Category: Crop Marketing

  • 2022 Price Outlook for Hard Red Winter and Soft Red Winter Wheat

    2022 Price Outlook for Hard Red Winter and Soft Red Winter Wheat

    In the last 2-1/2 years, wheat futures prices have doubled, from just over $4.00 per bushel in June 2019 to over $8.50 per bushel this past November. This has occurred in both the hard red winter wheat (Kansas City contract) and soft red winter wheat (Chicago contract) markets.  But over most of this period, hard red winter wheat, which normally trades at a premium to soft red winter wheat, traded at a discount. From January 2006 to December 2018, the average premium for hard red winter wheat to soft red winter wheat was 34 cents. From January 2019 through August 2021, hard red winter wheat traded at an average discount of 53 cents to soft red winter wheat. September 2021 to date, hard red winter wheat is back to an average 16-cent premium to soft red winter wheat.

    Figure 1. Wheat futures prices, Kansas City hard red winter and Chicago soft red winter, Tuesday close, cents per bushel

    The increase in wheat prices generally is associated with tightening world supplies.  Wheat acres globally have increased over the last several years, but the world average yield has declined. Total wheat production is up only 600 million bushels (about two percent) since the 2019/20 marketing year while world domestic use has grown by 1.6 billion bushels (about six percent). World wheat days of use on hand at the end of the marketing year have declined from a 146-day supply to a current estimate for 2021/22 of 130 days.  A decline in this measure of stocks-to-use has put upward pressure on prices.  

    World Wheat2019/20202020/20212021/2022
    Area Harvested, mil ac533546552
    Yield, bu per ac52.652.251.9
    Production, mil bu28,00628,51028,609
    Domestic Use, mil bu27,21828,46228,867
    Ending Stocks, mil bu10,87610,64210,236
    Days of use on hand145.9134.7129.8
    USDA, FAS, PSD, 1/12/2022

    Hard red winter wheat is the dominant class grown in Kansas, Oklahoma, and Texas with soft red winter wheat the most common class east of a line from Dallas to Kansas City. While the price of both classes of wheat are higher in the current global environment, there are important differentials in stocks-to-use by class which may help explain the premiums and discounts between these markets. 

    U.S. Wheat Associates, Planted Area, by Class, 2013-2019 http://maps.heartlandgis.com/storymaps/uswheatassociates/uswheatsupplychain/

    As with the global wheat situation, the stocks-to-use ratio for both hard and soft winter wheat have been on the decline in the U.S. the last several years. However, the decline in the stocks-to-use ratio for soft red has been sharper relative to the decline in the stocks-to-use ratio for hard red. 

    U.S. Wheat by Class: Days of Use on Hand at the End of the Marketing Year

    USDA, WASDE, January 2022

    In the 2017/18 marketing year, days of use for soft red was 34 less than hard red winter. By 2020/21, soft red days on hand were 103 less than for hard red—the soft wheat supply got tighter relative to hard wheat.  The hard red winter wheat premium declined from +8 cents to a 74-cent discount.  That situation appears to be reversing in the 2021/22 marketing year. The stocks-to-use ratio for soft red winter wheat has declined at a slower rate compared to hard red winter wheat and days on hand are back to a 54-day differential—soft winter wheat supplies are more plentiful relative to hard red winter wheat.  The price relationship to date this marketing year has hard red winter back on par with soft wheat. The latest weekly price shows a premium for hard red of 22 cents.  

    SRWW days of use on hand minus HRWW days of use on hand and the HRWW price premium

    USDA, Wheat Data and WASDE, Updated 1/13/2022

    With the U.S. only accounting for about six percent of world wheat production, supply and demand dynamics globally will largely influence the price of wheat overall.  But important distinctions in supply and use levels by wheat class can be important in local markets. For the time being, the fundamental (supply and demand) and price relationship between hard red winter and soft red winter wheat appears to be moving back toward long-term norms.    


    Welch, Mark. “2022 Price Outlook for Hard Red Winter and Soft Red Winter Wheat.” Southern Ag Today 2(5.1). January 24, 2022. Permalink

  • The U.S. Dollar’s Influence on ICE Cotton Futures

    The U.S. Dollar’s Influence on ICE Cotton Futures

    It is commonly assumed that a stronger U.S. dollar is a bearish influence on export commodities like cotton.  While that is often true, it is not quite that simple.  Figure 1 compares the inverse pattern of “nearby” (i.e., soonest to expire) ICE cotton futures prices (in red) and an index (in blue) of the U.S. dollar relative to a basket of six currencies: the Euro, Japanese yen, British pound sterling, Canadian dollar, Swiss franc, and the Swedish krona. Those six countries and their currencies have little to do with international cotton exports or imports. However, to the extent that U.S. dollar strength (for whatever reason) against these currencies coincides with U.S. dollar strength versus cotton exporting countries (e.g., Brazil, Australia, Central Asia, and sometimes India), then this chart may reflect situations where a strengthening dollar is directly associated with lower U.S. export competitiveness. The lower U.S. export competitiveness could transform into lower U.S. domestic cotton prices.  As a result, we see an inverse pattern in Figure 1. However, there are periods of time reflected in Figure 1 where the inverse relationship breaks down, e.g., in the center of Figure 1 during 2013. That period coincided with a time when European sovereign debt was weakening the euro relative to the dollar, which represents a distortion to what this chart is trying to explain. 

    Figure1. U.S. Dollar Index versus Nearby ICE Cotton Futures Settlement Price

    A potentially cleaner comparison would be of the U.S. dollar versus the Brazilian real or the Australian dollar.  The more cotton-specific impact of the U.S. dollar value on U.S. exports can be inferred from USDA trade-weighted exchange rate indices.   Looking back at these kinds of indices will show time periods like, for example, in 2015 when the U.S. dollar got 6.4% stronger (year-over-year) compared to the currencies of the specific countries that we trade cotton with.  This means that U.S. cotton was roughly that much more expensive to foreign buyers compared to other cotton exporting countries.

    Lastly, to the extent that large financial institutions (investment banks, hedge funds) are moving money across asset classes, a rise in the dollar could reflect a risk off shift of investment out of stocks and commodities (driving down cotton futures, all other things being equal) and into U.S. treasuries. This would presumably be reflected in a rising U.S. dollar. Parts of Figure 1 may be explained by such movements, and they have little to do with cotton economics or export competitiveness.

    Robinson, John. “The U.S. Dollar’s Influence on ICE Cotton Futures“. Southern Ag Today 2(4.1). January 17, 2022. Permalink

  • Input Price and Availability is Influencing 2022 Planting Intentions

    Input Price and Availability is Influencing 2022 Planting Intentions

    Historically, the harvest futures price from December 1 to March 31 can be a key predictor of planted acreage for spring crops. From 2010 to 2021, the monthly average futures price from December 1 to March 31 for soybeans (SX) divided by corn (CZ) has been 2.39, and corn (CZ) divided by cotton (CTZ) has been 5.85. A soybean-to-corn price ratio below 2.39 would tend to favor planting corn over soybeans and a corn-to-cotton price ratio above 5.85 would favor corn over cotton (Figure 1). So, with relative prices favoring corn and cotton, should we expect a reduction in soybean acres in 2022? Maybe not. 

    Figure 1. December 1 to March 31 monthly average futures closing price ratio for the harvest contract (December = Corn; Soybeans = November; and Cotton = December), 2010-2022*

    Commodity price ratios may not dictate producer decisions on what to plant in 2022. Instead, input cost and availability may be the driving force. High input crops, like cotton and corn, are at a disadvantage compared to lower input crops like soybeans and sorghum. High input prices reduce profit margins, and potential lower input availability increases production risk. 

    Using fertilizer as an example, retail prices (Figures 2 & 3), are up 62-176% compared to last November. To put this in context, from 2010 to 2020 for the Mississippi Portal Region, USDA ERS estimates the cost of fertilizer to be 4.49 times more expensive for an acre of corn than for an acre of soybeans and 2.64 times more expensive for an acre of cotton compared to an acre of soybeans. As such, a doubling in fertilizer prices can add $100-150 or more per acre to producer’s production costs for corn, whereas for soybeans, fertilizer costs may only go up $20-35 per acre with a doubling of fertilizer prices. Producers will need to estimate profitability and risk for each commodity when making planting decisions. 

    Figure 2. Select weekly fertilizer prices November 2019 to November 2021

    Figure 3. Select weekly fertilizer prices November 2019 to November 2021

    Currently, the availability and cost of inputs for the 2022 crop is a major concern for producers. This is likely to continue well into 2022. Producers who purchase inputs in winter 2021/22 at high prices should strongly consider mitigating downside commodity price risk to avoid potentially catastrophic financial outcomes — inputs purchased at high prices combined with the potential sale of commodities at substantially lower prices (than are currently offered). Controlling input costs and managing output price risk this winter will be key to set the foundation for a successful 2022 crop year for midsouth producers.  
     
    References:
    Barchart.com. 2021. https://www.barchart.com/futures/grains and https://www.barchart.com/futures/quotes/CT*0/futures-prices?viewName=main (Accessed December 1, 2021).
    Dehlinger, K. and Russ Quinn. 2021. “DTN Retail Fertilizer Trends.” https://www.dtnpf.com/agriculture/web/ag/crops/article/2021/11/10/nitrogen-fertilizer-prices-shatter-1 and https://www.dtnpf.com/agriculture/web/ag/crops/article/2021/12/01/nitrogen-fertilizer-prices-end-2021(Accessed December 1, 2021).
    U.S. Department of Agriculture Economic Research Service (USDA-ERS). “Commodity Costs and Returns.” https://www.ers.usda.gov/data-products/commodity-costs-and-returns/ (Accessed December 1, 2021).

    Smith, Aaron. “Input Price and Availability is Influencing 2022 Planting Intentions“. Southern Ag Today 2(3.1). January 10, 2022. Permalink

  • Is Shelled Use of Primary Peanut Products Softening?

    Is Shelled Use of Primary Peanut Products Softening?

    The National Peanut Board recently reported that per capita peanut consumption in the U.S. reached an all-time high of 7.9 pounds in 2021 (National Peanut Board, 2021). This is an increase from a record 7.6 pounds per capita in 2020.  Peanut consumption has increased domestically since the beginning of the pandemic led by peanut butter use.  The industry faced challenges of restocking grocery shelves after shoppers emptied them of peanut butter.  The JM Smucker Company reported 7.1% growth in peanut butter consumption in 2020 (JM Smucker Co., 2021). The growth was due to increased consumers working and schooling at home and an increased demand from food banks.  Peanut butter usage on a shelled raw basis was up 2.7% from August 2020 to July 2021 according to the USDA National Agricultural Statistics Service (2021).  This was above the six-year average of 1.93%.  Peanut butter makes up 58.9% of total shelled usage followed by snacks at 20.6%, candy at 17.6% and other uses at 2.95%.

    Figure 1. Shelled Peanut Use (Raw Basis) of Primary Peanut Products, 2015-2020 Marketing Years.

    The trends for shelled peanuts used domestically in primary peanut products is shown in Figure 1.  Peanut butter has increased at a rate of 1.9% over the last six years and averaged 2.6% since 2017.  Candy usage has grown at a rate of 2.5% over the last six years and averaged 3.5% since 2017.  Snack usage has remained flat over the same time period.  What about the 2021 crop marketing year beginning August 1, 2021?  The latest data shows usage for the first three months of the marketing year to be below last year by 2.9%.  Peanut butter usage is down 4.3%, candy up 2.7% and snacks down 5.7%.  The data suggest there might be a softening of shelled peanut usage.  The first three months of the marketing year represent old crop peanuts and a larger 2021 crop should start having an impact as we enter 2022.   Consumers have returned to the workplace and children are back in school.  Time will tell if shelled peanut domestic use has softened or if logistic challenges are impacting reporting. 

    Citations:

    JM Smucker Co., (2021) “Peanut Butter and Jelly: The Ultimate Pandemic Comfort Foods”  Press Release.  December 17, 2020. https://www.jmsmucker.com/news-stories/stories/22876.

    National Peanut Board, (2021) “Peanut Per Capita Consumption Breaks New Record for Second Year in a Row” Press Release. October 21, 2021,https://www.nationalpeanutboard.org/news/peanut-per-capita-consumption-breaks-new-record-for-second-year-in-row.htm

    USDA National Agricultural Statistics Service, (2021) “Peanut Stocks and Processing” ISSN: 1949-1875, August 27, 2021, https://downloads.usda.library.cornell.edu/usda-esmis/files/02870v87z/41688g448/9593vt44b/pnst0821.pdf

    Smith, Nathan. “Is Shelled Use of Primary Peanut Products Softening?“. Southern Ag Today 2(2.1). January 3, 2022. Permalink

  • Getting to Know FLOID

    Getting to Know FLOID

    Many associate the phrase “breakeven” as the point where revenue and operating expenses are equal.  But for ag producers, this breakeven point may leave significant cash needs unmet.  Producers will need cash for interest obligations, payments on long-term debt obligations and family living and income taxes in addition to operating expenses.  FLOID helps producers calculate their annual total cash requirements for the farming operation.

    In the above example, the producer needs $1,160,000 of revenue to meet its whole farm cash requirements. If operating expenses are removed from FLOID, FL_ID remains, which totals $250,000 in this example.  FL_ID is the earnings (EBITDA-Earnings Before Interest, Taxes, Depreciation, and Amortization) required to fulfill all cash obligations.

    FLOID can also be used to calculate breakeven cash prices for each commodity in consideration.  The table below provides a 2-step process for a hypothetical producer in the southeastern United States.

    This information is useful to help determine the crops to grow by comparing current price expectations to actual prices being offered via futures, cash forward contracts or production contracts.  Producers also use this information to evaluate changes needed in production costs or yield to achieve breakeven commodity prices for their operation.

    Consider attending the 2022 Executive Marketing seminar to develop your own pricing signals using FLOID.  Details can be found at www.clemson.edu/extension/agribusiness.


    Mickey, Scott. “Getting to Know FLOID.” Southern Ag Today 1(52.1). December 20, 2021. Permalink