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  • U.S. Sugar Policy and Prices

    U.S. Sugar Policy and Prices

    The price of domestic raw cane sugar and the price of refined beet sugar both have direct implications for current United States (U.S.) sugar policy. Nearby futures settlement prices for raw cane sugar and a price range for wholesale Midwest refined beet sugar (free on board factory as quoted each week in Milling and Baking News) are considered the two primary mechanisms to evaluate sugar market dynamics. Figure 1 depicts monthly per pound sugar prices, which as of April 2022 were 42.00 cents for beet sugar and 36.66 cents for raw sugar. According to USDA Economic Research Service (ERS) data, the U.S. wholesale beet sugar price has ranged since 2008 between a low annual average of 28.84 cents a pound in 2012/13 and a high annual average of 55.81 cents a pound in 2010/11 (October-September fiscal year). Furthermore, the USDA ERS reports that U.S. raw sugar price has similarly ranged from a low annual average of 21.00 cents a pound in 2012/13 to a high annual average of 38.46 cents a pound in 2010/11. 

    Figure 1. U.S. Refined Beet Sugar and Raw Sugar Prices (cents per pound), 2008-2022. 

    Source: USDA ERS

    Both U.S. beet sugar and raw cane sugar prices rose significantly from 2009 to 2012. A combination of tight domestic sugar supplies and announcements that the USDA would not allow for an increase in sugar imports prior to the end of the marketing year resulted in the raw sugar price in FY 2010 increasing 74% and the refined beet sugar price increasing by 50%. These price increases in the U.S. market occurred simultaneously as world sugar prices began to increase three-fold. The major sugar-exporting countries of India and Brazil reduced global supplies as adverse weather and prices for biofuels reduced exportable surplus in each country. Since U.S. sugar refiners import sugar under obligations of the sugar program, refiners had to compete against these higher prices that foreign supplies were receiving in the world market, hence increasing the domestic price paid to entice imports. However, the world sugar price fell from 30 cents per pound in 2011 to 23 cents in 2012 and then to 18 cents in 2013, lowering any supportive impact on U.S. sugar prices. 

    For the period 2008-2014, sugar imports from Mexico enjoyed virtually unhindered access to the U.S. domestic market via NAFTA. At its peak in 2013, sugar imports from Mexico came in over 2 million STRV, accounting for 66 percent of total U.S. imports for sugar. Consequently, increases in the amount of U.S. raw sugar supplies caused domestic raw sugar prices to decline. As a result of Mexico’s increased raw sugar shipments, sugar producers in the U.S. filed an anti-dumping and countervailing duty case of injury with both the U.S. Department of Commerce (DOC) and the U.S. International Trade Commission (ITC) in March 2014. According to ITC findings, there was determination that the U.S. sugar industry had sustained significant economic injury from Mexico’s action.  With the ITC’s findings, both the U.S. and Mexico entered into a suspension agreement with the key constraint of limiting the supply of imported sugar from Mexico. Additionally, terms were put in place specifying both minimum price and maximum quantity requirements on Mexican sugar destined for the U.S. market.  

    Another issue of concern for the domestic sugar industry arose in 2016 when legislation was proposed that would require the display of genetically engineered ingredients on food labels. Perception from this proposed legislation induced an excess in beet sugar supply relative to the supply of cane sugar. This scenario brought about a contraction in the price spread between cane and beet sugar. With the ensuing price contraction for beet sugar, the sugar industry took advantage of large inventories in beet sugar as shown in Figure 2. With passage of legislation establishing national labeling guidelines for food products containing GMO ingredients, beet sugar deliveries began to increase thus drawing down extant beet sugar supplies to such an extent that by 2018 the historical margin between U.S. beet and cane sugar had been reestablished.  

    Figure 2. U.S. Sugar Inventories, by source. 

    Source: USDA ERS

    Of the major events impacting domestic U.S. sugar prices, adverse weather events in October of 2019 played a significant role when flooding disrupted both the planting and harvesting of sugar beets. This disruption induced both a sudden and precipitous drop in U.S. beet sugar production, forcing many processors to declare force majeure. These actions caused refined beet sugars to increase by 26 percent per pound (35 cents per pound to 44 cents per pound) from September to November 2019. With improved crop conditions in FY 2021, prices retreated to settle around 36.5 cents per pound.

    In comparison with other major agricultural commodity markets, domestic policies for world major sugar producers are more prevalent and play a greater role than is the case for other agricultural commodities. Since there is a greater level of variation in sugar policy from country to country, the retail price of sugar reflects this in the world futures contract price. According to USDA data, from 2009 to 2017, the average monthly world price for raw sugar averaged 19.23 cents per pound. For the period 2009 to 2017, sugar prices have experienced a fair amount of volatility ranging from a low of 13.42 cents per pound in 2015 to a period high of 28.42 cents per pound in 2011. Figure 3 illustrates the imported price that refiners in the U.S. paid for foreign raw sugar (including freight costs). In essence, when the import tariff on raw sugar (to include freight) is coupled with the world raw price, a price ceiling is established on the U.S. raw market. From Figure 3, the U.S. raw price (blue line) has approached the foreign landed price (grey line) as increases in the world raw price track appreciation in the domestic market. 

    Figure 3. Raw Sugar Prices (U.S. futures, World futures, and World futures sugar imported into U.S.)

    Source: USDA ERS

    References:

    Sowell, Andrew R. and Ronald C. Lord. Sugar and Sweeteners Outlook, SSS-M-387, U.S. Department of Agriculture, Economic Research Service, November 17, 2020.

    USDA ERS. (2022). Sugar & Sweeteners Background.  https://www.ers.usda.gov/topics/crops/sugar-sweeteners/background/.

    Deliberto, Michael. “U.S. Sugar Policy and Prices“. Southern Ag Today 2(31.1). July 25, 2022. Permalink

  • Fixtures and Farm Leases

    Fixtures and Farm Leases

    Farm tenants often make improvements to the farm they are leasing. Building or repairing sheds or barns are an example, as is a tenant purchasing and installing irrigation equipment. However, before doing so, tenants should consider the legal status of these investments.  This issue is important as almost 40% of U.S. farmland is rented/leased (Figure 1).

    Legally, property comes in two forms, real and personal. Real property is land and everything growing upon or attached to it. Personal property is essentially everything else. A fixture, however, is personal property that becomes real property by being incorporated into or attached to real property.  Figure 2 provides an illustration of these concepts. 

    Whether an improvement qualifies as a fixture is important because fixtures are owned by the owner of the real property to which they become attached, regardless of who owned them before they were attached. Absent an agreement to the contrary, a landowner is entitled to keep fixtures at the end of a lease. Further, a tenant’s insurance may not cover a fixture, and if the landowner has a mortgage, the landlord’s lender may have a security interest in it, while the tenant’s lender may not.  

    Courts typically consider three factors when determining whether personal property has become a fixture. The first is whether the object is physically or constructively attached to real property. Constructive attachment occurs when the object comprises a necessary, integral, or working part of another object that is physically attached to real property. The second factor is whether the object is adapted to the use of real property. Thus, the more useful an article is to normal operations conducted on the property, the more likely it is to be considered a fixture. However, the most important of the three factors is whether there is evidence that the tenant intended to attach the object permanently. Courts are likely to presume such intent if removing the object would cause material injury to the real property or other fixtures. However, the best evidence of the parties’ intent is a provision in a written lease specifically stating who owns the improvement and what is to happen to it at the end of the lease. Tenants who make improvements without such language risk losing ownership and control of those improvements.

  • An Initial Look at Forced Base Update on the South

    An Initial Look at Forced Base Update on the South

    One of the questions policy economists get the most from farmers is how likely is it that they will get to update their base acres in the hopes of finally converting their non-base acres into base.  For example, there is a significant amount of cotton produced in the Texas Panhandle that does not have seed cotton base and therefore is not eligible for ARC or PLC protection.  In previous base update opportunities provided in the 2002, 2014 and 2018 (for cotton only) Farm Bills, producers always had the choice to stay with the crop bases that were established in the 1985 Farm Bill or update to align their crop bases more closely to current plantings.  Given the choice, producers rarely would choose to have less total base acres even if it meant more closely aligning their bases to current plantings.  This type of update has generally been scored by the Congressional Budget Office (CBO) as having a positive cost so Congress has had to find the money to update crop bases.

    One of the suggestions currently making the rounds in Washington D.C. is a forced base update where producers who were planting less than their farm’s base acres during some specified time period would lose base and similarly, those that were planting more than their current base acres would gain base.  Proponents see this as costing less to implement, as some farmers will most certainly gain base acres while others would lose base.  While the devil is very much in the implementation details that would be determined by USDA, a quick evaluation of USDA-NASS planted acre data relative to USDA-FSA base acre data for the 13 Southern States indicates the South would lose a considerable amount of base in a forced base update situation where keeping old crop bases would not be an option.

    Table 1 compares the planted acres of nine primary covered commodities (corn, grain sorghum, soybeans, rice, wheat, cotton, peanuts, barley and oats) in the South and indicates that an average of 53.6 million acres were planted in 2021 and 2022.  This compares to 2021 total base acres of 62.1 million acres.  Producers planted roughly 8.5 million acres less than their crop bases during that time period.  Of the 13 Southern States, only Kentucky, North Carolina, Tennessee, and Virginia planted more acres than they have crop base.

    While this quick analysis only looked at planted acres over two years, it still provides a good indication of what the direction of the overall impact would be on the Southern States.   A forced base update is still just one of many proposals that are floating around Washington as farm bill discussions are just getting started.  Individual farmers may benefit drastically; however, it is important to understand that a forced base update will have significant negative repercussions on the South as a whole.

    Table 1.  Planted Acres of Nine Primary Covered Commodities for 2021 and 2022 and 2021 Base Acres.

    Outlaw, Joe. “An Initial Look at Forced Base Update on the South“. Southern Ag Today 2(30.4). July 21, 2022. Permalink

  • Current Non-Real Estate Farm Debt

    Current Non-Real Estate Farm Debt

    Agricultural producers are currently having to manage numerous factors, including drought and rising input costs. In addition, the ag sector will see interest rates continue to increase as the Federal Reserve tries to reduce inflation. As the general economy and ag economy moves into a high interest rate environment, understanding agriculture debt becomes important. The majority of loans originate from the farm credit system or commercial banks. Every commercial bank in the U.S. submits quarterly performance reports. These reports include the number of agricultural loans and the status (on time or late) of the loans. Figure 1 displays the total loan volume, and total loan volume for all three late type volumes (30-89 days late, 90+ days late, Non-Accrual) for the last five quarters. The totals are for all the states in the Southern Region. 

    Through the first quarter of 2022, loans that are non-accrual and 90+ days late have maintained their trend. Non-accrual loan volume continued to decrease, while 90+ days late loans stayed relatively steady. These are positive indications that delinquent loan debt hasn’t increased. Total loan volume is approximately $1 billion higher than a year ago. This is expected as input costs have increased. Total debt volume for loans that are 30-89 days late continued to increase. This increase was expected due to the seasonality of these loans. That is, the highest volume of late loans is seen annually in Q1 and the lowest annually in Q3. Interestingly, the total volume of these loans (30-89 days late) is $8 million lower than in 2021. This also is a positive sign that loans stayed current over the past year, even with the increased input costs.   

    As we move into a high interest rate environment, the current status of commercial ag debt has some positivity. But this positivity could reverse for several reasons (i.e., drought continuation in areas). In the coming months, it is crucial that producers are efficient with their capital consumption and are mindful of their debt structure. 

    Martinez, Charley, and Haylee Ferguson. “Current Non-Real Estate Farm Debt“. Southern Ag Today 2(30.3). July 20, 2022. Permalink

  • Between a Rock and a Dry Place: Culling Decisions

    Between a Rock and a Dry Place: Culling Decisions

    In drought-stricken areas, cattle producers are having to sell more cattle than normal because of the lack of grass and increased costs of production. While some producers are selling feeder calves earlier than they wanted, the number of cull cows going to the market creates multiple ways to look at the situation. This article covers the current cull cow market and some potential management strategies to think about moving forward. 

                Figure 1 contains the weekly slaughter cow prices for Southern Plains auctions (current drought-stricken areas). The red line represents the 5-year average from 2016-2020, and illustrates the normal seasonal pattern observed in cull cow markets. The dotted line represents the weekly prices for 2021. Prices in 2021 were below the average from January-June, and then stayed relatively true to seasonal expectations. So far in 2022, prices have been frequently above the 5-year average and 2021 prices. This has created higher salvage value for cattle that had to be culled this year. But prices are starting to trend down due to the increased cull cow supply entering the market. The downward trend is expected based on seasonal patterns, but the decrease will likely continue. In the coming weeks, drought and production costs are going to be major drivers of slaughter cow supply as the market tries to find a floor. 

                From a management strategy, producers often start with older cows first. After the older cows, producers get pickier on reasons to cull (bad feet, other non-ideal characteristics). These types of cows have probably been culled already, which leaves the producer with management decisions (cull bred females? Cull yearling females?, etc.). To help with that decision, identify inefficient females. If they are bred, analyze the females calving cycle. If they are yearling females, look at their pedigree, and identify any maternal reproduction issues. If a producer has already culled based on age, bad feet and other physical traits, and reproduction, then look for alternative marketing strategies such as selling females to another producer in a region that isn’t in drought. If a producer has superior genetically based cattle, they probably won’t find enough salvage value from sale barn prices and having a marketing strategy to find more value could be useful for not only increased salvage value, but also for cash flow reasons. 

    Source: Livestock Marketing Information Center

    Martinez, Charley . “Between a Rock and a Dry Place: Culling Decisions“. Southern Ag Today 2(30.2). July 19, 2022. Permalink