Southern Ag Today

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  • Regional Equity in Crop Insurance

    Regional Equity in Crop Insurance

    Those who like to sow discord during farm bill discussions will often argue that crop insurance is regionally inequitable – that one region (typically the Midwest) subsidizes crop insurance in other regions of the country.  The argument often takes this form: loss ratios – the ratio of indemnities received to premiums paid – are highest in areas like the Great Plains and the South. Regional battles in farm bill deliberations are seldom constructive.  In the case of crop insurance, those battles endanger the entire crop insurance system and threaten to reduce the risk pool which is essential in spreading risk across multiple crops and states.

    For serious participants in the policy process, it’s important to make informed/balanced decisions based on the facts.  While loss ratios are certainly one metric, focusing on loss ratios alone can leave the impression that growers in certain parts of the country are not pulling their weight (i.e., not paying enough for coverage).  In this article, we delve into this topic using corn production to illustrate.  In particular, we explore average premiums paid by county for the highest coverage level (85%) for the most popular crop insurance product (Revenue Protection) in 2022 to examine regional equity throughout the country.  In carrying out the analysis, we utilize average yields in the county (specifically, the county reference yield utilized by RMA in rating crop insurance policies).  We further assume the crop is being produced for grain, and we focus exclusively on non-irrigated crop production.  Finally, we illustrate the case of enterprise units, but the relative results are largely the same for optional units as well.

    As noted in Figure 1, the lowest average premiums paid for 85% coverage are in the heart of the Midwest.  For example, the lowest premium rate in the country is in Marshall Co., IA, where producers are paying just 2.13% (or 2.13 cents for every dollar of liability insured) for 85% coverage.  In contrast, corn producers in Wilbarger Co., TX, would have to pay 32.5% (or 32.5 cents for every dollar of liability insured) for the same percentage coverage level.  No producer can afford to spend that kind of money on crop insurance, so their only option is to reduce their coverage level – and increase their risk exposure – as a result.  While we illustrate the two extremes, this highlights one reason why coverage levels outside of the Midwest tend to be considerably lower than 85% – producers simply cannot afford the coverage.    

    It is also important to note that rates are significantly variable within states as well.  For example, while the median county rate in Minnesota is just 3.9%, as noted in Figure 2, the average ranges from just 2.14% in Watonwan Co., MN, to 17.8% in St. Louis Co., MN.  No surprise…producers reduce their coverage as a result.  For example, in Marshall Co., MN, where the average premium for 85% coverage in 2022 was 13%, the average coverage level actually purchased by producers has averaged just 73% over the past 5 years, far below the maximum 85% coverage available.

    Bottom line: outside of the Midwest, much of the country is (1) paying considerably higher rates for crop insurance which is (2) resulting in producers having to significantly reduce coverage while shouldering considerably more risk.  Any effort in the farm bill to further raise premiums on these producers would simply drive coverage levels even lower and risk exposure even higher.

    Figure 1.  2022 Average Premium Rates for 85% Revenue Protection for Corn, by County

    Figure 2.  Range of County Average Premium Rates for 85% Revenue Protection for Corn, by State (median county premium rate denoted by black dots).

    Fischer, Bart, Henry L. Bryant, and Joe Outlaw. “Regional Equity in Crop Insurance.” Southern Ag Today 3(15.4). April 13, 2023. Permalink

  • Managing Price Risk for Cow-Calf Producers

    Managing Price Risk for Cow-Calf Producers

    David Anderson wrote yesterday about markets reaching record-high cattle prices as cattle supplies tighten and some of the questions out there about the market later in the year. Cow-calf producers certainly welcome higher prices anytime, but what about the producers who don’t have anything to sell right now? Nearly 75 percent of the calves born in the U.S. are born during the first half of the year, which means many producers are calving or have already finished calving for the year. These calves are still nursing and most likely won’t be sold until later in the summer or fall. While it may be months before the spring calves are sold, producers do have opportunities to utilize price risk management tools now.  

    Not only are cattle prices surging to high levels now, but there is also optimism that cattle prices could continue to gain steam as we move through 2023. The chart above plots the contract price for each Feeder Cattle Futures contract month traded on the CME Group. The spring contracts are trading near $200-$205 per cwt, but the summer and fall contracts are trading above $220. Some of this increase is seasonal, but much of it is also driven by the expectation of continually tighter cattle supplies. Importantly, these expectations of high cattle prices mean there are price risk management opportunities not seen since 2014-2015. 

    There are a few price risk management tools that cow-calf producers selling later this year could consider. Selling a futures contract or purchasing a put option are potential strategies. One thing to consider about these choices is the contract size is 50,000 pounds which might be a little large for many cow-calf producers. Forward contracting is worth considering – this simply means a producer would lock in a sales price with a buyer in advance. USDA’s subsidized Livestock Risk Protection (LRP) tool is also worth considering and can be used on as few as one head which makes it worth a look for producers of all sizes. Your local crop insurance agent may be well equipped to help you in any LRP decisions.  Each of these tools has their own design and tradeoffs to understand before jumping in, and there are certainly other risk management strategies out there. However, all tools are currently offering risk management opportunities at price levels not seen in the past eight years. Even if a producer doesn’t have any calves to sell now, they can still take advantage of the optimism in the market by managing their price risk. 

    Maples, Josh. “Managing Price Risk for Cow-Calf Producers.” Southern Ag Today 3(15.3). April 12, 2023. Permalink

  • Cattle Prices in Record Territory

    Cattle Prices in Record Territory

    Fed cattle prices surged into record territory last week, with the daily average 5 market live fed steers hitting $175.87 on April 7th.  Daily average fed steer prices last reached the $170s in late 2014 and early 2015, with a high of $172.08 on November 26th, 2014.  Steer prices have, generally, been increasing since the beginning of the year, with a couple weeks of dips in mid-January and mid-March.  

    The calf market surged along with it.  Georgia, 7-800 pound feeder steers began the year at $156 per cwt and finished last week at $176.  The same weight steers in the Southern Plains have advanced from $184 in January to $193 last week.  Lighter weight, 4-500 pound steers in Georgia and the Southern Plains averaged $240 and $247 last week, respectively.  

    Packers have continued to demand cattle as supplies have tightened.  Beef demand appears to continue to be good.  While wholesale prices for steak cuts like ribeyes and loin strips have declined over the last couple of weeks, 90 and 50 percent lean boneless beef and cuts like briskets have increased.  Higher fed cattle prices have pulled calf and feeders higher.  Lower feed prices are also boosting feeder cattle prices.  

    The big unknown in the market is beef demand over the course of the year.  The effect of federal reserve action to slow the economy to fight inflation is yet to be fully felt.  Will a broader segment of consumers buy less beef in response to tightening incomes?  Can retail beef prices increase to reflect record live animal prices or will margins absorb the higher live prices?  So far, packer margins have shrunk absorbing higher live prices.  Regardless of those questions and answers, beef supplies will continue to tighten.  High calf and feeder prices may provide some opportunities for cattle ranchers to grab some profits.  

    Tomorrow’s SAT will look at futures market prices and some ways to protect these higher prices now for this Fall.

    Anderson, David. “Cattle Prices in Record Territory.” Southern Ag Today 3(15.2). April 11, 2023. Permalink

  • Rethinking Fertilizer Prices

    Rethinking Fertilizer Prices

    Although the Russian war with Ukraine has been pinpointed as the leading cause of high fertilizer prices, the price of nitrogen fertilizer began to increase in May of 2021, long before Russia invaded Ukraine on February 24, 2022. The increases in fertilizer prices in 2021 were caused by supply and demand factors. On the supply side, increases in natural gas prices and shipping costs likely influenced fertilizer prices (Smith, 2022). Additionally, corn futures prices increased drastically in May 2021, incentivizing farmers to apply more nitrogen per acre. Following nitrogen application, fertilizer prices dropped slightly before increasing again in February of 2022 due to the Russian invasion of Ukraine, which caused supply chain disruptions in nitrogen fertilizer exports. Since September, fertilizer prices have dropped significantly. In this article, we reframe fertilizer prices to look more closely at the recent declines in fertilizer prices. Specifically, we focus on the fertilizer price to new crop corn futures ratio. Using this ratio, we can frame fertilizer prices in a form allowing us to account for fertilizer and corn prices.

    Figures 1, 2, and 3 show the plotted ratio of fertilizer price to new corn futures ratio for NH3, urea, and UAN from 2020 to early March of 2023, respectively. Unsurprisingly for all three commodities, the lowest ratios occurred before the price increases in 2021. Following the 2021 price increases, the impact of the Russian-Ukrainian war sustained an already high nitrogen price. The red line in each graph depicts the 2023 nitrogen price relative to the price of corn. For UAN and urea, the ratio of fertilizer to new crop corn price has fallen below the 5-year average levels, whereas the price of NH3 is still slightly above the 5-year average. These results may indicate that ammonia fertilizers are still unreasonably high due to Russia being the second largest NH3 exporter, behind Trinidad and Tobago (World Bank, 2021). 

    Figure 1. NH3 (Anhydrous Ammonia) Price Relative to New Crop Corn Futures

    Figure 2. Urea Price Relative to New Crop Corn Futures

    Figure 3. UAN Price Relative to New Crop Corn Futures

    As the ratio for NH3 remains above the five-year average, it may be time to look at alternative nitrogen sources. One nitrogen source of interest is urea, the nitrogen source furthest under the 5-year average. The average price of nitrogen/pound of urea is historically higher than that of NH3. However, this season, the current price per pound of nitrogen from both sources is similar, making the switch from NH3 to urea more appealing. If in-season nitrogen application is needed, the relative price of urea is historically lowest in June. However, it is worth noting that an escalation in Ukraine or a discontinuation of the Black Seas Grain Deal would likely cause the price of each nitrogen source to increase.

    Sources:

    Smith, Aaron. “The Story of Rising Fertilizer Prices.” Aaron Smith, March 2, 2022. https://asmith.ucdavis.edu/news/story-rising-fertilizer-prices.

    World Integrated Trade Solution. “Ammonia; Anhydrous Exports by Country |2021.” World Bank. Accessed March 20, 2023. https://wits.worldbank.org/trade/comtrade/en/country/All/year/2021/tradeflow/Exports/partner/WLD/product/281410.

    Gardner, Grant, and Hunter Biram. “Rethinking Fertilizer Prices.” Southern Ag Today 3(15.1). April 10, 2023. Permalink

    Photo by Todd Trapani: https://www.pexels.com/photo/corn-field-1382102/

  • Right to Farm Bills in the South

    Right to Farm Bills in the South

    States in the South are in their legislative sessions, and several are looking to amend their right to farm statutes.  A right to farm statute is a state law intended to protect qualifying agricultural operations from nuisance lawsuits brought by neighbors for noise, dust, odor, or other actions that interfere with the neighbors’ use and enjoyment of their property.  State law can vary dramatically across the country and small changes to language can have a major impact on how the law is applied in that state.

    Some proposed changes in the South are relatively minor, while others would make substantial changes in how nuisance laws would affect agricultural operations.  Below are the links to current bills in the South and a short description of the potential impact of the legislation.

    • Arkansas – HB 1434 – This bill was enacted into law and specifies that the burden of proof in a nuisance lawsuit is borne by the party that brought the lawsuit against the farming operation.  
    • Florida – HB 1361 and SB 1472 – Both bills are companion bills (bills that are largely the same, but filed in different chambers or by different members in the state legislature) that would allow farm operations to store, process and distribute organic material.  Organic material is defined as “vegetative matter resulting from landscaping maintenance or land clearing operations … ” This definition would not include organic material from animal agriculture operations.
    • Oklahoma – HB 1457 – Nuisance lawsuits involving the cultivation of medical marijuana would be excluded from the protections of the Oklahoma Right to Farm Act under this bill. 
    • South Carolina – H 3432 – This bill would change several things.  Importantly for the state right to farm statute, it would define several terms deemed “covered activities”, including composting. It would also require the Commissioner of Agriculture to investigate complaints about agricultural operations and make recommendations about best management practices.
    • Texas – SB 1421, HB 2308, and HB 1750
      • SB 1421 – This bill could significantly strengthen the existing Texas Right to Farm Act by setting one establishment date for the agricultural operation and protecting all activities after one year has passed (unless it is determined to be a “substantial change”).  Currently, expansions are not protected until the expansion has been in existence for at least one year.  This bill would also extend coverage to veterinary practices, increase the burden of proof to clear and convincing evidence, strengthen the attorney fees provision, limit the power of city governments to regulate farming operations in city limits, and make other small changes.
      • HB 2308 – Largely a companion bill to SB 1421; however, it does not have language about restricting the powers of city governments to regulate agricultural operations within city limits.
      • HB 1750 – Also largely a companion bill to SB 1421 and contains the language limiting city governments on how they regulate agricultural operations, but does not include the language on changing the establishment date or the addition of the language about “substantial change.”

    Words matter in the legal context.  Some changes, like with the Arkansas bill, may have little impact on how the state right to farm act is applied, while the changes to the Texas law, if enacted, could substantially change how nuisance lawsuits and zoning disputes move forward.  Even if your state is not on the list for proposed changes for this legislative term, it is common for other state legislatures to copy legislation and try to enact similar bills in their states in subsequent years. To see your state’s current right to farm statute, click here.

    Rumley, Rusty. “Right to Farm Bills in the South.” Southern Ag Today 3(14.5). April 5, 2023. Permalink

    Photo by Alejandro Barrón: https://www.pexels.com/photo/corn-field-during-daytime-96715/