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  • Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan

    Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan

    As farmers are planning for the new year, they have several factors to consider. Besides supply and demand uncertainties for cotton marketing and weather uncertainties for cotton production, we are in the middle of a supply chain crisis with rising input costs and limited supplies. Additionally, inflation is a major concern, with the latest annualized Consumer Price Index at 7.0 percent. Inflation translates into higher production costs for cotton producers. 

    Cotton producers are wondering if they will be profitable this year under rising cotton prices and higher input costs. Figure 1 below shows the estimated costs of production for cotton in 2021 and 2022 from the University of Georgia Cotton Enterprise budgets. The total costs of production rose significantly for 2022 compared with 2021, with an average increase in total costs for irrigated land of 17.4% and a 24.7% increase in total costs for dryland production. Similar year-over-year increases in production costs have been reported for Tennessee (21% for irrigated and 27% for non-irrigated) and Mississippi (11% for irrigated and 12% for non-irrigated).[1]This increase in input costs is largely driven by the rise in fertilizer costs, crop protection costs, land costs, and energy costs. Even though individual producers’ costs vary and are determined by their production practices, these estimates clearly show the increase in input costs year-over-year. 

    To ensure profitability, producers need to have a sound plan for input use, particularly fertilizer application this year. Soil testing will allow producers to determine available nutrients and the profit-maximizing amount of fertilizer that should be applied. Additionally, producers should develop secondary plans for chemical applications (e.g., if product A is unavailable what other products can be used). All of this implies higher production costs and greater financial risk for this year and makes it more critical for producers to estimate and control their cost of production. 

    The good news is high new crop cotton prices (December 2022 closed at 100.87 cents per pound on January 31, 2022), are providing potentially profitable outcomes. With a yield of 1,200 pounds per acre for irrigated land and 850 pounds per acre for dryland production, with the costs shown in the table, cotton producers would need to lock in prices at 89 cents per pound for irrigated land and 96 cents per pound for dryland to break even. Producers need to be cognizant of the elevated amount of money at risk and modify their marketing and risk management plans accordingly. Incrementally removing price risk when purchasing inputs will help mitigate some financial risk for cotton producers. As with every year, producers need to focus on managing their profit margin through sound risk management practices. 

    Figure 1. The Rise in Variable Costs and Fixed Costs for Cotton Production in 2022. Source: University of Georgia Cotton Enterprise Budgets. Average of conventional tillage and strip-tillage production. Costs Exclude Land Rent.

     

    [1] Budgets were created on different dates and have different specified costs, so some caution should be exhibited when comparing different states.

    References

    Estimate of 2022 Relative Row Crop Costs and Net Returns, Department of Agricultural & Applied Economics, University of Georgia, November 2021. https://agecon.uga.edu/extension/budgets.html

    Cotton 2022 Planning Budgets, Department of Agricultural Economics, Mississippi State University, Budget Report 2021-01, November 2021. https://www.agecon.msstate.edu/whatwedo/budgets.php

    2022 Cotton Budgets, Department of Agricultural and Resource Economics, University of Tennessee. https://arec.tennessee.edu/extension/budgets/

    Liu, Yangxuan. “Rise in Input Costs for Cotton Production: Make and Keep a New Year’s Plan“. Southern Ag Today 2(7.1). February 7, 2022. Permalink

  • Carbon Markets Are Not Like Other Markets

    Carbon Markets Are Not Like Other Markets

    Carbon markets are increasingly viewed as a way to combat climate change and supplement farm and forest landowner income. However, carbon markets differ from most other product markets in meaningful ways. First, buyers in carbon markets will generally be unable to determine product quality, as measured in terms of actual reductions in carbon emissions or increases in sequestration. When buyers in other markets cannot readily observe product quality, they often rely on third parties to provide that information. Governments sometimes play the role of information providers when the quality under consideration has wider social benefits. Examples include automobile fuel efficiency and household appliance energy efficiency.

    Carbon markets also differ from other markets in that both buyers and sellers in carbon markets have an incentive to overstate quality, i.e., the amount of reduction or sequestration that occurs. In voluntary markets, buyers participate to generate goodwill amongst consumers, investors, and policymakers. In regulatory markets, buyers participate to satisfy a regulatory requirement. Thus, buyers are motivated – not by actual emissions reduction or sequestration – but by the “credit” they receive from governmental regulators or the public. 

    Because of these differences, regulators and the public will be unlikely to extend this credit without third-party monitoring and verification. However, thorough but burdensome monitoring and verification will increase transaction costs and discourage market participation. On the other hand, lax monitoring and verification will erode trust in the market. Balancing these two will be critical for market success. Similarly, successful participation by landowners will require balancing potential revenue gains against the implementation, opportunity, and transaction costs of participation.

    Clark, Christopher D. . “Carbon Markets Are Not Like Other Markets“. Southern Ag Today 2(6.5). February 4, 2022. Permalink

  • The ARC-CO/PLC Decision Isn’t as Easy as You Think

    The ARC-CO/PLC Decision Isn’t as Easy as You Think

    Producers have until March 15th to select their Title I safety net coverage at their local county FSA office.  Current futures prices for many U.S. covered commodities are well above the reference prices which has most producers thinking there will be no payments for the Price Loss Coverage (PLC) so they should choose the revenue coverage provided by Agriculture Risk Coverage-County Option (ARC-CO).  The combination of price and yield protection provided by ARC-CO should be somewhat more likely to trigger a payment than just the price protection provided by PLC.  On the surface this seems quite reasonable, however, as is the case with most decisions in life, this one is much more complicated than that.

    First, with a 2022 yield equal to the 2022 county benchmark yield, ARC-CO would not trigger a payment until market prices fall below $3.18/bu for corn, $7.84/bu for soybeans, $3.40/bu for grain sorghum, and $4.73/bu for wheat (Figure 1).  These trigger prices are considerably lower than the effective reference prices for each crop.  So, what if the yield isn’t average?  Across these 4 commodities, it would take a 14 percent yield decline relative to the 2022 county benchmark yield just to increase each commodity’s ARC-CO trigger price to the effective reference price (i.e., $3.70 for corn, etc).

    Second, the supplemental coverage option (SCO) is only available on the crops for which a producer chooses PLC as their Title I safety net program.  Given the extremely high futures prices that currently are in place during price discovery, if a producer is looking for a shallow loss revenue protection option, SCO often provides significantly more revenue protection than ARC-CO which uses marketing year average prices to determine revenue benchmarks.  While SCO has a premium that must be paid, many producers may find the coverage difference well worth the cost.

    Finally, the current high futures prices for most commodities are good indicators that market prices will be quite strong this harvest.  However, both ARC-CO and PLC use marketing year average prices to determine whether a payment is triggered.  The 2022-23 marketing year for corn begins September 1, 2022 and continues through August 31, 2023.  While not likely to crash, a lot can happen between now and August 2023.  Purchasing SCO allows a producer to elect PLC for the covered commodity, effectively establishing a free put option at the reference price (at least on those base acres and program yields).

    Figure 1.  Example ARC-CO and PLC Parameters for the 2022 Decision.

    Crop Name2016 County Yield2017 County Yield2018 County Yield2019 County Yield2020 County Yield2022 Benchmark County Yield2022 Benchmark Price2022 Benchmark Revenue2022 Guarantee RevenuePrice below which ARC-CO is Triggered with an Avg Yield2022 Effective Reference Price (ERP)
    Corn129.62144.90168.80137.45157.42146.59$3.70$542.38$466.45$3.18$3.70
    Grain Sorghum97.93109.10120.0293.1493.48100.17$3.95$395.67$340.28$3.40$3.95
    Soybeans49.4644.5651.9639.0645.1146.38$9.12$422.99$363.77$7.84$8.40
    Wheat74.4586.2461.6961.7764.2166.81$5.50$367.46$316.46$4.73$5.50

    Outlaw, Joe, and Bart Fischer. “The ARC-CO/PLC Decision isn’t as Easy as You Think.” Southern Ag Today 2(6.4). February 3, 2022. Permalink

  • Financial Impacts of Higher Fertilizer

    Financial Impacts of Higher Fertilizer

    Last week we looked at the basic supply/demand factors contributing to the surge in fertilizer prices.  The abnormally high fertilizer market prompts the question:  How much of a financial burden do these prices represent for producers?  Today we are highlighting a study attempting to address that very question.  The Agricultural & Food Policy Center (AFPC) at Texas A&M maintains data on 64 representative crop farms across the U.S.  The data, provided by the consensus of local producer groups, describes the capital structure and operating parameters necessary to forecast a financial outlook for each representative farm.  The basic idea of the study was to impose higher fertilizer expense on each farm and compare the bottom-line results for a 2022 outlook with that of a baseline scenario (a fertilizer market without the current surge in prices expected in 2022).  Here’s the link to the full paper:  Economic Impacts of Higher Fertilizer Prices on AFPC’s Representative Crop Farms.

    As a baseline, the study assumes the market outlook as described by the Food and Agricultural Policy Research Institute (FAPRI) August 2021 Baseline for commodity prices and cost inflation.  In the baseline, fertilizer price inflation estimates in 2022 were 9.9% for Nitrogen (N) and 13.6% for Phosphorous and Potash (P & K).  Based on estimates of spot prices observed at the time of the study, the alternative higher cost scenario assumed inflation factors of 55.4% for N and 50.8% for P&K.  Results outline the total impact to each farm’s NPK costs for 2022.  Alternative inflation assumptions result in an approximate 37% higher fertilizer bill for all farms.  For 25 feed grain farms, the average increase in fertilizer cost for 2022 was $128,000 (or almost $40/acre over the baseline scenario).  Rice farms saw the highest per acre increase with an average across 15 farms of roughly $62/acre.   Both cotton and wheat farms would experience near $100,000 higher total NPK costs on average or approximately $30/acre and $20/acre, respectively.

    Summary Results of AFPC Study on Fertilizer Price Impact

    Type (# of Farms)Avg. Planted AcresNPK CostsBase($1,000)NPK CostsAlternative ($1,000)NPK CostsDifference ($1,000)NPK CostsDifference ($/Acre)
    Feed Grain (25)3,17835047812839.55
    Wheat (11)4,3192493439419.64
    Cotton (13)4,19930341711429.72
    Rice (15)2,51233746312662.04

    While the study illustrates a significant cost increase, two important factors suggest the results are somewhat conservative in measuring the impact of recent fertilizer trends.  First, the study only measures an estimated change in 2022 costs.  Fertilizer prices started their recent trend well before 2022.  Fertilizer had already seen significant increases in 2021 (17% for N and 26% for P&K relative to 2020).  Combining the two years, even the baseline in the study reflects 2022 prices that are 29% (N) and 43% (P&K) higher compared to 2020.  Second, the approximate 50% increase for 2022 may not be high enough.  Since the study was completed, spot prices this year have approached triple the prices from 2020.  On the other hand, it is important to note that current commodity future prices indicate an improved revenue in 2022 for most producers, which will offset some of the sting of increased costs of production.  In that vein, next week we will look at current and past fertilizer trends relative to commodity prices.

    Monthly Average Fertilizer Nutrient Prices, January 2000 to October 2021

    Source: AFPC Briefing Paper 22-01, compiled from DTN spot market price data for the last trading day of each month. The markets include New Orleans, Corn Belt, Southern Plains, South Central, Southeast, and Florida. The phosphorous price is specifically for diammonium phosphate (DAP).   

    Reference: 

    Outlaw, et al. Economic Impact of Higher Fertilizer Prices on AFPC’s Representative Crop Farms.  Texas A&M University System, Agricultural and Food Policy Center Briefing Paper 22-01. January 2022.  

    Klose, Steven, and J. Marc Raulston. “Financial Impacts of Higher Fertilizer“. Southern Ag Today 2(6.3). February 2, 2022. Permalink

  • Cattle Inventory Report

    Cattle Inventory Report

    Yesterday, the National Agricultural Statistics Service (NASS) released the biannual Cattle inventory report. This report provides a review of the changes in cattle inventory over the last year. Using the Cattle report, we can glean insight into the expected cattle supply and resulting beef supply in the near future. These supplies also inform our longer-term cattle and beef price expectations. 

    The last two January reports indicated that the number of beef cows that calved declined approximately 1.6% and 1.1% in 2021 and 2020, respectively. Declines in the number of cows are followed by a decline in the number of calves and, finally, a lower beef supply; one less cow calving in spring 2020 means one less live calf placed on feed in the fall of 2020, and subsequently, there is one less fed calf available for processing in summer 2021. Lower supplies, all else equal, mean higher prices. 

    Since 1990, in years when the cowherd shrank year to year the average decline in all cattle and calves was 1.2%. Yesterday’s inventory report indicated a 2% decline in all cattle and calves (from 93.8 million head to 91.9 million head), a 2.4% decline (from 30.8 million head to 30.1 million head) in the beef cow herd, and a 1% decline (from 35.5 million head to 35.1 million head) in the calf crop from 2020 to 2021. The larger drop in inventory than recent historical averages was likely a result of persistent drought across much of the western U.S. In fact, the average change in inventory in states to the west of the line including Texas to North Dakota was a loss of 2.7%, whereas the average change in inventory to the east of that line was a loss of 1.9%. A final interesting point: the number of heifers expected to calve in the upcoming year declined 3% year over year, suggesting a continued contraction in the cattle herd over the next year. The contraction in the cattle herd will support higher prices in the next year, all else equal. 

    Benavidez, Justin. “Cattle Inventory Report.” Southern Ag Today 2(6.2). February 1, 2022. Permalink