I think the most interesting number in USDA’s latest Cattle on Feed report (released Friday January 20th) was the quarterly number of heifers on feed. The report indicated 4.65 million heifers were on feed on January 1, down 25,000 head from January 1, 2022. The quarterly data breaks out the number of heifers and steers on feed and is released in January, April, July, and October. When comparing to the same quarter of the prior year, it was the first quarter since July 1, 2021 that registered a decline in the number of heifers in feedlots. That slightly fewer heifers are on feed than last year does not indicate a movement toward herd rebuilding, but it may indicate that there are fewer heifers to place as total cattle numbers decline. Compared to January 1, 2022, steers on feed were down 4.5 percent compared to the 0.5 percent decline in heifers.
Of the total cattle inventory on feed, 39.8 percent were heifers, the largest percentage since 2001. Heifers as a percent of cattle on feed exceeded 40 percent in 2000 and 2001 which was another period of cow herd contraction. This quarterly data began in 1996.
The headline numbers were not much different than expected. Marketings were down 6.1 percent, placements down 8 percent, and total cattle on feed were down 2.9 percent.
Author: David Anderson
Professor and Extension Economist Livestock and Food Products Marketing, Dairy, Policy
The 2021 and 2022 corn and soybean harvest futures prices for November and December had increased trading ranges (Figures 1 and 2). November 2022 soybean futures, from November 1, 2021, to contract expiration, had a trading range of $3.81 ($12.02 to $15.81; Figure 1). December 2022 corn futures, from December 1, 2021, to contract expiration, had a trading range of $2.23 ($5.43 to $7.66; Figure 2). Tight U.S. stocks, the Russia-Ukraine conflict, global inflation, supply chain disruptions, and drought in the U.S. and South America have propelled prices higher but have also increased volatility. In 2021 and 2022, the November soybean contract had 45 and 74 trading days, respectively, with a 20-cent up or down move. For the previous five years, the November soybean contract had a total of 64 days with a 20-cent up or down move. Similarly, the 2021 and 2022 December contracts had 49 and 65 trading days, respectively, with moves of 10 cents up or down. The previous five years had a total of 54 trading days with a 10-cent move.
Figure 1. November Soybean Futures Contract Price from November 1 to Expiration, 2010-2023*
Data Source: Barchart * November 1, 2022, to January 19, 2023Data Source: Barchart * December 1, 2022, to January 19, 2023
What will 2023 bring for soybean and corn futures prices and how should this affect producers marketing and risk management decisions? As of January 19, the 2023 average daily closing futures prices for corn and soybean harvest contracts were near the top of the 2010-2022 price range – November soybeans averaged $13.89 and December corn averaged $5.98. As such, it would be reasonable to think that prices have more downside risk than upside potential, but this will be largely determined by weather. Additionally, there remains a tremendous amount of uncertainty in the global economy, geopolitics, and U.S. and global production for the 2023 crop year. It is likely that volatility will continue in corn and soybean futures markets.
What should producers do? Protecting against downside risk seems logical given current market conditions. This can be accomplished using numerous marketing tools (futures, contracts, options, etc.). Put options provide an opportunity to establish a futures price floor. There are several strategies that producers can consider – at-the-money put options, out-of-the money put options, or a combination of put and call options to reduce premium expense. Each producer will have different risk tolerances, so there is no one size fits all approach. The key is to evaluate strategies and choose the one that makes the most sense for your individual circumstances. A simple example of an out-of-the money put option strategy (current December corn futures are trading at $6.00) is:
Buy a $5.50 December Put Option for 27 cents setting a $5.23 futures floor. This removes 87% ($5.23/$6.00) of the futures price risk, while leaving the upside open and the flexibility to set basis at a later date.
For producers interested in learning more about using futures and options to manage risk in grain and oilseed markets, the CME group has a self-study guide that explains several strategies. The current uncertainty and volatility in corn and soybean futures markets necessitates downside price protection. Producers should evaluate strategies that can remove price risk for the 2023 crop.
The H-2A visa program is an option that allows American growers to hire foreign agricultural workers. In the context of persistent farm labor shortages, the number of certified H-2A positions has experienced a rapid growth in the last two decades. Three states in the Southeast (Florida, Georgia, and North Carolina) and two on the West Coast (California and Washington) received more certified H-2A positions in 2022 (Figure 1). Except for Georgia, there was an increase in the amount of H-2A certified positions in the top 10 states using this program.
The demand for H-2A workers has remained strong despite continued incremental increases in their minimum compensation levels. Employers of H-2A workers need to pay at least the highest of a minimum wage known as the Adverse Effect Wage Rate (AEWR), the prevailing wage, the prevailing piece wage, the wage agreed upon a collective bargain, or the federal or state minimum wage (Osti et al., 2019).
AEWRs vary by state but are generally set to a level above the minimum wage. The AEWRs are calculated as the average hourly earnings of non-supervisory field and livestock workers in each state in the previous year. The values are determined through surveys conducted by the U.S. Department of Agriculture (called the Farm Labor Surveys) during January and April (published in May) and July and October (published in November). The information released each November includes annual data based on quarterly estimates of employment and wages (Gutierrez-Li, 2022).
In 2023, California has the highest rate, $18.65/hour, while states in the Southeast (Louisiana, Arkansas, Mississippi, Georgia, Alabama, and South Carolina) have the lowest AEWR, $13.67/hour (Figure 2). Overall, all southern states have AEWRs below the national average AEWR of $16.14/hour. However, most of the southeastern states experienced double-digit raises in AEWRs compared to 2022. Florida had the largest wage increase, as the hourly AEWR went up 15.47% (from $12.41 to $14.33/hour) followed by Alabama, Georgia, and South Carolina where wages grew by 14%. In contrast, AEWRs increased by less than three percent in West Virginia, Tennessee, and Kentucky rising from $13.89 to $14.26 an hour. On average, AEWRs climbed 7.5% nationwide.
The inflation rate in 2022 was approximately 6.5%, slightly below the average increase in AEWRs, suggesting that real wages for H-2A workers will be higher in some states (but lower in others). For growers of labor-intensive agricultural commodities employing large numbers of H-2A workers (like sweet potatoes, Christmas trees, fruits, and vegetables where labor represents at least a third of total costs), the increases in AEWRs could translate into significantly higher wage expenses. The final effect on farmers’ profit margins will depend on whether the prices of the products they sell grow enough to compensate for the rise in labor and other input costs.
Figure 1. Change in the Number of H-2A Positions Certified in Top H-2A Demanding States
Source: American Farm Bureau Federation with data from the Bureau of Labor Statistics. Data available up to the end of September of 2022.
The Consolidated Appropriations Act, 2023 (P.L. 117-328) was signed into law by President Biden on December 29, 2022. Among other things, the $1.7 trillion bill funds the federal government for fiscal year 2023. The package also included $250 million in support for rice producers, a key priority of Senator John Boozman (R-AR), Ranking Member of the Senate Committee on Agriculture, Nutrition, and Forestry.
The Agricultural & Food Policy Center at Texas A&M University maintains almost 100 representative farms across 30 different states which serve as a basis on which to conduct policy analysis at the request of Congress. In a May 2022 report requested by Sen. Boozman, we highlighted that the 15 representative rice farms maintained by AFPC faced the largest drop in net cash farm income in 2022 of all 64 representative crop farms maintained by AFPC – a reduction of $880,000 per farm or $442 per acre.
In the case of rice, AFPC has consistently reported that rice growers have faced the harshest financial outlook over the last several years. Rice producers, in particular, received very little support from ad hoc aid packages like the Market Facilitation Program (MFP) and the Coronavirus Food Assistance Program (CFAP). These problems are compounded by trading partners like India whose minimum support prices and input subsidies cause significant harm to U.S. rice producers, contributing to a nearly 40-year low in U.S. rice exports this year. Relatively flat prices and high input costs further exacerbated an already tenuous situation for U.S. rice producers in 2022.
The $250 million – all of which USDA is required to spend – is for one-time payments for U.S. rice producers for the 2022 crop. The payment is based on (1) a rate of not less than 2 cents per pound multiplied by (2) the producer’s actual production history (i.e., crop insurance APH) multiplied by (3) all of the producer’s planted (or prevented planted) rice acres in 2022. A separate payment limit applies, consistent with the limit imposed for WHIP+ (i.e., $250,000 if 75 percent or more of the average adjusted gross income of the person or legal entity is average adjusted gross farm income).
Importantly, nothing is final until USDA announces the official details of the program. In the meantime, our colleagues at the University of Arkansas have put together a helpful FAQ document that answers several key questions.
Crop insurance is a widely adopted risk management tool for producers. Depending on a producer’s insurance plan, crop insurance can protect against losses due to yield or revenue. For cotton producers, if they select a crop insurance policy to protect them against the losses for revenue, several insurance plans are available, including Area Revenue Protection, Revenue Protection, and Stacked Income Protection Plan. For each of these insurance plans, producers have the choice of selecting the plan with the harvest price exclusion (HPE) option. The default choices for these crop insurance options are without HPE, in which indemnity payment is determined by crop yield and the higher value among the projected price and the harvest price for the insured year. If producers choose the insurance options with HPE, indemnity payments are determined by crop yield and only the projected price.
The projected price serves as the minimum guarantee for cotton prices when calculating the crop insurance indemnity. With the default plan, the guarantee will go up if the harvested price is higher than the projected price. Discovery periods for projected and harvest prices for cotton differ among states and locations. For example, in Georgia, the cotton projected price is based on the average price for the December futures contract from January 15 to February 14 each year, and the harvest price is based on the average price for the December futures contract during October each year. For the insurance plans with HPE, because the price to calculate indemnity is only based on the projected price, HPE policies usually have lower premium costs for producers. A commonly asked question by producers is which option to select, with or without HPE.
Figure 1 illustrates the ratio of the projected price and harvest price for cotton from 2011 to 2022 in Georgia. Cotton harvest prices exceeded projected prices only in 4 years out of the past 12 years. A high price ratio between the harvest and projected prices was observed in 2021, largely due to high volatility in the cotton market that year. This figure can provide some information when deciding whether to select or not to select HPE. For 2023, farmers should consider the risk and consult with their insurance agents for insurance choices. When making the insurance choices to protect their revenue, producers should consider the chances of whether the harvest price would exceed the projected price and whether the additional costs of premium paying for the protection for harvest price fit their risk management goals. If producers anticipate higher harvest prices for this year’s cotton crop than the projected price and can bear the additional premium costs, purchasing the default plan without HPE would be an option.
Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance plans from 2011 to 2022 in Georgia. A higher than one ratio indicates harvest price is higher than the projected price. Source: U.S. Department of Agriculture, Risk Management Agency.
