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  • Considerations for Developing a Pre-Harvest Marketing Plan

    Considerations for Developing a Pre-Harvest Marketing Plan

    The upcoming winter months provide an opportunity for row crop producers to review their marketing plans. A marketing plan is a valuable tool that helps producers manage emotions when making marketing decisions. A marketing plan is an outline of price, date, and quantity objectives used to generate a reasonable return given the existing market conditions. A producer should, in practice, have two separate marketing plans—a pre-harvest and post-harvest plan—as marketing decisions in both instances offer different challenges. This article will discuss developing pre-harvest plans.  A pre-harvest marketing plan allows producers to take advantage of the normally higher spring and summer prices as seen in Figure 1. When developing a pre-harvest plan, producers should consider some basic items.

    A common question when developing a pre-harvest marketing plan is how much should be sold. A good rule of thumb is to not sell more than crop insurance covers. For example, if a producer has an expected production of 100,000 bushels of corn protected by revenue protection insurance at the 75% coverage level, then the maximum amount that the producer should sell pre-harvest is 75,000 bushels. The amount of expected production a producer sells pre-harvest will be influenced by their risk tolerance level, with risk-averse producers making fewer sales. Once a producer has determined the amount of pre-harvest sales, they will want to split sales into smaller more manageable units of 1,000 or 5,000 bushels. Splitting sales into smaller units will provide the producer with greater flexibility in marketing decisions. 

    A pre-harvest marketing plan should also include price targets and sale dates for the smaller sales units mentioned above that will force the producer to be proactive about pricing. The most important price target is the minimum price target, which is the lowest price at which the producer would make a pre-harvest sale. A common suggestion is to set the minimum price at the cost of production. The maximum price target should be a realistic price, determined by historical price movements and data, that producers can sell for.  The maximum price is less important than the minimum price because as you will see below, sales dates will force a sale if the price is not reached. Sales units should then be split between price targets, varying between the minimum and maximum price, which reduces the price volatility faced by the producer and hence the volatility of expected income. 

    Along with a price target, each sale unit in the marketing plan should have a pre-determined sale date. The sale date implies if a price target for a sale is not reached by the sale date, the producer will still make the sale. When selecting sale dates, producers should consider the price seasonality of the commodity. Higher price targets should be coupled with sale dates that correspond to the time of year the commodity price is typically the highest. 

    The final important piece is knowing, understanding, and choosing the marketing tool that will be used to make the sale. Local elevators will offer a variety of contracts to sell grain, or producers can use various futures and options strategies. Producers should consider incorporating multiple tools into their marketing plan to protect against varying types of risks associated with the tools. We do not have room to address all the available tools here, but there have been multiple Southern Ag Today articles discussing available tools for the reader’s reference. (Fences Aren’t Just for Cattle | Southern Ag Today; Marketing Strategies if Producers Do Not Have Access to On-Farm Storage | Southern Ag Today; Managing the Price Risk Gap between December Corn Futures and Projected Crop Insurance Prices | Southern Ag Today).

    Figure 1. Average Percent Change in the Monthly National cash Price Relative to the January Price for Corn, Cotton, and Soybeans, 2010-2021

    Source: USDA-NASS Quickstats: USDA/NASS QuickStats Ad-hoc Query Tool
    Mississippi state university logo

    Author: William E. Maples

    Assistant Professor and Extension Economist 

    Department of Agricultural Economics, Mississippi State University 

    Email: will.maples@msstate.edu

    Maples, Will. “Considerations for Developing a Pre-Harvest Marketing Plan.” Southern Ag Today 2(47.1). November 14, 2022. Permalink

  • Fresh Tomato Supply Chain: Challenges in Production & Marketing

    Fresh Tomato Supply Chain: Challenges in Production & Marketing

    Growers in Florida and California, where the majority of fresh tomatoes are grown in the U.S., continue to lose market share to Mexico (due in part to relatively higher U.S. farm labor wages and overlapping seasonal production) and Canada (greenhouse production), resulting in reduced numbers and consolidation among Florida’s growers (Fig. 1). Over the past two decades, shipping point prices reported by the USDA Agricultural Marketing Service are trending upward. Input prices are on the rise since 2020 due to global shocks such as the COVID-19 pandemic and Russia-Ukraine conflict, resulting in record high prices for phosphorus, nitrogen, potash, cardboard boxes and wooden pallets, and irrigation supplies.  Truck driver shortages remain the biggest challenge in distribution logistics, driven mainly by too few drivers and rising fuel costs. 

    Figure 1. Fresh tomatoes (field and hothouse): Supply and use, 1960 – 2020 (USDA-ERS)

    Fresh produce consumption trends are affected by food prices, food safety, and dietary concerns. In a survey of Southeastern U.S. tomato buyers, fresh produce consumers reported they are more concerned about the safety of U.S. foods relative to U.S. food price trends (Maples et al., 2018). Also, people are searching for food relationships in response to diet-related disease incidences in themselves and their family members (Thapaliya et al., 2017). Since 1996 (just after Canada, Mexico, and the U.S. signed the North American Free Trade Act), per capita availability of fresh tomatoes (field and greenhouse, domestic and imported sources) hovered between 16-17 pounds a year, up from about 11 lbs. per person in 1960. 

    The 2015–2020 Dietary Guidelines for American recommends an average adult may consume 2,000 calories per day, and suggest a well-balanced diet include two cups of fruit and 2.5 cups of vegetables. USDA food consumption surveys find that the average American falls far short, consuming only 0.9 (45% of recommended volumes) cups of fruit and 1.4 (56%) cups of vegetables per day. Are veggies really cost-prohibitive? Using the average vegetable price of $0.80 per cup and multiplying by the recommended 2.5 cups per day for a healthy diet, the cost of including vegetables in a healthy diet to equals $2.00 per day, about 20 percent of the average daily food cost of approximately $10 per person. Recently, the Bureau of Labor Statistics consumer price index (CPI) revealed that people are paying prices that are nearly double since 2000. 

    There is a need for improved understanding of the roles and dynamic interactions among fresh produce supply chain participants to improve industry coordination and competitiveness, expand U.S. market demand, and build in supply chain resiliency.

    Reference

    Maples, M.C.*, M.G. Interis, K.L. Morgan, and A. Harri. 2018. Consumer Willingness to Pay for Environmental Production Attributes of Fresh Tomatoes. Journal of Agricultural and Applied Economics 50(1): 1-21. 

    Stewart, H., and J. Hyman. August 2019. Fruit and Vegetable Prices. U.S. Department of Agriculture, Economic Research Service. Link: https://www.ers.usda.gov/data-products/fruit-and-vegetable-prices/

    Thapaliya, S.*, M.G. Interis, A. Collart, L. Walters, and K.L. Morgan. 2017. Are Consumer Health Concerns Influencing Direct-from-Producer Purchasing Decisions? Journal of Agricultural and Applied Economics 49(2): 211-231.

    U.S. Department of Agriculture and U.S. Department of Health and Human Services. December 2020. Dietary Guidelines for Americans, 2020-2025. 9th Edition. Link: DietaryGuidelines.gov

    U.S. Department of Agriculture, Economic Research Service. 1 April 2020. Based on data from various sources as documented on the Food Availability Data System home page. Link: USDA ERS – Food Availability (Per Capita) Data System

    U.S. Bureau of Labor Statistics. 2 August 2022. Consumer Price Index. Link: USDA ERS – Food Availability (Per Capita) Data System

    Author: Kimberly L. Morgan

    Associate Professor

    Author: Xiuri Cui

    Ph. D Candidate

    Author: Zhengfei Guan

    Assistant Professor

    Morgan, Kimberly L., Xiuri Cui, and Zhengfei Guan. “Fresh Tomato Supply Chain: Challenges in Production & Markets.” Southern Ag Today 2(46.5). November 11, 2022. Permalink

  • Correspondence of Rice Planted Acres to Safety Net Prices

    Correspondence of Rice Planted Acres to Safety Net Prices

    Over the past five years, the federal crop insurance program has become a more important part of the farm safety net – relative to ARC/PLC and the marketing loan.  There are several reasons for this, but the two most important are 1) higher commodity prices have made ARC/PLC and the marketing loan less likely to provide any benefits and 2) the crop insurance program uses the futures market to establish initial and harvest-time prices used in insurance calculations that are based on a monthly average of futures closing prices for a specified contract month.  When commodity prices are trending upward, like they have been over the past few years, crop insurance protection increases along with higher futures market prices.

    The correspondence, or lack thereof, of rice planted acres for four Southern rice growing states with the marketing year average price reported by USDA around October 1st of the year prior to planting and the projected insurance prices was evaluated over the 2016 to 2022 period.  The previous year’s marketing year average price was used to evaluate whether it was signaling for more or less acres for the next year.  The projected (initial) insurance price is determined just prior to planting.  The three states (Arkansas, Mississippi and Texas) that use the same futures contract to establish projected and harvest time prices are grouped together in the graphs followed by the graph for Louisiana.

    The graphs indicate both marketing year average prices and insurance projected prices are generally trending upward since 2017.  Planted acres for Arkansas and Mississippi and Louisiana do not exhibit an upward trend.  Producers in these states generally have multiple crop alternatives to rice that may be drawing acres away from rice based on the relative profitability of the alternatives to rice.  Texas producers generally have fewer viable alternatives to rice production, which appears to be revealed in the upward trend in planted acres.  Another consideration to keep in mind is that even though rice prices have increased over the past few years, generally speaking, prices still remain below the full cost of production for producers in Southern rice growing states, particularly when accounting for the deductible associated with insurance policies. 

    Outlaw, Joe, and Bart Fischer. “Correspondence of Rice Planted Acres to Safety Net Prices.” Southern Ag Today 2(46.4). November 10, 2022. Permalink

  • What Should We Expect for Farm Loan Interest Rates in 2022 & 2023?

    What Should We Expect for Farm Loan Interest Rates in 2022 & 2023?

    Rising input and labor costs have already created significant concerns for agricultural producers today. One of the major causes of rising costs is the high inflation rate which now stands at the highest level in the last four decades.

    Among some of the options available for the Federal Reserve System (the Fed) for lowering the inflation rate, adjusting the federal funds rate tends to be one of the first options to consider. Indeed, the Federal Open Market Committee (FOMC), a committee within the Fed, raised the federal funds rate multiple times this year. These federal funds rate hikes already had a significant impact on consumer loan rates, including agricultural loan rates. How does this work, and what should we expect for the rest of 2022 and 2023?

    First, the federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at the Fed) overnight. The federal funds rate is important because it is the central interest rate in the U.S. financial market. It influences short- and long-term interest rates such as mortgages, loans, and savings. While it is certainly possible that these consumer loan rates may not react to the changes in the federal funds rate, they tend to move in the same direction. This means that when there is a federal funds rate hike, consumer loan interests are likely to increase.

    Source: Federal Reserve Bank of New York

    At the beginning of 2022, the effective federal funds rate was at 0.08%, which was significantly lower than the 10-year average of 0.72%. The Fed has maintained a low level of the federal funds rate since the COVID-19 pandemic to ensure enough financial capital is circulating in the economy. Yet, prolonged low federal funds rate and interest rates contributed to the rapid increase in the inflation rate, and the Fed is now rapidly increasing the federal funds rate. From 0.08% in January, the effective federal funds rate now stands at 3.83%.

    How have farm loan interest rates reacted to the federal funds rate hikes? USDA’s Farm Service Agency (FSA) provides farm loan interest rates which are updated monthly, and we can observe how farm loan interest rates have changed in the past few months. Operating loan interest rates, ownership loan interest rates, and emergency loan interest rates have all spiked in the past twelve months. One year ago, interest rates for operating, ownership, and emergency loans were at 1.75%, 2.875%, and 2.75%, respectively. Interest rates have more than doubled since then, reaching 4.5%, 4.375%, and 3.75% on November 2022. While the magnitudes have varied, we can see that the farm loan interest rates have moved in the same direction as the federal funds rate. Farm loan interest rates issued from commercial banks are not available on a monthly basis, but these rates also tend to move in the same direction.  

    Source: USDA Farm Service Agency

    What should we expect for farm loan interest rates for the rest of the year and 2023? The consensus is that the Fed will increase the federal funds rate significantly for the rest of 2022 and 2023. The current forecast is that the FOMC will increase the federal funds rate to 4.4% by the end of this year and to 4.6% by the end of 2023. This will inevitably result in continued increases in farm loan interest rates as well. This means that cost of financing will increase for the next few quarters, especially for new loans and existing floating-rate loans that do not have fixed terms. We expect the federal funds rate to lower to 3.9% and 2.9% for 2024 and 2025, making it doubtful that we will return to the favorable loan terms from 2020 or 2021. 

    Author: Kevin Kim

    Assistant Professor

    kevin.kim@msstate.edu

  • Beef Cow Slaughter Ramps Up

    Beef Cow Slaughter Ramps Up

    Typically, beef cow culling peaks, nationally, during the last few weeks leading up to Thanksgiving.  The rapid pace of cow culling was documented in SAT back in early September, focusing on the South.  At that time, there was some hope that the pace of culling might slow in the Fall due to large numbers sent to market earlier.  Those hopes have failed to materialize as beef cow slaughter hit 84,800 head for the week ending October 22nd.  That is the largest weekly beef cow slaughter since the week of November 19th, 2011. 

    Total beef cow culling is up 364,000 head in 2022 over 2021.  All of the increase comes from states in the Southern half of the U.S. and the Plains.  Slaughter in Region 6, which includes Texas and Oklahoma, is up 207,000 head over last year.  Region 7, including Kansas and Nebraska is 171,000 head above 2021.  Slaughter is up 59,000 head in the deep South and 12,000 head in the Southwest.  Beef cow slaughter is lower than last year in the rest of the country.  Increased culling continues to largely coincide with areas experiencing drought.  Costs increasing faster than calf prices have also encouraged culling.

    Cow prices typically bottom out in the Fall, as slaughter peaks, and this year is no exception.  Prices have fallen below a year ago in local auctions in drought hit areas, especially for thin, lean cows.  Prices have been as much as 20 percent above a year ago, even though trending lower, in local auctions away from drought areas and for cull cows in better shape.  

    Watch for beef cow slaughter in the coming weeks to see if it maintains an 85,000 head per week pace.  The more sent to market now means an even larger decline in the cowherd for next year and higher prices to come.

    Data Source:  USDA-AMS & USDA-NASS
    Livestock Marketing Information Center

    Author: David Anderson

    Professor and Extension Economist Livestock and Food Products Marketing, Dairy, Policy

    danderson@tamu.edu

    Anderson, David. “Beef Cow Slaughter Ramps Up“. Southern Ag Today 2(46.2). November 8, 2022. Permalink