Southern Ag Today 2(34.1). August 15, 2022. Permalink

The change in the November soybean futures price from the market open on July 1 to market close on August 1 was down $0.56/bu. However, the open-to-close change does not capture the volatility that occurred in July 2022. The trading range for the month (contract high-low) was $2.01/bu, with 11 out of 21 trading days having moves of greater than (+/-) 25 cents (Table 1). Volatility reflects uncertainty regarding drought/production, geopolitics, trade, the global economy, and many other factors. Futures markets reflect the opinion of market participants on factors affecting current and future supply, demand, and prices. Market participants, including producers, merchandisers, end users, and speculators, will weigh factors differently; however, at any point in time, the futures market can be deemed as the best guess of future value as indicated by trades for various contract months.  The constant flow of new information causes markets to move continuously. 

As mentioned above, numerous factors have attributed to the dramatic price swings in soybean markets. However, one factor that will be watched closely moving forward is the change in the CME crush margin and the allocation of soybean value embedded in soybean meal and soybean oil. Crush margins can provide producers with valuable information regarding the drivers of demand for soybeans and soybean futures market prices. The CME crush margin is defined as:

CME Crush Margin = [(Price of Soybean Meal ($/short ton) x 0.022) + (Price of Soybean Oil (¢/lb) x 11)] – Price of Soybeans ($/bu)

In 2022, the value of the September soybean CME crush margin had ranged from $1.38/bu to $2.26/bu, with an average of $1.80/bu. The CME crush margin on August 1 was $2.18/bu, near the top of the 2022 range indicating a rebound in the June low and a strong incentive for more crush (Figure 1). When the CME crush margin peaked on April 27, the percent of value embedded in a bushel of soybeans was 52% meal and 49% oil. In other words, oil was leading the charge for soybean value (the value of a bushel of soybeans attributed to oil and meal has ranged from 60:40 to 50:50 in 2022). Now, as of August 1, that ratio has moved to 58:42 indicating meal is providing a greater influence on soybean value. 

Both soybean oil and meal have provided strong influence in soybean markets this year and demand for both products remains strong. Strong demand and shrinking USDA 2022/23 U.S. ending stock numbers (230 million bushels in the July WASDE) will continue to support soybean prices. Bearish influences, economic growth and geopolitical tensions, primarily with China, are still present in the market, but demand continues to be a positive factor supporting soybean prices.

Table 1. November Soybean Futures Price July 1 – August 1, 2022

Figure 1. Percent of Soybean Value Attributed to Meal and Oil Compared to CME Cush Margin (September Contracts)

References and Resources

Barchart.com. Accessed at: https://www.barchart.com/futures/grains?viewName=mainCME Group. Soybean Crush Reference Guide: https://www.cmegroup.com/education/files/soybean-crush-reference-guide.pdf

Smith, S. Aaron. “July Volatility in November Soybean Futures Prices“. Southern Ag Today 2(33.1). August 8, 2022. Permalink

Since mid-May, ICE cotton futures have witnessed an historic short-term collapse (see this article https://southernagtoday.org/2022/07/what-is-behind-the-recent-cotton-futures-market-plunge/ ).  In the two-month period between May 16 and July 14, the December ’22 contract fell over 49 cents.  In the last 40 years, there have only been six December cotton contracts with more than that total level of change, measuring from the contract high to the contract low.  The reason for the price decline has been attributed in the farm press and industry newsletters as “demand destruction” which is probably intended to mean both 1) a lower quantity demanded at the formerly high prices, and 2) an inward shift in demand in response to recessionary expectations.

Besides the major downward trend of this price movement, it is also associated with high volatility.  By volatility, I mean that prices are gyrating more variably and more quickly.  Historical volatility is a measure of the spread or risk of price movements over a defined period.  Figure 1 shows historical volatility in ICE December cotton futures during the period March through Mid-May.  The underlying measure of dispersion used in Figure 1 is the standard deviation of December futures settlements.

Contributing to the high volatility of the December ’22 contract were the strong price moves higher and lower, including many limit up and limit down moves.  Figure 1 indicates that the volatility of the December ’22 prices is approaching that of the notable price rally of 2010-11, which then reverted to more normal prices, a pattern that economists call “mean reversion”.  Like 2010-11, the current price movements will likely become smoother and less volatile, but perhaps not until the post-harvest season.  (Note: the 2010-11 price spike was triggered by a global supply shortage that was several years in the making.  In contrast, the 2021-22 price spike appears more demand driven.) 

The plunge in cotton futures represents a lost opportunity for growers with unsold or unhedged production this year.  The contribution of high volatility also increases the costs of marketing since more variable price moves increase the costs of hedging for growers or merchants.  The experience of high volatility in 2022 should serve as a reminder to growers about the riskiness of cotton price movements.  

Robinson, John. “More Volatile Cotton Prices“. Southern Ag Today 2(32.1). August 1, 2022. Permalink

The price of domestic raw cane sugar and the price of refined beet sugar both have direct implications for current United States (U.S.) sugar policy. Nearby futures settlement prices for raw cane sugar and a price range for wholesale Midwest refined beet sugar (free on board factory as quoted each week in Milling and Baking News) are considered the two primary mechanisms to evaluate sugar market dynamics. Figure 1 depicts monthly per pound sugar prices, which as of April 2022 were 42.00 cents for beet sugar and 36.66 cents for raw sugar. According to USDA Economic Research Service (ERS) data, the U.S. wholesale beet sugar price has ranged since 2008 between a low annual average of 28.84 cents a pound in 2012/13 and a high annual average of 55.81 cents a pound in 2010/11 (October-September fiscal year). Furthermore, the USDA ERS reports that U.S. raw sugar price has similarly ranged from a low annual average of 21.00 cents a pound in 2012/13 to a high annual average of 38.46 cents a pound in 2010/11. 

Figure 1. U.S. Refined Beet Sugar and Raw Sugar Prices (cents per pound), 2008-2022. 

Both U.S. beet sugar and raw cane sugar prices rose significantly from 2009 to 2012. A combination of tight domestic sugar supplies and announcements that the USDA would not allow for an increase in sugar imports prior to the end of the marketing year resulted in the raw sugar price in FY 2010 increasing 74% and the refined beet sugar price increasing by 50%. These price increases in the U.S. market occurred simultaneously as world sugar prices began to increase three-fold. The major sugar-exporting countries of India and Brazil reduced global supplies as adverse weather and prices for biofuels reduced exportable surplus in each country. Since U.S. sugar refiners import sugar under obligations of the sugar program, refiners had to compete against these higher prices that foreign supplies were receiving in the world market, hence increasing the domestic price paid to entice imports. However, the world sugar price fell from 30 cents per pound in 2011 to 23 cents in 2012 and then to 18 cents in 2013, lowering any supportive impact on U.S. sugar prices. 

For the period 2008-2014, sugar imports from Mexico enjoyed virtually unhindered access to the U.S. domestic market via NAFTA. At its peak in 2013, sugar imports from Mexico came in over 2 million STRV, accounting for 66 percent of total U.S. imports for sugar. Consequently, increases in the amount of U.S. raw sugar supplies caused domestic raw sugar prices to decline. As a result of Mexico’s increased raw sugar shipments, sugar producers in the U.S. filed an anti-dumping and countervailing duty case of injury with both the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) in March 2014. According to ITC findings, there was determination that the U.S. sugar industry had sustained significant economic injury from Mexico’s action.  With the ITC’s findings, both the U.S. and Mexico entered into a suspension agreement with the key constraint of limiting the supply of imported sugar from Mexico. Additionally, terms were put in place specifying both minimum price and maximum quantity requirements on Mexican sugar destined for the U.S. market.  

Another issue of concern for the domestic sugar industry arose in 2016 when legislation was proposed that would require the display of genetically engineered ingredients on food labels. Perception from this proposed legislation induced an excess in beet sugar supply relative to the supply of cane sugar. This scenario brought about a contraction in the price spread between cane and beet sugar. With the ensuing price contraction for beet sugar, the sugar industry took advantage of large inventories in beet sugar as shown in Figure 2. With passage of legislation establishing national labeling guidelines for food products containing GMO ingredients, beet sugar deliveries began to increase thus drawing down extant beet sugar supplies to such an extent that by 2018 the historical margin between U.S. beet and cane sugar had been reestablished.  

Figure 2. U.S. Sugar Inventories, by source. 

Of the major events impacting domestic U.S. sugar prices, adverse weather events in October of 2019 played a significant role when flooding disrupted both the planting and harvesting of sugar beets. This disruption induced both a sudden and precipitous drop in U.S. beet sugar production, forcing many processors to declare force majeure. These actions caused refined beet sugars to increase by 26 percent per pound (35 cents per pound to 44 cents per pound) from September to November 2019. With improved crop conditions in FY 2021, prices retreated to settle around 36.5 cents per pound.

In comparison with other major agricultural commodity markets, domestic policies for world major sugar producers are more prevalent and play a greater role than is the case for other agricultural commodities. Since there is a greater level of variation in sugar policy from country to country, the retail price of sugar reflects this in the world futures contract price. According to USDA data, from 2009 to 2017, the average monthly world price for raw sugar averaged 19.23 cents per pound. For the period 2009 to 2017, sugar prices have experienced a fair amount of volatility ranging from a low of 13.42 cents per pound in 2015 to a period high of 28.42 cents per pound in 2011. Figure 3 illustrates the imported price that refiners in the U.S. paid for foreign raw sugar (including freight costs). In essence, when the import tariff on raw sugar (to include freight) is coupled with the world raw price, a price ceiling is established on the U.S. raw market. From Figure 3, the U.S. raw price (blue line) has approached the foreign landed price (grey line) as increases in the world raw price track appreciation in the domestic market. 

Figure 3. Raw Sugar Prices (U.S. futures, World futures, and World futures sugar imported into U.S.)

Deliberto, Michael. “U.S. Sugar Policy and Prices“. Southern Ag Today 2(31.1). July 25, 2022. Permalink

On June 30, USDA released the June Acreage and Grain Stocks reports. The Acreage report is a survey-based estimate of planted acres for primary crops. The producer survey is conducted the first two weeks of June. The Grain Stocks report provides survey-based estimates for corn, soybean, wheat, and sorghum stocks, which includes producers and commercial grain storage facilities. Survey respondents indicate stocks held on their operation as of June 1.

Comparing estimated June 2022 to 2021 final planted acreage estimates: corn was down 3.4 million acres, soybeans up 1.1 million acres, wheat up 0.4 million acres, cotton up 1.2 million acres, sorghum down 1 million acres, rice down 0.19 million acres, and peanuts down 42 thousand acres (Figure 1). Combined, planted acreage for the seven crops is projected to be 1.91 million acres lower than in 2021. 

Compared to USDA’s March 2022 Prospective Plantings report, the June Acreage Report indicated an increase of 431,000 acres of corn, soybean acres decreased 2.63 million acres, wheat decreased 259,000 acres, cotton increased 264,000 acres, sorghum increased 100,000 acres, rice decreased 109,000 acres, and peanuts decreased 28,000 acres – a combined decrease of 2.2 million acres. The majority of the reduced acres planted were for soybeans in North Dakota (1.1 million) and Minnesota (500,000). However, future USDA acreage adjustments remain likely due to delayed planting, primarily in the Northwest Corn Belt States.

The June Grain Stocks report indicated, year-over-year, corn stocks were up 5.7% and implied disbursement from March 1 to June 1 was down 4.9%; soybean stocks were up 26.3% and implied disbursement from March 1 to June 1 was up 21.1%; wheat stocks were down 21.9% and implied disbursement from March 1 to June 1 was down 21.8%; and sorghum stocks were up 195.7% and implied disbursement from March 1 to June 1 was down 10.2%.

What are the market implications for producers moving forward?

Markets were declining prior to the release of the USDA reports (Table 2). Recent market declines can be attributed to global economic concerns, improved weather forecasts, higher global production estimates, and a reduction in long speculative positions in futures markets. The reports provided a mix of bearish and bullish estimates. 

Looking forward, there remains a great deal of uncertainty with the 2022 crop. However, it is likely that the preharvest highs for corn, soybeans, cotton, and wheat have already been set. As such, producers should evaluate the amount of 2022 production that is unpriced (or does not have downside price protection), storage availability, and investment in the crop. Margins have tightened dramatically and may be negative for many producers, if below trendline yields are realized. Crop insurance will provide some protection and will be an important risk management and marketing consideration moving forward. The harvest price for wheat (Chicago) was set at $10.11 compared to a current (July 5) futures price of $7.93. The projected price for corn ($5.90), cotton ($1.03), and soybeans ($14.33) are all higher than the current harvest contract prices – $5.78, $0.93, and $13.16, respectively. The price collapse of the past two weeks has created a new marketing and risk management environment for producers. Now is the time for producers to evaluate where they stand with their current risk management and marketing plans and make adjustments to establish a path forward.

Figure 1. USDA NASS Planted Acreage Estimates, March, June, and Final for Corn, Soybean, Wheat, Cotton, Sorghum, Rice, Peanuts, and Combined, 2018-2022 (million acres)

Table 1. USDA Estimated Corn, Soybean, Wheat, and Sorghum Stocks, March 2021 to June 2022  

Table 2. Corn, Soybean, Wheat, and Cotton Harvest Futures Contract Prices for Select Dates

References:

Barchart.com. Corn, soybean, cotton, and wheat futures prices. Accessed at: https://www.barchart.com/futures/grains?viewName=main

U.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). June 30 Acreage Report. Available on-line at: https://usda.library.cornell.edu/concern/publications/j098zb09z.

U.S. Department of Agriculture – National Agricultural Statistics Service. June 30 Grain Stocks Report (USDA-NASS). Available on-line at: https://usda.library.cornell.edu/concern/publications/xg94hp534.

U.S. Department of Agriculture – Risk Management Agency (USDA-RMA). Price Discovery. Available on-line at: https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/.

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Smith, Aaron, and William E. Maples. “The USDA June Acreage and Grain Stocks Report.”Southern Ag Today 2(30.1). July 18, 2022. Permalink