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  • U.S. Agricultural Imports are Expected to Surpass Exports Post Covid and Beyond

    U.S. Agricultural Imports are Expected to Surpass Exports Post Covid and Beyond

    Since the beginning of the 21st century, the United States has experienced an agricultural trade surplus in 20 of the last 22 years, with 2019 and 2022 being the only years where imports surpassed exports.  U.S. agricultural imports have increased from $43.1 to $199.3 billion from 2001 to 2022, respectively. This increase of U.S. agricultural imports was accentuated during the Covid-19 pandemic years as total imports increased by 40 percent in value and 13.1 percent in volume between 2019 and 2022 (Tables 1 and 2).  The rather large difference between value and volume increases shows that there was a price increase in most of the commodities mainly due to supply chain issues and inflation during COVID-19. The largest increase in value of the top five US agricultural imports from 2019 to 2022 are oilseeds and products, grain and feeds, and livestock and meats with 105.5, 54.5, and 44.6 percent increases, respectively.  Moreover, in terms of volume, livestock and meats, other and horticultural products have the largest increase with 35.5, 21.9 and 14.1 percent respectively.

    Figure 1.  Value of U.S. Agricultural Imports, Billion Dollars

    Table 1. Value of U.S. Agricultural Imports, Thousand Dollars

    Table 2. Volume of U.S. Agricultural Imports, Metric Tons

    The latest USDA Outlook for U.S. Agricultural Trade report (August 2023) forecasted imports for 2023 at $196.5 billion, down $1.5 billion from the May forecast mainly due to easing import prices throughout FY 2023.  The year-over-year imports from January to July show an overall decrease of 1.4 percent in value, but a 4.4 percent increase in volume confirming that prices of importing commodities are easing (Tables 1 and 2).  The value of the top five U.S. agricultural imports year-over-year has gone down except for grains and feeds.  On the other hand, the volume of all U.S. agricultural imports has gone up except for sugar and tropical products. Moreover, forecasted imports for 2024 are expected to be $199.5 billion, $3 billion above 2023, and virtually the same as 2022 imports.

    ReferencesU.S. Department of Agriculture (USDA).  “Outlook for U.S. Agricultural Trade: August 2023.”  AES-125, August 31, 2023. https://www.ers.usda.gov/webdocs/outlooks/107311/aes-125.pdf?v=1152.5

    Ribera, Luis. “U.S. Agricultural Imports are Expected to Surpass Exports Post Covid and Beyond.” Southern Ag Today 3(40.4). October 5, 2023. Permalink

  • Dairy Revenue Protection Historical Performance for Class Price

    Dairy Revenue Protection Historical Performance for Class Price

    Dairy Revenue Protection (Dairy-RP) is an insurance policy available to dairy producers to guarantee revenue every quarter. Dairy-RP was introduced in 2018 and is designed to help producers combat the volatile fluid milk market. Dairy-RP requires numerous choices by a producer when selecting a policy. When purchasing Dairy RP, the producer must first select which quarter (Jan-Mar, Apr-Jun, July-Sept, Oct-Dec) they would like to insure. Policies can be purchased five quarters in the future and are available up until the day before the quarter. Producers then select their pricing option of Class Pricing or Component Pricing[1] and declare a total fluid milk weight for the quarter to insure, with the minimum being 2,000 pounds. Additionally, the producer will select their coverage levels (80%, 85%, 90%, 95%) and a protection factor (1-1.5), which play a role in calculating the liability and expected revenue. Producers can receive an indemnity payment if the actual revenue is less than the expected revenue. Since the introduction of Dairy-RP, there have been over 75,000 policies purchased.  The number of Class Pricing policies has increased from 5,000 in 2019 to 18,500 in 2022. Alternatively, Component Pricing policies have decreased from 2,800 policies in 2019 down to 2,400 in 2022. This publication covers the class pricing option.

    The loss ratio is one method of measuring the performance of Dairy-RP. A Loss Ratio is the indemnity payment divided by the total premiums, thus representing a ratio of the total money paid back to the producers with respect to the total 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 analyze the performance of Dairy-RP(class price option), by state, under the class pricing option. Figure 1 shows the weighted average loss ratio for Dairy-RP (class pricing option) by state (Southern Ag Today States are colored Red). Of the 40 states enrolling in Dairy-RP, the loss ratio in 21 states was less than 1.0, three of which are in the Southeast. Alternatively, 19 states participating in Dairy-RP had a loss ratio of one or greater. States like Arizona and Colorado have loss ratios greater than two, equating to more than double the premiums received were paid back to producers with revenues lower than expected. Organizing the states by share of declared milk, Wisconsin is the second largest and accounts for 14.8% of the total milk insured under Class Pricing option but had a weighted loss ratio of only 0.80. The largest share is California, representing 18.3% of the total milk declared under the Class Pricing option with a weighted loss ratio of 1.37. The largest in the Southeast is Kentucky with a weighted loss ratio of 1.77.  

    Figure 1. Weighted Average Loss Ratio for Class Price 2019-2022

    (Data Source: USDA RMA Summary of Business Dairy Revenue Protection Participation)

    [1] Class pricing uses dollar values for class III and IV milk, where component pricing uses the dollar values for butterfat, protein, and other solids.

    Haley, Wyatt, Charley Martinez, and Chris Boyer. “Dairy Revenue Protection Historical Performance for Class Price.” Southern Ag Today 3(40.3). October 4, 2023. Permalink

  • New Commercial Poultry Breeder Housing Under Economic Stress

    New Commercial Poultry Breeder Housing Under Economic Stress

    While the overall demand for chicken remains strong, a couple of production trends caught my attention last year that have continued into 2023. It seems there could be a new “normal” in the broiler industry – fewer chicks hatched per broiler-breeder hen placed. Breeder hens produce the fertile eggs that will be hatched to produce the broilers that are eventually slaughtered for chicken products. Figure 1 shows roughly a 6% drop from the long-term average in chicks hatched per hen per month. Multiplied across the industry’s breeder farms, that could result in millions fewer chicks per year. This could be caused by any number of factors. Whatever the cause, the industry needs the chicks to keep up with demand for chicken. To offset this loss, figure 2 shows that about 8% more hens are currently in the field than in the past. One could argue that this is the easy solution to make up the difference. However, that solution eventually requires additional breeder housing. That leads to a difficult economic situation for commercial poultry companies and their contract growers. 

    In my last article for SAT, I discussed the increasing cost of broiler housing and its impact on growers’ ability to build new farms or expand existing farms. Breeder growers are facing similar challenges. A typical breeder farm today consists of four to eight 40’ x 500’ houses with enclosed concrete hallways between the houses and cooled egg storage facilities. In addition to the normal environmental control systems, these farms have specialized equipment like nesting boxes, egg conveyors and split feeding / drinking areas for hens and roosters. The structures are also specialized for the task of keeping large hens and roosters comfortable and producing fertile eggs for 40+ weeks. To contend with labor shortages, growers and integrators have had to adopt labor saving equipment for egg collection and crating. All such specialized housing and equipment comes at a premium. Add the general increase in building materials and labor costs over the last few years and the resulting cost of a new four-house breeder farm in the southeast today is $32.50 per square foot or approximately $2.6 million or more. This does not include the cost of the land itself, extensive land prep, or any cost for ancillary equipment. 

    For example, if we assume a USDA Farm Services Agency guaranteed loan that reduces equity requirements down to 10% and include estimated additional costs and fees, a grower will need to borrow approximately $2,795,000 to get a new four house breeder farm up and running on land they already own. The corresponding annual payment (20-year loan, 8% APR) would be approximately $284,677. At an average annual income of $4.60 per square foot for new breeder farms (ref 2), the annual gross revenue would be $368,000. Annual operating expenses have been shown to cost approximately 25% of gross revenue on new breeder farms, or in this case, $92,000 per year. This leads to a shortfall in net revenue of ($8,677) per year for the grower. Integrators have recognized this is an untenable situation for growers and a barrier to obtaining additional breeder housing. In response, some have offered direct cash incentives that lower the effective cost of the new houses while others include additional pay per dozen eggs for new housing. These direct cash incentives must decrease loan amounts and increase net revenue to meet the typical bank requirement of a 1.30 debt service ratio if new loans are to be made. In the scenario depicted in table 1, a cash incentive of $7.00 per square foot combined with a revenue equal to $4.82 per square foot would result in a positive net return, meet debt service requirements, and allow for new farms to be built. It remains to be seen whether such incentives would support enough new housing to overcome what could become a serious challenge for some companies.  

    Figure 1:

    Figure 2.

    Table 1.

    Four New 40′ x 500′ Breeder HousesNo IncentiveIncentive
    Incentive Payment $7.00 per Square Foot$0 $560,000
    New Farm Loan 20-year, 8% APR, 10% Eq.$2,795,000 $2,215,400
    Interest Paid Over Loan Period $2,898,538 $2,297,468 
    Gross Revenue per Square Foot $4.60 $4.82 
    Annual Gross Revenue $368,000 $385,336 
    Annual Loan Payment ($284,677)($225,643)
    Annual Operating Expenses25% of Gross Revenue($92,000)($92,000)
    Annual Net Return($8,677)$41,923 
    Debt Service Ratio0.971.30

    Ref: 

    1. Livestock Marketing Information Center: www.lmic.info
    2. New Farmer’s Guide to the Commercial Broiler Industry: Farm Types & Estimated Business Returns: www.aces.edu/blog/topics/farming/new-farmers-guide-to-the-commercial-broiler-industry-farm-types-estimated-business-returns/

    Brothers, Dennis. “New Commercial Poultry Breeder Housing Under Economic Stress.” Southern Ag Today 3(40.2). October 3, 2023. Permalink

  • Corn and Soybean Harvest Futures Contract Price Frequency 

    Corn and Soybean Harvest Futures Contract Price Frequency 

    This article examines the daily closing price frequency for the November soybean and December corn futures contracts from November 1st to contract expiration for soybeans and December 1st to contract expiration for corn for the 2010 to 2023 (to September 22, 2023) crop years. Figures 1 and 2 show the frequency of closing prices by price range (bars) and cumulative price frequency (line). The total number of daily closing prices are 3,600 for soybeans (Figure 1) and 3,629 for corn (Figure 2). Figure 1 shows that 14.0% of the daily closing futures prices for the November soybean contract were between $9.50/bu and $10.00/bu. Figure 2 shows 21.1 % of the daily December corn futures price closings were between $3.75 and $4.00. The November soybean futures daily closing price was below $14.00/bu 92.1% of the time and the December corn futures daily closing price was below $6.00/bu 85.1% of the time over the period considered.

    As of September 22, 2023, the December 2024 corn futures price was $5.07/bu and November 2024 soybean futures price was $12.56/bu. This is down substantially from recent highs, but at the mid to higher price in terms of historical price frequency. Weak US soybean export demand from China paired with record Brazilian soybean production has resulted in relatively lower futures contract prices for 2024. Corn has also had downward price pressure given a 15.13-billion-bushel 2023 U.S. crop, estimated US ending stocks of 2.22 billion bushels, and no indicators for significantly stronger corn demand in 2024.

    So how can these data guide a risk management decision? Consider a simple options fence strategy.  On September 22, an $11.40/bu November 2024 put option could be purchased for 31 ½ cents, and a $14.00/bu November 2024 call option could be sold for 35 ½ cents (net premium gain of 4 cents). This strategy sets a futures market price floor of $11.40/bu by setting a lower fence removing approximately 55% of the historical downside futures price risk at the cost of forgoing 7.9% (i.e., 100% – 92.1%) of the historical upside in futures prices by setting the upper fence (Figure 1).  Similarly, for corn, buying a $4.50/bu December 2024 put option for 16 ½ cents and selling a $6.00/bu December 2024 call option for 15 ½ cents (net premium expense of 1 cent) would set the lower fence at $4.50/bu – removing 55% of the historical downside futures price risk at the cost of forgoing 14.9% (100% – 85.1%) of the historical upside in futures prices due to the upper fence. Producers may want to examine risk management strategies that protect against downside futures market price risk at the cost of some upside potential. 

    Figure 1. November soybean closing futures price frequency, 11/1/09 to 9/15/23.

    *Futures price closes are for the November contract from November 1st to contract expiration for 010 to 2023 (September 22, 2023). 3,600 daily price closes.

    Figure 2. December corn closing futures price frequency, 12/01/09 to 9/15/23. 

    *Futures price closes are for the December contract from December 1st to contract expiration for 2010 to 2023 (September 22, 2023). 3,629 daily price closes.

    References and Resources

    Barchart.com. https://www.barchart.com/futures/grains?viewName=main

    Smith, Aaron. “Corn and Soybean Harvest Futures Contract Price Frequency.” Southern Ag Today 3(40.1). October 2, 2023. Permalink

  • What Does a Government Shutdown Mean for Farmers?

    What Does a Government Shutdown Mean for Farmers?

    As we approach the end of the U.S. government’s (USG) fiscal year, the probability of a government shutdown seems imminent. The USG has until tomorrow (September 30th) to reconcile differences in government spending before they ultimately shut down for an unknown period (Cassella, 2023). The issues arise in Congress where disagreements on government spending based on ideological lines have paralyzed the passing of funding bills needed to keep the government running beyond September 30, 2023. To avoid a government shutdown, Congress has several tools at its disposal, ranging from passing a short-term Continuing Resolution to passing all 12 appropriations bills (e.g., funding allocations for government agencies). Keep in mind that President Biden must also sign whatever Congress passes by the end of day on September 30th (Committee for a Responsible Federal Budget, 2023). Otherwise, a shutdown is nearly impossible to avoid. Incidentally, the 2018 Farm Bill also expires tomorrow. While we touch on that below, farm bill reauthorization is currently taking a backseat to efforts to fund the government.

    What does a shutdown mean for farmers?

    Besides a shutdown impacting everything from social security, national parks, and air travel, the agricultural sector may also be heavily affected. Namely, the Farm Service Agency (FSA), Natural Resources Conservation Service (NRCS) and Rural Development offices are expected to close (Bickelhaupt, 2023). For a producer who participates in government programs, these agencies likely will not hold sign-ups, accept acreage reports, or issue participation payments during this time. While the length of a government shutdown would ultimately determine the overall impact to the farm sector, folks expecting payments for participation and/or wanting to enroll in a new program will likely feel the impacts shortly after the shutdown. 

    What about farm bill expiration?

    Importantly, the prospect of a government shutdown and the expiration of the farm bill are two separate issues – they just happen to be occurring at the same time.  However, the difficulty incurred in avoiding a government shutdown further highlights the challenges Congress faces in reauthorizing the farm bill. For producers, the impact of an expiring farm bill would likely not be felt until early 2024, because the current programs like Price Loss Coverage (PLC) and Agriculture Risk Coverage (ARC) run through the end of this calendar year (Zimmerman, 2023). If farm bill expiration were to stretch into the New Year, USDA would need to pay out commodity price supports as laid out in the 1938 and 1949 Farm Bills; meaning, the USDA would be forced to purchase commodities such as milk, wheat, and cotton, at “parity prices” that are on par (in terms of purchasing power) with levels in the early 1900s (e.g., $50.70/hundredweight for milk based on May 2023 data). These price supports could mean that the U.S. government would “outbid” commercial markets and ultimately raise the price of retail commodities (Congressional Research Service, 2023). With respect to farm bill expiration alone, government programs such as SNAP (Supplemental Nutrition Assistance Program) and crop insurance would likely not feel the same impacts. SNAP is an appropriated entitlement, and Congress likely would continue funding SNAP via the appropriations process (although we discussed above how that process has unfolded this year) and thus could continue most programs. Crop insurance is permanently authorized and funded by the Federal Crop Insurance Act that does not expire with the 2018 Farm Bill (Congressional Research Service, 2023).   

    References

    Bickelhaupt, H. (2023, September 18). A Government Shutdown Could Impact Farmers. Retrieved September 20, 2023, from https://ilcorn.org/news-and-media/current-news/article/2023/09/a-government-shutdown-could-impact-farmers.

    Cassella, M. (2023, September 19). How a Government Shutdown Could Leave the Fed Flying Blind. Retrieved September 20, 2023, from https://www.barrons.com/articles/government-shutdown-fed-inflation-data-48058234?mod=livecoverage_web.

    Committee for a Responsible Federal Budget. (2023, September 5). Government Shutdown Q&A. Retrieved September 21, 2023, from https://www.crfb.org/papers/government-shutdowns-qa-everything-you-should-know#whatservicesaffected.

    Congressional Research Service (2023, August 21). Expiration of the Farm Bill. Retrieved September 20, 2023, from https://crsreports.congress.gov/product/pdf/R/R47659.

    Zimmerman, S. (2023, September 12). How the Looming Government Shutdown is Complicating the Farm Bill. Retrieved September 21, 2023, from https://www.agriculturedive.com/news/farm-bill-budget-government-shutdown-food-prices/693425/.

    Loy, Ryan. “What Does a Government Shutdown Mean for Farmers?” Southern Ag Today 3(39.5). September 29, 2023. Permalink