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  • Large Placements Bring Tighter Feeder Supplies

    Large Placements Bring Tighter Feeder Supplies

    USDA released the May Cattle on Feed report on Friday, May 20th and it showed continued large numbers of cattle on feed.  Placements, marketings, and cattle on feed were 99.1, 97.8, and 101.7 percent of a year ago, respectively.  Placements and the number on feed were larger than the average pre-report estimates and so the report was regarded as being a negative one for the market.  

    The report was important in terms of calf price expectations for later this year.  Placements were 99.1 percent of a year ago, 1.809 million head.  For the January-April period, 7.651 million feeders have been placed.  That is the second largest number, behind only 2019, in the last 20 years.  Maybe more important, it is the largest number of placements as a percent of January 1 cattle outside of feedlots.  Placements this year have totaled 30 percent of the January 1 feeder cattle supplies.  Again, more evidence of pulling feeders ahead and it implies tighter supplies of feeder cattle as the year goes on.  Those tighter supplies should translate into higher calf and feeder prices.

    The next quarterly cattle on feed report will have some more evidence of heifers on feed.  Given the rate of placements of available feeder cattle, heifers as a percent of cattle on feed should remain large, meaning continued herd contraction from the replacement side, as well as the cow side.

    Anderson, David. “Large Placements Bring Tighter Feeder Supplies“. Southern Ag Today 2(22.2). May 24, 2022. Permalink

  • Forward Pricing with Options on ICE Cotton Futures

    Forward Pricing with Options on ICE Cotton Futures

    A producer’s marketing plan is a contingency plan to sell a commodity in the context of price risk. Cotton prices have been in a long term up-trend, with considerable volatility in recent weeks (see the blue line in Figure 1). A typical marketing goal would be to sell commodities at relatively higher prices, or (conversely) protect un-sold commodities from down-side price risk.  

    One way to reduce the risk of lower prices is to forward cash contract portions of expected production.  However, drought-elevated production risk in 2022, coupled with uncertain plantings, uncertain yield impacts from reduced fertilizer usage due to higher fertilizer prices, inverted futures markets, likely price volatility, and higher costs of financing have all likely led cotton merchants to limit their forward cash contract offerings.

    Futures hedging by selling ICE cotton futures contracts is another approach to set a price floor, subject to basis risk. However, the possibility of higher trending futures has raised the actual and potential margin risk of futures hedging.  In addition, futures hedging sacrifices any benefit of potentially selling at higher cash prices if the market continues to rise.

    Put options are one way to lock-in high price levels without margin calls or sacrificing upside flexibility. A put option gives the buyer the right, but not the obligation, to sell cotton futures at a certain price. In Figure 1 below, Dec’22 cotton futures (the blue line) have trended higher since 2021. As of May 3, the Dec’22 futures settled at 126.18 cents per pound. While this has happened, the premium for put options on Dec’22, like the $1.20 put option graphed in red, have gotten cheaper over the long term. The $1.20 put option means that the buyer of this put option has the right to sell Dec’22 cotton futures at $1.20 per pound.  Note that hedgers have flexibility in the price coverage level by being free to choose from different strike prices.

    Put options at a given strike price cost less in a rising market because the put option gives the right to have sold Dec’22 futures at $1.20, which has intrinsic value only when the underlying futures price is below $1.20.  Therefore, put option premiums move opposite to the direction of the underlying futures price.  This is important because an increasing put option premium can act as an insurance payment against falling futures and falling cash prices (assuming a stable cash basis).  The insurance analogy is important since nobody knows the direction of futures prices for certain.  And unlike other forms of insurance, put options can be offset when they are no longer needed, e.g., when the crop is sold in the cash market, giving hedgers a chance to recover  some of their initial expense in option premiums.

    At 9.71 cents per pound (as of May 3), buying a $1.20 put option on Dec’22 ICE futures is essentially buying the right to a 110.29 cent short futures ($1.20-$0.0971) position, without the margin call exposure and without removing upside potential if markets continue to strengthen.   Waiting to implement this strategy could be beneficial, i.e., more affordable, if ICE cotton futures continue to rise, which they might.  So hedging portions of expected production with put options over the next several months might be a good way to dollar-cost-average decent hedged prices.

    Figure 1. Dec’22 ICE Cotton Futures Settlement Price (in Blue) vs. Associated 120 cent Put Option Premium (in Red).

    Daily

    July 28, 2021 – May 3, 2022

    Robinson, John. “Forward Pricing with Options on ICE Cotton Futures“. Southern Ag Today 2(22.1). May 23, 2022. Permalink

  • Mental Health & Agriculture: There is Always Hope

    Mental Health & Agriculture: There is Always Hope

    Agriculture is known to have numerous unique occupational hazards. Physical hazards include heat and sun exposure and the potential dangers of working with heavy machinery. Working out in the elements also brings the risk of venomous snakes, spiders, and disease-carrying mosquitos. What is less often discussed, however, are the mental and emotional hazards associated with working in agriculture. The volatile farm economy, long days at work, social isolation, and natural disasters can add stress beyond what is expected or tolerated in other industries. 

    May is Mental Health Awareness Month and is a significant opportunity to remind anyone struggling that they are not alone and do not have to suffer in silence. A 2021 poll commissioned by the American Farm Bureau Federation found that farmers and farm workers were more comfortable talking to friends, family, and doctors about stress and mental health than in 2019. Open dialogue about stress and mental wellbeing can help reduce stigma in the community, which is often cited as a barrier to seeking care for a mental health challenge. Emotional wellness is a key dimension of our health and must be maintained, just like physical wellness, to live a fulfilling life. If you are struggling or notice someone else struggling, seek help. Recovery from a mental health challenge or illness, like recovery from a heart attack or other physical illness, is possible.  There is always hope.

    The following resources are designed for agricultural producers and families:

    Authors:  Miquela Smith, MPH Extension Program Specialist – Health and Tiffany Dowell Lashmet, Associate Professor & Extension Specialist – Ag Law

    Smith, Miquela, and Tiffany Dowell Lashmet. “Mental Health & Agriculture: There Is Always Hope.” Southern Ag Today 2(21.5). May 20, 2022. Permalink

  • U.S. Long-Grain Rice Faces Growing Challenges Overseas

    U.S. Long-Grain Rice Faces Growing Challenges Overseas

    The U.S. has consistently ranked among the top-5 rice exporters in the world. However, since hitting a record 3.98 million metric tons (mmt) in 2002, U.S. rice exports have shown a downward trend, reaching 2.98 mmt in the marketing year 2020/21. The decrease in US exports contrasts with a growing global rice market and results in a significant drop in the US share in global rice exports in the last two decades. The decrease in U.S. exports is exclusively a result of a drop in long-grain rice exports since exports of medium- and short-grain rice have shown a positive trend. Long-grain rice is the main type of rice produced in the Mid-South, accounting for over 91% of the volume of production. 

    In the last 20 years, exports of long-grain rice to North America and the Caribbean, the two largest market destinations, have grown marginally (less than 1% a year), while those to Central America and the Middle East have decreased moderately (between 1 and 2% a year on average). Exports to Europe have not recovered since the GM-contamination case in the mid-2000s. Exports to Mexico, the largest market for US long-grain rice accounting for a quarter of total exports in the period 2018-2020, show almost no growth since the early 2000s, and more recently are in a downward trend as competition from other suppliers, primarily Mercosur, grow. Haiti remains a core and growing market for US rice, but one plagued with risks and uncertainty. Competition in Central America, primarily from Mercosur, is eroding the market share of US rice despite its preferential access under DR-CAFTA. 

    Efforts are being made to improve the competitiveness of US rice, particularly when it comes to rice quality. The US was once regarded as the golden standard for long-grain rice quality, but many will argue that is a thing of the past. The blame goes far and wide as to why the quality of US long-grain rice has diminished, but what matters is that the industry is taking steps to address the issue. The US exports around half of its rice crop every year, so working on regaining competitiveness in the global market is of utmost importance.   

    Durand-Morat, Alvaro. “U.S. Long-Grain Rice Faces Growing Challenges Overseas“. Southern Ag Today 2(21.4). May 19, 2022. Permalink

  • Potential Cost Savings of Multiple Inlet Rice Irrigation

    Potential Cost Savings of Multiple Inlet Rice Irrigation

    Irrigation water can be one of the largest expenses associated with rice production, particularly when energy prices are high as in the current production season. Multiple inlet rice irrigation (MIRI) has potential to reduce the cost of applying irrigation water to rice. MIRI uses poly pipe to distribute irrigation water to all rice paddies simultaneously. This differs from conventional cascade flood in which water is applied to the first paddy at the top of the field and then flows over spills to lower paddies until the entire field is flooded. Fields are flooded much faster with MIRI. Based on examples in Arkansas, applied water savings of up to 25 percent are achievable with MIRI relative to cascade flood. Other potential benefits of MIRI relative to cascade flood include reduced irrigation labor and higher rice grain yields. Labor is reduced with MIRI due to less adjustment of levee gates and better management of water depth during the growing season. Yields can be 3 to 5 percent higher under MIRI due to a reduced “cold water” effect at the top of the field (more cold water concentrated at top of field with cascade flood) and improved nitrogen efficiency due to faster flooding of the field. 

    Figure 1 presents rice irrigation variable costs per acre for both cascade flood and MIRI. Irrigation variable costs include energy, repairs and maintenance, irrigation labor, and for MIRI, the additional cost of poly pipe pick-up and removal. Rice irrigation variable costs are presented for three total dynamic head (TDH) levels (80 ft, 100 ft; 120 ft), and assume 32 acre-inches of water are applied under cascade flood and 24 acre-inches of water are applied under MIRI during the growing season. Both applied water amounts are typical water amounts for cascade flood and MIRI as reported in the Arkansas Rice Production Handbook. 

    Irrigation variable costs are presented for both diesel and electric power. Irrigation energy costs were calculated based on diesel and electric energy consumption data from McDougal (2015). A diesel price of $3.94/gallon and an electric price of $0.138/kWh were used in the energy cost calculations. The diesel price comes from 2022 Arkansas field crop enterprise budgets, while the electric price represents a median price estimated from electric rate schedules for irrigation from various electric cooperatives located throughout eastern Arkansas. Irrigation labor is charged at $11.33/hour, also from 2022 Arkansas field crop enterprise budgets. 

    Irrigation variable costs are much lower for electric power than for diesel power (Figure 1). Farmers have switched many of their diesel irrigation motors to electric motors because the cost of electricity has been lower and less variable over time relative to the cost of diesel. Irrigation variable costs are lower for MIRI than for cascade flood at all TDH levels. Lower costs are associated with less applied water and lower irrigation labor under MIRI. Monetary savings from MIRI are greater for diesel power than for electric power because applied water costs are much greater under diesel power than under electric power. Applied water cost for diesel power ranged from $5.35/acre-inch at 80 ft TDH to $8.02/acre-inch at 120 ft TDH. In contrast, applied water cost for electric power ranged from $2.10/acre-inch at 80 ft TDH to $3.15/acre-inch at 120 TDH. Diesel irrigation motors could potentially receive larger monetary payoffs from MIRI than electric irrigation motors on farms. Nonetheless, rice fields supplied with irrigation water by both diesel and electric motors could potentially benefit monetarily from MIRI relative to conventional cascade flood irrigation.

    References and Resources

    McDougall, W. M. (2015). A Pump Monitoring Approach to Irrigation Pumping Plant Performance Testing. Graduate Theses and Dissertations Retrieved from https://scholarworks.uark.edu/etd/1146

    University of Arkansas System Division of Agriculture, Cooperative Extension Service. 2022. Arkansas Field Crop Enterprise Budgets. https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

    University of Arkansas System Division of Agriculture, Cooperative Extension Service. 2021. Arkansas Rice Production Handbook. https://www.uaex.uada.edu/farm-ranch/crops-commercial-horticulture/rice/

    Wilkins, Brad. “Potential Cost Savings of Multiple Inlet Rice Irrigation“. Southern Ag Today 2(21.3). May 18, 2022. Permalink