Even as we are in the middle of the heat of summer, contract poultry growers should be concerned about fuel prices going into this winter. Propane prices have remained at a high level through the spring and into the summer. Looking ahead, evaluating the world market demand for energy and current US inventories suggests that prices could increase drastically. According to an analysis by Propane Resources LLC, a leading US propane marketing company, growers should expect a very volatile six to nine months in propane prices. Much of this will be driven by a very active European market with much instability being caused by the Ukrainian conflict, which is stifling natural gas trading. To help fill that void, sellers of liquid natural gas that would normally supply Asia are rerouting that LNG to a European market. That LNG will likely be replaced in Asia by propane.
As supply and demand for propane becomes an even more global market, a look at the current and projected US propane inventory for 2022-23 does not give one a good feeling for the upcoming winter’s prices, or even into next spring. The current peak projected inventory for the US comes in at about 3.25 billion gals, and drops off from there, staying at or below the historical monthly minimum inventory over the last five years. This simply means that the supply of propane does not look to be ample for the next several months. For poultry growers, this means the time to secure future pricing is now. Waiting around for a mid-summer price drop will likely mean you will be paying more, not less, for your propane this winter.
Producers face risks every growing season. Production risks, such as extreme weather and drought, affect yield. Marketing risks, including price direction and volatility, is affected by global supply and demand. Developing strategies that use crop insurance in conjunction with options can be an effective way to manage marketing and production risks within the growing season for row crop producers.
Annually, Federal crop insurance provides over $100 billion in total liability protection (RMA, 2022). Many crop insurance products and features are available to producers; however, three popular crop insurance types are yield protection (YP), revenue protection (RP), and revenue protection with harvest price exclusion (RP-HPE). YP offers protection against declines in yield, whereas RP and RP-HPE offer protection against declines in revenue (yield and price). To calculate the insurance guarantee, RP policies use the greater of the projected or harvest crop insurance price while RP-HPE utilizes only the projected price. It is important for producers to consider the in-season price protection offered by the type of crop insurance policy and buyup coverage level as well as the price risk exposure throughout the growing season. Considering price risk exposure throughout the growing season introduces the opportunity for using crop insurance products in conjunction with other risk management tools such as futures and options.
Options can be used during the growing season to establish a futures price floor greater than the projected price in the crop insurance policy. Buying options allows producers to obtain the right, but not the obligation, to establish a position in the futures market at a specified strike price. The cost to purchase the option is the premium. As such, the strike price minus the premium establishes a futures price floor for the bushels protected. Figures 1, 2, and 3 show the daily December corn futures contract closing price, the projected crop insurance price (for Arkansas the projected price discovery period is January 15 to February 14 (Table 1); projected price discovery periods vary by state), and the put option floor (strike price minus the premium) that could have been established when the market peaked during the 2020, 2021, and 2022 growing seasons. In 2021 and 2022, purchasing a put option was an effective method to establish a futures market price floor above the projected price provided by crop insurance. In both years, the price floor established with the option contract also exceeded the harvest crop insurance price (Table 1). However, each year presents different market opportunities. In 2020, no opportunity was presented to establish a futures market price floor through put option purchases above the crop insurance projected price – the December corn contract declined after the projected price determination period and remained flat through most of the growing season.
Take Aways
Producers should consider utilizing marketing tools that work in conjunction with crop insurance during the growing season.
In-season marketing opportunities can be short lived, so action should be considered when opportunities are presented.
Each marketing year is different, presenting unique challenges and opportunities. Knowing how to use numerous marketing tools (options, futures, hedge-to-arrive (HTA’s), forward contracts, basis contracts etc.) allows producers to select the tool that is best suited to provide in-season price protection.
Figure 1. Projected Crop Insurance Price, December Corn Price, and May 20th Option Floor, 2022
Figure 2. Projected Crop Insurance Price, December Corn Price, and May 7th Option Floor, 2021
Figure 3. Projected Crop Insurance Price, December Corn Price, and February 21st Option Floor, 2020
Table 1. Projected and harvest crop insurance prices for corn (Arkansas), 2020-2022
Using social media content to grow an agribusiness should not be a mystery, but for most, it is. Often, the problem is that the content produced does not grab followers’ attention. When that happens, followers ignore the content.
But recent research shows how to create social media content to get attention and engagement. The solution is to avoid critical mistakes when creating content (Barnes, 2020).
One common mistake is agribusiness companies don’t explain that they solve a specific problem for customers. How do you write this type of content? Here’s an example post from a Mississippi agribusiness company calledHogEye Trap Cameras. This Facebook post reached more than 10 million followers:
Are you frustrated because you can’t stop feral hogs from destroying
your land, property, and habitat?
Now let’s see why the post attracted attention and engagement. [Frustrated] is the negative feeling landowners have. {Can’t stop feral hogs} is the problem. [Destroying your land, property, and habitat] are the economic losses. In a few words, this post asks landowners if they have this problem. If they do, they will keep reading. The rest of the post highlighted the solution this company sells and the savings that will accrue if customers buy, namely the economic value of stopping feral hog damages.
Talk about the problem you solve for your customers. It’s the easiest way to hook followers’ attention.
Want to learn how to avoid more mistakes and create social media content to grab your followers’ attention? Access the marketing resources provided by the Bricks-To-Clicks® Marketing Extension Program at Mississippi State University, including Dr. James Barnes’ new book and courses, or listen to the podcast. Get more customized help here.
References
Barnes, J. 2020. 5 Social Media Mistakes Your Business Should Avoid: A Step-By-Step Guide to Help You Grow Your Business [Amazon Kindle & Audible]. Mississippi State University Extension.
The Risk Management Agency (RMA) is responsible for rating crop insurance in an actuarially sound way. Unlike private insurance companies, RMA is not driven by profit when determining rates. Premium rates do not include the cost of sales, underwriting, loss adjustments, or the operating costs of RMA. Legislative language instructs that “the amount of the premium shall be sufficient to cover anticipated losses and a reasonable reserve[1].” RMA considers actual production history in the rating process, and rates are established independently of crop and geographic region. The loss experience of rice is not a factor when developing a premium rate for corn. Likewise, the loss experience of corn in Mississippi is not a factor when developing a premium rate for corn in Illinois.
The politics of crop insurance comes into play with the premium subsidy percentage amounts set by policy. Subsidy percentages are equitable across all crops, though, with each crop receiving the same subsidy percentage dependent on coverage level and unit choice. Total acres insured, coverage level, and premium rates all factor into the total amount of subsidies received by a crop. As seen in Figure 1., corn has received a total of $24.6 billion of crop insurance subsidies in the past decade, followed by soybeans at $14.9 billion. Rice and peanuts have total subsidy amounts of $617 million and $424 million, respectively, over the past decade.
Crop insurance performance is often judged by loss ratios. A loss ratio is simply calculated as indemnity payments divided by total premium. A loss ratio of 1.0 means that indemnity payments equaled total premiums. A loss ratio greater than 1.0 means indemnity payments exceed premiums, and a loss ratio less than 1.0 means total premiums exceed indemnity payments. The Risk Management Agency (RMA) is statutorily mandated to achieve a target loss ratio of 1.0. While loss ratios can fluctuate year-to-year, the national and crop-specific ratios have been trending down since 1989, as seen in Figure 2. Interestingly, many crops have trended down at similar rates. Rice, cotton, wheat, soybeans, and the national total have similar sloping trend lines. Corn has trended down but at a slower rate than the previously mentioned crops. Peanuts have seen the most dramatic decrease in the trend of any crop.
Figure 1. Total 10 Year Subsidy Amount by Crop, 2013-2022
[1] Coble, K. H., Knight, T. O., Goodwin, B. K., Miller, M. F., Rejesus, R. M., & Duffield, G. (2010). A comprehensive review of the rma aph and combo rating methodology: Final report. Prepared by Sumaria systems for the risk Management agency.
Large-scale ecosystem benefits tend to drive policy interest in cover crops. However, incorporating cover crops in a farm management plan will also require them to generate on-farm returns. To date, findings of their ability to generate profits have been mixed with inconsistent results across several studies. However, returns in a broad sense of cover crops include potential impacts on risks in addition to their effect on profits. A year of substantial loss savings can offset or justify years of minimal to slightly decreased net profit outcomes. Especially true in areas where crop prices are countercyclical to yields. Therefore, if or how cover crops help manage risk is an important consideration for their inclusion in a farm management plan.
Cover crops and their ability to reduce soil erosion and provide increased root infiltration into the soil have been studied in the context of managing specific risks, extreme wet and extreme dry (drought) conditions. Roughly 83% of total crop insurance losses in the Mid-South were related to one of these two events with 70% being excess moisture related and the majority of those from prevented planting. Regarding extreme moisture risks, most studies indicate that cover crops reduce crop damage under specific conditions. Where nutrient leeching is an issue, which may be a feature on some irrigated fields, cover crops, particularly grass cover crops, have been found to reduce corn yield losses during extreme moisture events because of higher available carbon during the growing season. A study in Northeast Mississippi showed reduced effects of excess moisture in corn-soybean rotation fields. However, some studies also show that cover crops can create early season planting challenges getting the cash crop planted in wet fields. The additional time required to terminate the cover crop may not allow sufficient time to get the cash crop planted and established. This is especially true in conventional tilling systems and where planting green (planting the cash crop in a living cover crop) is not possible.
In NRCS Zone 4 cover crop regions, the effects of cover crops in drought conditions seemed to be more consistent. The findings suggest that cover crops reduced soil compaction, increased root infiltration, and in general, led to increased water availability for the cash crop, reducing drought damage. More studies are needed in the mid-south, but a few studies observing farmers in the Midwest during the 2012 drought saw farms with cover crops experiencing an eleven (11) percentage point increase in yields relative to farms without cover crops.
Overall, cover crops show potential for risk management, particularly for managing drought risk. However, outcomes appear to be highly related to the suite of management practices on the farm, such as the cover crop variety used, whether combined with no-till, the ability to plant green, and the planting dates of the cash crop in question. In the mid-south, a cover crop before planting cotton or soybeans may be more feasible than a cover crop before planting corn when considering planting dates and early season weather risks. Nevertheless, where risk management rather than yield is the goal, a conversation with a local agronomist may help determine whether cover crops may be a good consideration as a long-term risk management tool on your farm.
Mid–South Causes of Indemnities Crop Insurance: 2015 – 2020
Source: RMA Summary of Business
References:
Bergtold, J., Ramsey, S., Maddy, L., & Williams, J. (2019). A review of economic considerations for cover crops as a conservation practice. Renewable Agriculture and Food Systems, 34(1), 62-76. doi:10.1017/S1742170517000278
Bharat Sharma Acharya, Syam Dodla, Lewis. A. Gaston, Murali Darapuneni, Jim J. Wang, Seema Sepat, Hari Bohara, Winter cover crops effect on soil moisture and soybean growth and yield under different tillage systems, Soil and Tillage Research, Volume 195, 2019, 104430, ISSN 0167-1987, https://doi.org/10.1016/j.still.2019.104430
Blanco-Canqui, H., Shaver, T.M., Lindquist, J.L., Shapiro, C.A., Elmore, R.W., Francis, C.A. and Hergert, G.W. (2015), Cover Crops and Ecosystem Services: Insights from Studies in Temperate Soils. Agronomy Journal, 107: 2449-2474. https://doi.org/10.2134/agronj15.0086
Chalise, K.S., Singh, S., Wegner, B.R., Kumar, S., Pérez-Gutiérrez, J.D., Osborne, S.L., Nleya, T., Guzman, J. and Rohila, J.S. (2019), Cover Crops and Returning Residue Impact on Soil Organic Carbon, Bulk Density, Penetration Resistance, Water Retention, Infiltration, and Soybean Yield. Agronomy Journal, 111: 99-108. https://doi.org/10.2134/agronj2018.03.0213
G.S. Marcillo and F.E. Miguez, Corn yield response to winter cover crops: An updated meta-analysis, Journal of Soil and Water Conservation May 2017, 72 (3) 226-239; DOI: https://doi.org/10.2489/jswc.72.3.226
