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  • Can Solar Panels Improve Contract Farm Profitability?

    Can Solar Panels Improve Contract Farm Profitability?

    The cost of solar systems has been decreasing rapidly over the past 10 years, making it an attractive option for poultry growers across the U.S. seeking to counteract rising electricity costs. However, it is imperative that growers understand how a typical contract pays them back for their solar investment. The key points are how much electricity a system produces and the value of that electricity to the farm.

    Barring other restrictions, the maximum sized solar generation system utility companies typically allow a customer to install and connect to their grid is one with solar production capacity equal to the customer’s normal annual usage. Many solar installers will use this basic design logic to sell a customer a  large system  claiming they are going to offset 100% of the power bill. That claim will likely not be true for a poultry grower because the variable usage pattern of poultry production. The chart illustrates an example electric usage pattern of a poultry farm vs. the solar production potential of varying sized systems (100%, 50%, and 30% of annual usage). The highly variable usage pattern results in a lot of excess solar energy produced that is not being used by equipment on the farm but is put back on the grid. The realized value of the excess solar energy is highly variable across utility companies and for many growers in southeastern states, they will be compensated for it at rates much lower than retail. 

    To further examine how this scenario works out for contract poultry growers, a recent study was published in the Journal of American Society of Farm Managers and Rural Appraisers that examines how the variable power usage of broiler farms interacts with solar production and the resulting effect on the profitability of various solar system scenarios such as system size, location, and electricity rates. The study showed that under a simple net billing arrangement, where excess solar is valued at close to wholesale rates by the utility company, maximizing system size to match annual usage was not the most profitable, and in fact could be a losing proposition. The study also showed the impact of cost-share and tax credit incentives on profitability. The full study can be found here: https://higherlogicdownload.s3.amazonaws.com/ASFMRA/aeb240ec-5d8f-447f-80ff-3c90f13db621/UploadedImages/Journal/2022/SolarSystemProfitability_2022Journal.pdf

    The variable electricity usage pattern of poultry farms greatly affects the amount of lower valued excess solar energy a system produces (energy above the red line) compared to solar that directly offsets retail purchases (energy below the red line.) 

    Brothers, Dennis. “Can Solar Panels Improve Contract Poultry Farm Profitability?“. Southern Ag Today 2(27.3). June 29, 2022. Permalink

  • Hedging Opportunities for Managing Price Risk for Cattle

    Hedging Opportunities for Managing Price Risk for Cattle

    Uncertainty and volatility are dominating most commodity markets given the current environment, which includes increasing inflation and interest rates. Despite the cash price of many goods escalating rapidly, cash cattle prices have done no such thing as can be confirmed by the CME feeder cattle index and the 5-area weighted average price for live cattle. However, the futures market, options market, and Livestock Risk Protection insurance (LRP) have been offering several opportunities to hedge cattle prices at much higher prices than have been physically experienced for several months. For instance, the August feeder cattle contract has traded between $163.93 and $186.65 per hundredweight over the life of the contract. During that time, the August futures price has held a $10.53 to $27.29 per hundredweight premium to the CME Feeder cattle index. These premiums appear to encourage hedging cattle, but convergence has been an issue with cash prices and the futures market. This is where LRP has an advantage in that it is indemnified based on the CME feeder cattle index and the 5-area weighted average price for live cattle. Figure 1 illustrates the number of days the daily settlement price for each feeder cattle contract exceeded the final settlement price from 2015 through 2020. The point of this figure is that the futures market often offers opportunities to benefit from hedging.

    Figure 1. Number of days the daily settlement price of feeder cattle futures contracts exceeded the final contract close price during the life of the contract (2015-2020). (LMIC, 2021; Griffith and Boyer, 2022)

    Griffith, A.P., C.N. Boyer, I. Kane. 2022. Producer Focus Groups: Price Risk Management Contributions to Economic Sustainability in the Cattle Industry. University of Tennessee Extension publication. In Press.

    Livestock Marketing Information Center (LMIC). 2021. Historic CME Feeder Cattle Futures Prices.

    Griffith, Andrew P. . “Hedging Opportunities for Managing Price Risk for Cattle“. Southern Ag Today 2(27.2). June 28, 2022. Permalink

  • Some Quirky Aspects of Cotton Marketing

    Some Quirky Aspects of Cotton Marketing

    This article highlights some differences between U.S. cotton and other ag commodity markets. The subject really involves the nexus of politics and economics.  There is a long history of government regulation of commodity markets. A textbook example is the Onion Futures Act of 1958 which banned trading of onion futures (and which was the basis for subsequent studies of efficient markets by Working[i] and Gray[ii]).  

    Our cotton example begins in 1929 when the U.S. Congress singled out cotton in a notable policy restriction.  It seems that two years earlier, one of USDA’s routine monthly forecasts had projected lower cotton prices.  When this forecast proved accurate, some in the cotton industry assumed that the forecast caused the price decline. This led to a political reaction where the USDA was banned from forecasting (only) cotton prices, a policy that remained in place until the 2008 Farm Bill.  

    Cotton was unique in dropping out of Title 1 commodity programs in the 2014 Farm Bill, only to come back in 2018 with “seed cotton” as a new, covered commodity in the Bipartisan Budget Act of 2018.  Space does not allow an adequate discussion of the underlying events of that story.

    A unique reporting requirement of U.S. cotton since the 1950s is the CFTC Cotton On-Call report (https://www.cftc.gov/MarketReports/CottonOnCall/index.htm ).  This is a weekly report of merchant on-call (i.e., basis contract) transactions reflecting purchases from farmers and sales to textile mills that are unfixed with ICE futures, presented by delivery month.  These data are potentially informative in identifying large, hedged positions in ICE cotton futures (see the peaks of the red line in Figure 1).  This market transparency could benefit suppliers and smaller merchandisers and market analysts, but in some cases it could lead to speculative trading on anticipated short covering prior to futures contract expiration (https://southernagtoday.org/2021/12/current-squeeze-dynamics-in-ice-cotton-futures/ ).  

    Why have these different policies existed for cotton? One reason is the historical dominance of southern politicians during the 20th century.  Thus, if the cotton grower segment was angry at USDA, even mistakenly, they had the political power to have something done about it for a southern crop like cotton.  The global aspect of cotton is another feature that brought about the trade talk attention, the Doha Round, and the WTO case, which precipitated cotton leaving and returning to federal farm programs. Finally, some cotton-specific regulations may have to do with the concentration of the cotton merchandising sector, relative to grains.  Compared to grains, the U.S. cotton market is dominated by a handful of global merchandising firms.  The cotton on-call reporting requirement originated as a way for the cotton merchant sector to report their futures transactions as legitimate hedges, which they are. Curiously, it is the cotton merchant sector that now opposes the collection and publication of the cotton on-call data, which they consider proprietary (https://acsa-cotton.org/wp-content/uploads/2020/05/ACSA-Position-Limits-Comment-Letter.pdf).  The merchant sector also has had an ongoing concern since 2008 with excess speculation in ICE cotton futures.  This may explain their opposition to publication of cotton on-call data.  

    [i] Working, Holbrook (1960-02). “Price Effects of Futures Trading.” Reprinted from Food Research Institute Studies, Vol. 1, No. 1, February 1960, in Selected Writings of Holbrook Working, Anne E. Peck, ed., Chicago Board of Trade, 1977. pp. 45–71.

    [ii] Gray, Roger.  1963. “Onion Revisited.” Journal of Farm Economics,. Vol. 45, No. 2, May 1963.

    Robinson, John. “Some Quirky Aspects of Cotton Marketing“. Southern Ag Today 2(27.1). June 27, 2022. Permalink

  • Local Food Sales & Practices

    Local Food Sales & Practices

    USDA released the results of the recently completed 2020 Local Food Practices Survey in April 2022.  The survey results revealed continued growth in local food sales across the country.  Over one-hundred and forty-seven thousand farmers and ranchers across the U.S. sold $9 billion of local edible food commodities directly to consumers, retailers, institutions, and intermediaries.  The reported level of sales reveals a three percent increase from 2015.  While reported sales increased, the number of operations selling directly decreased by twelve percent (12%). Direct farm sales across different buyer types are shown in Table 1 for the U.S. and Southern region only. In 2020, direct sales to retailers represent 46% of U.S. total direct farm sales, yet account for only 27% of Southern Region direct farm sales. To explore all of the data from the results of this survey, visit https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Local_Food/

    Table 1.  Total U.S. and Southern Region Direct Farm Sales, by Buyer Type, 2015 and 2020

                            SOURCE:  2020 AND 2015 Local Food Marketing Practices Survey, USDA NASS.

    While direct farm sales market continues to grow, farm operations using this marketing strategy have declined overall. A close examination of the data shows slight changes between producer locations and the targeted marketing channels.  For example, the Southern region reported an increase in the number of farms selling direct and a decrease in sales volume over the same period. Nationally, 77% of farms with direct sales (consumers, intermediaries, and retailers) sold through direct to consumer channels (Fig. 1). 

    Figure 1.  U.S. and Southern Region Direct-to-Consumer Sales by Marketing Practice 2020 ($ million).

    A majority (57%) of farms selling food directly were located in metropolitan counties, and these farms accounted for sixty-two percent (62%) of all direct food sales. Lastly, 78% of farms selling food directly marketed their products within a 100-mile radius of their farm operation.

    Rainey, Ron, and Celise Weems. “Local Food Sales & Practices.” Southern Ag Today 2(26.5). June 24, 2022. Permalink

  • Broadband Adoption and Impacts on COVID-19 Unemployment Recovery in the South

    Broadband Adoption and Impacts on COVID-19 Unemployment Recovery in the South

    Looking at unemployment rates experienced from February to December of 2020 paints a picture of the resiliency of southeastern states counties to the COVID-19 pandemic. As shutdowns took place and unemployment rates rose, telework became an important factor in recovery. Across the 1,206 counties of the 12 southeastern states, rates of telework ability – defined as the percentage of jobs that could be done remotely – ranged from 22% to 43%.  As the pandemic unfolded, the resiliency of each county was determined by industry composition, unemployment rates at the beginning of the pandemic, county demographic characteristics, and –  broadband adoption rates. 

    Household broadband subscription rates ranged from 34% to 94% across the counties in the sample, and the results demonstrate that these differences are vital. The ability to telework had no impact on unemployment rates from February to April in counties with broadband adoption rates under 50%. Although some individuals may have been employed in occupations that were telework-friendly, their home broadband situation may have prevented them from continuing work. Alternatively, telework increased resilience in counties with higher broadband adoption rates, with marginal effects of -0.21 percentage points. That is, counties with high rates of broadband adoption had more resiliency (lower increases in unemployment) during the first two months of the pandemic.  During the April to December period, areas where a high percentage of workers could telework – but had low broadband adoption – saw lower rates of recovery. 

    During the initial months of the pandemic, a high ability to telework and a high broadband adoption rate helped dampen increases in unemployment rates. However, the longer-term effects of broadband on unemployment recovery were diminished. Counties with a high ability to telework but low broadband adoption rates were held back in recovering from April to December.  This is a striking finding that local broadband adoption rates are crucial for the potential impact of telework. In particular, federal programs put in place to subsidize household broadband access (the Emergency Broadband Benefit and Affordable Connectivity Programs) likely came too late to influence resiliency during the initial phase of the pandemic. 

    To read more about these findings and other correlations corresponding to counties resiliency, check out the full journal article: Carvalho, Mckenzie, Amy D. Hagerman, and Brian Whitacre. 2022. “Telework and COVID-19 Resiliency in the Southeastern United States.” Journal of Regional Analysis & Policy, https://jrap.scholasticahq.com/article/36123-telework-and-covid-19-resiliency-in-the-southeastern-united-states

    Carvalho, Mckenzie, Amy Hagerman, Brian Whitacare, and Teresa Haddock. “Broadband Adoption and Impacts on Covid-19 Unemployment Recovery in the South.” Southern Ag Today 2(26.4). June 23, 2022. Permalink