Category: Crop Marketing

Producers can keep track of their price risk protection through revenue insurance in a given growing season by comparing the Harvest (Fall) Price to the Projected (Spring) Price determined by USDA-RMA. In the broader picture of a marketing plan, revenue crop insurances provide a form of price guarantee at a premium expense similar to locking in a price guarantee using a put option contract (Biram and Smith, 2022). A previous article examined the price protection offered by Revenue Protection (RP), Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) crop insurance for corn and rice (Biram, 2023). That article only considered the change in prices and did not consider the potential change in yield. This article builds on the previous one by considering both the price and yield protection offered by ECO, and providing a snapshot of how changes in county yields can also trigger indemnities.

ECO is an area-based crop insurance product and must be paired with farm-level insurance like Yield Protection (YP) or RP. The liability insured by ECO is calculated using the same parameters as RP (e.g., APH farm yield and futures prices) at coverage levels of 90% and 95%. The futures price used is based on the higher of the Projected Price and the Harvest Price determined by USDA-RMA. Unlike RP – which triggers indemnities based on farm-level losses –ECO triggers an indemnity based on county-wide losses and will trigger a full indemnity when county-level revenue losses fall to 86%.

A county-level map is provided in Figure 1, which shows the extent that the final county yield can change relative to the expected county yield and still trigger an indemnity for corn that is equal to the producer paid premium (i.e., breakeven indemnity). In other words, this map answers the question of how much the county yield must change to trigger an indemnity that will at least cover the producer-paid premium. The producer premium was determined for RP at the 75% coverage level (RP-75) under optional units paired with ECO at the 95% coverage level (ECO-95) with the associated premium subsidy rate applied. Projected and Harvest Prices reported by the RMA Price Discovery Tool are used with theassociated price volatility. 

As an example, a county shaded in the darkest green shows that the final county yield may increase at least 21-26% for an indemnity to trigger which covers the producer premium. This suggests the price decline in the futures market was severe enough to allow for yield upside risk that would offset indemnities triggered on price alone. Conversely, a county shaded in the darkest red indicates that the final county yield must decline at least 6-11% before a large enough indemnity to cover producer premium is triggered. This implies that the price decline was not severe enough to trigger an indemnity on price alone. Most counties have experienced severe enough price declines in corn that yield can increase in comparison to the expected yield and potentially obtain a net indemnity above zero (e.g., yellow and green shaded counties).

A similar pattern exists for cotton and soybeans (Figures 2-3). Nearly all counties insuring cotton under ECO-95 and RP-75 allow for yield upside risk, or favorable potential, to determine an indemnity equal to producer premium with most counties allowing for 7-10% yield upside risk. The same story holds for soybeans with potential yield upside risk of 9-14% for most counties which indicates the extent of futures price declines for both cotton and soybeans in 2024. Rice is the exception with no counties allowing for yield upside potential in determining an indemnity equal to producer premium (Figure 4). This is expected given there was virtually no change (i.e., $0.002/lb) in the rough rice futures price between planting and harvest.

This analysis shows that price risk protection, which does not require a crop insurance premium, could be provided through ECO-95 if yields do not increase by more than 5% across most counties. However, given the potential for record yields across most of the U.S., this potential may be largely eclipsed. While this yield upside could be beneficial, it only considers one half of the profit equation, gross revenue. Further, price declines, paired with elevated production expenses, have not been met by risk protection from other farm bill programs, such as Price Loss Coverage and Agriculture Risk Coverage. This underscores the lack of price risk mitigation provided by current farm policy tools and the need for an updated farm safety net.

Figure 1. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Corn)

Figure 2. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Cotton)

Figure 3. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Soybeans)

Figure 4. Percentage Change in County Yield for ECO-95 to Result in Zero Net Indemnity (Rice)

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References

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor“. Southern Ag Today 2(35.1). August 22, 2022. Permalink

Biram, Hunter. “Comparing the Harvest Price and Projected Price in Revenue Protection Crop Insurance for Rice and Corn.” Southern Ag Today 3(35.1). August 28, 2023. Permalink

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Biram, Hunter. “Can Yield Upside Risk Eclipse Price Downside Risk Protection in ECO Crop Insurance?” Southern Ag Today 4(47.3). November 20, 2024. Permalink

On November 8, the USDA released its monthly World Agricultural Supply and Demand Estimates (WASDE) report. Table 1 provides a summary of the November WASDE estimates for wheat, corn, soybean, and cotton.

Table 1. Wheat, Corn, Soybean, and Cotton Supply, Use, Stocks, and Price Estimates, November 2024 WASDE

	Wheat	Corn	Soybean	Cotton
	Production and Supply
Planted (million acres)	46.1	90.7	87.1	11.17
Harvested (million acres)	38.5	82.7	86.3	8.63
Yield (bu/acre or lb/acre)	51.2	183.1	51.7	789
Production (millions of bushels or bales)	1,971	15,143	4,461	14.2
Total Supply (millions of bushels or bales)	2,788	16,928	4,818	17.4
	US Exports and Use
Exports (millions of bushels or bales)	825	2,325	1,825	11.3
Total Use (millions of bushels or bales)	1,973	14,990	4,348	13.1
Exports % of Total Use	42%	16%	42%	86%
	Stocks and Price
U.S. Ending Stocks (millions of bushels or bales)	815	1,938	470	4.3
Foreign Ending Stocks (millions of bushels or bales)	8,649	10,035	4,371	71.45
U.S. Stocks/Use (%)	41%	13%	11%	33%
U.S. Avg. Season Price ($/bu or $/lb)	$5.60	$4.10	$10.80	$0.66

Wheat

Month-over-Month Changes

Limited revisions were made to U.S. wheat supply and demand estimates. Imports increased 5 million bushels, and food use increased 2 million bushels, resulting in a 3 million bushel increase in U.S. projected ending stocks. Limited changes to foreign supply and demand resulted in a 9 million bushel decrease in foreign stocks.

Year-over-Year Changes

Compared to the last marketing year, U.S. production was up 276 million bushels and ending stocks were up 199 million bushels; however, foreign wheat stocks were down 438 million bushels, from 9.087 billion to 8.649 billion.

Price Reaction and Outlook

Prices for the report release day traded mostly flat, with price reaction limited to a 10-15 cents trading range. Overall, the report does not change the outlook for wheat prices.

Corn

Month-over-Month Changes

The most substantial revision compared to the previous month was a decrease in the U.S. national average corn yield of 0.7 bu/acre, resulting in a 60-million-bushel decline in production. With use unchanged, ending stocks decreased 60 million bushels to 1.938 billion. Foreign stocks decreased 33 million bushels due primarily to increased corn use in Brazil, Mexico, and Southeast Asia. No production changes were noted in South America. 

Year-over-Year Changes

Year-over-year changes show a mixed supply and demand situation. U.S. corn production is estimated to be up 199 million bushels, with exports up 33 million. Net, the projected increase in U.S. ending stocks is 178 million bushels. Foreign stocks are projected to decline 575 million bushels compared to the previous marketing year.

Price Reaction and Outlook

Corn futures prices reacted positively to the report, with prices up a few cents for the day. Overall, the report can be viewed as neutral to slightly bullish for corn prices. The price outlook has not fundamentally changed; however, the report assists in stabilizing the downside of the market.

Soybean

Month-over-Month Changes

The U.S. average soybean yield decreased 1.4 bu/acre to 51.7 bu/acre, resulting in a decline in production of 121 million bushels. Exports and crush were decreased 15 and 25 million bushels, respectively. Projected ending stocks decreased 80 million bushels to 470 million. Foreign projected ending stocks also decreased 26 million bushels. No changes were made to South American production estimates.

Year-over-Year Changes

Compared to the previous marketing year, U.S. soybean production is estimated up 371 million bushels, and total use is up 243 million bushels. U.S. and foreign ending stocks are estimated up 128 million bushels and 582 million bushels, respectively.

Price Reaction and Outlook

Futures prices reacted positively to the WASDE report, with prices up 3-5 cents for the day. Overall, the report was slightly bullish for soybean prices; however, price direction will be dictated by crop progress in South America.

Cotton

Month-over-Month Changes

U.S. exports decreased 200,000 bales compared to October, resulting in a corresponding increase in U.S. ending stocks. Projected U.S. carryover into the next marketing year is 4.3 million bales. Foreign cotton stocks declined 780,000 bales due primarily to stock revisions in India and production decreases in Pakistan.

Year-over-Year Changes

Compared to the previous marketing year, U.S. production is up 630,000 bales, and exports are down 450,000 bales. Year-over-year ending stocks are projected to increase 1.15 million bales. Foreign stocks are projected to be unchanged compared to 2023/24.

Price Reaction and Outlook

Cotton prices showed limited movement for the day. Price ranges remained firmly intact, with nearby cotton futures trading 69-73 cents and deferred contracts at a 3-5 cents premium. Global demand remains the primary obstacle to improved cotton prices.

References and Resources

USDA World Agricultural Supply and Demand Estimates (WASDE). November 8, 2024. https://www.usda.gov/oce/commodity/wasde/wasde1124.pdf

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Smith, Aaron. “Changes to Supply and Demand Estimates in the November WASDE.” Southern Ag Today 4(46.3). November 13, 2024. Permalink

In its October World Agricultural Supply and Demand Estimates (WASDE) update, USDA forecasted a roughly 2% increase in total corn supply for the 2024/25 season, contrasting with last year’s levels, while demand is forecasted to hold steady. This supply growth and stable demand has led to a downward trend in corn prices, projected at $4.10 per bushel – a 10% decrease from last season. 

On the supply side, a 29% rise in beginning stocks has boosted total supply availability by 400 million bushels over last year. Despite a 3.7% increase in yields, a 4.4% reduction in harvested acreage shaved overall production by 0.9%, leaving output 138 million bushels below last year’s total (Table 1). Recent USDA ratings show roughly two-thirds of the crop in good or excellent condition, suggesting strong yield potential. Dry weather across the Corn Belt created ideal harvest conditions, accelerating progress to 81% of the crop harvested in the top 18 corn-producing states by October 27 – well ahead of the five-year average of 64%.

On the demand front, feed and residual use for corn is projected to edge up by 0.2%, or 11 million bushels, compared to last season, as growth in the broiler and hog sectors offsets a decline in the cattle herd. While corn usage for ethanol may see a slight dip of 21 million bushels (-0.4%), corn exports are forecast to climb 1.4%, adding 33 million bushels over last year’s total. The export boost can be partially attributed to competitive U.S. prices and limited supplies from drought-affected South American countries, particularly Brazil. However, total corn demand is projected to remain largely unchanged from the 2023/24 crop season, as shown in Table 1.

With supply anticipated to surpass demand, the USDA projects ending corn stocks to climb by 239 million bushels, a 14% increase over last season (Table 1). The “Days of Use on Hand at the End of the Marketing Year” built from ending stock levels indicates how many days the remaining corn supplies would last, based on average daily consumption, assuming no additional supply. This metric has a strong inverse relationship with season-average farm prices (SAFP), as illustrated in Figure 1. Given this relationship, along with USDA projections, Figure 1 suggests prices will hover around $4.10 per bushel in the coming year.

Latent factors could shift these projections, with geopolitical tensions playing a key role. The outcome of the U.S. elections may spark trade tensions, potentially changing global commodity markets. Meanwhile, the ongoing conflicts in the Middle East and between Russia and Ukraine can impact fertilizer and grain prices. In South America, recent rainfall has improved growing conditions, but the onset of La Niña brings uncertainty. After months of bearish sentiment and a period of neutrality, non-commercial net long positions in corn have turned positive, signaling a shift; speculators now hold more long than short positions, betting on a price rise.

Figure 1.  U.S. Corn Average Farm Price and Days of Use on Hand

References

USDA (2024). WASDE Report. Retrieved from: https://www.usda.gov/oce/commodity/wasde

Welch (2024). Feed Grain Outlook. Volume 33, Number 61. 

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Calil, Yuri. “Corn Market Outlook: Higher Ending Stocks, Steady Demand, and Price Pressure.” Southern Ag Today 4(45.3). November 6, 2024. Permalink

The October 16, 2024, edition of Southern Ag Today indicated a slightly bullish wheat situation within the United States (Welch, 2024). Today’s article discusses this further using three charts: U.S. Wheat Imports by Country, Wheat Production by Country, and Ending Stocks by Country. Wheat is a global crop, with the U.S. accounting for just 7% of the world’s wheat supply (Welch, 2024). Thus, U.S. fundamentals may not be the best indicator of a bullish outlook. Generally, the U.S. has a few uses for wheat, including food, seed, feed, and exports. Year over year, we see similar quantities of wheat used for food, seed, and feed. Significant changes in demand, which could result in a bullish outlook, typically occur due to changes in exports. 

                  Figure 1 illustrates U.S. wheat imports by country. In general, Mexico is the largest importer of U.S. wheat. China is a vast producer – typically keeping most of its production for domestic use – but it is also a significant importer. In 2023, China imported more wheat than usual due to quality deterioration. This situation is unlikely to occur again in 2024, as China is projected to have above-average production (Figure 2) and standard quality. However, the U.S. could see a price increase due to smaller production and ending stocks in the European Union (Figures 2 and 3). The E.U. has had a bad year of production with low quality in crucial wheat producing countries, including Germany and France. Consequently, E.U. stocks are projected to be the lowest since 2000. French wheat, similar to U.S. soft red winter, is used for food products like cakes, cookies, and pastries, requiring lower-protein wheat. German wheat is similar to U.S. hard wheats, including hard red winter wheat, and it is often used for bread and pizza dough.  

                  The low stocks and production situation could cause the E.U. to limit their exports, opening opportunities for more U.S. exports to countries that typically buy wheat from the European Union.  It could also result in more direct U.S. exports into the E.U., boosting U.S. wheat price. A series of U.S. sales to the E.U. could indicate bullish action in the wheat market and be a crucial indicator to sell this marketing year. 

Figure 1: U.S. Wheat Imports by Country

Figure 2: Wheat Production by Country

Figure 3: Ending Stocks by Country

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Sources:

U.S. Department of Agriculture. (2024). Production, Supply, and Distribution database. Foreign Agricultural Service. https://www.fas.usda.gov/data/psd-online

Welch, J. Mark. “Recap of the October WASDE for Grains and Soybeans.” Southern Ag Today 4(42.3). October 16, 2024. Permalink

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Gardner, Grant, and Frayne Olson. “Global Wheat Shortfalls Could Signal Bullish Potential for U.S. Wheat.“ Southern Ag Today 4(44.3). October 30, 2024. Permalink

The October 2024 WASDE report featured a sizeable cut to U.S. cotton yield and production forecasts.  This was largely the result of impacts from Hurricane Helene on the southeast region of the Cotton Belt. USDA reduced the U.S. average all cotton yield by 18 pounds to 789 pounds per acre.  If realized, this would be the lowest yield since 2015. USDA in turn lowered production by approximately 310,000 bales, which put the 2024 crop estimate at 14.2 million bales.  No adjustments were made to planted and harvested area estimates.  Beginning Stocks were left unchanged at 3.15 million bales.  Total supply was reduced to 17.36 million bales on this lower production estimate. 

On the demand side of the U.S. balance sheet, USDA reduced 2024/25 domestic mill use by 100,000 bales to 1.8 million and lowered its export forecast by 300,000 bales to 11.5 million. The current mill use estimate would be the lowest since the 1884/85 marketing year, when approximately 1.7 million bales were used (Meyer and Dew, 2023).  U.S. cotton export weekly net sales are off to a sluggish start in the new crop (2024/25) marketing year. Cumulative export sales for the 2024/25 crop are down 10 percent from last year, as of the week ending October 3rd.  Notably, U.S. cotton sales to China are off 74 percent from a year ago, reflecting USDA’s outlook for a 6-million-bale reduction in China’s import needs this year. In recent years, China has consistently been the single largest buyer of U.S. cotton.  However, in the current marketing year, China purchases lag Pakistan, Vietnam, Mexico and Turkey. Of note, in 2023/24, China’s imports reached an 11-year high of 15 million bales.  A few key factors led to last year’s surge in imports, including purchases for government reserves, lower domestic production, and lower foreign prices relative to domestic prices.  Imports for government reserves in 2023/24 amounted to one-third of China’s total imports, or roughly 5 million bales. With an increase in government reserves and an 800,000-bale increase in cotton production this year, China’s imports are expected to decline sharply in 2024/25, falling below the 5-year average of 9.8 million bales. 

Total demand for U.S. cotton was lowered 400,000 bales this month, which left 4.1 million bales in ending stocks. Despite a large cut in production, ending stocks were increased 100,000 bales from the September estimate as larger reductions in mill use and exports offset sizeable productions losses in Georgia and the Carolinas. 

The 2024/25 season average upland farm price was unchanged at 66 cents per pound, down 13.3 percent from last year’s 76-cent average.  This price would be the lowest season average farm price since 2019/20. There were no revisions to the 2023/24 U.S. cotton balance sheet.

USDA’s October projections for the world cotton balance sheet included a decrease in beginning stocks, an increase in production, stable consumption, and slightly lower ending stocks.   World production was increased over 200,000 bales to 116.64 million bales from 116.42 million last month. Notable increases were in China (+400,000 bales) and Brazil (+100,000 bales) which more than offset the 300,000 bale reduction in the U.S. crop.  Brazil is expected to produce a second consecutive record crop of 16.8 million bales in 2024/25.  Brazil surpassed the U.S. last year in cotton production and exports, becoming the world’s largest cotton exporter and third largest producer, behind China and India.

World cotton trade was reduced over 510,000 bales to 42.47 million, mainly due to a 500,000-bale reduction in China’s imports.  For 2024/25, China’s imports are estimated at 9 million bales, down from 9.5 million last month and 15 million bales last year.  China’s cotton inventories relative to use are comfortable. With production of 28.2 million bales, ending stocks in China are expected to be 36.24 million at the end of the marketing year.  Thus, domestic stocks would be equivalent to 95 percent of China’s 38 million bale projected mill use.  World ending stocks were reduced 160,000 bales from last month to 76.3 million, up from 75.2 million in the 2023/24 marketing year. There were no significant revisions to the 2023/24 global balance sheet.

USDA did note in its October Crop Production report that survey work for the field crop forecasts occurred primarily from September 28 to October 7. While much of the survey work did occur after the most severe weather from Hurricane Helene, the full impact of the storm may not be reflected in the current report.

Reference:

Meyer, L., & Dew, T. (2023). Cotton and wool outlook: December 2023 (Report No. CWS-23k) U.S. Department of Agriculture, Economic Research Service.

USDA. (2024). World Agricultural Supply and Demand Estimates. (WASDE-653) U.S. Department of Agriculture, World Agricultural Outlook Board. October 11.

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Stiles, Scott. “October WASDE Report Decreases U.S. Cotton Production, Mill Use, and Exports.” Southern Ag Today 4(43.3). October 23, 2024. Permalink