Southern Ag Today

Category: Crop Marketing

  • Exports to Canada and Mexico Provide Stability to Peanut Market

    Exports to Canada and Mexico Provide Stability to Peanut Market

    In a typical year, about a quarter of the U.S. peanut crop is exported to foreign countries with the primary destinations being Canada and Mexico.  As seen in Figure 1, these two closest neighbors to the U.S. have continued a steady growth of purchasing of U.S. peanut products.   This has provided a stable base to the peanut export market over the years, accounting for between 33% and 48% of the overall exports during the last five years.  This trend has continued in 2021, where the period of January to July has seen a 5% increase in exports to Canada and Mexico compared to the same period during 2020.  

    Alternatively, China has been a relatively new buyer of U.S. peanuts over the last decade.  Early in the decade, China had purchased U.S. peanuts through third-country agreements, The first substantial shipments directly to China came in 2016 when low priced in-shell peanuts were purchased for oil production.  After buying 30% of the U.S. exports in 2016, China pulled back in subsequent years, averaging roughly 13% of the U.S. export market from 2017-2019.  While this did result in a general upward trend in overall exports (excluding 2016), a combination of trade disputes, tariffs and higher prices played a factor in the decline of exports to China after 2016.  In 2020, China once again substantially increased their purchasing to a record level for that country.  However, from January to July 2021, exports to China have dropped 55% compared to the same period in 2020.  At the current pace, this will result in the third highest export quantity to China. 

    While it is promising in terms of trade with China, competition from India, higher prices, and the potential for current purchases being related to the Phase One trade agreement raise questions about the stability of peanut exports to that market.

    The European Union (E.U.) is another market of concern, with export quantities included in the rest of the world data in Figure 1.  Challenges with trade to the E.U. have focused on aflatoxin testing where standards target a four (4) parts per billion (ppb) aflatoxin level instead of the U.S. 15 ppb.  Furthermore, with at least 10% of the shipments being subject to testing and failed shipments being returned or requiring cleaning, there are concerns about sending peanuts to that market.  While peanut exports to the rest of the world are up 17% for the period of January to July 2021 compared to the same period in 2020, they are down 40% compared to the same period in 2019.  All things considered for the peanut market, trade to Canada and Mexico provides the stable foundation for what appears to be a changing landscape of export markets for the industry.

    Figure 1. Peanut Exports to Canada, Mexico, China, and the Rest of the World: 2010-2020
    Source: Data from the USDA Foreign Agricultural Service

    Rabinowitz, Adam. “Exports to Canada and Mexico Provide Stability to Peanut Market.” Southern Ag Today 1(43.1d). October 18, 2021. Permalink

  • Cotton Prices Above 90th Percentile of the Historic Range

    Cotton Prices Above 90th Percentile of the Historic Range

    Since March 2020, cotton futures prices have climbed from below 50 cents per pound to north of 95 cents. The current outlook for cotton prices remains bullish; however, prices are currently above the 90th percentile (89.02 cents; Figure 1) of the historic price range going back to January 2000. Cotton producers may want to consider removing some additional price risk – depending on production costs, current price protection levels, and year-to-date sales. Over 83% (15.5 million bales) of 2021 US cotton production is projected, by USDA, to be exported. As such, prices will be reactive to events overseas that can be unpredictable but potentially have dramatic ramifications domestically (for example, recent events with Evergrande). To manage price risk, producers have a vast array of marketing tools — cash sales, futures, options, forward contracts, marketing pools, and the USDA Loan Program. The effectiveness of the marketing tools will vary based on current market conditions. 

    In addition to price risk, there is still substantial production risk for many US producers, which needs to be considered when factoring how much production to price and the marketing tool utilized to mitigate risk. One marketing tool that producers may want to consider is buying December or March put options to set a futures price floor. Using put options allows producers to participate in upward movements in cotton futures while establishing a price floor on the protected production. Additionally, put options define the potential loss (the amount of the put premium), do not have margin calls, and do not require the physical delivery of cotton. For example, on September 13, 2021, a December 2021 put option with a 94-cent strike price could be purchased for 4.63 cents to establish an 89.37 cent futures price floor or a March put option with a 93-cent strike price could be purchased for 6.69 cents to establish an 86.31 futures floor (always check futures and options markets for updated premiums for different strike prices). Both options would secure a futures price above the 85th percentile of the historic price range in Figure 1. More complex option strategies can be considered to offset premium cost. Producers need to understand the risks and rewards for all strategies so working with a qualified professional is recommended. Current prices will result in profitable outcomes for many cotton producers; as such removing some price risk or protecting against the downside should be strongly considered. 

    Figure 1. Monthly Nearby Cotton Futures Prices, January 2000 to August 2021

    Smith, Aaron. “Cotton Prices are Above the 90th Percentile of the Historic Range.” Southern Ag Today 1(42.1). October 11, 2021. Permalink