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  • The Silly Season Has Begun…Must Be Farm Bill Time

    The Silly Season Has Begun…Must Be Farm Bill Time

    When the Agriculture Committees and their staff begin working on a farm bill, like clockwork, experts from around the country, including us, put out information intended to help inform the process.  Every farm bill cycle, we run across a report or research geared toward the next farm bill that, while what the authors did and said isn’t technically wrong, boy does it leave out something kind of important…hence the term “Silly Season.”

    The article that caught our eye this time is titled “State Shares of US Commodity Program Payments: 2002–2021” by Zulauf, et al., written for farmdoc.[1]  The authors summarize their paper with the following:

    “Payments are compared to the value of all field crop production. One would expect payments to be proportional to value of production. In general, commodity payments follow farm production, but exceptions exist. States whose share of commodity payments are higher (lower) than their share of field crop production tend to be in the South (Midwest).”

    When looking at the share of commodity payments relative to the share of the value of crop production, the South does receive proportionally more payments than the Midwest.  The implication is that Southern farmers are provided significantly more benefits than the value of their crops would imply is needed.  The problem is the report leaves out one word that we think should have been included: ethanol.

    The biofuels blending mandates contained in the Energy Policy Act of 2005 (EPA of 2005) and the Energy Independence and Security Act of 2007 (EISA of 2007) dramatically changed the value of corn production in the United States.  See the SAT article from April 14, 2022, for more information on these two acts.  Overnight, this effectively created a new demand for biofuels – and therefore corn – leading to a significant increase in price and the quantity of corn diverted to ethanol production (Figure 1).  The blue line indicates the share of total corn supply going to industrial uses…namely ethanol.  The red line indicates what happened to corn prices when the ethanol mandate took effect.

    All corn producers have benefitted greatly from the ethanol mandate.  While there are definitely spillover effects on some other crops resulting from ethanol policy, leaving out the effect of ethanol when discussing proportional shares of farm program payments is misleading.  As Paul Harvey was fond of saying: “now you know…the rest of the story.”  

    Figure 1.  Share of Total Corn Supply Utilized in Food, Alcohol and Industrial Use and Marketing Year Average Corn Prices, 1973 to 2022.

    Compiled from USDA-WASDE and USDA-NASS data

    [1]

     Permalink: https://farmdocdaily.illinois.edu/2023/05/state-shares-of-us-commodity-program-payments-2002-2021.html

    Outlaw, Joe, and David Anderson. “The Silly Season Has Begun… Must Be Farm Bill Time.” Southern Ag Today 3(21.4). May 25, 2023. Permalink

  • Prevented Planting and APH Reductions After Planting a Second Crop

    Prevented Planting and APH Reductions After Planting a Second Crop

    Commercial row crop production faces many risks that may result in actual harvest yields falling below yield expectations. Historical data from the USDA-RMA Cause of Loss indicate excess moisture and drought are the top weather risks faced by producers nationwide. In the mid-south, excess moisture early in the season is a prevalent risk affecting planting decisions (USDA-RMA, 2023). Producers with wet fields may be forced to plant later than anticipated, plant an alternative crop (e.g., soybeans), or forego planting altogether. If a producer is forced to forego planting altogether, not only will the producer experience the loss in revenue expected from harvesting the crop, but they also bear the cost associated with land preparation prior to the prevented planting. The prevented planting provision of federal crop insurance helps producers to reduce the financial uncertainty of navigating early season planting risks. 

    The prevented planting provision is unlike other crop insurance provisions since indemnities paid to producers are not intended to cover yield losses, but rather the sunk cost required to have land prepared for planting and, to a certain extent, the cost of invested capital needed for crop production. An insured producer is eligible to make a prevented planting claim if they are unable to plant a crop before the final planting date[1], which varies across counties and crops (USDA-RMA, 2021a). A producer will receive 100% of the prevented planting indemnity on the first insured crop if a second crop is not planted or if a cover crop is planted but not harvested for grain or seed. A producer may also receive the full prevented planting indemnity if the subsequent cover crop is grazed, cut for silage, hayed, or baled (USDA-RMA, 2021b).

    Importantly, the prevented planting indemnity itself does not affect a producer’s Actual Production History (APH), the 10-year average of an insured unit’s yields. However, the APH will be adversely impacted if a second crop is planted, grown, and harvested following the prevented planting claim of a first insured crop. If the producer decides to plant a second crop after the late planting period[2] of the first crop, the prevented planting indemnity is reduced to 35% of the full prevented planting payment, and the producer receives a yield of 60% of APH of the first crop to be included in future APH calculations (USDA-RMA, 2021a). Using long grain rice as an example, Figure 1 demonstrates how planting a second crop following a prevented planting claim can affect a producer’s APH over time. 

    Beginning with the Jackson County, AR, 2023 average APH for rice of 70.33 cwt/acre, Figure 1 shows that if insured rice is prevented from planting and a second crop for harvest is planted, the unit’s APH will be reduced by 4%. Figure 1 further shows that consecutive years of planting a second crop following prevented planting can have a compounding effect. If a producer planted a second crop in 2 of the previous crop years considered in the APH calculation, the producer’s 2023 APH is reduced by 8%. After planting a second crop in 4 of the historical crop years used in the APH calculation, the reduction in the 2023 APH will be as much as 16%. If this choice was made in 10 consecutive historical years, the unit’s APH would be reduced to nearly half its original value. In addition to losing insurable yield levels, a declining APH will impact insurance premium rates.  Special provisions exist for counties with approved double crop practices, and in certain cases multiple year prevented planting claims may be limited.  Always confirm your choice options and consequences with your crop insurance agent.

    Figure 1: Percent loss in APH rice yields after planting a second crop following prevented planting

    [1] For maps giving the breakdown of final planting dates by county and crop across the U.S., visit https://www.arcroprisk.com/data/crop-insuranceand look under “Final Planting Dates by Crop.”

    [2] The late planting period is generally 25 days after the final planting date of a given crop (USDA-RMA, 2021c).

    References:

    USDA-RMA (2021a, July). First and Second Crop Rules. Risk Management Agency Fact Sheet. Washington National Office, Washington DC.

    URL: https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/First-and-Second-Crop-Rules.

    USDA-RMA (2021b, July). Managers Bulletin: MGR-21-004. 

    URL: https://www.rma.usda.gov/en/Policy-and-Procedure/Bulletins-and-Memos/2021/MGR-21-004.

    USDA-RMA (2021c, July). USDA Risk Management Agency Fact Sheet. Prevented Planting Insurance Provisions Flood. 

    URL: https://www.rma.usda.gov/en/Fact-Sheets/National-Fact-Sheets/Prevented-Planting-Insurance-Provisions-Flood.

    USDA-RMA (2023, May). USDA Risk Management Agency Cause of Loss Historical Data Files. 

    URL: https://legacy.rma.usda.gov/data/cause.html.

    Biram, Hunter, and Lawson Conner. “Prevented Planting and APH Reductions After Planting a Second Crop.” Southern Ag Today 3(21.3). May 24, 2023. Permalink

    Photo by Tim Mossholder: https://www.pexels.com/photo/photo-of-green-field-near-mountains-974314/

  • Low Hog Prices and Red Ink

    Low Hog Prices and Red Ink

    Low hog prices and losses are causing significant financial stress in the hog industry.  Farrow to finish returns as estimated by Iowa State University have been negative for the last 6 months and were as large as -$36.04 per head in January.  This string of monthly losses has been the largest in at least a decade.  It’s interesting to note that financial losses have been reported by hog producers worldwide.  European and Asian producers have reported significant breeding stock culling due to losses.

    Barrow and gilt slaughter is 1.7 percent larger than last year through the first week of May.  When combined with lighter barrow and gilt weights, pork production is just under 1 percent larger than last year, but with a rebound in exports so far this year, means that there is slightly less pork on our domestic market than last year.  

    Tighter pork supplies after netting out trade have not translated into higher hog prices.  Slaughter weight hog prices, net of premiums and discounts, were $79.11 per cwt in mid-May compared to $100.35 last year at this time.  While $79 per cwt is about equal to the 5-year average price, costs are higher.  Feeder pig and early weaned pig prices have declined dramatically since the first of the year, down 50 and 64 percent, respectively. Extremely low prices for feeders don’t indicate a lot of hope for higher prices in the future.

    The pork cutout value in mid-May was $82.48 per cwt compared to $103.57 last year.  Most primal cuts are well below last year’s prices as well, including bellies which are 50 percent lower than this time last year.  Some bad news for those interested in BBQ, prices for pork butts are 9.9 percent higher than last year. However, on the positive side, the primal rib is about 41 percent lower than last year.

    There are several things to watch for in this market in the coming weeks.  Sow slaughter should increase as breeding numbers are reduced.  Fewer gilts may be held back also lending a boost to slaughter numbers.  USDA’s June quarterly inventory report should help confirm some direction for future farrowing and breeding herd inventory.  We should start to see slaughter decline seasonally boosting prices.  A seasonal price rally would be welcome news for producers.  

    Anderson, David. “Low Hog Prices and Red Ink.” Southern Ag Today 3(21.2). May 23, 2023. Permalink

    Photo by Mark Stebnicki: https://www.pexels.com/photo/groups-of-pigs-in-pigpens-6791938/

  • Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth 

    Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth 

    Grain and oilseed producers in the Midsouth experienced record low soybean basis, which is the cash price less futures price, in October 2022 due to reduced barge traffic and record high barge freight rates along the lower Mississippi River. These factors were associated with soybean basis as weak as 125 cents under the harvest time futures contract which was nearly one dollar below the 5-year average of 28 cents under for the month of October.  In a previous Southern Ag Today article, Biram et al. (2022) noted the primary reason soybean basis values fell to historic lows was because grain buyers at local elevators were pushed to bid lower cash prices for soybeans to compensate for the additional cost to transport grain from the elevator to the port of New Orleans for export. Further, grain buyers essentially had no place to store the grain even if they wanted to buy it which supports the principle of offering lower cash prices to disincentivize farmers from making delivery.

    While we witnessed the association of record-low basis with record-low river levels in the lower Mississippi River last fall, we are now witnessing an association of relatively lower basis and record-high river levels in the upper Mississippi River due primarily to snow melt. As the Mississippi River level increases to flood-level stages, barge traffic is limited as locks and dams along the river are closed, preventing the transportation of grain downriver or empty barges upriver. On April 16th, the Mississippi River gauge height at McGregor, IA, reached 16 feet which is considered a minor flood stage by the United State Geological Survey (USGS, 2023). On April 20th, the gauge height measured at the same location reached a moderate flood stage of 19 feet. On April 28th, the gauge height was measured at 23 feet, above major flood stage of 22 feet, which is the greatest gauge height reported since April 26, 2019, when it measured 22 feet. 

    Soybean basis reported in locations along the lower Mississippi River began to diverge from historical trends on April 10th and continue throughout the month of April. Consider the case of soybean basis at Elaine, AR, which is representative of basis reported in other southern states in the region (Figure 1). In this example, I consider the basis for 2023 delivery at harvest time which is the difference of the forward cash price and the November 2023 soybean futures contract (ZSX23). The first reported drop in this specific soybean basis was on April 10th with a fall from 25 cents over to 18 cents over which suggests a local response to the rising upper Mississippi River levels (Figure 1). This weakening of basis is associated with the increase in river gauge height throughout the month of April despite the relatively strong 4-year average basis for years in which the gauge height at McGregor, IA, did not reach moderate or major flood stage (i.e., 2018, 2020, 2021, and 2022). The most recent period basis fell below zero in April was in 2019 when it consistently stayed near 40 cents under which is another period in which the upper Mississippi River experienced record-high levels.

    The river level in the upper Mississippi River is starting to fall and with it will most likely come relatively stronger soybean basis in the Midsouth if the historical association between these two variables continues. Additionally, forward cash prices typically reach their strongest in early summer before declining as we approach the harvest months. One implication for a grain marketing plan would be to consider holding off on the May forward contracting decision for 2023 harvest-time delivery until the latter part of the month in anticipation of recovery in the  soybean basis.

    Figure 1. Spring Soybean Basis at Elaine, AR and Mississippi River Gauge Height at McGregor, IA (2018-2023)

    Note: The Nonflood Four-Year Average is calculated using the years when the gauge height at this location did not reach moderate or major flood stage.

    References

    Biram, Hunter, John Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink

    Report-Arkansas Daily Grain Bids | MARS, https://mymarketnews.ams.usda.gov/viewReport2960

    Mississippi River at Mcgregor, IA – 05389500, United States Geological Survey. May 3, 2023.https://waterdata.usgs.gov/monitoring-location/05389500/#parameterCode=00065&timeSeriesId=43560&startDT=2023-04-01&endDT=2023-04-30

    Biram, Hunter. “Flooding in the Upper Mississippi River is Associated with Relatively Weak Soybean Basis in the Midsouth.” Southern Ag Today 3(21.1). May 22, 2023. Permalink

    Photo by Tom Fisk: https://www.pexels.com/photo/mississippi-river-during-golden-hour-14819622/

  • United States Supreme Court Upholds Proposition 12

    United States Supreme Court Upholds Proposition 12

    Last week, the United States Supreme Court issued its Opinion in National Pork Producers Council v. Ross.  The National Pork Producers Council (NPPC) challenged California’s Proposition 12, a law imposing certain animal welfare requirements such as pen size and space on pork sold in California, alleging that it violated the Dormant Commerce Clause.  

    The Dormant Commerce Clause essentially implies that because the United States Constitution expressly grants power to regulate interstate commerce to Congress, that, by implication, means such power is not vested with the states.  Here, NPPC argued that the California law had extraterritorial impacts on pork producers in other states, thereby violating the Dormant Commerce Clause.

    The Court issued a fractured Opinion affirming the lower courts’ grant of California’s Motions to Dismiss, with some portions agreed upon by each of the 9 Justices, and others garnering support from far fewer.

    The Justices unanimously agreed on two points.  First, the “antidiscrimination principle lies at the very core of” Dormant Commerce Clause jurisprudence.  Here, NPPC did not allege that Proposition 12 was facially discriminatory statute, admitting it applied equally to in-state and out-of-state pork producers.  Second, all Justices rejected NPPC’s argument that there is an “almost per se” rule that forbids state laws that have a “practical effect of controlling commerce outside the state.”  This was too broad a reading of the Dormant Commerce Clause for all of the Justices.  As the Court explained, “In our interconnected national marketplace, many (maybe most) state laws have the ‘practical effect of controlling’ extraterritorial behavior.”

    Where the Justices disagreed, however, was the proper scope and analysis under the Pike balancing test.  When a law has a substantial burden on interstate commerce, the Pike balancing test requires a court to balance the burden on interstate commerce against the local benefits from the law.  Some Justices held that the Court was not intended to, or able to, weigh such burdens.  Other Justices held that there was no proof of a substantial burden on interstate commerce, which means the Court should not reach the balancing test at all in this case.  Still others found that a substantial burden was alleged, but that the US Court of Appeals for the Ninth Circuit improperly applied the balancing test and would have remanded the case with instructions to correctly balance the interests.

    Where does this leave producers?  Currently, the regulations surrounding Proposition 12 are not set to go into effect until July 1, 2023. Another challenge alleging additional facts seeking to prove that Proposition 12 does impose a substantial burden could potentially be filed.  A similar law was passed in Massachusetts, and a lawsuit is currently pending challenging that law.  It is certainly possible that additional laws related to animal husbandry practices could be passed in other states as a result of this ruling. 

    For more information click here.

    Lashmet, Tiffany. “United States Supreme Court Upholds Proposition 12.” Southern Ag Today 3(20.5). May 19, 2023. Permalink

    Photo by Mark Stebnicki: https://www.pexels.com/photo/close-up-shot-of-pigs-2737178/