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  • Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis

    Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis

    Low water levels in the Mississippi River have caused grain barge rates to increase, which causes grain buyers at local grain elevators to reduce their bids for grain delivered. When water levels drop in the marine highway system, barge drafts are reduced (U.S. Army Corps of Engineers, 2022). A barge draft is the distance between the waterline and boat, or the barge hull structure, and increases with the amount of weight present on the barge. The average barge with a draft of 9 feet can hold 1,500 tons of grain which equates to about 59,000 bushels of corn, 55,000 bushels of soybeans, and 53,500 bushels of rice (USDA-AMS, 2022). Each reduced foot of draft results in 150-200 fewer tons, or anywhere between 5,500 to 7,500 bushels depending on the crop, of grain capacity on a barge (Iowa Soybean Association, 2022). If barge drafts decrease for vessels carrying grain, this means the cost to transport grain downriver, or the grain barge rate, increases since it takes more barges to move the same amount of grain.

    Barge freight rates are established by the U.S. Inland Waterway System using a percent of tariff system. Barge freight rates for the Mississippi River at New Madrid, Missouri near Memphis, Tennessee have skyrocketed since the beginning of September (USDA-AMS, 2022). The 3-year average percent of tariff rate indicates weekly barge freight rate tends to oscillate around 400 percent of tariff, or about $12.56/ton. In October 2022, the barge freight rate averaged 2400 percent of tariff, or $75.36/ton, which means the cost to transport grain from Memphis to the port of New Orleans was roughly six times higher than average. The increase in transportation cost is usually reflected in lower cash grain bids at country grain elevators which results in a weakened basis, which is the local cash price received by farmers at the country elevator less the futures price established by the Chicago Board of Trade.

    In a technical report recently published by the Fryar Price Risk Management Center of Excellence, Biram, et al. (2022) provide a detailed analysis of how increased barge freight rates weaken basis. Here, we provide a snapshot of how soybean basis has fluctuated in typical harvest months for Helena[1], Arkansas for the previous five years and show how significant the impact of the low water levels in the Mississippi River has been in recent weeks (Figure 1). As of October 18, 2022, new crop soybean basis at Helena, Arkansas is abnormally low at 90 cents under the front month soybean futures contract (ZSX2) which is nearly 200% below the five-year average during the months of September and October (i.e. 30.4 under). Additionally, basis is relatively more volatile than the five-year average with the strongest basis in this time frame of 100 cents over ZSX2 on September 6, 2022, to the weakest basis of 125 cents under the week of October 5, 2022. The strong basis in early September is primarily due to tight pre-harvest stocks.

    We now provide immediate and near-term implications for risk management. In the immediate term, a producer should consider storing grain until the winter months where current cash bids for delivery appear to have stronger basis and to consider the benefit of higher prices at a future delivery date relative to storage costs. Based on historical USDA-AMS data, basis typically improves by 50 cents between harvest months and winter months. Looking to the 2023 growing season, producers should consider revenue insurance such as RP and RP-HPE or to engage in forward contracting which allows a producer to take advantage of stronger basis in the summer months prior to harvest. While revenue crop insurance provides price protection based on futures market prices, it can allow a producer the opportunity to be more aggressive with their forward contracting as they can price more bushels confidently with an additional layer of non-production risk protection (i.e. elevator fees and non-delivery). These tools may be used independently or jointly, and the best risk management strategy for a producer considering these tools may differ across farms.

    Figure 1. Daily Soybean Basis (ZSX) at Helena, Arkansas (2018-2022) (During Harvest Months of Sep. – Oct.)

    Source: USDA-AMS MyMarketNews Data Query (2022)

    [1] Basis in Helena, Arkansas is representative of basis for other country elevators along the Mississippi River in other states on October 18, 2022. According to USDA-AMS Daily Grain Bids reports, basis was 111 under ZSX2 in Greenville, Mississippi and 95 under ZSX2 in West Central, Tennessee.

    References

    Biram, H.D., S. Stiles, A.M. McKenzie, and J.D. Anderson. “Risk Management Tools and        Strategies for Arkansas Corn and Soybean Producers: Implications of Mississippi River            Transport Disruptions.” Fryar Price Risk Management Center of Excellence. Technical Report No. FC-2022-05. October 2022. (Link)

    Grain Transportation Report | Agricultural Marketing Service, Oct. 2022,     https://www.ams.usda.gov/services/transportation-analysis/gtr. 

    Hutton, Jeff. “Waterway Woes.” Iowa Soybean Association, Sept. 2022,      https://iasoybeans.com/newsroom/article/waterway-woes. 

    “Navigation.” U.S. Army Engineer Institute for Water Resources (IWR),           https://www.iwr.usace.army.mil/Missions/Coasts/Tales-of-the-Coast/Corps-and-the-Coast/Navigation/.

    Report-Arkansas Daily Grain Bids | MARS,      https://mymarketnews.ams.usda.gov/viewReport/2960.

    Hunter Biram

    Assistant Professor and Extension Agricultural Economist

    hbiram@uada.edu

    John Anderson

    Director, Fryar Price Risk Management Center of Excellence

    jda042@admin

    Scott Stiles

    Instructor and Extension Economist

    sstiles@uada.edu

    Andrew McKenzie

    Professor

    mckenzie@uark.edu

    Biram, Hunter, John Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink

  • Insurance Plans for Specialty Crops

    Insurance Plans for Specialty Crops

    Producers face production and marketing risks that could affect the operation’s financial performance every growing season. Developing strategies to mitigate such risk is essential for the health of the operation. USDA offers a number of programs to insure specialty crops including individual insurance programs, federal crop insurance, whole-farm revenue protection, and the production and revenue history insurance plan. 

    Interest in insurance plans for specialty crops has increased with the Federal Crop Insurance program alone providing coverage for specialty crops amounting to more than $22 Billion in 2021 (Figure 1). In terms of broad categories, fruits and tree nuts receiving the highest share followed by vegetables and horticulture nursery crops.

    Figure 1. Federal Crop Insurance Coverage for Specialty Crops, years 2007-2021. 

    Source: Risk Management Agency (RMA 2022).

    Some expansions of insurance products and programs to specialty crops piloted in 2021 with the production and revenue history insurance plan made available to FL strawberry producers for the 2021 crop year. Interested in learning more about available programs? A list of individual crop insurance programs is provided by the USDA Risk Management Agency: hyperlink https://www.rma.usda.gov/en/Topics/Specialty-Crops

    Author: Maria Bampasidou

    Assistant Professor

    mbampasidou@agcenter.lsu.edu

    Bampasidou, Maria . “Insurance Plans for Specialty Crops“. Southern Ag Today 2(44.5). October 28, 2022. Permalink

  • An Early Look at the Farm Safety Net for Cotton in 2023

    An Early Look at the Farm Safety Net for Cotton in 2023

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    From wild swings in commodity prices to an explosion in input costs that would make the Consumer Price Index (CPI) blush, agricultural producers have been riding a rollercoaster over the past year.  The purpose of the farm safety net – the combination of Federal crop insurance and the traditional farm bill programs like Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) – is to help producers manage these risks. However, unprecedented pressure from the COVID-19 pandemic and natural disasters, along with the inflated input costs, have exposed gaps in the current farm safety net.  One of the concerns on the minds of most producers at this point is how the farm safety net will perform in 2023 if commodity prices fall and input costs remain at elevated levels.  In this article, we look at this question in the context of cotton.

    This summer, USDA’s Economic Research Service (ERS) forecasted a U.S. average total cost of production for cotton in 2023 of $794/ac.[1]  Assuming an average yield of 847 lbs/ac (based on the 5-year harvested-acre average for upland cotton from 2017-21), the total average cost of production for cotton in 2023 would be an estimated $0.9374/lb.  The question:  how much of the cost incurred by producers will be protected by the farm safety net?

    Federal crop insurance is the cornerstone of the farm safety net.  The insured price for cotton in the spring will be based on the Cotton #2 Dec ’23 futures contract (CTZ23).  While the price is based on a month-long average (with the discovery period depending on your location), this example simply uses yesterday’s closing price ($0.731/lb) as a proxy for how the safety would perform if the insured price were established at yesterday’s levels (Figure 1).  For a grower with Revenue Protection (RP) at a 75% coverage level, they are effectively protecting $0.5483/lb (= $0.731/lb x 75%).  Even in the case where a grower purchases STAX at a 90% coverage level (in addition to RP), they still are only able to protect $0.6579/lb (= $0.731/lb x 90%).  In other words, a producer would only be able to insure, on average, 70% of their total cost of production (= $0.6579/$0.9374).  

    But, won’t PLC help fill in the gap given it is designed to help in low-price scenarios?  With cottonseed prices at $343/ton (NASS August 2022[2]), a lint value of roughly $0.637/lb equates with a seed cotton equivalent of $0.367/lb (the PLC seed cotton reference price).  In other words, if cottonseed prices for the marketing year averaged $343/ton, lint prices would have to fall below $0.637/lb before PLC would trigger support.  If the marketing year average price were to hover around the insurance price in our example ($0.731/lb), PLC would end up paying nothing.

    Naturally, any number of different scenarios could transpire.  For example, prices could rebound before planting.  Input costs could fall between now and the spring.  And, above-average yields could blunt the impact of lower prices.  In the case of yields and given the example above, if prices averaged $0.731/lb, yields would need to be more than 28% above average to break even.  While that is possible (especially in isolated areas), neither producers (nor their lenders) can bank on yields that are 28% above average.

    This scenario clearly highlights just one example of the gaps that exist in the current farm safety net.  It also highlights the importance of the upcoming debate on the 2023 Farm Bill.  While pundits are prognosticating over whether there will be a simple extension of the current farm bill next year, agricultural producers may not be able to wait.  Even if the markets end up breaking their way, they currently are exposed to a considerable amount of risk and the prospect of significant losses.

    Figure 1.  Cotton #2 December 2023 ICE Futures Contract (CTZ23)

    [1] https://www.ers.usda.gov/webdocs/DataFiles/47913/cop_forecast.xlsx?v=4738.9

    [2] https://downloads.usda.library.cornell.edu/usda-esmis/files/c821gj76b/69700872f/k643c9334/agpr0922.pdf

    Fischer, Bart L., and Joe Outlaw. “An Early Look at the Farm Safety Net for Cotton in 2023.” Southern Ag Today 2(44.4). October 27, 2022. Permalink

  • Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lender’s Loan Evaluation Models

    Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lender’s Loan Evaluation Models

    After decades of litigation and settlements of lawsuits alleging discriminatory lending decisions, lenders have learned valuable lessons to increasingly “objectify” their loan decision-making procedures.  The resulting “more objective” loan evaluation models consider borrowers’ business profitability, liquidity, solvency, and repayment capability – in addition to credit histories and collateral arrangements, among other considerations.   

    One may ask if these “objective, more transparent” decision models have increased minority farmers’ access to credit.  The reality is that farm businesses operated by certain ethnic groups are typically smaller, less profitable, and with liquidity concerns – thus not always faring well in those lenders’ models.

    Even if certain minority farmers get their loan applications approved, they must still negotiate another hurdle – the packaging of their loan terms.  Table 1 presents a compilation of information on the approved loans for beginning farmer clients of the Farm Service Agency (FSA) from 2004 to 2014.

    The most favorable loan package for any borrower should combine a relatively lower interest rate and longer loan maturity, which would result in lower periodic loan amortization amounts.  The trends in Table 1 indicate that Hispanic and Black farmers received higher interest rates than the rest of the approved borrowers.  The average loan term for Hispanic borrowers, however, was longer (and comparable to White borrowers’ terms), hence could have tempered the unfavorable high interest rate effect.  In contrast, Black farmers were prescribed the shortest average repayment term, which may pose a potential liquidity concern when combined with higher interest rates.

    From the lenders’ perspective, loan terms are additional tools for credit risk management.  Specifically, borrowers’ credit risks are factored into loan packaging decisions, so lenders are inclined to prescribe higher interest rates and shorter loan maturities to borrowers with higher credit risk profiles.  When this rationale is factored into the interpretation of lending statistics and trends, then it becomes clearer that the more urgent priority in addressing minority farming issues is to implement effective reforms geared towards helping smaller minority farms overcome persistent hurdles that threaten their economic and financial viability.    Only then will these farmers gain better credit access and command the most favorable lending terms when their loan applications are approved.

    Table 1.  Comparative Lending Terms Packaged for Approved FSA Loans of Beginning Farm Borrowers from different racial/ethnic groups

    FSA lending termsWhiteBlack or African AmericanAmerican IndianAsianHispanic or Latino
    Obligated loan ($’000)104.5752.0097.3669.7176.00
    Interest rate (%)2.923.273.072.783.91
    Loan maturity (year)17.4814.9219.3512.9018.64

    Source: Ghimire, J., C.L. Escalante, R. Ghimire, and C. Dodson. “Do Farm Service Agency Borrowers’ Double Minority Labels Lead to More Unfavorable Loan Packaging Terms?”  Agricultural Finance Review.  80,5 (2020): 633-646.

    Escalante, Cesar L.. “Loan Packaging Terms for Beginning Minority Farmers Under More Objective Lenders’ Loan Evaluation Models“. Southern Ag Today 2(44.3). October 26, 2022. Permalink

  • It’s Turkey Time!

    It’s Turkey Time!

    It’s the season to think about turkey prices as the birds will start showing up in our grocery store meat cases in the next couple of weeks.  Last year, at this time, turkey prices were record high.  Prices have set new record highs this year leading up to Thanksgiving. 

    Wholesale, frozen, 8-16 pound, national average whole hen prices hit $1.80 per pound in the third week of October 2022.  They were $1.41 per pound in October 2021.  Turkey prices normally peak around the end of September to the 1st of October.  Fresh turkeys hit $1.93 compared to $1.47 last year.

    The most important factor in high prices is reduced turkey production.  High Pathogenic Avian Infuenza (HPAI) has hit the turkey industry hard.  Production this year is 4.7 percent below last year.  Turkey production has increased dramatically in recent weeks as the industry tries to boost supplies in time for Thanksgiving.  Last week’s production was 8 percent above the same week the year before.  Turkeys are typically put into cold storage for sales in the Fall.  September cold storage stocks of turkey were about 5 percent below a year ago.  The second major factor in high turkey prices are high feed costs.  High corn and soybean prices have pressured profits for turkey producers leading to lower production.  Like all other businesses, transportation costs, labor, and other costs of getting turkeys to market are higher contributing to higher turkey prices. 

    While higher wholesale prices will likely translate to higher retail prices, stores often use turkeys as part of Thanksgiving marketing specials.  Grocery stores should have plenty of turkeys on hand.  But, smaller restaurants and other users have struggled getting supplies for most of this year.  

    Photo by Randy Fath on Unsplash

    Anderson, David . “It’s Turkey Time!“. Southern Ag Today 2(44.2). October 25, 2022. Permalink