War has contributed to cattle market uncertainty and sharply higher feed costs, record-high cattle on feed, and falling cutout values have hit heavy feeder prices hard. But, cull cow prices have continued to skyrocket since the beginning of the year, shooting past $75 per cwt in the Southern Plains. A year ago, 85-90% lean cull cows averaged about $46 per cwt.
Cow prices are increasing in spite of large cow slaughter. Cow slaughter during the first two weeks of February totaled 145,000 head, or more, per week. That is the largest weekly slaughter since December 2012. Beef cow slaughter is extremely large, rivaling peak Fall slaughter levels. This large beef cow slaughter is coinciding with seasonally large dairy cow slaughter, which typically peaks early in the year.
High cow beef prices are providing some insight into beef demand. Both the cow beef cutout and the wholesale 90 percent lean beef for ground beef are well above a year ago, at $229 and $284 per cwt, respectively. But, wholesale middle meat prices have dropped in recent weeks with both wholesale ribeye and strip loin prices lower than last year. Consumers may be shifting purchases to more ground beef and fewer steaks in response to high retail prices.
Increasing milk prices should slow dairy culling in the coming weeks. Beef cow culling is going to be greatly influenced by drought and costs. The rate of culling over the last year should have already moved older, less productive cows. Reduced dairy culling should pull down total cow slaughter and support prices in the coming weeks.
Global commodity markets have been affected by the Russian invasion of Ukraine on February 24, 2022. Energy prices have skyrocketed. The American Automobile Association estimated the national average gas price in the United States at $4.32/gallon on March 10. Implications of the conflict are far reaching, affecting nearly all aspects of the global economy. Agricultural producers have been affected on two fronts, input prices (fuel, fertilizer, etc.) and commodity prices (wheat, corn, and soybeans). The focus of this article is the impact on grain and oilseed markets and marketing tools that producers may want to consider to help mitigate price risk.
Ukraine is an important producer and exporter of wheat, corn, barley, and sunflower seed products. Table 1 shows Ukraine’s share of world production and their share of world exports for these commodities. While Ukrainian corn represents only 3.5% of world production, it accounts for 13.8% of world exports. Meanwhile, Ukraine produces almost a third of the world’s sunflower seed, which is then turned into about half of the world’s meal and oil exports. Sunflower seed oil production and exports in Ukraine have some ramifications for soybean oil and soybean prices as imperfect substitutes.
Table 1. Ukraine’s Share of World Production and Exports for Select Commodities, 2021/22
Volatility in corn, wheat, and soybean futures markets have been extreme (Figures 1-3). For example, daily price changes for July wheat for the past ten trading days have been: -75, 67, 50, 74.25, 75, 59, 77.25, -57.25, -85, and -67.5 cents. Extreme volatility can make marketing decisions challenging and potentially expensive. However, volatility also often provides opportunities for profit. Three months ago, every farmer would have jumped at the ability to sell wheat futures at $9.00; now farmers can set a futures price floor at $9.62. Purchasing put options is expensive – $1.48 for an at-the-money put as of March 9. However, with a gap between the fall crop insurance price of $7.14 and current market offerings of $11.10, taking some additional downside risk off the table while leaving the top side open is a prudent move.
Corn and soybean projected crop insurance prices were set 10 days ago at $5.90 and $14.33, respectively. Harvest futures prices on March 10 were $6.50 for corn and $14.95 for soybeans, an increase of 60 and 62 cents, respectively. Producers should be asking themselves at what point they should take some additional price risk off the table. Being too aggressive with setting prices (i.e. cash forward contracts and short hedges) should be approached cautiously as producers need to avoid exchanging price risk for production risk or selling their way out of a bull market. However, managing the downside price risk should be on every producer’s mind, particularly with input prices at elevated levels.
Grain and oilseed markets are likely to remain unpredictable, due to uncertainty generated from the Russia-Ukraine conflict. Producers should consider how much of the 2022 crop they are comfortable pricing at this point in the year and how they can protect the downside of this market while keeping the upside open. Options strategies will be expensive but should be fully explored based on current market conditions.
Figure 1. Daily July Wheat Futures, January 3 to March 10, 2022
As a result of COVID-19 grocery store shortages, federal and state governments are investing in local food systems with meat processing high on the list. However, once local meat processing bottlenecks have been relieved, additional obstacles will need to be overcome. Clemson surveys of consumers and restaurants in 2020 and 2021 reveal that additional obstacles for increasing local meat sales are availability, price, and inconsistent quality1.
A lack of availability points out that there are not enough sales outlets for local meats and purchasing local meats is often inconvenient for potential customers. For instance, most local meat consumers visit a farmers’ market once a month2 yet shop at a grocery store 2-3 times per week3. Even the most dedicated local food consumer sources less than 50% of their groceries from local producers4. For local meats to grow long-term, producers must work together to supply grocery stores and restaurants while addressing the remaining issues of quality inconsistency and price.
One of the best ways for farmers to work together is to form a cooperative or similar collaborative business arrangement. Through collaborative business arrangements, local meat producers can adopt quality guidelines, provide a consistent supply to more sales outlets, and operate at a more efficient scale (possibly becoming more price-competitive). In short, business collaborations will give local meat producers a shot at gaining and maintaining a competitive position in the market.
For more information about cooperatives and collaborative business formation, contact a land grant university or cooperative development center in your region. Contact information for USDA rural cooperative development centers can be found at this link:
Richards, S. (2021). National Restaurant Buyer Survey Results. Clemson University (Unpublished report). Copy in possession of the first author.
Richards, S. (2020). Local Meat Consumer Survey Results. Clemson University (Unpublished report for Berkeley Electric Cooperative and the South Carolina Cattlemens’ Association). Copy in possession of the first author.
Ver Ploeg, M., Larimore, E., & Wilde, P. (2017). The Influence of Food Store Access on Grocery Shopping and Food Spending. ers.usda.gov
Cicatiello, C. (2020). Alternative food shoppers and the “quantity dilemma”: a study on the determinants of their purchases at alternative markets. Agricultural and Food Economics, 8(1). https://doi.org/10.1186/s40100-020-00160-6
The Russian invasion of Ukraine has impacted financial and energy markets, as well as agricultural markets, increasing price volatility for major commodities. Russia and Ukraine are not major markets for US agricultural exports, ranking 56th and 80th, respectively. Before 2014, when Russia invaded Crimea, US exports of agricultural products ranged between $1.2 to $1.7 billion annually. Afterwards, US agricultural exports to Russia have been around $250 million annually, with animal products (e.g., beef, poultry) taking the largest hit (USDA, 2022). Moreover, neither Russia nor Ukraine are major exporters of agricultural products to the US; the US ranks 55th and 53rd, respectively. That said, both Russia and Ukraine are major players in the international wheat and corn markets. In 2020, Russia was the largest wheat exporter reaching almost $8 billion, while Ukraine was fifth with almost $3.6 billion in wheat exports. Moreover, Ukraine is the fourth largest corn exporter reaching almost $5 billion, while Russia is the 11th with $400 million in 2020 (UN Comtrade, 2022). Since Russia and Ukraine’s marketing year ends at the end of May, the impacts of the Russian invasion on their wheat and corn exports this marketing year could be minimal. On the other hand, it is unknown the extent of infrastructure damage for hauling and shipping, or the impact of shipping restrictions in the Black Sea that could slow down or increase the cost of trade. Finally, Russia accounts for 14 percent of the world’s nitrogenous fertilizer exports and is the leading supplier of urea to the US. Additionally, Russia and Belarus accounts for about 20 percent of US potash imports (USDA, 2022). The sanctions again Russia and Belarus (for supporting the Russian invasion) could hurt US agricultural producers as they are already experiencing record high fertilizer prices.
Determining what to pay or charge for custom rates is a challenge in normal years. There is very little publicly available data on custom rates, and though many universities publish surveys of custom operation rates, they usually aren’t updated every year.
This year, rapidly rising input costs will likely compound the already challenging process of agreeing on what to pay for custom operations. However, we can estimate approximately how much we expect custom rates to increase based on the change in costs for two critical inputs: fuel and labor. Combined, these two inputs represent approximately 25% of the cost of field operations during an average year, with overhead (repairs, maintenance, depreciation, transportation, etc.) representing the other 75%.
Restructuring the economy post-COVID-19, supply chain disruptions, and mass movement of workers around the country all led to rapidly rising wages in 2021. The Bureau of Labor Statistics (BLS) reports that the cost of employment rose approximately 4.5% across the board and approximately 4.3% for farming occupations in 2021. Surveys of private firms suggest they are planning for wages to rise 3% to 5% in 2022; a nominal increase that does not keep up with the current rate of inflation, meaning that real wages would be down. On its own, a 5% increase in wages would represent a 1% change in the cost of custom operations to maintain profit margins, on average.
As recently as December 2021, the Energy Information Administration (EIA) forecast a modest increase in the average annual cost of WTI Crude from $68/barrel in 2021 to $73/barrel in 2022. However, cash WTI Crude is currently trading at $115/barrel. The recent war in Ukraine and Russia’s role in the global energy market led to a two-week spike in the price of WTI Crude, up from $90/barrel to $115/barrel. If prices remain at approximately $115/barrel, (many economists assume it will get more expensive before it gets less expensive) it will represent a 70% increase in the cost of crude over the 2021 average price. On its own, a 70% increase in the cost of fuel represents a roughly 10% increase in the cost of custom operations on average.
The table below shows the expected change in the cost of custom operations as a function of different WTI Crude values. The February EIA Short Term Outlook (which was published prior to the Russian invasion of Ukraine) placed the 95% confidence bounds on 2022 forecasted average price of WTI Crude at $40/barrel and $60/barrel. The cost of fuel and labor account for a different percentage of each custom operation’s cost, so the change in the cost of fuel impacts each category differently. If the cost of fuel remains at $115/barrel and wages do increase 5% year over year, we can expect all custom operations to cost 10% more than in 2021, with the cost of grain harvest up 10%, the cost of tillage up 12%, the cost of planting up 8%, the cost of chemical and fertilizer application up 6%, the cost of forage harvest up 19%, and the cost of hay baling up 12%. If you don’t utilize custom operators, you may also view these figures as the expected increase in cost to conduct these operations yourself.
Change in Cost of Custom Operations, 2021-2022, based on Different WTI Crude Prices and 5% Wage Increase
