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  • Dairy Revenue Protection Historical Performance for Component Price

    Dairy Revenue Protection Historical Performance for Component Price

    Dairy Revenue Protection (Dairy-RP) is an insurance policy available to dairy producers to guarantee revenue every quarter. Dairy-RP was designed to help producers combat the high volatility in the fluid milk market. There are five terms producers must agree to when purchasing a policy, however, the most important decision is the pricing option of either class or component pricing. Since the introduction of Dairy-RP, over 82,000 policies have been purchased. From these policies, 253 billion pounds of milk have been insured, generating $1.72 billion in premiums, which resulted in $1.26 billion in indemnities. The number of Class Pricing policies has increased from 5,000 in 2019 to 11,300 in 2023. Alternatively, Component Pricing policies have decreased from 2,800 policies in 2019 down to 2,300 in 2023. For the producer selection terms and added information, see the previous article, Dairy Revenue Protection Historical Performance for Class Price, as this publication covers producer options.

    The loss ratio is one method of measuring the performance of Dairy-RP. The loss ratio is calculated as total indemnity payments divided by the total premiums, thus representing a ratio of the total money paid back to the producers relative to the premiums paid (in total) for the policies. We often focus on a loss ratio of one, which means all money paid for the policy (insurance premiums) was distributed back to the producers in protection (indemnities).

    We analyzed the performance of Dairy-RP by state under the component pricing option. Figure 1 shows the weighted average loss ratio for Dairy-RP (component pricing option) by state. Compared to the class pricing option, policies purchased under component pricing as a collective have had historically lower loss ratios. There are 40 states that are currently enrolled in Dairy-RP, and none of the states have loss ratios greater than or equal to one. California accounts for 22.8% of the milk declared under the component pricing option, but even though being the most declared, it ranks twelfth with the highest loss ratio of 0.75. Wisconsin is the second most declared, accounting for 15.1% of the milk declared under the component pricing option, and ranks fifth for the highest loss ratio at 0.82. Idaho has the largest loss ratio of 0.91 and accounts for 14.4% of the component priced milk declared. Three states, New Hampshire, Delaware, and Massachusetts are not listed as producers in these states have not purchased any component pricing policies. The southeast is expected to see lower participation in component price due to the federal milk marketing order. However, Texas ranks second with a loss ratio of 0.84 and accounts for 9.1% of the milk declared under the component pricing option. 

    Data Source: USDA RMA Summary of Business Dairy Revenue Protection Participation
  • Ag Census Reveals Fewer Beef Cow Farms

    Ag Census Reveals Fewer Beef Cow Farms

    In the previous SAT livestock article, Dr. Griffith asked about the girls’ whereabouts. Last week, the USDA/NASS released the 2022 Agricultural Census. Every five years, the Census takes a snapshot of U.S. agricultural operations. There is a wealth of interesting insights in the census data.  The data also sheds light on the structural changes in beef cow operations. The decrease in beef cow ranches could slow future herd expansion. 

    Figure 1 highlights the decline in beef and milk cow farms. Between 2017 and 2022, 106,844 beef cow ranches disappeared, a 15 percent drop. In the same period, milk cow farms decreased by 34 percent. In contrast to the 2012 drought, we have fewer beef cow ranches to rebuild the herd, making it more challenging to find our girls. The contractions in cow farms are steeper than the overall number of farmers, which has declined by 6.9 percent, according to USDA/NASS. 

    Figure 1 – Number of Cow Farms: 2002 – 2022.

    Source: 2022 USDA/NASS Census

    Although there has been a decline in beef cow farms, the Census has reported an increase of 1,034 ranches with more than 500 head (Fig. 2). From 2017 to 2022, the beef cow herd has decreased by 2.5 million head. However, there has been an increase of 839,603 head in farms with more than 500 head. It indicates industry consolidation, providing insights into where we may find our girls.   

    Figure 2 – Number of Beef Cow Farms by Herd Size: 2017 – 2022.

    Source: 2022 USDA/NASS Census

    Beef cow farms shrunk across all farm size categories (Fig. 3). Most beef cow ranches are between 10 and 49.9 acres. Between 2017 and 2022, this category displayed the smallest drop, 9 percent, showing its resilience. But, during this period, the extremes recorded the most significant declines, producers with 1 to 10 acres declined by 23 percent, and 1000 to 2000 acres ranches declined by 20 percent. Regardless of the production scale, environmental, and economic factors affected beef cow ranches’ survivorship.

    Figure 3 – Number of Beef Cow Farms by Herd Size: 2017 – 2022.

    Source: 2022 USDA/NASS Census

    The 2022 USDA/NASS Agricultural Census reported a decline in beef cow operations from 2017 to 2022.  The census also reported some growth in larger operations.  The effect of fewer total operations on the speed of herd rebuilding remains to be seen.

    Calil, Yuri. “Ag Census Reveals Fewer Beef Cow Farms.” Southern Ag Today 4(8.2). February 20, 2024. Permalink

  • Soybean Option Strategies

    Soybean Option Strategies

    Since the start of 2024, soybean futures prices have declined dramatically (Figure 1). The March and November contracts have declined 88 cents and 57 cents, respectively. The primary reason for the decline in soybean prices has been the projected large crop in South America. The February USDA WASDE report estimated soybean production in Argentina and Brazil at 1.84 and 5.73 billion bushels, respectively, compared to last year’s record Brazilian crop of 5.95 billion bushels and Argentina’s drought-stricken crop of 0.92 billion bushels. In aggregate, the two South American soybean production powerhouses are projected to increase year-over-year production by 700 million bushels. Increased production with moderate global demand will continue to weigh on futures market prices in 2024. Prices could be pushed higher if China increases soybean purchases or drought impacts US soybean production.

    Figure 1. Daily Closing Futures Prices for March (ZSH24) and November (ZSX24) Soybeans, January 2 to February 13, 2024

    Producers may want to consider using options to help mitigate price risk during the production or marketing year. Options can be a useful tool to manage price risk during specific time intervals. Past articles have examined mitigating price risk between the time when inputs were purchased and projected crop insurance prices were determined (Duncan, 2024). This article examines two option strategies for the start of the 2024 crop.

    Strategy #1: Purchase a put option. Purchasing a put option establishes a futures price floor for the selected strike price (Table 1). For example, a producer could purchase a $10.20 put option for 16.5 cents and set a $10.03 ½ futures floor. Strike prices and premiums can be selected to reflect the purchaser’s risk preference. No margin is required for strategies that purchase put options.

    Table 1. Strike price and premium for November soybean put options, February 14, 2024

    Strike (cents/bu)Premium (cents/bu)
    1000-0P12.9
    1020-0P16.5
    1040-0P20.9
    1060-0P26.0
    1080-0P32.1
    1100-0P39.1
    1120-0P47.0
    1140-0P55.9
    1160-0P65.8
    1180-0P76.5
    1200-0P88.1

    Strategy #2: Purchase a $10.60 November put option for 26 cents and sell a $13.00 November call option for 26 cents. This strategy fences in a futures price between $10.60 and $13.00 for a net zero premium. The strategy protects against futures prices declining below $10.60 at the cost of forgoing price increases above $13.00. This strategy relies on maintaining margin requirements.

    There are two primary concerns that producers voice when examining options 1) premiums are too high and 2) options often expire worthless. These two factors are interrelated as options should be used for a defined period of risk and then the position liquidated if the option is out-of-the-money, before the option expires. This avoids having the option expire worthless and can assist in recouping part of the premium. If options are in the money, then the position can be exercised, and financial gains realized. For experienced users of options, there are near infinite variations in strategy to consider (contract month, strike price, buy/sell puts or calls). Developing knowledge on using options adds another tool producers can use to manage their price risk.

    References and Resources

    Barchart.com. November Soybean Options Price Quotes.   https://www.barchart.com/futures/quotes/ZSX24/options.  

    Duncan, W.H. 2024. “Bridging the Price Risk Gap.” Southern AgToday. https://southernagtoday.org/2023/11/27/bridging-the-price-risk-gap/

    USDA World Agricultural Supply and Demand Estimates (WASDE) Report. Office of the Chief Economist. February 2024. https://www.usda.gov/oce/commodity/wasde

    Smith, Aaron. “Soybean Option Strategies.” Southern Ag Today 4(8.1). February 19, 2024. Permalink

  • Part 1: Cultivating Resilience and Innovation in US Specialty Crop Economics: Navigating Market Dynamics, Labor Challenges, and Global Realities

    Part 1: Cultivating Resilience and Innovation in US Specialty Crop Economics: Navigating Market Dynamics, Labor Challenges, and Global Realities

    The economics of the ever-evolving landscape of the US specialty crop industry demands a comprehensive understanding of the factors influencing competitiveness. In this article, the author identifies key economic drivers impacting the sector and emphasizes the imperative for resilience, innovation, and strategic choices as opportunities available that may improve sustainability of specialty crop stakeholders in the United States.

    Distinct Economic Factors Shaping US Specialty Crop Industry Competitiveness

    Dynamic Market Windows

    The market for specialty crops is characterized by its fast-paced nature and a continuous narrowing of windows for product availability. Compounded by a widening gap between processed and fresh produce prices, growers face the additional challenge of meeting retailer demands for product homogeneity and year-round supplies. This underscores the need for agility and responsiveness in the face of evolving market dynamics.

    Labor Costs and Dynamics

    A significant demand for farm workers in the production, harvesting, and packing of fresh, higher-valued crops is evidenced by the increase in H2A certifications from approximately 48,000 in FY 2005 to 370,000 in FY 2022 (Figure 1). Despite this shift, total employment across produce operations has seen minimal growth in recent years. The surge in H2A certifications, particularly in southern states, highlights the industry’s dependence on seasonal labor. Addressing labor challenges continues to be a critical factor for maintaining economic viability.

    Perishable and Seasonal Challenges

    Limited access to land and water suitable for high-value fruit and vegetable production poses a substantial challenge. Genetic packages for many fresh vegetables prioritizing shipping and storage needs and disease and pest pressure reductions, and while crucial concerns, may come at the cost of product quality and nutritional value, further reducing consumer demand.

    Consumption Trends and Health Implications

    US consumers’ declining consumption of fruits and vegetables over the past two decades, coupled with a shortfall in meeting recommended dietary guidelines, raises concerns for public health (Figure 2). Strategies to bridge this gap involve not only production considerations but also consumer education to expand palates and encouragement to add produce to their diets to support health and wellness.

    Global Network Exposure:

    The heightened supply chain risks, driven by regulatory changes and increasing costs related to carbon emissions, underscore the industry’s vulnerability. The lag in grower adoption of automation technologies highlights the need for the industry to embrace innovation for increased efficiency and competitiveness. Researchers and educators need to find ways to improve knowledge of the value added from tech solutions and, more importantly, function as intermediaries to bring producer and market needs back to the tech developers.

    Figure 1. The number of H-2A jobs certified increased more than sevenfold from fiscal years 2005 to 2022.

    Figure 2. Estimated average U.S. consumption compared to recommendations, 1970 to 2018.

    Stay tuned for Part 2: Economic Choices for US Specialty Crop Industry Success!

  • Farm Bill Fault Lines: Why is the Farm Bill Debate Stuck in Neutral?

    Farm Bill Fault Lines: Why is the Farm Bill Debate Stuck in Neutral?

    As the saying goes: a picture is worth a thousand words.  We present to you Figure 1.

    Figure 1: Farm Safety Net and SNAP Spending, 1962 to 2026F

    Source:  OMB Table 11.3 – Outlays for Payments for Individuals by Category and Major Program: 1940 – 2028 and Table 3.2 – Outlays by Function and Subfunction: 1962 – 2028.
    Note:  spending for budget subfunction 351 (farm income stabilization) is used as a proxy for farm safety net spending.

    Any serious student of farm policy is taught very early on that nutrition policy and farm policy go hand in hand…and that you can’t get a farm bill done that doesn’t include both.  Why?  The argument goes like this: there are not enough rural votes to pass a farm bill, and including nutrition brings along urban votes that otherwise would not vote for a farm bill. Figure 1 paints an interesting picture of how this relationship has changed over time. Following are our observations:

    • For 40 years, spending on the Supplemental Nutrition Assistance Program (SNAP) and the farm safety net were roughly equivalent.[1] Remarkably, over the 40-year period from 1962 to 2001, SNAP spending edged out farm safety net spending by just 2/10ths of 1 percent ($439.28 billion versus $438.39 billion). Interestingly, the House was controlled by Democrats for 33 of those 40 years.
    • In contrast, over the past 20 years (2002-2021), SNAP spending has outpaced spending on the farm safety net by 242% ($1,231.87 billion versus $360.14 billion).  While part of this increase is certainly attributable to the Great Recession and COVID, it was also the subject of considerable scrutiny during both the 2014 and 2018 Farm Bills. Interestingly, the significant increase in SNAP spending occurred despite the fact that Republicans controlled the House in 14 of the last 20 years.
    • In spite of the politically-charged concerns over SNAP spending levels in each of the last two farm bills, in 2021 the Biden Administration revised the Thrifty Food Plan market basket which was estimated to further increase spending on SNAP by $254 billion from 2022 to 2031.[2] As a result, according to the last estimates from the Office of Management and Budget (OMB), over the next 6 years, SNAP spending is projected to outpace farm safety net spending by 508% ($787.44 billion versus $129.49 billion). Notably, that provision was estimated to be budget neutral in the 2018 Farm Bill.
    • With respect to the farm safety net, spending over the last 20 years has been flat. In inflation-adjusted terms, spending is actually declining.

    While we are simply making observations, the purpose in doing so is to help paint a picture for why it has become so painfully difficult to get a farm bill done. In our judgement, this latest administrative action – against the backdrop of what had already been a considerable amount of angst over SNAP spending levels – is putting a significant amount of strain on that historic coalition.  At the same time, grower comments at listening sessions across the country over the last two years have repeatedly highlighted what is self-evident in the chart below: the farm safety net is lagging behind. 

    [1] For purposes of this article, we are equating farm income stabilization (budget subfunction 351) and the farm safety net.

    [2] https://www.whitehouse.gov/wp-content/uploads/2021/08/msr_fy22.pdf

    Fischer, Bart L. and Joe Outlaw. “Farm Bill Fault Lines: Why is the Farm Bill Debate Stuck in Neutral?” Southern Ag Today 4(7.4). February 15, 2024. Permalink