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  • Up-Side-Down Yields? 

    Up-Side-Down Yields? 

    No… not crop yields, we are talking about bond yields and rising interest rates.  As the Federal Reserve began battling inflation a little more than a year ago with interest rate hikes, Dr. Anderson and I discussed the progression of inflation, interest rates, and the nature of yield curves in a series of articles here on Southern Ag Today.   Over the course of the last 14 months, the Fed has incrementally pushed the Federal Discount Rate to 5.25% as of late May 2023, up from 0.25% in March 2022.  

    In “Careful on the Curves” from July 13, 2022, we described yield curves for Treasury bills/notes.  Without repeating too much of that discussion, the yield curve is simply the structure of market interest rates or yields for instruments (treasury bills or corporate bonds) with varying maturity dates.  The shape of the yield curve can reveal a sense of what the market expects with regard to inflation and future economic conditions.  

    Typically, yields increase as the maturity length of a financial instrument increases creating an upward sloping yield curve.  This fairly normal yield relationship reflects the expectation that investors require a higher yield to commit to longer-maturing investments but also suggests relative stability in other factors, such as inflation, economic growth, and market volatility.

    Figure 1 shows the progression of the yield curve at the end of each quarter from September 2021 through May 2023.  In today’s market, we find the unusual (up-side-down) inverted yield curve where long-term yields are below short-term yields.  By September 2022, the curve between 3Yr and 10Yr maturities was inverted.  In December 2022, the inversion progressed to cover 6Mo to 10Yr maturities.  In the first quarter of 2023, longer-term rates declined relative to Q3 & Q4 of 2022.  Combined with continued upward pressure from the Fed on short-term rates, today we see the strongest downward sloping curve spanning 1Mo to 10Yr maturities.

    There is a well-known quip that economists have predicted 10 of the last 5 recessions.  That line is particularly apt in a discussion of the yield curve.  An inverted yield curve has frequently been a precursor to recession – that’s why people take notice when it happens.  Unfortunately, there is no such thing as a sure thing when it comes to economic indicators; which is too bad because that would make economic forecasting a whole lot easier.  What the inverted yield curve tells us for certain is that the current economic situation is particularly uncertain.  As we write this, the market is trying to figure out how the government is going to navigate the imminent approach of the debt ceiling limit, whether the Fed will continue on their path of raising interest rates, and what OPEC plans to do with oil production.  And those are just a handful of the big-ticket items in play.  These significant market events will be taking place within – and being influenced by – a domestic and international political situation that is tense, to say the least.  So what is a decision maker to do with the inverted yield curve?  The old adage ‘hope for the best, prepare for the worst, comes to mind.  More concretely, that means preparing for two or three quarters of recession (e.g., by minimizing exposure to short-run interest rate risk and protecting equity).  While a recession is not a foregone conclusion, the probability is too high to prudently ignore.

    Figure 1.  Treasury Yield by Maturity: Selected Daily Yields, 2021 to 2023

    Data Source: U.S. Department of the Treasury.  

  • Grass Fed Beef Prices

    Grass Fed Beef Prices

    Cattle ranchers continue to have a significant interest in direct-to-consumer marketing of their own beef. These ranchers are typically aiming to build their own brand and integrated business from the land: from their cattle, to the beef, and on to the consumer.  Some of this beef might be grain finished in a feedlot or grass fed and finished.  Those looking to start selling to consumers often struggle for a bit to figure out pricing their product.  USDA’s Agricultural Marketing Service (AMS) publishes some price data on wholesale, direct-to-consumer retail, and carcass prices for grass fed beef.  

    Grass fed, direct to consumer retail prices for whole, half, and quarter carcasses were $8.08, $8.28, and $9.30 per pound in April.  All were higher than April 2022 but, whole and halves were lower priced than in March of 2023.  Ribeye steaks were quoted at $31.12 per pound, the highest price in the data which goes back to 2013.  Almost all the reported cuts were higher in price than a year ago ranging from $17.28 per pound more for filet mignon to $0.95 higher for skirt steaks.  

    There is also some carcass price data through the Small and Very Small (SVS) Producer verified program. The weighted average grass fed carcass price reported under this program was $4.31 per pound in April.  As you might suspect, the weighted average price was the highest, $4.99 per pound in 2020 during the pandemic.  A range of prices are reported and the range at the peak of the pandemic was from $3.20 to $6.75 per pound.  In recent months the range was $3.15 to $5.45 per pound.

    The last report we’ll mention here is the National Monthly Negotiated Grass Fed Beef Report.  These prices represent negotiated grass fed wholesale beef prices for a variety of cuts.  Ribeye steaks in April were reported to be $28.65 per pound slightly higher than the $27.79 per pound last April.  Ninety percent lean bulk ground beef was $16.20 per pound, a $6.24 increase over a year ago.  

    This data, while perhaps not well known, should be a good resource for folks moving into the direct-to-consumer area.  The data allows you check your prices compared to some national average pricing trends and plan for pricing future products.  

    Anderson, David. “Grass Fed Beef Prices.” Southern Ag Today 3(22.2). May 30, 2023. Permalink

  • Sorghum Exports and Production Expectations for the 2023/24 Season

    Sorghum Exports and Production Expectations for the 2023/24 Season

    Current expectations indicate an increase in global and U.S. sorghum production and U.S. exports during the 2023/24 marketing year. Projections indicate 62.18 million metric tons of production globally, surpassing last year’s production of 57.34 million tons. According to USDA forecasts, the United States is anticipated to contribute significantly to the growth in sorghum production as the country rebounds from last year’s drought. 

    USDA’s May 2023 World Agricultural Supply and Demand Estimates (WASDE) report projects a substantial increase in U.S. sorghum production for the 2023/24 growing season, estimating a 91.5% increase from the previous year, which moves production from 188 to 360 million bushels (Table 1). 

    Table 1: U.S. Grain Sorghum Supply and Demand

    Source: USDA/NASS/ERS/WASDE

    The U.S. is currently projected to regain its position as the leading global sorghum producer and exporter. Projections indicate that the U.S. will export approximately 6.00 million metric tons of  the 9.75 million metric tons exported globally.

    While domestic consumption is projected to remain the same as last year, export projections suggest an increase in sorghum exports (Figure 1). The U.S. 2023/24 marketing year exports are expected to reach 235 million bushels, a substantial increase to the 90 million bushels exported last year. According to USDA data, China will continue to be a significant importer of U.S. sorghum.  Chinese demand is driven largely by the country’s livestock industry and has made up the largest share of U.S. grain sorghum exports since 2013/14, with the exception of 2018/19.

    Figure 1. US Grain Sorghum Exports

    Note: 2022/23 marketing season includes export data up to March 2023.
    Source: USDA WASDE

    Ending stocks are also expected to increase from 25 to 30 million bushels, a 20% increase from the previous year. The average farm price of sorghum is projected to mirror the corn price in the upcoming 2023/24 marketing year, with current estimates indicating an average price of $4.80/bu, a sharp decline from the $6.90/bu estimated for 2022/23 (Table 1). Although a lower price is expected compared to the last three marketing seasons, prices are expected to be above pre-pandemic values. The last season with prices lower than the expected 2023/24 price was in 2019/20, when the average price was $3.34/bu.

    In summary, the 2023/24 season presents opportunities for sorghum production and exports, with the U.S. expected to regain its position as the top global producer and exporter.  However, this comes at lower expected prices.

    Abello, Francisco Pancho, and Samuel Zapata. “Sorghum Exports and Production Expectations for the 2023/24 Season.” Southern Ag Today 3(22.1). May 29, 2023. Permalink

  • How Much Can I Sell This For? Part II

    How Much Can I Sell This For? Part II

    As a continuation of part 1 of our “How Much Can I Sell This For?” series, we dive deeper to determine how to set our price targets. 

    It is important to know how much has been invested in order to recoup the cost. Next is to generate revenue greater than the investment in order to be profitable. Capture ALL costs of carrying out a particular activity, often referred to as production or variable costs. This varies according to how much is produced of a certain item. Think of inputs like fertilizer, seeds, irrigation, labor, etc. that will go up as you produce more. Not all crops will have the same inputs or amount of inputs so it is specific to what you are growing. Generally, total cost will go up but the cost per unit produced will go down as you produce more.

    Second, there are various costs of operating a business such as insurance, rent, property taxes, utilities, and depreciation. They are not specific to a particular crop but an overall cost to the business. It is important to know these too and then allocate them in a reasonable method. This is where it can be part art and part science. How much of the electricity bill do you charge to the tomato crop for instance? One method would be segmenting the production of your farm, and if tomatoes are roughly 20% of your farm production, you will allocate total general overhead expenses at 20%. Perhaps some costs are allocated completely if it only applies to one enterprise. Another method would be charging a percentage, 10% for example, on top the direct production expenses, as an estimate of overhead costs for the crop. With the second method, a way to check for accuracy is totaling the estimates charged from all crops and seeing if it is close to the actual overhead for the year. If so, the estimate is suitable. Otherwise, you may need to change your percentage or use a different method.

    We have done a quick calculation on 1 acre of tomatoes to demonstrate both the art and the science needed to set price targets. The examples and numbers have been simplified and do not reflect actual production costs (Table 1).

    Table 1. Example: Total Costs (Allocated and Estimated) for Field-grown Tomatoes (one acre)

    To be conservative, we’ll use the allocated method which estimates a greater cost, $11,500. This starts to give targets for marketing the product. The $10,000 of direct cost is the first revenue goal. But ultimately $11,500 or greater needs to be generated for long term profitability. Meaning we are covering the production costs and a portion of the operating expenses for the business. 

    For further analysis, this can be broken down by yield or expected yield (Table 2). The price per lb. and price per box end up being the same number in the end, but it is a different way to evaluate the information depending on how you plan to sell. 

    An additional piece of the puzzle is the cost associated with participating in a specific market. If you know there is a market fee, there is mileage, and labor hours, that must be factored in as well. In Part III of “How Much Can I Sell This For?”, we will discuss how to evaluate your marketing expenses.   

    Burkett, Kevin. “How Much Can I Sell This For? (Part II).” Southern Ag Today 3(21.5). May 26, 2023. Permalink

  • The Silly Season Has Begun…Must Be Farm Bill Time

    The Silly Season Has Begun…Must Be Farm Bill Time

    When the Agriculture Committees and their staff begin working on a farm bill, like clockwork, experts from around the country, including us, put out information intended to help inform the process.  Every farm bill cycle, we run across a report or research geared toward the next farm bill that, while what the authors did and said isn’t technically wrong, boy does it leave out something kind of important…hence the term “Silly Season.”

    The article that caught our eye this time is titled “State Shares of US Commodity Program Payments: 2002–2021” by Zulauf, et al., written for farmdoc.[1]  The authors summarize their paper with the following:

    “Payments are compared to the value of all field crop production. One would expect payments to be proportional to value of production. In general, commodity payments follow farm production, but exceptions exist. States whose share of commodity payments are higher (lower) than their share of field crop production tend to be in the South (Midwest).”

    When looking at the share of commodity payments relative to the share of the value of crop production, the South does receive proportionally more payments than the Midwest.  The implication is that Southern farmers are provided significantly more benefits than the value of their crops would imply is needed.  The problem is the report leaves out one word that we think should have been included: ethanol.

    The biofuels blending mandates contained in the Energy Policy Act of 2005 (EPA of 2005) and the Energy Independence and Security Act of 2007 (EISA of 2007) dramatically changed the value of corn production in the United States.  See the SAT article from April 14, 2022, for more information on these two acts.  Overnight, this effectively created a new demand for biofuels – and therefore corn – leading to a significant increase in price and the quantity of corn diverted to ethanol production (Figure 1).  The blue line indicates the share of total corn supply going to industrial uses…namely ethanol.  The red line indicates what happened to corn prices when the ethanol mandate took effect.

    All corn producers have benefitted greatly from the ethanol mandate.  While there are definitely spillover effects on some other crops resulting from ethanol policy, leaving out the effect of ethanol when discussing proportional shares of farm program payments is misleading.  As Paul Harvey was fond of saying: “now you know…the rest of the story.”  

    Figure 1.  Share of Total Corn Supply Utilized in Food, Alcohol and Industrial Use and Marketing Year Average Corn Prices, 1973 to 2022.

    Compiled from USDA-WASDE and USDA-NASS data

    [1]

     Permalink: https://farmdocdaily.illinois.edu/2023/05/state-shares-of-us-commodity-program-payments-2002-2021.html

    Outlaw, Joe, and David Anderson. “The Silly Season Has Begun… Must Be Farm Bill Time.” Southern Ag Today 3(21.4). May 25, 2023. Permalink