Many specialty crops are cultivated in nurseries including flowers, shrubs, seasonal vegetables, and fruit trees. During the spring and early summer seasons nursery products are in high demand for landscape contractors, landscape architects, and people working on their yards and gardens. Nurseries also supply wholesale and retail distribution firms, such as garden centers, home stores and distribution centers.
The last couple of years nurseries face added stress to keep up with increased demand while securing key production resources. An increase in nursery products and services can be attributed to (i) a spike in demand that started during the pandemic as more people turned to home gardening, (ii) adapting to new production practices such as adopting sustainable practices, and (iii) switching to soilless systems such as container production. The nursery industry faces same increasing cost and input supply issues as other agricultural sectors. Figure 1 presents information on farm production expenses with labor and fertilizers being two inputs that we have seen increases the last year. Persistent supply chain disruptions, price fluctuations caused by the pandemic and volatile energy prices, as well as increased labor costs particularly for those operations depending on H-2A labor are well documented.
In the nursery industry, labor costs, and fertilizers and pesticides are two costly production inputs. Jeb Fields reports that a $600 barrel of herbicide in 2021 now costs at least $1,500 so differences between 2021 and 2022 would be even more extreme. Another resource that is high in demand and low in supply is growing media and containers, with orders taking more than one year to be fulfilled. In nursery and greenhouse ~85-90% of all ornamental production nationally is containerized. The only non-container-grown ornamentals are some large trees, but even those are shifting to containers.
While the nursery products and services are high in demand, the challenges the industry faces are persistent, and the new ones are daunting with ripple effects experienced in the green industry.
Figure 1: Selected US farm production expenses, 2020-2021F USDA, ERS
Maria Bampasidou is an assistant professor in the LSU AgCenter Agricultural Economics and Agribusiness Department, and Jeb Fields is an assistant research coordinator and extension specialist at the LSU AgCenter Hammond Research Station.
So far, 2022 has been a stressful weather year with large portions of the country suffering from first severe cold and then severe drought. Spring storms and tornados have destroyed farm equipment, buildings, and fence lines. Weather risk is something all producers think about and should manage in some way. This could mean diversification of crops, adoption of production practices to mitigate the impacts of extreme weather, and participation in crop insurance.
Weather risk management is more critical than ever. The number of extreme weather events has increased since the turn of the century. Between 1980 and 2019, states in the southern climate region (AR, KS, LA, MS, OK and TX) were affected by 182 weather-related disasters with multi-state impacts totaling $660B (NOAA). The average number of events per year increased to 6.6 disasters per year from 2000 to 2019 compared to 2.6 disasters per year from 1980 to 1999. These types of extreme weather events affect households and agricultural producers years into the future.
Ad hoc disaster assistance has been reported by USDA-Economic Research Service since 1998. From 2000 to 2019, ad hoc disaster programs resulted in $46B in payments to agricultural producers and averaged $2B per year. Ad hoc payments were about 15% of the total direct payments to producers on average but varied widely by year. Nationally, these programs have addressed damages due to hurricanes, drought, extreme heat and cold, flooding, blizzards, and severe weather. Programs include
Crop Insurance
Noninsured Crop Disaster Assistance Program
Tree Assistance Program
Livestock Indemnity Program
Emergency Assistance for Livestock, Honeybees and Farm-Raised Fish
Livestock Forage Program
Emergency Conservation Program
In September 2021, as part of the continuing resolution to fund the Federal government, Congress provided an additional $10 billion in disaster assistance for crop and livestock producers. In response, USDA launched a new Emergency Livestock Relief Program and Emergency Relief Program for producers affected by qualifying weather disasters in 2020 (ERP) and 2021 (ELRP and ERP). Like the recent Wildfire and Hurricane Indemnity Program-Plus (WHIP+), ERP is tied to risk management decisions. Row crop producers eligible for a Phase I ERP must have participated in crop insurance and received an indemnity in a qualifying event on their crop. Payment factors are tied to the level of coverage producers participated in, like WHIP+, as shown in the table. It is also tied to future risk management. To receive the Phase I ERP payment producers will also agree to purchase crop insurance for the next two crop years. Producers who participated in NAP will be addressed in additional phases of the ERP but no details are available at this time. As we draw closer to the 2023 Farm Bill discussions, these ad hoc disaster programs and the increased tie between risk management and program payments may be a point of further discussion.
The April U.S. Bureau of Labor Statistics Consumer Price Index (CPI) update confirms what anyone who has gone to the gas station or grocery store in the last few months already suspected: prices are rising rapidly, particularly on food and energy. The CPI is a composite measure of the cost of consumer related products, and a number of different CPI measures include different types or bundles of consumer products. The CPI which includes all-items was up 8.5% from March 2021 to March 2022. The March index for food only was up a bit more than that year-over-year, increasing by 8.9%. The March energy index was up 32.0% over the past twelve months.
While energy and food prices have clearly gotten a lot of attention, price inflation is occurring broadly throughout the economy. The core inflation index (all items less food and energy) for March was 6.5% higher than the previous year. This is the largest year-over-year increase in the core index since August 1982. So, while inflation may be most pronounced on energy and food at present, it is clearly not confined to those sectors. The overall economy is experiencing the worst inflation in forty years. Figure 1 illustrates the annual rate of inflation over the past half century, expressed as the year-over-year percentage change in the monthly all-items CPI.
Figure 1. Inflation, Measured by Percentage Change (year over year) in Consumer Price Index (CPI)
Rising prices are a challenge not only for consumers but also for businesses who must deal with rising production costs. Many businesses will respond to increasing costs of labor, supplies, materials, or other inputs by raising the price of their output to maintain profits. Competitive pressure can certainly constrain a business’ ability to raise prices, but many businesses generally have some latitude to adjust their product prices in response to higher input costs. This is not the case for farmers and ranchers, who are price takers in both input and output markets. That is, farmers and ranchers have no ability to influence the price they pay for inputs or to set prices on their output. Thus, their ability to pass along increased costs to their customers is basically nonexistent.
Figure 2 illustrates the long term trends in consumer prices and farm product prices. It is clear that farm prices have not kept pace with broad consumer prices. Effectively farm products are losing buying power relative to broad consumer products. An aggregate bundle of farm products today is sold for 5.25 times the price received in 1970. On the other hand, a bundle of consumer products costs 7.5 times what it would have cost in 1970. Farm commodities today will only buy about 70% of the consumer products they would have bought in 1970, and that is only after the gap has narrowed considerably since the spring of 2020.
It is important to note that the agricultural industry as a whole is in better shape than the chart alone would suggest. To offset the erosion of buying power, farmers have increased the quantity of products they sell by relying on improved production efficiency, yield gains, and growing the size of their farm. In other words, the erosion of purchasing power per unit of farm output has been offset by increases in the scale of production. Necessarily over time, an increase in farm size also implies a decrease in the total number of farms (two trends that date back hundreds of years). The challenge for the individual farm or ranch is to manage times of volatility and uncertainty while also navigating the normal long-term trend of attrition, and thus surviving to be one of the “fewer” farmers moving forward. We appear to be in the middle of one of those times when price volatility is a significant management challenge.
The warning on the horizon for agricultural producers is not the immediate problem of inflation. Instead, the concern is what comes after. Producers can weather inflation reasonably well, as long as, farm prices are moving more-or-less in conjunction with input prices. Such a situation is not unprecedented: take the 1970’s as an example. While the 10 years from 1973 to 1982 represent some of the worst inflation in this country’s history, we don’t talk about a 1970’s agricultural crisis because farm prices were mostly keeping pace. In fact, in the face of extraordinary inflation, agricultural conditions encouraged farmer investment and taking on additional debt. The crisis didn’t appear until the 1980’s. As inflation moderated and commodity prices flat-lined, the burden of servicing debt at high interest rates (which were both a result of and the treatment for high inflation) became unsustainable for an industry that was not only highly dependent on short and intermediate term financing but that had also leveraged up to high debt levels. The lessons moving forward in an uncertain economy where both inflation and farm prices are rising together: 1) farm prices are not likely to keep up with broader inflation rates indefinitely, 2) higher interest rates are very likely coming soon, and 3) don’t take on new debt based on the assumption that current conditions will continue.
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.
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).
