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  • Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy producers continue to struggle with decreasing farm level milk prices and high feed costs. For the first five months of 2023, the US All Milk price averaged $21.16 per hundredweight (cwt), which was more than $4 per cwt lower than the first five months of 2022. In fact, the US All Milk dropped below $20 per cwt in May for the first time since October 2021. Lower milk prices are never a welcome change, but they are especially problematic in the current feed price environment. While farm level milk prices were considerably lower for the January-May time period this year compared to last year, feed prices were actually higher. Using the Dairy Margin Coverage (DMC) feed ration as a proxy for feed cost to produce a cwt of milk, feed costs were almost $1 per cwt higher during the first five months of this year. Needless to say, this combination puts a serious squeeze on dairy producers. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014 and the recent convergence of the two lines is very obvious. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

    While I would prefer market conditions be different, times like this are good opportunities to discuss risk management strategies. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin (LGM) for Dairy, forward contracts, futures and options, etc. But the Dairy Margin Protection (DMC) program is a relatively inexpensive way to get some margin protection, especially on an operation’s first 5 million lbs of milk production history. Because it is readily available and inexpensive, I suggest to producers that DMC should be their first layer of risk protection. In fact, producers that enrolled in the DMC program at the highest level ($9.50 per cwt) have received a payment in each of the first five months of 2023. 

    The chart below tracks DMC margin back to January of 2014 and one can easily see decline in margins over the last several months. The last point on that chart is May of 2023 for which the DMC actual margin was $4.83. While it can’t be seen in the chart, one would have to go back to 2012 to find a lower DMC margin than that, had the program existed back then. In terms of the payment level for May 2023, participating producers received a payment of $4.67 for that month’s share (1/12) of the production history they chose to cover. While a dairy producer would be better off if prices were such that a DCM payment was not triggered, a payment of this magnitude absolutely makes a difference. 

    Many risk management tools today are market based. By that, I mean that available coverage levels and costs evolve with market conditions. Examples of this would include Livestock Risk Protection and Livestock Gross Margin Insurance, as well as crop insurance for which reference prices are determined by February futures. But DMC really is a countercyclical tool. The margin levels that can be purchased are available regardless of market conditions. In fact, producers may enroll in DMC at times when the likelihood of payouts is extremely high. There is considerable price and cost risk going forward this year.  Historically large corn acres planted, 94 million, combined with trend yields would produce a record large corn crop and lower prices.  But drought worries may cut into those yields, substantially boosting prices. Today’s futures market indicates some slightly higher Class III milk prices in the coming months.  Every operation should consider all available tools when putting together their risk management plan, but it’s hard to imagine that DMC-Dairy would not be one of the tools in their risk management toolbox.

  • Soybean Indemnity Payments for Wildlife Damage

    Soybean Indemnity Payments for Wildlife Damage

    Often, we think of crop loss being caused by weather, such as drought or excess moisture. However, a lesser quantified, but growing, cause of loss for crops in the southeast United States is wildlife damage. The most common causes of wildlife damage in soybeans are deer and hogs. Wildlife damage can be quantified when crop yield is damaged to a level that triggers an indemnity payment. Using the USDA RMA cause of loss data, Figure 1 shows the county map of soybean indemnity payments due to wildlife damage from 2011 to 2022; Figure 2 shows the percent of total soybean wildlife indemnities as a percent of total insured liability for soybeans by county. Mississippi received the most payments totaling $6.54 million, and Arkansas received the least number of payments, totaling $1.1 million. Tennessee was second with $5.65 million and Kentucky was third with $5.5 million. Missouri received $4.3 million, and Alabama received $2.4 million. 

    We also show the annual losses to wildlife damage for soybeans in the seven states combined (Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia) from 2011 to 2022 (Figure 3). Indemnity payments due to wildlife damage to soybeans in 2022 were approximately $4.8 million, which is a 487% increase from 2011. Between 2011 and 2022, in these seven southeastern states, a total of 250,818 soybean acres received an indemnity payment due to wildlife damage. Figure 3 also shows the percentage of total soybean indemnity payments caused by wildlife damage (orange line). These indemnities due to wildlife losses are a small percentage of the total soybean crop insurance losses but have increased since 2011. 

    It should be noted that the total indemnity payments received do not capture the total loss of wildlife damage in soybean fields. Before an indemnity payment is made, the actual revenue or yield must be below the crop insurance yield or revenue guarantee for the insured unit. Also, damage to uninsured acres would not be accounted for in the data. Further, some losses due to wildlife may be being attributed to another cause that also impacted the farm (e.g. drought or excess moisture). As such, indemnities paid due to wildlife losses in soybeans represent only a portion of actual producer losses. In the seven-state region, state average soybean crop insurance coverage levels for 2022 (2011-2022 average) were: Alabama 72.1% (71.6%), Arkansas 63% (62.2%), Georgia 67.6% (66.8%), Kentucky 76.1% (76.2%), Missouri 73.2% (73.0%), Mississippi 69% (69.2%), and Tennessee 72% (72.2%).

    We note that some states and counties allow for nuisance hunting permits out of season to control deer and hog damage to crops. It might be of interest to check with your local game warden to determine if this is an option for your farm.  

    Figure 1. Soybean Indemnity Payment Map for Wildlife Damage Cause of Loss for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia from 2011 to 2022

    Figure 2. Percent of Wildlife Damage Cause of Loss as a Percent of Total Insured Liability for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia from 2011 to 2022

    Figure 3. Soybean Wildlife Indemnity Payments for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia and Percent of Total Soybean Indemnity Payments Caused by Wildlife Damage by Year from 2011 to 2022

    References

    U.S. Department of Agriculture – Risk Management Agency. Cause of Loss Historical Data Files 2011-2022. Accessed at https://www.rma.usda.gov/SummaryOfBusiness/CauseOfLoss

    Duncan, Hence, Chris Boyer, and Aaron Smith. “Soybean Indemnity Payments for Wildlife Damage.” Southern Ag Today 3(29.1). July 17, 2023. Permalink

  • Why is Our Cooperative Struggling?

    Why is Our Cooperative Struggling?

    It is widely recognized that agricultural cooperatives are founded on seven distinct principles.

    1. Voluntary and open membership
    2. Democratic member control
    3. Members’ economic participation
    4. Autonomy and independence
    5. Education, training, and information
    6. Cooperation among cooperatives
    7. Concern for community

    Although some cooperatives adjust the first two principles, in general, adherence to these principles allow agricultural producers to collectively own assets of production that they might not otherwise be able to access. Simply put, the cooperative business structure works, and it will always be needed by agricultural producers so long as they participate in markets with very large buyers and sellers or lack the ability to effectively transfer cost increases and risk downstream. 

    However, these principles add some complexity to successful management. Occasionally managers and directors feel their cooperative is not meeting their expectations. Their frustrations often originate with the challenges presented by cooperative principles and a misunderstanding of how those principles apply to successful cooperative leadership. Here are a few examples of complexities that might describe your cooperative.

    We struggle with member loyalty.

    Cooperatives are owned by their customers, so one would expect that cooperative members would naturally be loyal to the business they own. However, cooperative managers often complain that their members are only loyal to price. Cooperatives rely on their members economic participation for profitability, but most feature open and voluntary membership. Just like any other firm, cooperatives must offer their customers a reason to do business, but it must be more than just price. If cooperative members are choosing your competitors, they may need to be educated about the value of the cooperative’s services, the value of shared profits, or the value of the cooperative’s influence on market power.    

    We struggle with recruiting directors with the skills we need.

    Cooperative directors are elected from among the membership. Members, in turn, are users or customers of the business. The implication of democratic member control is that directors are selected from among a group of relatively similar people with similar skills and backgrounds from within a defined geographic region. Compared to other forms of corporations, a cooperative can’t always recruit directors from other industries or with specific professional backgrounds. On the other hand, a cooperative board has incredible customer insight. 

    We struggle with directors who want to control managerial decisions.

    Another implication of democratic member control is that cooperative directors are not only customers, but they themselves are managers of their own business ventures. Most likely, the directors of your cooperative are also very successful managers. However, the director role is very different in purpose and function from that of management. At times, cooperative directors might fall back on what they know best (operational management) if they aren’t familiar with the role of the director (setting policy and strategy). In addition, cooperative directors may need education about the industry or business model of their cooperative. For example, a director may be very familiar with cotton production, but not understand retail pricing and inventory control at their cooperative farm store. Or a director may be familiar with grain production, but not understand the economics of milling and bagging feed. 

    Education is a key method for helping a struggling cooperative. There are many professionals ready to assist a cooperative board with specific knowledge and education to help them overcome these struggles. Look for help from your local bank, accountant, lawyer, and cooperative extension service.

    Photo by Monstera: https://www.pexels.com/photo/cutout-paper-composition-with-graphic-and-hand-with-bills-5849592/

  • U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels

    U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels

    In 2022, China’s total food and agricultural imports reached a record $218 billion, compared to its agricultural exports of $70 billion making China the largest net importer of food and agricultural products by a considerable margin. China’s 2022 import levels follow on the footsteps of retaliatory tariff increases in 2018 and 2019, the Economic and Trade Agreement between the United States of America and the People’s Republic of China (Phase One that entered into force on February 14, 2020), and the Covid-19 pandemic. While the two-year Phase One agreement (2020-2021) fell short of the purchase commitments China agreed to, its agricultural imports from the U.S. soared to record levels in 2022, and the share of China’s agricultural imports sourced from the U.S. has recovered to levels at or near the pre-trade war era. 

    Figure 1 shows the value of China’s agricultural imports from its top nine export suppliers and an aggregate rest-of-world (ROW) region (left vertical axis, $ Billion, area graph). China’s imported a record $40.8 billion of food and agricultural products from the U.S. in 2022, up from $38 billion in 2021, and nearly twice the $22.6 billion China imported from the U.S. in 2017 prior to trade dispute and Phase One trade agreement. China’s food and agricultural imports from the U.S. are more than double its imports from the EU-27 but trail China’s record agricultural imports from Brazil valued at $52.5 billion in 2022. Together, Brazil and the United States supply 43% of China’s total food and agricultural imports. 

    However, comparing nominal trade values through time can lead to misleading conclusions, especially when commodity trade values are subject to considerable price inflation later in the sample period. Starting in mid-late 2021, commodity prices spiked following poor weather conditions in North and South America, the U.S. dollar appreciated, Central Banks began raising interest rates, and an overall inflationary environment took hold.  Commodity prices surged to new highs following Russia’s invasion of Ukraine on February 24, 2022, before returning to their pre-invasion levels more recently. For example, global wheat prices increased by over 60 percent from February 24 to June 1, 2022 compared to average wheat prices prior to the invasion. 

    If food price inflation is a global phenomenon (i.e. not specific to an individual country), then an alternative metric by which to judge China’s record import values is to compute the share of China’s imports from the U.S. in 2022 relative to the pre-trade war period. Given inflationary pressure in 2022 that impacted most food and agricultural products, market shares allow us to evaluate whether the U.S. has regained its market share standing following a turbulent five years of commodity trade. The dashed lines in the figure trace the share of China’s agricultural imports from the U.S. (black) and Brazil (green) and are illustrated on the secondary right vertical axis. While U.S. market share in China’s food and agricultural imports was on a downward trend since 2012, it fell precipitously in 2018 and 2019 to 12% and 10%, respectively. Brazil’s market share in China increased from 21% in 2017 to 27% in 2018 but has remained stable in the 22-24% range since then.  Conversely, U.S. market share has recovered significantly in 2021 and 2022 to 18% and 19% of China’s total agricultural imports and is about equal to its share in 2017, prior to the US-China trade dispute. Overall, the rapid surge in U.S. market share in China since 2019, and stable market shares of Brazil and other competing exporters suggests, relatively speaking, that China has been importing more from the U.S. in 2021 and 2022. 

    Figure 1. China’s Agricultural Import Values from its Top 10 Export Suppliers, and the Market Share of China’s Imports Sourced from the U.S. and Brazil

    Source: Authors calculations from Trade Data Monitor using China’s reported import statistics through December 2022.

    Figure Note: Source: Author Calculations from Trade Data Monitor. Left vertical axis are in $ Billion. Right vertical axis are percentage market shares. Data are from China’s reported imports throughout.

    Grant, Jason H. “U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels.” Southern Ag Today 3(28.4). July 13, 2023. Permalink

  • Mid-Year Review and Planning

    Mid-Year Review and Planning

    We have now past the midway point for the 2023 calendar year. We are carefully and optimistically watching our crops develop as well as keeping tabs on global events. It has been another wild year with crazy weather and its effects around the country, from areas of drought and high heat, to areas where excessive moisture has produced standing water and flood warnings. The upheaval in Eastern Europe, Russia’s ongoing attempt to take over Ukraine, continues to create a variety of issues around the globe. With all the issues taking place, we are seeing variability and fluctuation in commodity prices, both positive and negative, and we can sometimes get dizzy thinking about all of the “what ifs.” When this happens, we choose not to want to think about it, and it simply creates management decision paralysis. We need to eat this elephant one bite at a time, and possibly request some assistance from the right individuals. Make sure you have the right information to make the best decisions that can be made to prepare for the rest of the season and year. 

    This is a good time to take a few steps to ensure you are on the right track for risk mitigation. 

    1. Have you scouted your crops to estimate yield, barring any late-season weather-related disasters? Does this match your marketing plan, or do adjustments need to be made? For livestock, do you have the feed necessary on hand/or being produced? Does additional feed need to be purchased? What options are available to lock in prices and supplies that allow for profit?
    2. Review your marketing plan and determine if any changes need to be made. Is it time to look at additional hedging or spreads opportunities to help mitigate price/marketing risk?
    3. Do you have labor available and can you afford what is needed? Is mechanization required to cut back on labor, and does it pay to do so? 
    4. Have you run cash flow estimates for where you believe you will be at the end of the year? Do you need to make adjustments, prepare for tax management strategies before the end of the year, cut back on expenses, increase sales of culls, other inventory to access cash, etc.?

    Although the above-mentioned situations are things that we normally think about, we typically don’t give the thought each of those deserves as we get overrun with daily tasks on the farm. However, a mid-year check to mitigate risk may offer the opportunity for the farm or ranch to increase its cash flow. There are a number of resources available to assist farms and ranches in understanding the decisions to be made, and possibly even performing a true analysis of the farm financials. You should begin by contacting your local farm management/agribusiness Extension staff, legal and tax professionals, and others. But it must start with a plan, the farm/ranch goals, objectives, and knowing your numbers. If you do not have a way to collect the “numbers,” including production, income, costs, etc. or able to produce an easy way to review the information, you may be making decisions based on information that is incomplete at best.

    With the variables presently at play today, it’s time to take a deep dive into what shocks your farm/ranch enterprise(s) can handle to determine the farm’s economic stability and sustainability.  But without knowing the farms’ “numbers” the owner/operator will not know how to appropriately plan for potential changes. 

    Reach out to your local Cooperative Extension service and your legal and tax professional. Additional resources and tools can be found through your local Cooperative Extension website, and at ruraltax.org (www.ruraltax.org), Center for Farm Financial Management (https://www.cffm.umn.edu), National Council of Agricultural Employers (NCAE) (https://www.ncaeonline.org).

    Kantrovich, Adam. “Mid-Year Review and Planning.” Southern Ag Today 3(28.3). July 12, 2023. Permalink