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  • What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities

    What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities

    Commodity reference prices are used in both the price loss coverage (PLC) and agriculture risk coverage (ARC) programs to calculate program benefits.  For most commodities, reference prices have not increased since their establishment in the 2014 Farm Bill.  One of the major farm bill changes farm groups would like to see in the next farm bill is an increase in reference prices to catch up with input price inflation.  However, a feature added to the 2018 Farm Bill allows for reference prices to increase along with commodity prices.  Since most commodity prices have increased over the past few years it is interesting to see whether reference prices are likely to increase.

    Section 1101 of the 2018 Farm Bill (P.L. 115-334) allows for the “effective reference price” for a commodity to replace the statutory reference price if 85% of the previous five-year Olympic average of the national marketing year average price is greater than the statutory reference price (Schnepf).  The “effective reference price” may increase to as much as 115% of the statutory reference price. 

    Table 1 contains the statutory reference prices and calculated commodity “effective reference prices” for 2023 through 2028 determined using historical prices and CBO May 2022 commodity price estimates.  The statutory reference prices are blue.  If the projected “effective reference prices” are green or red that means the commodity prices have risen enough to generate a higher “effective reference price”.  If the calculated reference price is green it means the “effective reference price” is less than 115% of the statutory reference price.  If the calculated reference price is red it means the “effective reference price” is greater than 115% of the statutory reference price and would be set at 115% of the statutory reference price.

    Corn, soybeans, oats, grain sorghum, mustard seed, sunflower, safflower and large and small chickpeas could see an increase in “effective reference prices” over the next six years depending upon whether CBO’s price estimates are realized.  While many commodities such as wheat have experienced significant price increases, prices have not increased enough to overcome only being able to use 85% of the Olympic average of the previous 5 years commodity prices.  If the “effective reference prices” in Table 1 are realized then the cost of increasing reference prices for all commodities should be significantly lower when cost estimates are developed during farm bill discussions. 

    Table 1.  Statutory Reference Prices and Calculated “Effective Reference Prices” Based Off of Historical and CBO Estimated Prices for Covered Commodities.

    References

    Schnepf, R.  “Farm Commodity Provisions in the 2018 Farm Bill (P.L. 115-334), Congressional Research Service Report R45730, May 21, 2019.  The report can be found at: https://www.everycrsreport.com/files/20190521_R45730_24831706457d3ed90c82fa471d93b778b7d33676.pdf

    Congressional Budget Office (CBO).  USDA Mandatory Farm Program Baseline, May 2022.  The report can be found at: https://www.cbo.gov/system/files?file=2022-05/51317-2022-05-usda.pdf

    Author: Joe Outlaw
    Professor and Extension EconomistCo-Director Agricultural & Food Policy Center at Texas A&M University
    joutlaw@tamu.edu 

    Outlaw, Joe. “What is the Expected Impact of High Commodity Prices on Effective Reference Prices for Covered Commodities.” Southern Ag Today 2(50.4). December 8, 2022. Permalink

  • Enterprise Budgeting

    Enterprise Budgeting

    Enterprise budgets are a helpful tool for organizing and understanding what production costs are for the coming year. Producers can use enterprise budgets to examine their farm by crop, variety, irrigation, tillage, or any other production practice. The more specific the enterprise budget, the more a producer can determine where their farm is profitable and where it can be improved. Enterprise budgets are typically developed in the late fall or winter as producers plan their next year’s crop decisions. 

    Table 1 is an example of a corn enterprise budget developed at Mississippi State. The budget title should describe what is being examined in as much detail as possible. The income section should be a projection of the prices and yield expected for that enterprise. The costs can be broken down into direct and fixed expenses. Direct expenses are any costs needed in the production of the given crop, such as costs of fertilizers, herbicides, insecticides, seed, labor, etc. Fixed expenses are any costs that would be paid regardless of the production. In the example budget, this would be fixed expenses related to equipment, such as depreciation and interest. Returns above total expenses or break-even prices can then be calculated based on the expenses.

    Mississippi State creates yearly enterprise budgets across various crops, like the one presented in Table 1. Costs are obtained from companies across Mississippi, and a multidisciplinary team puts together example enterprise budgets based on the latest trends/recommendations. Since every producer will have different costs and revenues, it is important for each producer to determine their own enterprise budgets that match their farm’s situation. Over 80 example budgets are available to help with this process at: https://www.agecon.msstate.edu/whatwedo/budgets.php. In addition, each state in the Southern Region will have their own version of enterprise budgets, so contact your local Agricultural Economics department for more information (links below).  In times where input costs are especially high, developing an enterprise budget can help in managing those costs and in determining which crop is going to be the most profitable. 

    Alabama: https://www.aces.edu/blog/tag/profiles-and-budgets/?c=farm-management&orderby=title

    Arkansas: https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

    Florida: https://fred.ifas.ufl.edu/extension/commodityenterprise-budgets/

    Georgia: https://agecon.uga.edu/extension/budgets.html

    Kentucky: https://agecon.ca.uky.edu/budgets

    Louisiana: https://www.lsuagcenter.com/portals/our_offices/departments/ag-economics-agribusiness/extension_outreach/budgets

    North Carolina: https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets/

    Oklahoma: http://www.agecon.okstate.edu/budgets/

    South Carolina: https://www.clemson.edu/extension/agribusiness/enterprise-budget/index.html

    Texas: https://agecoext.tamu.edu/resources/crop-livestock-budgets/

    Tennessee: https://arec.tennessee.edu/extension/budgets/

    Table 1. Example Corn Enterprise Budget

    Mississippi state university logo

    Author: Brian E. Mills

    Assistant Professor and Extension Economist

    Delta Research and Extension Center

    Mississippi State University

    Email: b.mills@msstate.edu

    Mills, Brian. “Enterprise Budgeting.” Southern Ag Today 2(50.3). December 7, 2022. Permalink

  • Fed Cattle Prices Jump Higher

    Fed Cattle Prices Jump Higher

    Fed cattle prices in the Southern Plains jumped a few more dollars per cwt last week to get to $154.71 per cwt.  That was almost $20 per cwt higher than the summer low.  Prices were also the highest since Spring 2015 and the highest for the first week of December since 2014.

    Fed cattle prices typically increase, seasonally, from summer through the end of the year.  This year, there was not much of a summer low with prices trading between $135 and $140 most of the year.  

    Several factors are contributing to rising fed cattle prices.  It appears that slaughter numbers are beginning to decline compared to earlier in the year.  Slightly fewer numbers have packers bidding more for available supplies.  It appears that beef demand continues to support the market.  

    Throughout this year, fewer fed cattle graded Prime than during the corresponding week of the prior year.  That has led to rising premiums for Prime beef.  The national weekly direct slaughter cattle premium for Prime has averaged $23.59 per cwt this year compared to $18.19 in 2021.  The premium was $30.03 per cwt last week marking 11 straight weeks over $30 per cwt.  It surpassed $30 per cwt in only 6 weeks of November and December 2021.  Prior to 2021 the average weekly premium had never surpassed $30 per cwt.

    Higher fed cattle prices are pulling calf and feeder prices along for the ride.  Feed costs drifting lower are helping boost calf and feeder prices.  Georgia 5-600 pound steers have climbed from $160 to $170 per cwt over the last few weeks.  Southern Plains 5-600 pound steers have reached $190 over the same period.  Prices for these calves typically climb through the new year and into March.  

    Author: David Anderson

    Professor and Extension Economist Livestock and Food Products Marketing, Dairy, Policy

    danderson@tamu.edu

    Anderson, David . “Fed Cattle Prices Jump Higher.” Southern Ag Today 2(50.2). December 6, 2022. Permalink

  • Looking Ahead to the 2023 Cotton Market

    Looking Ahead to the 2023 Cotton Market

    For planning purposes, it is never too early to think about next season’s opportunities and risks.  To start with, we’re still not settled on the size of the 2022 cotton crop. USDA forecasted the latter back in May at over 16 million bales, and their November forecast is two million fewer.  Many in the southern plains expect more downward revision.  If the old crop carry-out is the currently-forecasted three million bales or fewer, this will be the first contribution to what is shaping up as a tight new crop situation for the 2023/24 marketing year. 

    The second consideration is new crop planting.  Relative prices of competing crops like feedgrains and wheat may induce fewer cotton acres being planted in 2023.  For example, if you take Dec’23 corn futures trading over $6 per bushel and Dec’23 cotton under 80 cents per pound, the result is a historically high ratio of corn futures prices to cotton futures prices.  History suggests that when pre-plant corn futures prices are this high in relation to cotton futures (presently around 8.0), we could expect cotton planted acres around nine million acres, all other things being equal (see Figure 1 below).  

    Obviously, there are other competing crop prices to consider such as soybeans, peanuts, and wheat.  However, the corn:cotton model reflected in Figure 1 does a decent job incorporating the influences of those other competing crops. 

    The third consideration is the lingering drought impact of the fading La Niña.  A relatively dry looking drought map implies at least average, if not above average, abandonment of cotton acreage in the southern plains for the 2023 crop, which will increase U.S. average cotton abandonment.  Nine million planted acres of cotton with average abandonment implies potentially very tight supplies for the 2023/24 marketing year.  It might imply an in-season weather market, with market volatility in anticipation of (or reaction to) milestone supply reports from USDA. 

    In short, there may be stronger new crop prices, but they may gyrate sharply between planting and harvest, which is typically volatile weather market behavior.  

    Figure 1. U.S. All Cotton Planted Acreage and Ratio of New Crop Corn:Cotton Futures Ratio.

    Author: John Robinson

    Professor and Extension Economist

    jrcr@tamu.edu

    Robinson, John. “Looking Ahead to the 2023 Cotton Market.” Southern Ag Today 2(50.1). December 5, 2022. Permalink

  • The Potential Implications of Large-Scale Solar Development: A Case Study on Maryland’s Agricultural Industry

    The Potential Implications of Large-Scale Solar Development: A Case Study on Maryland’s Agricultural Industry

    Maryland has the most significant solar, specific carve-out of any state at 14.5% energy generation sales by 2028 (1) – the majority of which will be produced through utility-scale solar operations. Utility-scale solar is a solar energy generating system that sells electricity through power purchase agreements or into the wholesale electricity market (2). Utility-scale solar facilities are usually owned by a generation company and require a Certificate of Public Convenience and Necessity (CPCN) to be developed and connected to the grid (2). 

    Although there are mandatory considerations and research-based claims to prioritize solar development on non-farmland, that has not been the case in Maryland and other states. In Maryland, only one of the currently built utility-scale solar projects is not on “Prime Farmland” or “Farmland of Statewide Importance,” as defined by the Natural Resources Conservation Service (NRCS). More specifically, 44% of utility-scale solar acres developed are on “Prime farmland,” 48% on “Farmland of statewide importance,” and 8% on “Not prime farmland.”

    Producers who own land are acting as rational economic agents, given the estimated additional gross revenue utility-scale solar can generate for the landowner compared to traditional crop rotation gross annual farm profits. In the lefthand column of the following table is the range of annual gross rental rates, less the land payment or land cost[1], a commercial corn-soybean field rotation receives per acre in Maryland[2]. The first row shows the range of utility-scale solar rental payments collected from focus groups and leases. The most likely outcome amongst the ranges of annual gross revenues for a farmer who transitions land from farmland to solar generation in Maryland would be a ~350% increase in gross revenue per acre. 

    The ambitious renewable energy generation goals of Maryland, paired with the financially attractive offers landowners are receiving, have and look to continue to result in the development of utility-scale solar generation facilities on farmland. The continuing increase in renewable energy generation, like large-scale solar generation, will likely result in the loss of farmland nationwide. It would be advantageous for the Southern region to conduct outreach and research to determine the impacts of farmland loss on renewable energy generation.  

    This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2020-68006-31182/project accession no. 1022637, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.

    Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

    1. Renewable Energy Development and Siting, (2020, August 14). Governor’s Task Force on REDS –Final Report. Retrieved November 18, 2022, from https://docs.google.com/presentation/d/1F4wXH9XD9Tbozab6gpuhLg4tmuGJSw52/edit#slide=id.p13
    2. Maryland Public Service Commission. (2022, October 7). Solar in Maryland – Maryland Policies. Electricity – Renewable Energy. Retrieved November 18, 2022, from https://www.psc.state.md.us/electricity/renewable-energy/solar-in-maryland/ 

    [1] The land payment or cost is assumed to be the same per acre between farmland and land developed into solar fields

    [2] Derived from University of Maryland Extension Enterprise Budgets (https://extension.umd.edu/programs/agriculture-food-systems/program-areas/farm-and-agribusiness-management/grain-marketing/crop-budgets)

    Thilmany, Elizabeth. “The Potential Implications of Large-Scale Solar Development: A Case Study on Maryland’s Agricultural Industry.” Southern Ag Today 2(49.5). December 2, 2022. Permalink