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  • A View of Cash Rents

    A View of Cash Rents

    Cash rents in 2021 have increased at a national average of 1.4% from 2020.  Agricultural land values have seen a similar pattern.  However, land values and cash rents may not necessarily reflect the same set of factors affecting the farm economy.  Cash rents will capture factors affecting returns to agricultural land (past, present and expectations of the future) while agricultural land values will also capture non-agricultural factors such as expected future land use pressures and land taxation which are decoupled from farm incomes. 

    Cash rents therefore will depend on indicators of expected returns to farming such as yields, soil quality, irrigation, crop choice, prices and farm policy.  Since a dip in farm incomes after 2012, cash rental rates at the national level have been relatively stable.  However, recent increases in farm income indicators have begun placing upward pressure on cash rental rates.  As the figure shows, not all locations or land use types experience this pressure similarly. For many Southern states, irrigation is becoming more common in row crop production and irrigated acres have seen the most significant upward trend in rents.  Changes to rents on non-irrigated acres were much less pronounced.

    As a tenant or landlord, negotiating what to pay/charge as cash rent can be a complex question. Maintaining good records of farm performance usually provides a good basis for starting, and a variety of income/expense driven formulas can be found to use as templates. The producer income approach, for example, takes expected revenue and subtracts expected costs to evaluate net returns available for rent. Most formula methods will require some assumptions about future revenue streams, which can be a drawback but allows for a relatively straightforward reference point from which to begin determining a final cash rental rate. While coffee shop market information about local rates can be helpful, it rarely tells the full story. Widely collected USDA data can describe trends, but doesn’t address specific attributes of a unique piece of farmland.  Don’t ignore any of these sources, but it is critically important to do the math with your own assumptions to determine what you can afford.  

    Citations:

    Fee, R. February 2011, “Seven Ways to Compute Cash Rent”. Successful Farming. https://www.agriculture.com/farm-management/farm-land/farmland-values-on-a-rocket-ship

    US Department of Agriculture, National Agricultural Statistics Service.  2021. QuickStats. September.  http://quickstats.nass.U.S.da.gov/

    Connor, Lawson. “A View of Cash Rents.” Southern Ag Today 1(45.3). November 3, 2021. Permalink

  • It’s Turkey Time! Gobble Gobble!

    It’s Turkey Time! Gobble Gobble!

    It’s that time of year where our attention turns to turkeys.  While the South is not normally thought of as a major turkey producing region, we are major eaters.  But, Arkansas and North Carolina are the second and third largest turkey producing states, respectively, according to NASS, USDA data. 

    Weekly turkey production is down about 5.5 percent for the year compared to last year.  But, as Thanksgiving has approached the production gap has closed a little, with production only trailing last year by 2 percent over the last 2 months.  Production, estimated to total 5.7 billion pounds is the smallest since 2015.  Struggling turkey demand over the last few years and higher feed costs over the last year have contributed to falling production.  Per capita consumption at 15.34 pounds in 2021 will be the smallest since 1987.  

    Tighter supplies have led to higher prices.  While USDA no longer reports retail turkey prices, the wholesale market provides an indication of prices for the holidays. Wholesale prices for frozen 8-16 pound hens and 16-24 pounds toms are 17 percent higher than those last year.  So, grocery stores will feel the pressure of higher prices and figuring out how much to pass on to their customers.  Turkeys are often used to sell the whole basket of Thanksgiving dinner items.  It appears that retail store featuring is starting to pick up, but price specials are lagging behind last year.  

    While stores aren’t likely to run out, it may pay to shop early this year, especially if there is a specific weight, brand, or fresh vs frozen bird you like the best.    

    Anderson, David. “It’s Turkey Time! Gobble Gobble!” Southern Ag Today 1(45.2). November 2, 2021. Permalink

  • Speculative Influence on ICE Cotton Futures

    Speculative Influence on ICE Cotton Futures

    Cotton futures, like many commodities, are subject to speculative buying and selling.  Participants in the futures market can buy or sell futures contracts with the anticipation of future prices rising or dropping. The most variable type of speculative buying is from so-called hedge funds, comprised mostly of managed private investment money. Hedge funds use various quantitative and other methods to position themselves for anticipated uptrends or downtrends in commodity markets.  Notwithstanding the validity of their technical indicators or buying rules, hedge fund buying appears somewhat influential on prices, particularly ICE cotton in 2021. 

    This is depicted in Figure 1 as the upward spikes in the green area, representing the excess of long ICE cotton contract positions (buying positions) held over short positions (selling positions) held.  These green peaks and valleys visually correspond to peaks and valleys in the pattern of nearby ICE cotton futures settlement prices as represented by the red line (Figure 1).  Statistically speaking, simple annual cotton futures price models can be specified to account for the influence of things like USDA’s projected ending stocks-to-use ratio, the speculative net position of hedge funds (in contracts), and outlier years like 2010/11.  The results of these types of models tend to project slightly less than a cent up or down, resulting from a 10,000 contract increase or decrease, respectively, in the hedge fund net long position.  In 2021, from early June to early October, the hedge fund net long position has risen almost 60,000 contracts, which is associated with about six cents of the 24+ cent upward move in ICE cotton futures since June.  (Note:  other potentially influential variables in 2021 include tightening fundamentals and increased index fund buying are not included in the analysis here).

    Whatever the quantitative influence of changing hedge fund positioning, it may be useful to take note of the short duration of fluctuations in hedge fund excess buying.  Figure 1 shows many instances of peaks in hedge fund buying that appear to last only a few weeks, as do the associated price rallies.  It seems impossible to predict the change in sentiments, animal spirits, model forecasts, technical indicators, and/or black swan events that will influence hedge fund managers’ positioning in ICE cotton.  So, whatever the influence of hedge fund buying on the cotton market, it is frequently a short-lived phenomenon.

    Figure 1. Weekly net position of hedge funds in ICE Cotton Futures and Options (green area) and daily nearby ICE Cotton Futures settlement price (red line). The left vertical axis represents the net position of hedge funds, and the right vertical axis represents the price for the ICE cotton futures settlement prices. 

    Source: Commitment of Traders Supplemental Report (Futures and Options)

    Robinson, John. “Speculative Influence on ICE Cotton Futures.” Southern Ag Today 1(45.1). November 1, 2021. Permalink

  • Update on Waters of the United States

    Update on Waters of the United States

    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

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

    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