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  • An Initial Look at Forced Base Update on the South

    An Initial Look at Forced Base Update on the South

    One of the questions policy economists get the most from farmers is how likely is it that they will get to update their base acres in the hopes of finally converting their non-base acres into base.  For example, there is a significant amount of cotton produced in the Texas Panhandle that does not have seed cotton base and therefore is not eligible for ARC or PLC protection.  In previous base update opportunities provided in the 2002, 2014 and 2018 (for cotton only) Farm Bills, producers always had the choice to stay with the crop bases that were established in the 1985 Farm Bill or update to align their crop bases more closely to current plantings.  Given the choice, producers rarely would choose to have less total base acres even if it meant more closely aligning their bases to current plantings.  This type of update has generally been scored by the Congressional Budget Office (CBO) as having a positive cost so Congress has had to find the money to update crop bases.

    One of the suggestions currently making the rounds in Washington D.C. is a forced base update where producers who were planting less than their farm’s base acres during some specified time period would lose base and similarly, those that were planting more than their current base acres would gain base.  Proponents see this as costing less to implement, as some farmers will most certainly gain base acres while others would lose base.  While the devil is very much in the implementation details that would be determined by USDA, a quick evaluation of USDA-NASS planted acre data relative to USDA-FSA base acre data for the 13 Southern States indicates the South would lose a considerable amount of base in a forced base update situation where keeping old crop bases would not be an option.

    Table 1 compares the planted acres of nine primary covered commodities (corn, grain sorghum, soybeans, rice, wheat, cotton, peanuts, barley and oats) in the South and indicates that an average of 53.6 million acres were planted in 2021 and 2022.  This compares to 2021 total base acres of 62.1 million acres.  Producers planted roughly 8.5 million acres less than their crop bases during that time period.  Of the 13 Southern States, only Kentucky, North Carolina, Tennessee, and Virginia planted more acres than they have crop base.

    While this quick analysis only looked at planted acres over two years, it still provides a good indication of what the direction of the overall impact would be on the Southern States.   A forced base update is still just one of many proposals that are floating around Washington as farm bill discussions are just getting started.  Individual farmers may benefit drastically; however, it is important to understand that a forced base update will have significant negative repercussions on the South as a whole.

    Table 1.  Planted Acres of Nine Primary Covered Commodities for 2021 and 2022 and 2021 Base Acres.

    Outlaw, Joe. “An Initial Look at Forced Base Update on the South“. Southern Ag Today 2(30.4). July 21, 2022. Permalink

  • Current Non-Real Estate Farm Debt

    Current Non-Real Estate Farm Debt

    Agricultural producers are currently having to manage numerous factors, including drought and rising input costs. In addition, the ag sector will see interest rates continue to increase as the Federal Reserve tries to reduce inflation. As the general economy and ag economy moves into a high interest rate environment, understanding agriculture debt becomes important. The majority of loans originate from the farm credit system or commercial banks. Every commercial bank in the U.S. submits quarterly performance reports. These reports include the number of agricultural loans and the status (on time or late) of the loans. Figure 1 displays the total loan volume, and total loan volume for all three late type volumes (30-89 days late, 90+ days late, Non-Accrual) for the last five quarters. The totals are for all the states in the Southern Region. 

    Through the first quarter of 2022, loans that are non-accrual and 90+ days late have maintained their trend. Non-accrual loan volume continued to decrease, while 90+ days late loans stayed relatively steady. These are positive indications that delinquent loan debt hasn’t increased. Total loan volume is approximately $1 billion higher than a year ago. This is expected as input costs have increased. Total debt volume for loans that are 30-89 days late continued to increase. This increase was expected due to the seasonality of these loans. That is, the highest volume of late loans is seen annually in Q1 and the lowest annually in Q3. Interestingly, the total volume of these loans (30-89 days late) is $8 million lower than in 2021. This also is a positive sign that loans stayed current over the past year, even with the increased input costs.   

    As we move into a high interest rate environment, the current status of commercial ag debt has some positivity. But this positivity could reverse for several reasons (i.e., drought continuation in areas). In the coming months, it is crucial that producers are efficient with their capital consumption and are mindful of their debt structure. 

    Martinez, Charley, and Haylee Ferguson. “Current Non-Real Estate Farm Debt“. Southern Ag Today 2(30.3). July 20, 2022. Permalink

  • Between a Rock and a Dry Place: Culling Decisions

    Between a Rock and a Dry Place: Culling Decisions

    In drought-stricken areas, cattle producers are having to sell more cattle than normal because of the lack of grass and increased costs of production. While some producers are selling feeder calves earlier than they wanted, the number of cull cows going to the market creates multiple ways to look at the situation. This article covers the current cull cow market and some potential management strategies to think about moving forward. 

                Figure 1 contains the weekly slaughter cow prices for Southern Plains auctions (current drought-stricken areas). The red line represents the 5-year average from 2016-2020, and illustrates the normal seasonal pattern observed in cull cow markets. The dotted line represents the weekly prices for 2021. Prices in 2021 were below the average from January-June, and then stayed relatively true to seasonal expectations. So far in 2022, prices have been frequently above the 5-year average and 2021 prices. This has created higher salvage value for cattle that had to be culled this year. But prices are starting to trend down due to the increased cull cow supply entering the market. The downward trend is expected based on seasonal patterns, but the decrease will likely continue. In the coming weeks, drought and production costs are going to be major drivers of slaughter cow supply as the market tries to find a floor. 

                From a management strategy, producers often start with older cows first. After the older cows, producers get pickier on reasons to cull (bad feet, other non-ideal characteristics). These types of cows have probably been culled already, which leaves the producer with management decisions (cull bred females? Cull yearling females?, etc.). To help with that decision, identify inefficient females. If they are bred, analyze the females calving cycle. If they are yearling females, look at their pedigree, and identify any maternal reproduction issues. If a producer has already culled based on age, bad feet and other physical traits, and reproduction, then look for alternative marketing strategies such as selling females to another producer in a region that isn’t in drought. If a producer has superior genetically based cattle, they probably won’t find enough salvage value from sale barn prices and having a marketing strategy to find more value could be useful for not only increased salvage value, but also for cash flow reasons. 

    Source: Livestock Marketing Information Center

    Martinez, Charley . “Between a Rock and a Dry Place: Culling Decisions“. Southern Ag Today 2(30.2). July 19, 2022. Permalink

  • The USDA June Acreage and Grain Stocks Report

    The USDA June Acreage and Grain Stocks Report

    On June 30, USDA released the June Acreage and Grain Stocks reports. The Acreage report is a survey-based estimate of planted acres for primary crops. The producer survey is conducted the first two weeks of June. The Grain Stocks report provides survey-based estimates for corn, soybean, wheat, and sorghum stocks, which includes producers and commercial grain storage facilities. Survey respondents indicate stocks held on their operation as of June 1.

    Comparing estimated June 2022 to 2021 final planted acreage estimates: corn was down 3.4 million acres, soybeans up 1.1 million acres, wheat up 0.4 million acres, cotton up 1.2 million acres, sorghum down 1 million acres, rice down 0.19 million acres, and peanuts down 42 thousand acres (Figure 1). Combined, planted acreage for the seven crops is projected to be 1.91 million acres lower than in 2021. 

    Compared to USDA’s March 2022 Prospective Plantings report, the June Acreage Report indicated an increase of 431,000 acres of corn, soybean acres decreased 2.63 million acres, wheat decreased 259,000 acres, cotton increased 264,000 acres, sorghum increased 100,000 acres, rice decreased 109,000 acres, and peanuts decreased 28,000 acres – a combined decrease of 2.2 million acres. The majority of the reduced acres planted were for soybeans in North Dakota (1.1 million) and Minnesota (500,000). However, future USDA acreage adjustments remain likely due to delayed planting, primarily in the Northwest Corn Belt States.

    The June Grain Stocks report indicated, year-over-year, corn stocks were up 5.7% and implied disbursement from March 1 to June 1 was down 4.9%; soybean stocks were up 26.3% and implied disbursement from March 1 to June 1 was up 21.1%; wheat stocks were down 21.9% and implied disbursement from March 1 to June 1 was down 21.8%; and sorghum stocks were up 195.7% and implied disbursement from March 1 to June 1 was down 10.2%.

    What are the market implications for producers moving forward?

    Markets were declining prior to the release of the USDA reports (Table 2). Recent market declines can be attributed to global economic concerns, improved weather forecasts, higher global production estimates, and a reduction in long speculative positions in futures markets. The reports provided a mix of bearish and bullish estimates. 

    Looking forward, there remains a great deal of uncertainty with the 2022 crop. However, it is likely that the preharvest highs for corn, soybeans, cotton, and wheat have already been set. As such, producers should evaluate the amount of 2022 production that is unpriced (or does not have downside price protection), storage availability, and investment in the crop. Margins have tightened dramatically and may be negative for many producers, if below trendline yields are realized. Crop insurance will provide some protection and will be an important risk management and marketing consideration moving forward. The harvest price for wheat (Chicago) was set at $10.11 compared to a current (July 5) futures price of $7.93. The projected price for corn ($5.90), cotton ($1.03), and soybeans ($14.33) are all higher than the current harvest contract prices – $5.78, $0.93, and $13.16, respectively. The price collapse of the past two weeks has created a new marketing and risk management environment for producers. Now is the time for producers to evaluate where they stand with their current risk management and marketing plans and make adjustments to establish a path forward.

    Figure 1. USDA NASS Planted Acreage Estimates, March, June, and Final for Corn, Soybean, Wheat, Cotton, Sorghum, Rice, Peanuts, and Combined, 2018-2022 (million acres)

    Data Source: USDA-NASS

    Table 1. USDA Estimated Corn, Soybean, Wheat, and Sorghum Stocks, March 2021 to June 2022  

    Source: USDA-NASS

    Table 2. Corn, Soybean, Wheat, and Cotton Harvest Futures Contract Prices for Select Dates

    Source: Barchart.com

    References:

    Barchart.com. Corn, soybean, cotton, and wheat futures prices. Accessed at: https://www.barchart.com/futures/grains?viewName=main

    U.S. Department of Agriculture – National Agricultural Statistics Service (USDA-NASS). June 30 Acreage Report. Available on-line at: https://usda.library.cornell.edu/concern/publications/j098zb09z.

    U.S. Department of Agriculture – National Agricultural Statistics Service. June 30 Grain Stocks Report (USDA-NASS). Available on-line at: https://usda.library.cornell.edu/concern/publications/xg94hp534.

    U.S. Department of Agriculture – Risk Management Agency (USDA-RMA). Price Discovery. Available on-line at: https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/.

    Smith, Aaron, and William E. Maples. “The USDA June Acreage and Grain Stocks Report.”Southern Ag Today 2(30.1). July 18, 2022. Permalink

  • U.S. Supreme Court to Hear Proposition 12 Case

    U.S. Supreme Court to Hear Proposition 12 Case

    In the past 15 years, several states have passed laws regarding the amount of space that specific types of farm animals- pregnant sows, veal calves and laying hens- must be given.  The constitutionality of one of these laws, passed as a ballot proposal in California, will be considered in October by the Supreme Court of the United States (“SCOTUS”). 

    “Prop 12” was passed in 2018 and required that eggs produced and sold in California be from cage-free hens.  Additionally, it required that pork and veal sold in California come from farms without veal crates or gestation crates.  These requirements apply not only to California producers, but also to producers across the country (and the world) selling products into the large California market.  While Prop 12 took effect in January 2022, a California state court has prevented its enforcement until six months after the regulations outlining its administration are finalized.  

    Prop 12 was also challenged in federal court.  In one case, the National Pork Producers Council and American Farm Bureau Federation (“NPPC/AFBF”) argued that it violates the “commerce clause” to the United States Constitution.  The commerce clause gives Congress the right to pass laws affecting multiple states.  On the flip side, the “dormant commerce clause” limits state legislatures, with some exceptions, to only passing laws affecting people located in that specific state.  The NPPC/AFBF case argued that Prop 12 acted as a barrier to trade between states by imposing obligations on out-of-state competitors in order to assist local producers.

    The plaintiffs lost at both the federal district court and the Ninth Circuit Court of Appeals.  However, NPPC/AFBF requested that SCOTUS hear the appeal and that request was accepted.  It will be heard at SCOTUS on October 11th.  To see other states with similar statutes, click here.      

    Rumley, Elizabeth. “U.S. Supreme Court to Hear Proposition 12 Case“. Southern Ag Today 2(29.5). July 15, 2022. Permalink