Category: Crop Marketing

Production and supply of a crop is a critical component for the market outlook for every marketing year.  For the cotton crop, U.S. planted acreage outcome is a major part of the global cotton production and supply.

Grower surveys are one common method for predicting cotton planted acreage. One of the earliest publicly available grower planting intentions surveys is measured in December by Cotton Grower magazine and published in early January.  Similarly, the National Cotton Council measures grower intentions in the weeks before and after New Year’s Day and publishes the result in February.  In 2022, these two surveys measured 12.5 million and 12.0 million planted acres of U.S. all cotton (upland and Pima combined), respectively.  USDA will subsequently measure grower planting intentions in March, and then survey planted acreage in June.

A second approach to predicting cotton plantings is by focusing on the relative price of competing crops.  In the eastern half of the Cotton Belt, cotton competes largely with corn, soybeans, and peanuts.   In the Southern Plains region, the major alternatives are corn, sorghum, and wheat-fallow.  A simple method for predicting cotton plantings is, for example, matching the ratio of new crop corn and cotton future prices to U.S. cotton plantings (Figure 1). So far, the Dec’22 CBOT corn/Dec’22 ICE cotton futures price ratio has been ranging between 5.7 and 5.9 during the first quarter of 2022.  Assuming the price ratio stays at that level, history suggests an outcome of between 12 and 13 million planted acres of U.S. all cotton (see Figure 1). This is similar to the early surveys of growers.

Note that the dryer-than-normal conditions in the central and western Cotton Belt, along with an insurance price above $1.00 per pound, could add 500,000 to 1,000,000 planted acres in the Southern Plains region, albeit with uncertainty in the abandoned acres at the end of the season due to possible drought impacts.

Assuming 13 million planted acres in the U.S. with an average/higher abandonment (20%) and 10-year average yield (850 lbs), the U.S. would produce over 18 million bales of cotton in 2022, with over 21 million bales of supply.  Assuming U.S. domestic spinning is 2.6 million bales and U.S. exports are 15 million bales, the result could be another year of U.S. ending stocks around four million bales.  That year-over-year change in ending stocks would be considered price neutral.  This year that suggests that new crop futures prices may be fundamentally supported at historically high levels, with weather market speculation providing additional upside volatility.

Figure 1. Ratio of December Corn/Cotton Futures and All Cotton Planted Acreage in the United States

Robinson, John. “U.S. Cotton Planted Acres“. Southern Ag Today 2(11.1). March 7, 2022. Permalink

For many feed grain producers, 2021 was a profitable year; however, the uncertainty and risk associated with the 2022 corn crop is elevated. Following is a look at how the components of the supply and demand balance sheet might provide price direction as we head into the new crop season.  Importantly, is there a likelihood of an increase in ending stocks that puts downward pressure on prices, or might stocks get tighter and prices go higher? 

USE:  U.S. corn use over the last six years has ranged from a low of 14.0 billion bushels (2019/20) to a high of 14.8 billion bushels (2017/18, 2020/21, 2021/22).  Domestic use over this time frame is little changed, varying in a range from 12.1 to 12.4 billion bushels. 

Looking at the major use categories, growth in the corn for fuel use category seems limited due to uncertainty around the Renewable Fuel Standard and gasoline demand projections.  With rising fuel-efficiency ratings and a growing number of vehicles on the road that do not use gasoline, the Energy Information Administration forecasts motor gasoline demand in the U.S. (the foundation of ethanol demand) to decline over the next several years in its Annual Energy Outlook (https://www.eia.gov/outlooks/aeo/). 

Impacting the corn for feed category is a decline in grain consuming animal units (GCAU) over the last two years and a decline in energy feed per GCAU over the last five years (https://www.ers.usda.gov/data-products/feed-grains-database/). 

Food, seed, and industrial use (other than ethanol) have held steady in a range from 1.415 to 1.453 billion bushels since 2016.

Exports have been the use category with the most variability over the last several years and have therefore had the most impact on ending stocks. U.S. corn exports hit an all-time record high in 2020/21 at 2.753 billion bushels. Corn production from the top four competitors for U.S. corn exports: Brazil, Argentina, Ukraine, and Russia, is forecasted to be at record high levels in 2021/22, while U.S. exports are projected to be back down to 2.425 billion bushels. High corn prices provide incentives for producers all around the world to increase acres.  At the time of this writing, the conflict between Russia and Ukraine has the potential to upset grain flows from the Black Sea region, an important component of the global grain trade.  

SUPPLY:  One of the greatest areas of uncertainty for 2022 is the impact of record-high fertilizer prices and crop input availability. How will this impact farm productivity, profitability, and planting decisions? Will farmers opt for crops that are less fertilizer intensive given these high input costs? Will herbicide cost and availability shift planting decisions to crops with a wider range of alternative crop production systems that are less reliant on over-the-top herbicides? The current ratio of soybean to corn prices suggests net farm returns are about equal between these two crops in Midwest crop budgets (farmdoc dailyhttps://farmdocdaily.illinois.edu/2021/12/2022-updated-crop-budgets.html).  Late-spring input pricing and input product dealer inventories may keep the acreage question unanswered longer than normal this spring.  

ENDING STOCKS AND PRICE:  If farmers plant about the same number of corn acres in 2022 as 2021 (about 93 million), we once again achieve a trendline yield (about 179 bushels per acre), and projected use holds steady in 2022 as currently projected for 2021, total production would exceed the 14.8 billion bushels of projected use. That would increase ending stocks in 2022 and fundamentally put downward pressure on prices.  

RISK MANAGEMENT:  A primary area of financial risk in 2022 is that producers will have locked in high input costs early in the season only to see prices fall significantly by harvest. This highlights the importance of a two-prong approach to risk management. First, focus on cost management and input use efficiency while maintaining productivity. This is to get the break-even cost as low as possible. Second, have an accurate estimate of break-even cost and a plan and the tools in place to not let profitable price opportunities get away.  

Welch, J. Mark. “2022 Corn Outlook“. Southern Ag Today 2(10.1). February 28, 2022. Permalink

Soybean prices have maintained their bullish momentum into 2022. The March soybean futures contract closed at $15.52 ¼ on February 15, which is up $2.03 ¼ since the start of the year. Numerous factors have propelled prices higher, including drought in South America, global economic recovery, and very strong domestic crush margins. United States domestic soybean crush has been at a record pace and the current crush margin, well above $2.00/bushel, will continue to support domestic soybean prices. Additionally, the current global reserves of soybean’s two primary products – soybean meal and soybean oil – are also very supportive of soybean prices. The three largest producers of soybeans are Brazil, the United States, and Argentina. The largest importer of soybeans is China; however, the rest of the world (ROW) maintains a substantial portion of soybean meal stocks – 46.7% in 2021/22 (Figure 1) and soybean oil 40.4% in 2021/22 (Figure 2). 

Since the 2019/20 marketing year, global soybean meal stocks have decreased from 14.54 million metric tons (MMT) to 12.27 MMT, a 15.6% decline in two years. The decrease in soybean meal stocks is largely attributed to declines in Argentina (16.4%) and ROW (27.2%) (Figure 1). Over the same time, global soybean meal consumption has increased from 240.5 MMT to 247.5 MMT. Increasing meal demand and lower meal stocks will continue to support soybean meal and soybean prices.

Figure 1. Global Soybean Meal Stocks by Country, 2006/07-2021/22

Similar to soybean meal, soybean oil also has lower stocks compared to recent years. USDA projects global soybean oil stocks at 3.719 MMT, down 22.4% compared to the 2019/20 marketing year (Figure 2). Soybean oil stocks have dropped 50.6% for Argentina, 34.2% for ROW, and 23.1% for China. Global soybean oil consumption has increased from 57.2 MMT, in the 2019/20 marketing year, to 60.2 MMT projected for the 2021/22 marketing year. Lower soybean oil stocks and increased demand will continue to support high soybean oil and soybean prices.

Figure 2. Global Soybean Oil Stocks by Country, 2006/07-2021/22

A great deal of uncertainty continues to be prevalent in the soybean complex. However, there are numerous reasons to be cautiously optimistic that high soybean prices will continue in 2022. Low stocks of soybean oil and meal are one of the factors that will be supportive for soybean prices.

References

U.S. Department of Agriculture Foreign Agriculture Services (USDA FAS). 2022. Production, Supply, and Distribution (PSD). Accessed online at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

Smith, S. Aaron. “Soybean Meal and Oil Stocks Supportive for High Soybean Prices“. Southern Ag Today 2(9.1). February 21, 2022. Permalink

Rice saw a record overall yield with the 2021 crop, but rice production was down almost 16% from the previous year. The overall rice yield was 7,709 lbs./acre, which beats the previous record high of 7,694 lbs./acre in 2013. This new record high was driven by a record medium-grain rice yield of 8,623 lbs./acre, which was 2.8% higher than the previous record. The 2021 long-grain rice crop saw the second-highest yield on record at 7,471 lbs./acre, just below the record of 7,517 obtained in 2018. Despite these high yields, 2021 production was lower than the previous year at 191.8 million hundredweight for all rice and 144.6 million hundredweight for long-grain rice. Lower production was driven by a reduction in planted acreage by nearly 17% in 2021 as compared to 2020. Mississippi saw the largest reduction of any state in planted acreage, down 36% from the previous year. 

 With lower production, U.S. long-grain rice ending stocks for the 2021 marketing year is currently estimated by the USDA at 21.4 million hundredweight resulting in a stocks-to-use ratio of 12.1%, which is down from 29.7% in 2020. Domestic U.S. consumption of long-grain rice, while lower than last year, remains strong, but exports remain flat compared to previous years. The current 2021 market year average price projection for long-grain rice is $13.20/cwt, which is the highest price since 2013. 

U.S. long-grain rice acreage has fluctuated from around 2.5 million to 3 million acres year to year consistently since 2013. Given this pattern and current high prices, rice acreage is expected to rebound back to around 3 million acres in 2022. One potential factor that can limit an acreage increase is current high input costs and supply uncertainty. Soybeans are the common rotational crop planted with rice and currently, soybean prices are strong and can be planted at a lower cost of production per acre. Current high long-grain rice prices though will likely convince most producers to stay with their normal crop rotation.         

Maples, William E. . “Rice Production Down in 2021 Despite Strong Yields“. Southern Ag Today 2(8.1). February 14, 2022. Permalink

As farmers are planning for the new year, they have several factors to consider. Besides supply and demand uncertainties for cotton marketing and weather uncertainties for cotton production, we are in the middle of a supply chain crisis with rising input costs and limited supplies. Additionally, inflation is a major concern, with the latest annualized Consumer Price Index at 7.0 percent. Inflation translates into higher production costs for cotton producers. 

Cotton producers are wondering if they will be profitable this year under rising cotton prices and higher input costs. Figure 1 below shows the estimated costs of production for cotton in 2021 and 2022 from the University of Georgia Cotton Enterprise budgets. The total costs of production rose significantly for 2022 compared with 2021, with an average increase in total costs for irrigated land of 17.4% and a 24.7% increase in total costs for dryland production. Similar year-over-year increases in production costs have been reported for Tennessee (21% for irrigated and 27% for non-irrigated) and Mississippi (11% for irrigated and 12% for non-irrigated).^[1]This increase in input costs is largely driven by the rise in fertilizer costs, crop protection costs, land costs, and energy costs. Even though individual producers’ costs vary and are determined by their production practices, these estimates clearly show the increase in input costs year-over-year. 

To ensure profitability, producers need to have a sound plan for input use, particularly fertilizer application this year. Soil testing will allow producers to determine available nutrients and the profit-maximizing amount of fertilizer that should be applied. Additionally, producers should develop secondary plans for chemical applications (e.g., if product A is unavailable what other products can be used). All of this implies higher production costs and greater financial risk for this year and makes it more critical for producers to estimate and control their cost of production. 

The good news is high new crop cotton prices (December 2022 closed at 100.87 cents per pound on January 31, 2022), are providing potentially profitable outcomes. With a yield of 1,200 pounds per acre for irrigated land and 850 pounds per acre for dryland production, with the costs shown in the table, cotton producers would need to lock in prices at 89 cents per pound for irrigated land and 96 cents per pound for dryland to break even. Producers need to be cognizant of the elevated amount of money at risk and modify their marketing and risk management plans accordingly. Incrementally removing price risk when purchasing inputs will help mitigate some financial risk for cotton producers. As with every year, producers need to focus on managing their profit margin through sound risk management practices. 

Figure 1. The Rise in Variable Costs and Fixed Costs for Cotton Production in 2022. Source: University of Georgia Cotton Enterprise Budgets. Average of conventional tillage and strip-tillage production. Costs Exclude Land Rent.

 

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^[1] Budgets were created on different dates and have different specified costs, so some caution should be exhibited when comparing different states.

References

Estimate of 2022 Relative Row Crop Costs and Net Returns, Department of Agricultural & Applied Economics, University of Georgia, November 2021. https://agecon.uga.edu/extension/budgets.html

Cotton 2022 Planning Budgets, Department of Agricultural Economics, Mississippi State University, Budget Report 2021-01, November 2021. https://www.agecon.msstate.edu/whatwedo/budgets.php

2022 Cotton Budgets, Department of Agricultural and Resource Economics, University of Tennessee. https://arec.tennessee.edu/extension/budgets/

Liu, Yangxuan. “Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan“. Southern Ag Today 2(7.1). February 7, 2022. Permalink