USDA released the April Cattle on Feed report on Friday, April 21st. This monthly publication estimates the number of cattle on feed at feedlots with a capacity of over 1,000 head and serves as a measure of likely beef production over the next several months. While the cow herd has been decreasing in size for several years, an increase in the number of heifers in the beef system kept on-feed numbers running relatively high for much of 2022. Finally in the fall, the long-expected shift occurred, and on-feed numbers have been running below year-ago levels since then.
In Friday’s report, April 1, 2023, on-feed inventory was estimated to be down about 4.5% from April 1, 2022. While this might not immediately raise any eyebrows from casual observers, this on feed number was higher than expected and really came down to March placements being greater than most pre-report estimates. The net effect was that total on-feed inventory was virtually unchanged from March 1 to April 1, which was counter to what many expected.
Heifers continue to make up a historically large proportion of cattle on feed. Fewer heifers were reported on feed than on April 1, 2022. While steers on feed declined by 6 percent, heifers on feed were only down about 1.7 percent from last year. That indicates that there has not been a large movement in holding back heifers yet.
There are some possible explanations for the larger-than-expected March placements number. First, March is a month when cattle are often moved off wheat pasture and continued dry weather combined with high wheat prices, likely impacted movement of feeders. Secondly, live cattle imports from Mexico were higher in March. So far this year, feeder cattle imports from Mexico are up about 95,000 head from last year. But it’s worth remembering that feeder cattle imports in 2022 were the fewest since 2008. Finally, there is still a lot of carry on the feeder cattle board, meaning that feedlots have been aggressively buying feeders ahead, in anticipation of the rising price levels suggested by deferred live cattle futures. Put simply, I absolutely think that feedlot placements bears watching in the coming months, but I suspect the larger placement number last month has more to do with timing than a major shift in market fundamentals.
Fertilizer prices have come down from the peak in April 2022 (Figure 1), however fertilizer prices remain elevated compared to 2017 through 2020. In 2021 and 2022, high fertilizer prices coincided with high corn prices, resulting in positive profit margins for many producers, especially those that were not affected by adverse weather. Since August 2022, Henry Hub Natural Gas Prices have declined sharply. Natural gas is a key input in the production of nitrogen fertilizer accounting for 70-90% of variable production costs (Outlaw et al. 2022). Two important questions for many producers are how related are these prices and how does this relationship potentially impact profitability in 2023? To examine this, we look at the historical relationship between corn, urea, and natural gas prices.
Figure 1. Weekly Urea, Natural Gas, and Nearby Corn Futures Price, January 2, 2017, to March 27, 2023
Nitrogen, natural gas, and corn prices are positively correlated (correlation describes the strength of an association between two variables, positive correlation indicates that prices move in the same direction, negative correlation indicates prices move in opposite directions; correlation coefficients have values between -1 and 1). Examining weekly price data from January 2017 to March 2023, natural gas and urea prices were positively correlated (0.738), natural gas and corn prices were positively correlated (0.668), and urea and nearby corn futures prices were positively correlated (0.906). All three variables are strongly positively correlated. However, there are event-based anomalies in the data that create temporary deviations in the relationship between prices. For example, natural gas prices briefly spiked in February 2021 during a winter storm that strained natural gas and electricity markets in Texas and Oklahoma (USEIA, 2022). It is also important to note that correlation does not indicate causation. In other words, a higher natural gas or urea price does not necessarily cause higher corn prices, and vice versa. However, the takeaway from this figure and correlations for natural gas, corn, and urea prices are they tend to move in the same direction.
Over the past year, natural gas and urea prices have decreased substantially from recent highs. Urea prices have fallen from $1,031/ton to $626/ton (down 39%) and natural gas prices have fallen $9.56 to $2.01 (down 79%). Nearby corn prices have decreased from $8.13 ½ to $6.60 ½ (down 19%). Based on the realized decline in natural gas prices, the downward trend in urea prices, and the historical correlations above, further weakness in corn futures prices may occur in 2023. There are many factors that will influence corn (and other commodity) prices, such as weather and geopolitical uncertainty, however decreased prices for natural gas and urea provides some indication that weaker corn prices may occur in the not-too-distant future.
From a profitability standpoint for the 2023 crop year, many producers locked in fertilizer prices last fall or early in 2023. In general, those that priced earlier will have higher fertilizer costs than those that priced later. Producers that have locked in fertilizer prices for the 2023 crop may want to consider locking in futures prices for a portion of their crop to avoid a margin squeeze should corn prices decline.
Extreme weather events seem to dominate the news. According to the National Oceanic and Atmospheric Association, the number and cost of climate related disasters in the United States is on the increase. While some events can be devastating, other events such as droughts, snow events, heat events, rising sea levels, or wildfire can also disrupt communities. The ability to anticipate and respond to climate related events defines the capacity of a community to be climate resilient.
Designing community resiliency plans is the work of every community. Because environmental, geographic, and demographic variables are unique to every community, every community will need to create their own working strategy. The National Oceanic and Atmospheric Association (NOAA) offers communities a useful five step resilience planning process, US Climate Resilience Tool Kit (https://toolkit.climate.gov/): 1) understand exposure, 2) Assess vulnerability and risks 3) Investigate Options, 4) Prioritize and Plan, and 5) Take action.
Following these planning steps can help community leaders assess risk factors and shape action response plans for their community. Helpful information and resources to assist communities in their planning include:
I see Change website – https://www.iseechange.org/. A resource for a citizen science approach to recording changes in climate.
Communities become more climate resilient when they work together to improve their readiness and response to climate disruptions. Start the conversation in your community today!
As reported this week by Jim Wiesemeyer with Pro Farmer, there is renewed interest by some in Washington, D.C., in tying commodity program payments to planted acres rather than base acres. Since the mid-1980s, commodity programs in the U.S. have used base acres of each program crop on a farm to determine a producers’ payment for each crop, with two notable exceptions: (1) the period covered by the 1996 Farm Bill (1996 to 2001) and (2) the Average Crop Revenue Election (ACRE) program in the 2008 Farm Bill which paid on planted acres (not to exceed total base acres on the farm).
The primary argument for using base acres rather than planted acres centers around the desire to not have potential commodity program benefits unduly influence program commodity plantings. On the other hand, using planted acres as the basis for payments would allow producers to more effectively manage their risk, as potential payments would be based on the crop they are actually planting.
So, why is paying on planted acres a topic of discussion in Washington, D.C.? There are producers that plant more acres than they have base all over the United States. These producers and their associations are lobbying Congress to allow them to add base either through a forced base update or alternatively, by basing payments on planted acres, which effectively is the same thing. Either way you look at it, there will be a cost as additional acres are added. Looking at 2022 FSA enrolled base acres and 2022 planted and prevented planted acres reported to FSA shows a difference of about 9 million acres (Table 1). Most of the commodities in the table would have lower bases in the future while soybeans and seed cotton would add acres.
The House version of the 2014 Farm Bill included what some would call a compromise option (similar to payment acres in ACRE in the 2008 Farm Bill) where commodity payments would have been paid on planted acres not to exceed their current base acres. While it was not included in the final bill, this would seem to solve some of the risk management concerns but would still leave producers with more planted acres than base wanting more.
Table 1. FSA Total Enrolled Base Acres and Planted and Prevented Planted Acres Reported to FSA in 2022.
Source: USDA, https://www.fsa.usda.gov/programs-and-services/arcplc_program/arcplc-program-data/index and https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index
Agriculture is considered a stressful profession, not just because of the complexity of decisions that must be made to successfully run a farm or ranch operation but primarily because there is uncertainty. Whenever uncertainty is involved in the farm business, risks must be taken.
There are five main areas of risk in agriculture: production, marketing, financial, legal, and human. The ability to identify risks in agriculture is the first step in managing those risks.
Production risk is first because it involves the primary livelihood of the agricultural operation. Production risk impacts the ability to produce a crop, raise livestock and poultry, or provide a service. Production risk occurs because of the uncertainty of weather events, pest (weed, disease, or insect) problems, and the availability of inputs – from fertilizers to seed to production technologies.
The second type of risk is marketing. Marketing risk brings the price component into play. Thinking back to when we took basic economics, we learned farmers were price takers who produce similar products. For example, a bale of cotton on your farm is not much different than a bale of cotton in the next county or neighboring state. Furthermore, the prices of agricultural products and inputs are impacted by things happening nearby and globally. Two recent examples include 1) the Covid pandemic, which caused prices to drop for many inputs and commodities, and 2) the war in Ukraine drove prices for some commodities like wheat up, as well as increased in the cost of fertilizer and fuel. These events were out of the producers’ control and difficult to predict.
The third type of risk is financial. Financial risk involves the ability of the operation to cash flow and gain access to capital to maintain and expand the operation. In today’s environment, financial risk is impacted by inflation and interest rates. Inflation makes inputs “more expensive” to buy, and consumers are unable to purchase as much with their dollar. In addition, the Federal Reserve has increased interest rates to try to get inflation in check. Higher interest rates result in a higher cost to borrow funds. Farmers are seeing higher interest expenses, even without expanding their operations.
The next area of risk is legal. Legal risk includes the knowledge of, and compliance with, regulations and laws related to the production and marketing of agricultural products and services. A recent example has been with the ability to apply dicamba herbicides which are regulated by the United States Environmental Protection Agency. Although laws vary by state, any certified applicator who plans to apply dicamba herbicides must be trained specifically on their application to ensure label compliance and stewardship. This training must be completed annually and prior to the use of any dicamba herbicides. Legal risk also encompasses the other two areas of risk: financial (requirements to follow the terms of debt) and human (labor rules and regulations). Those who do not comply with laws and regulations will be subject to liability. Liability occurs when a person or entity is held legally responsible for any potential damage or losses that result from the non-compliance.
The final area of risk is human. Although listed as the final area of risk, the figure shows it as the topmost circle in the stack of risk circles – meaning it is one of the most important areas of risk. Human risk involves the people of the agricultural operation, from management to employees to future heirs. Human risk includes the health and well-being of the people who maintain the day-to-day operations. It should also include plans to transition the operation if a change in management were to occur.
For more information on risk in agriculture and how to manage it, refer to the handbook linked in the resources, titled: “Introduction to Risk Management. Understanding Agricultural Risks: Production, Marketing, Financial, Legal, and Human.”
Five Types of Risk in Agriculture
Figure Source: Author compiled.
Resource: Crane, L., G. Gantz, S. Isaacs, D. Jose, and R. Sharp. “Introduction to Risk Management. Understanding Agricultural Risks: Production, Marketing, Financial, Legal, and Human.” Extension Risk Management Education Programs and USDA, Risk Management Agency. Handbook Second Edition, 2013. http://extensionrme.org/Pubs/Introduction-to-Risk-Management-ENGLISH.pdf
