AFPC network

The Agricultural & Food Policy Center network

Update on Waters of the United States

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For decades, there has been contentious debate surrounding the meaning of a seemingly simple phrase in the Clean Water Act (CWA), “waters of the United States.”  This phrase describes the scope of federal jurisdiction under the CWA but is not statutorily defined.  In 2015, the Obama administration promulgated the WOTUS Rule.  The Trump administration then replaced the WOTUS Rule with the Navigable Waters Protection Rule in 2020.  Both the Obama and Trump Rule faced a flurry of lawsuits filed across the nation. 

A recent decision from the United States      District Court for the District of Arizona has vacated the Trump administration’s Navigable Waters Protection Rule, meaning it is no longer in place.  This triggered the Environmental Protection Agency to announce that it has “halted implementation of the Navigable Waters Protection Rule.”  The EPA and US Army Corps of Engineers are currently interpreting “waters of the United States” consistent with the pre-2015 regulatory approach.  

The EPA Administrator, Michael Regan, has announced that the agency  promulgate its      definition, which will differ from both the Obama WOTUS Rule and Trump Navigable Protection Rule.  The EPA plans to release their proposed rule for comment in November.  To read more, click here. 

Dowell Lashmet, Tiffany. “Update on Waters of the United States.” Southern Ag Today 1(44.5). October 29, 2021. Permalink

US Agricultural Market Shares Fall, Despite US-China Trade Increasing in 2021

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Less than three months remain in the US-China Phase One Trade Agreement. Although China’s purchases of US exports overall are projected to fall short of the two-year, $200 billion target (Bown 20211), China’s purchases of US agricultural products have steadily increased. An important question, however, is whether increased Chinese imports from the US has translated into actual gains in US market share, relative to the 2017 pre-trade war benchmark? This figure plots changes in US trade values against changes in US market shares in 2021 (Jan-Aug) at the product level relative to the same period in 2017 (Jan-Aug). US corn exports are the big winner, with exports to China increasing over $3.5 billion compared to 2017, coupled with a nearly 40%-point gain in the US corn market share in China. US beef and poultry  exports to China also gain in value and market share thanks to the easing of China’s non-tariff prohibitions. 

However, for a number of product categories, increasing Chinese imports from the US (moving east on x-axis) have not translated into market share gains relative to 2017 (moving north on the y-axis). US exports experiencing higher trade with China but a declining market share include pork, wheat, grain sorghum, feed and fodder, cotton, and to a lesser extent, soybeans, dairy, and tree nuts. Thus, for many US agricultural products, China’s increased year-to-date import values in 2021 has not necessarily resulted in higher US market share in China. Overall, US agricultural and seafood exports to China are up $7.4 billion through August 2021 relative to the same period in 2017, but down 4.8 percentage points in market share. Relatively speaking, this perplexing drop in agricultural and seafood market share suggests China is actually importing more from the rest of world compared to its imports from the US under the Phase One Trade  Agreement. 

Year-to-date (Jan.-Aug.) trade value and market share changes for US ag exports to  China by-product: 2017 versus 2021

Grant, Jason H. . “US Agricultural Market Shares Fall, Despite US-China Trade Increasing in 2021.” Southern Ag Today 1(44.4). October 28, 2021. Permalink

Cost-Plus Pricing?

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Interest rates and the cost of interest isn’t always the first thing on producer’s minds. However, interest expense can be a significant outlay. Headlines about historically low-interest rates, and even zero interest rates in some countries, may lead to the expectation that interest costs may be lower than what is reality. The graph shows that interest rates have come down from the near-term high in the second quarter of 2019.  While current rates are at a 20-year low, they are not that different from rates seen over the last 10 years. 

One might wonder why interest rates on loans hover around 5% when the Fed Funds Rate is currently at  0.25%. The Fed Funds Rate is set by the Federal Reserve as the rate at which banks can borrow money from each other overnight, and the rate serves as a benchmark for short-term interest rates. The answer can be found in a fairly common loan pricing strategy called cost-plus pricing. This method builds loan pricing  (interest rate) from the ground up. It starts with the cost of obtaining loanable funds which can be the price paid on deposits or other means of obtaining loanable funds. To this cost has added the cost of servicing the loan (processing, salaries, etc.), a risk premium to account for the risk of default, and a profit margin. When all four parts of pricing are taken as a whole, the market equates a near-zero fed funds rate to about 5% cost of funds for Agriculture.  

Citations:

Federal Reserve Bank of Dallas. 2021. Agricultural Survey. Octoberhttps://www.dallasfed.org/research/surveys/agsurvey/2020/ag2002.aspx#Data

Board of Governors of the Federal Reserve System. July 2021. “Open Market Operations.” Policy Tools. https://www.federalreserve.gov/monetarypolicy/openmarket.htm

Diette, Matthew D. November 2000. “How do lenders set interest rates on loans?” Federal Reserve Bank of Minneapolis. https://www.minneapolisfed.org/article/2000/how-do-lenders-set-interest-rates-on-loans

Knapek, George. “Cost-Plus Pricing?” Southern Ag Today 1(44.3). October 27, 2021. Permalink

Strong Meat Export Totals in 2021

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The latest estimates for meat trade were recently released by USDA ERS. These estimates include export and import data across many different meats including beef, pork, and broilers during the month of August. This article highlights beef export data as each sector is on track for record or near-record export totals in 2021.  

Beef exports set a record at 325 million pounds during August and were 21 percent higher than in August  2020. Japan was the largest volume destination for beef exports during August followed by South Korea and  China. The year-over-year increases in beef exports to China have been large throughout 2021 as shown in the chart above. Exports to Hong Kong have declined. Combined, year-to-date beef exports to China and Hong  Kong are 163 percent above 2020 levels. 

Pork exports during August were about the same as during August 2020. However, there were big shifts in volumes to particular destinations. Pork exports to China (the third largest volume destination) during August were 49 percent lower than during August 2020. However, exports to Mexico were 50 percent higher which offset the declines to China. Mexico was the largest volume destination during August followed by Japan. 

Broiler exports were up 5.5 percent above August 2020. The biggest increases were in exports to Mexico (up  22 percent) and Cuba (up 80 percent) from August 2020. These countries were the top two export destinations during August. 

 

Maples, Josh. “Strong Meat Export Totals in 2021.”. Southern Ag Today 1(44.2). October 26, 2021. Permalink

What’s Driving Soybean Value: Meal or Oil?

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Soybean value is derived from two products: oil and meal. In general, a 60-pound bushel of soybeans produces 48 pounds of soybean meal and 11 pounds of soybean oil with 1 pound of processing waste. To estimate crush margin, the following calculations can be used: 

Soybean meal value ($/bu) = Soybean meal price ($/ton)/2,000 x 48 lb/bu[1]

Soybean oil value ($/bu) = Soybean oil price (cents/lb)/100 x 11 lb/bu

Crush margin ($/bu) = (Soybean meal value + Soybean oil value) – Soybean price ($/bu)

The crush margin is an estimate of gross margin for a soybean processor and can be used as an indicator of profitability. Figure 1 depicts the monthly nearby soybean futures price and the monthly crush margin. Since January 2006, the average futures market crush margin has been $1.46/bu with a minimum of $0.90 and a maximum of $3.18. As of October 13, 2021, the crush margin was $2.08 indicating an above average gross margin or an incentive to crush (this may be partially diminished due to increased costs to operate soybean crush facilities due to COVID-19 and labor/logistical issues). 

But what is driving this incentive? Looking at the data shows that the percent of value derived from meal and oil changed in April 2021. For the first three months of 2021, soybean meal was 65% of the soybean value, the same as the January 2006 to October 2021 average. However, since April this ratio has moved in favor of oil with the October 2021 estimate of 54% of soybean value attributed to meal and 46% to oil (Figure 2). There are two primary reasons for increased soybean oil value. First, increased vegetable oil demand and lower stocks are causing the number of global days-on-hand (stocks divided by daily average consumption) to drop from 41.7 days in the 2020/21 marketing year to 38.5 days projected for the 2021/22 marketing year. The second factor is current and potential demand for biodiesel derived from soybean oil. Energy prices have risen dramatically this year, and the federal government has emphasized continued development of biodiesel as a renewable fuel.

So, what does this tell us about prices? Soybean meal futures prices have declined since the start of the year, dropping from $417.60/ton in January 2021 to $312.90/ton in October 2021. Conversely, soybean oil futures have increased from 44.62 cents/lb to 58.62 cents/lb. Over the same time, soybean futures have dropped from $13.70/bu to $11.88/bu. While strong demand for soybean oil has helped support soybean prices, it is likely that soybean meal will drive prices and gross returns to farmers moving forward.  As such, even if soybean oil prices continue to strengthen, the soybean meal market will likely need to establish a floor (or increase in value) for soybean prices to resume a strong upward trend.

Figure 1. Monthly Nearby Soybean Futures Contract Price and Crush margin, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

Figure 2. Meal and Oil Value per bushel of Soybeans, January 2006 to October 2021 (Calculated based on futures data from: barchart.com)

[1] There are two common approaches to estimating the quantity of soybean meal: (1) the one depicted above, 48 lbs of soybean meal at (44% protein) or (2) 44 lbs of soybean meal (48% protein), which is used by CME group.

Smith, Aaron. “What’s Driving Soybean Value: Meal or Oil?” Southern Ag Today 1(44.1). October 25, 2021. Permalink