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  • Heating Fuel and Electricity Concerns for Commercial Poultry

    Heating Fuel and Electricity Concerns for Commercial Poultry

    Spring weather in the southeast can indeed be a mixed bag. Environmental control systems are strained as poultry growers in the southeastern United States can easily see temperature swings approaching 60 degrees Fahrenheit over 48 hours. While most modern houses today are capable of successfully handling such temperature swings and keeping the birds inside comfortable, the growers themselves feel the strain in the form of utility costs. Historically, the two largest variable costs contract growers must contend with are heating fuel used to keep birds warm and electricity used to keep birds cool. Luckily, falling propane and natural gas prices accompanied the latest cold snap. A relatively mild winter across the US and Europe facilitated this, leading to decreased usage. The results are increasing stocks of propane in the US starting in November ’22 up to the beginning of March ’23 (Fig 1). Increased supply has led to falling prices for propane. Comparing the previous year’s weak supply numbers to the current strong supply situation could indicate that the upcoming winter may also be met with lower heating fuel prices. This is good news for growers heating chicken houses in the U.S. this spring. This could of course change quickly if the winter of ’23 shapes up to be harsh, or if the crude oil prices again rise to higher levels (as propane is closely tied to crude oil production and price.) Even so, going into next winter with a strong supply of propane is a good sign for poultry growers. Natural gas supplies are also predicted to be higher and long-term prices NG are predicted to be down accordingly. 

    Alternatively, electricity costs are not looking as promising going into the summer when most electricity is used on poultry farms. As poultry houses have become better insulated and better managed to control heating costs, electricity has become the most prevalent cost factor for many growers. Electricity prices saw a significant 10% increase in 2022. While the projection for 2023 is lower at 2.5%, the long-term pricing trend is upward (Fig 2). The causes of this continued increase are varied, from general inflationary forces, increasing demand for electricity met with the increased cost of new generation facilities, to the increased cost for utility companies to implement carbon neutral generation goals. This makes it imperative for growers not only to focus on housing and equipment for heating purposes but also focus on electrical energy usage efficiency. While any money spent on energy efficient upgrades to equipment must be analyzed closely looking at initial cost versus payback over time, electrical efficiency upgrades look to be becoming more and more important going forward. 

    Figure 1.

    https://www.eia.gov/petroleum/weekly/propane.php

    Figure 2.

    https://www.eia.gov/outlooks/steo/images/Fig29.png

    Brothers, Dennis. “Heating Fuel and Electricity Concerns for Commercial Poultry.” Southern Ag Today 3(13.2). March 28, 2023. Permalink

  • Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Soybean Crush Demand

    Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Soybean Crush Demand

    At the Agricultural Outlook Forum in late February, the USDA released its first supply and demand projections for the 2023 crop year. In the March 20th issue of Southern Ag Today, we looked at how changes in corn exports could change the stocks-to-use (STU) ratio and, thus, price. In this article, we perform a similar analysis for soybeans. Specifically, we find that the soybean STU is much more sensitive to changes in demand than corn. Results indicate that a miss-projection of domestic crush levels could significantly affect soybean STU and price. Although we focus on soybean crush in this article, results would be the same for other increases in demand, such as exports or other domestic products. 

     As mentioned in our previous article, STU is a fundamental indicator in commodity marketing, as it compares commodity ending stocks to commodity demand. The impact of missed projections on STU provides insight into each commodity’s supply and demand dynamics (Gardner and Smith, 2023). Plot A of Figure 1 shows the year and soybean marketing year average price at various levels of STU. Generally, we would expect a larger STU to indicate more supply than demand which would cause a lower price and vice versa. From 2011 to 2013, supply was short due to below trend line yields or lower harvested acres, thus causing a shortage relative to demand that resulted in higher prices. Lower STUs and prices occurred in 2014 and 2015 due to increased acres (5 million acres more were harvested in 2014 and 2015 than in 2013) and a return to trend line yields. Since 2016, domestic crush capacity has increased substantially (CME Group).

    Figure 1. Stocks-to-Use (STU) Ratio and Price by Year and Impact of Missed Soybean Crush Projections on STU

    Plot B of Figure 1 displays the potential impact of an under-projection of soybean crush on STU, holding other factors constant. The American Soybean Association projects U.S. soybean crush capacity in 2023 to increase by close to 64 million bushels in 2023 (460 million bushels of increased capacity by 2025); however, the EPA is only assuming an increase in crush demand of close to 45 million bushels (Gerlt, 2023). This difference between increased crush capacity and crush demand could result in an underestimation of projected soybean crush in 2023. If soybean crush is underestimated, an increase in crush numbers of 5 million bushels lowers soybean STU by 0.12%, indicating that soybean STU is more sensitive to demand shocks than corn. If crush expansion and demand are met, soybean STU could quickly move lower than 6%, indicative of 2022, in which the soybean price was $14.30. 

    Changes in projected supply and demand will impact soybean STU and, consequently, the marketing year average price. The USDA current marketing year average soybean price for 2023 is projected to be $12.90, but if biodiesel capacity expansion increases soybean demand, the marketing year average price could be higher in 2023. Soybean prices could also increase with a rise in export demand or a supply shortage. Producers and traders should be mindful of projected changes in STU and use this information as one factor that could influence price expectations for the upcoming crop. 

    Sources:

    CME Group. “US Soybean Crush.” Accessed March 21, 2023. https://www.cmegroup.com/content/cmegroup/en/trading/agricultural/soybean-reports.html.

    Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Corn Exports.” Southern Ag Today, March 20, 2023. https://southernagtoday.org/2023/03/20/sensitivity-of-usdas-agricultural-outlook-forum-projections-to-changes-in-corn-exports/.

    Gerlt, Scott. “Economist’s Angle: EPA’s Proposed Blending Levels Threaten Ongoing Industry Growth.” American Soybean Association (blog). Accessed March 14, 2023. https://soygrowers.com/news-releases/economists-angle-epas-proposed-blending-levels-threatens-ongoing-industry-growth/.

    United States Department of Agriculture. “Grain and Oilseeds Outlook,” 2023. https://www.usda.gov/sites/default/files/documents/2023AOF-grains-oilseeds-outlook.pdf.

    Gardner, Grant, and Aaron Smith. “Sensitivity of USDA’s Agricultural Outlook Forum Projections to Changes in Soybean Crush Demand.” Southern Ag Today 3(13.1). March 27, 2023. Permalink

  • A Cheese by Any Other Name

    A Cheese by Any Other Name

    The U.S. Court of Appeals  for the Fourth Circuit (“4th Circuit”) recently decided InterProfession Du Gruyere vs. U.S. Dairy Export Council, which considered whether a geographic indication was essential to the use of the label “gruyère.”  The 4th Circuit decided that it was not, finding that using that term on labels in the United States does not depend on where the cheese was produced (often referred to as a geographical indication), but merely on whether it meets Food and Drug Administration’s (FDA) standard of identity.

    FDA is responsible for the labeling of dairy products, among other things.  It partially regulates labels by creating “standards of identity,” outlining how specific words may be used.  FDA has created a standard of identity for gruyère cheese, defining it by the process needed to create the cheese, not by the location where the cheese is made.  

    In Europe, however, the label can only be used on cheese produced in the Alps region, near the Swiss/French border.  As a result, a group of Swiss and French cheese producers brought the lawsuit at issue today.  Ultimately, the court decided that FDA- and ultimately American consumers- saw gruyère as a type of cheese (similar to a label of “mozzarella” or “cheddar”) rather than one produced in a specific place.  

    Geographical indications are used worldwide, helping protect producers’ market share in specific regions.  Whether you’re interested in “Idaho Potatoes” or “Parmigiano-Reggiano,” a part of the label’s meaning includes an indication of the area where the product originated.  This case illustrates a trend that international food and beverage manufacturers are becoming more proactive in protecting names with a regional geographical significance.  This is an important international trade issue because we expect similar litigation from other affected producers. On a larger scale, the European Union focuses on including geographical indicators as a critical part of trade deals and we expect this trend to continue.  To learn more about geographical indications and international trade, click here for a National Agricultural Law Center webinar.

    Rumley, Rusty. “A Cheese by Any Other Name.” Southern Ag Today 3(12.5). March 24, 2023. Permalink

  • What Might Climate Change Mean for U.S. Grain Exports?

    What Might Climate Change Mean for U.S. Grain Exports?

    Climate change represents a threat to future food security. There has been plenty of recent research on the effects of climate change on agricultural yields, productivity, and cropping decisions. In the agricultural trade domain, researchers have shown that trade can serve as a climate adaptation device, buffering the effects of shocks in importing regions where domestic agricultural systems are negatively affected by adverse weather shocks and climate change. But how will climate change affect the trade flows of exporting countries?

    This question is the focus of our recent working paper with co-authors Kjersti Nes and Dan Scheitrum. We assess the impacts of growing-season extreme weather events on agricultural trade outcomes in the short run, as well as the trade implications of long-run shifts in climate expectations and variability. Our analysis focuses on trade in three crops—corn, rice, and soybeans. Together, these crops account for approximately $12.4 billion in U.S. exports and about 50% of calorie consumption worldwide. 

    What did we find? 

    We find that—in the short-run—extreme weather events can be extremely disruptive to agricultural trade. A growing-season weather shock with about a 1-in-100-year odds reduces corn and rice exports by more than 60%. Figure 1 shows the average annual losses in U.S. corn and rice exports associated with weather variability, evaluated as a percentage of potential exports. (Note that soybean trade appears to be less sensitive to extreme weather events.) As shown in Figure 1, on average, the U.S. loses approximately 4% of potential corn exports and 8.5% of potential rice exports due to weather variability. A 10% increase in weather variability would increase these average losses to 6.5% for corn and 10.8% for rice. 

    In the long run, we find that climate change may have large impacts on U.S. grain exports, as production shifts to regions with more temperate climates, like Canada or Argentina. Figure 2 shows our estimates of the long-run impacts of climate change on U.S. grain exports under +2°C and +4°C climate change scenarios. Under a +2°C climate change scenario, U.S. corn exports are projected to fall by as much as 44%. Things may be even more bleak if warming temperatures are accompanied by an increase in climate variability. When we simulate the +2°C climate change scenario with a 15% increase in climate variance, U.S. corn exports are projected to fall by 50%. U.S. rice and soybean exports may be hit even harder than corn. 

    Figure 1: Short-Run Impacts of Weather Variability on U.S. Agricultural Exports

    Figure 2: Long-Run Impacts of Climate Change on U.S. Agricultural Exports

    Gammans, Matthew, and K. Aleks Schaefer. “What might climate change mean for U.S. grain exports?” Southern Ag Today 3(12.4). March 23, 2023. Permalink

    Photo by Guillaume Falco: https://www.pexels.com/photo/icebergs-2229887/

  • Loan Amortization

    Loan Amortization

    Long-term loans are a valuable financial tool that producers can use to purchase large capital investments, including farm equipment, land, or housing. These types of loans are typically paid off over a period of time lasting longer than one year. Long-term loan payments are made up of principal and interest. The principal is the original amount of money borrowed. Interest is set by the terms of the loan and accrues over the lifetime of the loan based on the interest rate, the principal balance remaining, and the length of the loan. 

    Loan amortization is the schedule for how payments will be made over the lifetime of the loan. The loan amortization schedule tells borrowers the beginning period loan balance, the regular payment, the amount of the payment that goes towards interest and the principal, and the remaining loan balance. A fixed payment schedule is the most common, where each payment is the same amount. 

    When considering securing a long-term loan, it is important to consider not just the monthly payments but the overall amount you will be paying over the lifetime of the loan. Since interest accrues on the loan, the amount you pay will be more than the initial loan amount. Table 1 is an example of a loan amortization schedule for a 5-year, $30,000 loan, with a 5% interest rate and payments made annually. In that example, the initial loan was $30,000, but total payments equaled $34,646.22. The loan amount, interest rate, and length of the loan can all have large impacts on how much you end up paying in total. A lower interest rate will decrease the overall amount paid, so it is important to search for a lender that will charge you the lowest interest rate. But, most lenders will likely offer a similar interest rate. A more effective way to reduce the total payment amount is to take a loan with a shorter payment schedule. This will increase the payment made each pay period but will reduce the total amount paid over the lifetime of the loan. Lastly, putting down a larger down payment and reducing the loan amount will also decrease the total amount paid. Since interest accrues based on the principal, a reduction in the loan amount will result in less interest accruing, and the total amount paid on the loan will decrease.            

    There are several tools available that can help you evaluate a loan and the total costs involved. Mississippi State University has a free loan amortization calculator Excel tool that can be found at: https://www.agecon.msstate.edu/whatwedo/budgets.php. The Farm Credit Services of America also has a free loan amortization calculator at: https://www.fcsamerica.com/products-services/digital-tools/loan-payment-calculator.Understanding how your loan payments are constructed and what factors impact total payments is essential in getting the right loan for your farm business. 

    Mills, Brian, and Kevin Kim. “Loan Amortization.” Southern Ag Today 3(12.3). March 22, 2023. Permalink