Southern Ag Today

Blog

  • The Russia/Ukraine Conflict and Farm Input Markets

    The Russia/Ukraine Conflict and Farm Input Markets

    The Russian invasion of Ukraine has already had a significant impact on the global economy.  In a recent article on this site, Dr. Aaron Smith explored the grain and oilseed market implications of the conflict.  As significant as these are, they are not the only market disruptions of concern to the agricultural sector.  Russia is a major producer of energy and fertilizer, key inputs across the entire agriculture industry.

    According to data from the U.S. Department of Energy, Russia is the third largest energy producer in the world and a significant source of oil and petroleum products for the U.S.  In 2021 the U.S. imported a total of 2.23 billion barrels of crude oil.  Only about 3% (72.6 million barrels) of this came from Russia – still enough to make Russia our fourth largest source of foreign oil.   Russia’s share of imported refined products is considerably larger than its crude oil market share.  In 2021, the U.S. imported 860.9 million barrels of refined products.  Russia supplied 20% (172.6 million barrels) of those imports, making that country our second largest foreign source of refined products (behind Canada).  Given Russia’s status as a major petroleum provider, it is not surprising that the sudden isolation of that market in response to the conflict has affected fuel prices.  For the week ending March 14, the U.S. average retail gasoline price (all grades, all formulations) was a record (in nominal terms) $4.414 per gallon, eclipsing the previous high from the summer of 2008. 

    Russia is also a global leader in fertilizer production and exports, as shown in Figure 1.  Russia dominates global exports of urea and ammonium nitrate.  According to World Bank data, in 2018 (most recent complete data) Russia accounted for 17% of all urea exports and 40% of all ammonium nitrate exports.  With respect to ammonium nitrate, the second largest exporter (the EU) accounted for just 7% of world exports.  In 2018, Russia was also the third leading exporter of potash, accounting for just over 17% of world exports (far behind Canada’s 43% export share).

    To be fair, fuel and fertilizer prices were on the rise well before the onset of hostilities in Ukraine.  Retail gasoline prices have increased steadily since their pandemic-induced low in April 2020.  Fertilizer prices began a steady march upward beginning last summer, topping out late last year before retreating in the first quarter of 2022.  But the effects of the Russian invasion – extensive sanctions on Russian products, loss of access to the global financial system for Russian companies, and the disruption of Black Sea trade routes – have reinforced and accelerated the inflationary trend on fuel and fertilizer.

    For farmers, the market impacts of the conflict in Ukraine will make a high-cost year even worse.  Farmers had already planned for expensive fertilizer, and fertilizer purchases for the new crop have likely already mostly been made.  Rising prices for nitrogen may yet be a problem for some producers, and it seems possible – given global reliance on Russians supplies of nitrogen – that availability of nitrogenous fertilizers may become limited if the conflict drags on.  Fuel prices are going to be far higher than most planning budgets assumed, cutting into expected margins, particularly in more energy-intensive production systems (e.g., irrigation-intensive crops like rice).  The commodity market reaction to the conflict has created an attractive pricing opportunity on some crops, but this early in the production cycle – with planting barely underway – the decision of how aggressively to forward price can be a difficult one.

    Figure 1.  Major Exporters of Selected Fertilizer Products

    Notes: 2018 exports by volume. Data Source: World Bank, World Integrated Trade Solution Database.

    References and Resources

    U.S. Department of Energy, Energy Information Administration Petroleum market data: https://www.eia.gov/petroleum/

     World Bank, World Integrated Trade Solution On-line Database International trade data by harmonized system (HS) code:  https://wits.worldbank.org/country-indicator.aspx?lang=en

    Anderson, John D. . “The Russia/Ukraine Conflict and Farm Input Markets“. Southern Ag Today 2(14.3). March 30, 2022. Permalink

  • The Cost of Avian Flu to the Southeastern Broiler Industry

    The Cost of Avian Flu to the Southeastern Broiler Industry

    Highly Pathogenic Avian Influenza (HPAI) is once again rearing its ugly head across the poultry industry. This year’s bird flu outbreak has taken millions of birds from the commercial broiler industry, egg industry, and turkey industry. According to USDA numbers as of March 21, 2022, a grand total of 11,901,888 commercial birds have been destroyed from control efforts in confirmed cases of highly pathogenic avian influenza (https://www.aphis.usda.gov/aphis/ourfocus/animalhealth/animal-disease-information/avian/avian-influenza/hpai-2022/2022-hpai-commercial-backyard-flocks the current count at the time of this printing may be higher). This number is sobering but is thankfully still much less than the over 50 million chickens and turkeys destroyed during the 2014-2015 outbreak.  Considering the Delmarva area as part of the southeastern poultry region, 3.59 million birds have been lost to HPAI thus far in the southeast alone. 32% of these, or 1.1 million, have been broiler type birds.

    Table 1: Total Bird Losses due to HPAI for Southeastern Poultry Industry (as of 3/21/22)

    DelawareMarylandMissouriKentuckyTotal
    Broilers       421,800         150,000       360,000       231,398       2,310,135
    Layers 1,146,937       1,160,333       1,160,333
    Turkeys         62,785         53,286          116,071
    Total      1,568,737       1,310,333       422,785       284,684       3,586,539

    Focusing on Broiler Impacts

    Since the southeastern poultry region is considered the “broiler belt”, and the highest percentage of losses in that region has been broilers, let’s focus on that impact. How do these losses compare to the total inventory of broiler type birds in this region? If you take the recent 2020 USDA inventory data (which excludes LA) and estimate a 2% inventory increase over the last two years, the southeastern region currently has approximately 9 billion live broilers in inventory. Losing 1.1 million broilers equates to losing 0.013% of the total inventory of the region – which doesn’t sound like much when you put it in those terms. Estimated total dollar value lost is a little more impactful number. Using an average live weight of 6.4# per broiler with a 75% dressing percentage and current combined southern states average traded value of $0.64 per pound of chicken, the lost broilers represent a total dollar value of $3,573,344 in lost revenue to the industry. According to a recent report from the National Chicken Council’s (https://www.nationalchickencouncil.org/wp-content/uploads/2022/03/Live-Chicken-Production-FARMECON-LLC-2022-revision-FINAL.pdf), the current average contract broiler pay rate across companies was estimated at $0.0676 / pound of live bird delivered to the plant. Using this rate, $503,246, or roughly 7% of the total industry value, would have gone to the contract broiler growers raising these birds. For these individual commercial poultry growers, the loss of a flock could represent up to 25% of their annual revenue and could be truly devastating to their operations.

    Is There Relief in Sight?

    The U.S. Department of Agriculture and state level agencies have the responsibility of protecting the nation’s agricultural industry population from disease outbreaks. Everyone involved in commercial poultry is focusing on tight biosecurity to avoid the HPAI losses seen in 2014-2015. Unfortunately, HPAI infection means mass depopulations. Fortunately, the Animal Health Protection Act authorizes USDA to provide indemnity payments to producers for birds and eggs lost due to HPAI, including costs of actual depopulation and mortality disposal. While these payments may not completely cover all losses, and this program does not cover losses incurred through additional out-times or other future business interruptions, they can go a long way to securing the future of the farm in the face of these catastrophic situations. Poultry growers can go to https://www.aphis.usda.gov/publications/animal_health/2016/hpai-indemnity.pdf for additional HPAI indemnity program information.

    Brothers, Dennis. “The Cost of Avian Influenza to the Southeastern Broiler Industry“. Southern Ag Today 2(14.2). March 29, 2022. Permalink

  • Using Put Options for Risk Management

    Using Put Options for Risk Management

    Commodity prices for corn, cotton, soybeans, and wheat are high, yet could go higher.  Put options on agricultural commodity futures are an important risk management tool for producers in today’s environment. Buyers of put options pay a “premium” for the right, but not an obligation, to sell a commodity at a specified price on a future date.  The premium price (cost) is based on five primary factors:

    1. Current futures price of the underlying commodity.
    2. Strike Price: Price at which the buyer can exercise the right to sell the underlying futures contract.
    3. Time to Expiration: Number of days until the option expires.
    4. Volatility: The variation of a trading price of the commodity over time.
    5. Interest Rate: The risk-free interest rate that matches the time to expiration.

     Scenario 1, depicted in Figure 1, simulates how these five factors impact the put option premium and provide price risk management for producers.

    Figure 1. Simulated Put Option Premiums – Various Strike Prices on Single Date. Author calculations.

    On March 17, 2022, September 2022 Corn futures (CU22) were trading for $6.49 per bushel.  The days to expiration are 162 days or 44.4% of a year.  The volatility is 36.79% and the risk-free interest rate is 0.50%.  An at-the-money (ATM) put option ($6.50) would be priced at $0.63 per bushel, while an out-of-the-money (OTM) put options ($6.40) would be $0.58 per bushel.

     Scenario 2 (Figure 2) illustrates how the put premium changes over time, if the market price, volatility, and interest rate remain at the March 17, 2022, values.

    Figure 2. Simulated Put Option Premiums – Time Premium over Multiple Dates. Author calculations.

    The risk that futures prices, volatility, or interest rates could change diminishes as the days to expiration decreases. With less time there is less risk and premiums decrease.  Scenario 2 shows the put premium dropping about $0.01 per bushel per week based on time. 

    Assume a producer buys a $6.50 September 2022 put option on March 17, 2022, for $0.63 per bushel.  The producer will receive $6.50 if the option expires worthless on August 26, 2022.  The effective price would be $5.87 after deducting the put option cost of $0.63 from the strike price of $6.50.

    An effective price of $5.87 is not attractive when the current futures price is $6.49.  But the buyer of a put option can sell his option before expiration and realize a higher effective price which makes buying puts a valuable risk management tool. Figure 3 illustrates how put option premiums change as time diminishes and futures prices fluctuate.   The table maintains volatility and interest rates at the March 17th levels.

    On April 16th, if September 2022 corn futures are still trading at $6.49, the producer could sell the put option for $0.57 and price his corn for $6.49 for a net price of $6.43 plus basis (Sell for $6.49 minus $0.63 cost to buy plus $0.57 for selling the put).  If the price rallies to $6.79, the net option loss increases to $0.18 per bushel (Sold for $0.45 and bought for $0.63) but the net price increases to $6.61 per bushel (Sold for $6.79 less $0.18 net put premium cost). If the price drops to $6.19, the gain on the put premium is $0.09 (Sold for $0.72 and bought for $0.63) and the net price is $6.28 (Sold for $6.19 plus $0.09 net put premium gain)

    Figure 3. Simulated Put Option Premiums – Single Strike Price, Multiple Dates & Futures Prices. Author calculations.

    Buying put options provides buyers protection against lower prices.  The premiums can be high, especially when volatility and time to expiration are high.  But when used for short periods of time, the premiums can retain a significant portion of their value. Buying put options requires no margin deposits although the premium is paid when purchased.  Put options are an important risk management tool for creating minimum price floors over short periods of time. 

    Mickey, Scott A. . “Using Put Options for Risk Management“. Southern Ag Today 2(14.1). March 28, 2022. Permalink

  • Market Trends for U.S. Blueberry: Implications for Southeastern U.S. Producers

    Market Trends for U.S. Blueberry: Implications for Southeastern U.S. Producers

    Annual harvested U.S. blueberry acreage has increased from 40,820 to 91,400 from 2000 to 2020 (Figure 1). In this same period, average blueberry yields increased from 4,480 to 6,630 pounds per acre, and the value of utilized production jumped from $177.8M to $904.8M. Georgia, North Carolina, and Florida were among the top eight producing states, with 21,700, 7,500, and 5,200 acres harvested, respectively, representing 30% of all U.S. blueberry acreage in 2019. Most of these Southeastern-grown blueberries are sold to the fresh market during the early season window of March through June. The 2019 average farm gate value for these three states was $256.2M, or 28.2% of the overall U.S. average farm gate value for cultivated fresh and frozen blueberries. While yields are relatively lower compared to northern growing states, ranging from 4,160 to 4,740 pounds per acre, grower prices are relatively higher, from $2.64/lb. in Florida to $1.42/lb. in Georgia.

    As evidenced by the improved U.S. demand for blueberries, coordinated research and promotion efforts have proven successful drivers of industry profitability. Growers are encouraged to inform production decisions based on historical market trends and current price movements, with the goals of producing to market specifications and building in swift targeted responses to anticipated consumer demand shifts. Produce buyers possess the market side data metrics and timely analytics while growers are capable of manipulating inputs and varietal choices. Adopting a grow-on-demand approach built on shared data analysis between producers and retailers may allow the industry to capture added revenues and provide higher quality fresh berries to consumers.

    Source: Developed from U.S. Department of Agriculture. May 2021. Noncitrus Fruits and Nuts 2020 Summary. National Agricultural Statistics Service. Link: https://downloads.usda.library.cornell.edu/usda-esmis/files/zs25x846c/sf269213r/6t054c23t/ncit0521.pdf

    Morgan, Kimberly L. . “Market Trends for U.S. Blueberry: Implications for Southeastern U.S. Producers“. Southern Ag Today 2(13.5). March 25, 2022. Permalink

  • U.S. Agricultural Trade with Plenty of Uncertainties but Expected to Hit Record Numbers in 2022

    U.S. Agricultural Trade with Plenty of Uncertainties but Expected to Hit Record Numbers in 2022

    U.S. agricultural exports are projected to reach a record of $183.5 billion in 2022, up $34.4 billion from 2020 and $6.5 higher than 2021. This increase is primarily driven by higher exports of most commodity groups with oilseeds and products leading the way (ERS-FAS/USDA).  Overall good commodity prices are the main reason for this record-setting value of exports with soybean exports reaching $31.3 billion. Overall grain and feed exports are projected to reach $42.9 billion led by higher wheat as well as feed and fodder forecasts.  Horticulture product exports reaching a record of $38.5 billion is partly driven by tree nut export projection while cotton reaching its second-highest level at $8 billion. Finally, livestock poultry and dairy exports are forecast at a record $39.2 billion, with gains in beef and dairy more than offsetting declines in pork.  Mexico is forecast to overtake Canada as the second-largest U.S. agricultural market with a projection of $27 billion, while Canada is projected at $26 billion.  China is expected to remain the largest market with a forecast of $36 billion.

     U.S. agricultural imports in 2022 are forecasted at $172.5 billion, up $25.8 billion from 2020 and $1.4 billion higher than 2021 due to expected increases in livestock and beef products, horticultural products and the new “Agricultural Products” definition and in this case distilled spirits. The U.S. agricultural trade surplus is expected to increase to $11 billion in 2022. Recent global events, mainly the Russia-Ukraine war could have significant impacts to these forecasts.

    Ribera, Luis. “U.S. Agricultural Trade with Plenty of Uncertainties but Expected to Hit Record Numbers in 2022“. Southern Ag Today 2(13.4). March 24, 2022. Permalink