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  • If You are Following the Conversation about Reference Prices… Here are a Few Facts 

    If You are Following the Conversation about Reference Prices… Here are a Few Facts 

    There was a time when agricultural economists who focus on farm policy didn’t take a position on a farm bill proposal.  At least the authors of this article were taught by our mentors…just describe what’s in a policy proposal and don’t take a position…that’s not your job.  Good and bad was for others to decide…primarily elected officials since it is, in fact, their job.  Those days are over.  In the last two weeks since the House Agriculture Committee majority released details of their bill, there has been a steady stream of articles talking about the proposal’s reference price increases as being tilted to the South and Southern crops. 

     We thought we would instead try to provide facts and information that you can use to help decide whether any proposed bill—House or Senate—is providing a safety net for all U.S. farmers.

    Fact #1 

    During the development of every farm bill, there are people who say unequivocally that one or more commodities are advantaged relative to others.  In the current environment – with ARC and PLC as the Title I safety net programs – since they are both countercyclical, producing a map that shows payments are higher in one area really means very little.  It very likely means that prices for those crops are lower and triggering payments, not that the farm bill was titled toward producers of those crops.

    Fact #2 

    While farm bills encompass a broad range of topics, producers rely on the programs in Title I and Title XI to provide a minimal safety net so they can endure economic downturns like we are currently in.  Without meaningfully bolstering the safety net provided in Title I and Title XI, the producers we encounter all over the country see little benefit in passing a new farm bill.    

    Fact #3

    Statutory reference prices were established in the 2014 Farm Bill and have not kept up with increases in the cost of production.  Using USDA cost of production data, the average increase in costs from 2014 to 2023 (the most current) for corn, cotton, grain sorghum, peanuts, rice, soybeans, and wheat was 31 percent.

    Fact #4 

    The effective reference price (ERP) provisions included in the 2018 Farm Bill allow individual crop reference prices to increase based on the 5-year Olympic average of market prices (lagged one year) multiplied by 85%.  ERPs are capped at 115% of statutory reference prices.  Of the 23 covered commodities with reference prices, only 10 (corn, oats, soybeans, grain sorghum, large chickpeas, small chickpeas, mustard seed, crambe, sesame seed and temperate japonica rice) had market prices increase enough to result in a 2024 ERP greater than the statutory reference prices in the 2018 Farm Bill.   Of these 10, only corn, soybeans and grain sorghum represent significant base acreages.  Based on realized market prices and CBO projections, corn and soybean ERPs are expected to increase each year and hit the 115% cap in each year through 2027.  Based on hearing testimony in both the House and Senate, commodities not in that position were seeking reference price increases in the next farm bill.

    Fact #5

    Statutory reference prices are set by Congress.  In past farm bills, at least since the 1970s, reference prices and their predecessor (i.e., target prices) have been established with the commodity’s cost of production in mind.  Looking at major crop cost of production for 2023 indicates that current reference prices are not covering much of major commodity costs (Table 1).   This happens for two reasons: (1) costs are higher than reference prices and (2) the payment calculations use an 85% payment factor to reduce payments.  Based on USDA data, wheat and grain sorghum appear to have the strongest case for significant reference price increases, but USDA data is just one resource the Committees use in establishing support levels.

    Table 1.  Major Crop Cost of Production, Effective Reference Prices and Percent of Costs Covered by the Effective Reference Price.

    1The 85% payment factor is included in this calculation.  2The majority of rice acres are planted to medium or long grain.  The reference price for these rice types was included in the table.

    Outlaw, Joe, Nathan Smith, and Bart L. Fischer. “If You are Following the Conversation about Reference Prices… Here are a Few Facts.” Southern Ag Today 4(21.4). May 23, 2024. Permalink

  • Management and Marketing Implications of Deforestation-Free Soybeans in the Southern Region

    Management and Marketing Implications of Deforestation-Free Soybeans in the Southern Region

    Starting December 24, 2024, the EU will require all imported soybeans to be deforestation-free and traceable to specific fields. Archer Daniels Midland (ADM) and the Farmers Business Network (FBN) have launched a Deforestation-Free Soybean Program to meet this requirement. This EU mandate will affect all elevators selling soybeans to Europe, prompting additional verification platforms across the U.S.

    For Southern soybean producers, selling soybeans to ADM may require enrollment in ADM’s Deforestation-Free Soybean Program via the FBN website/app by June 1, 2024, and the submission of field boundary data by July 15, 2024. Enrollment is free, and by submitting field boundary data, FBN will use satellite imagery to verify that the soybeans were grown on land not deforested after December 31, 2020. Table 1 lists the ADM locations across the U.S. participating in the Deforestation-Free Soybean Program, with southern locations in Arkansas, Kentucky, and Tennessee impacted.

    What constitutes not deforested? A field where more than 1.24 acres of trees were forested (including fence rows). Early indications also suggest that some ADM locations will only accept deforestation-free soybeans, albeit at a premium. ADM is offering up to a $0.15/bushel premium if farmers enrolled in the program and an additional $0.05/bushel if enrolled by May 1, 2024, and field boundary data submitted by June 1, 2024. 

    For more information on enrolling in the program, please visit ADM’s re:source website here and contact your local ADM elevator for specific requirements. If you choose not to enroll in this program, selling to a different elevator could incur additional costs, particularly if your typical ADM site does not accept unenrolled soybeans. Understanding hauling costs and local basis when delivering to a different market is important, as it can impact fuel, labor, other operating costs, and marketing strategies. Contract options may be limited, and local basis could be affected.

    The push for non-deforested beans may affect local markets and grain marketing decisions in the future. Similar premiums will likely be offered for other sustainable agriculture efforts, such as carbon sequestration. These changes provide opportunities but also challenge producers to adapt quickly to evolving market conditions.

    Table 1. ADM locations participating in the Deforestation-Free Soybean Program

    StateADM Locations
    ArkansasHelena
    IllinoisCreve Coeur, Curran, Decatur, Farina, Gulfport, Havana, Hennepin, Hume, Mendota, Mound City, Mt. Auburn, Niantic, Ottawa, Ottawa South, Quincy, Sauget, Spring Valley, Taylorville, Tuscola
    IndianaEvansville, Mt. Vernon, Newburgh, Rockport
    IowaBurlington, Clinton
    KentuckyHenderson, Livingston Point, Silver Grove
    MissouriCenter, Charleston, Montgomery City, New Madrid, Novelty, Shelbina, St. Louis
    OhioToledo
    TennesseeMemphis

    Shockley, Jordan, and Grant Gardner. “Management and Marketing Implications of Deforestation-Free Soybeans in the Southern Region.” Southern Ag Today 4(21.3). May 22, 2024. Permalink

  • Steer Dressed Weight: Recent Counter-Seasonal Behavior and its Long-Term Growth Trend

    Steer Dressed Weight: Recent Counter-Seasonal Behavior and its Long-Term Growth Trend

    Total beef production can be defined as the number of animals slaughtered times the average dressed weight. I’ll briefly discuss the steer dressed weight in this article, emphasizing its recent surprising behavior. Dressed weight corresponds to the weight of the carcass minus feet, head, hide, and organs (ERS/USDA). Figure 1 shows the atypical seasonal pattern so far in 2024 for the U.S. federally inspected weekly average steer dressed weight. The blue line exhibits the 2024 counter-season pattern when contrasted with 2023 (dotted line) and the 2018-2022 average (red line).

    Following a record high for the first week of January (937 lb./head), the dressed weight experienced a gradual decline until the fifth week of 2024, when it reached 909 lb./head. Winter weather helps explain this fall at the beginning of the year. However, instead of continuing to decrease, the dressed weight unexpectedly surged, reaching record highs for weeks 9 to 16. During this period (weeks 9 to 16), the steer’s average dressed weight was 921 lb./head, tallying 25 lb./head heavier than in 2023 and 32 lb./head more than the previous five years’ average.

    One of the key factors contributing to the recent increase in dressed weight is the surge in days on feed. The number of cattle on feed (COF) for over 120 days significantly increased, exceeding 4.9 million head in April, up by about half a million from last year. Meanwhile, the COF, for over 90 days, plateaued at around 6.6 million heads since February. As the cost of gain has dropped, producers tend to increase weights. But, keeping the yard full and packers slowing harvest schedules may be more important factors in dressed weights.  One by-product of heavier weights and more days on feed is the percent of carcasses grading Prime.  In fact, the percent of Prime carcasses jumped from 9.9 percent in the first week to 11.4 percent in the last week of April 2024 (Figure 2). More Yield Grade 4’s and 5’s is another by-product, but that is another subject.   

    In the short run, the dressed weight shows a counter-season pattern. Nevertheless, in the long run, the steer dressed weight exhibits an upward trend. Figure 3 illustrates this behavior, displaying an average increase of 4.95 pounds for every additional year (linear regression, dotted line). In 50 years, the average dressed weight has grown by approximately 30%. It means that nowadays, three steers produce almost the same amount as four steers in the seventies. Technological advancements, such as in nutrition, management, and genetics, help explain this phenomenal growth. 

    Figure 1 – Steer Dressed Weight, Federally Inspected, Weekly

    Source: NASS/USDA

    Figure 2 – Beef Graded Prime as Percent of Beef Graded, Weekly

    Source: AMS/USDA

    Figure 3 – Steer Dressed Weight, Federally Inspected, Yearly

    Source: NASS/USDA

    References

    AMS/USDA. (2024, May 10). Retrieved from: https://publicdashboards.dl.usda.gov/t/MRP_PUB/views/LPMeatGradingDashboard/GradeData?%3Aembed=y&%3Aiid=1&%3AisGuestRedirectFromVizportal=y

    ERS/USDA. (2024, May 10). Retrieved from: https://www.ers.usda.gov/data-products/chart-gallery/gallery/chart-detail/?chartId=77827

    NASS/USDA. (2024, May 10). Retrieved from: https://quickstats.nass.usda.gov/

  • Analyzing World and U.S. Sugar Price Dynamics

    Analyzing World and U.S. Sugar Price Dynamics

    It is critical to consider the relationship between macroeconomic forces and the balance of global sugar supply and demand when examining sugar markets. Global economic expansion, along with a world population that is growing at approximately 1% per year  (U.S. Department of Commerce, 2024), supports strong sugar demand globally, which typically also supports world prices. However, falling energy prices and/or a worldwide recession could push global sugar prices lower. 

    The world raw sugar price is somewhat reflected in the Sugar No. 11 futures contract (Figure 1). The Sugar No. 11 contract price does not include the transportation costs associated with delivering sugar to destination ports. As stated in the specifications for the Intercontinental Exchange (2024) Sugar No. 11 futures contract, “the contract prices the physical delivery of raw cane sugar, free-on-board the receiver’s vessel to a port within the country of origin of the sugar.” 

    Major sugar-producing countries like Brazil, India, and Thailand provide subsidies and other support for their sugarcane sector, which can have a strong influence on the Sugar No. 11 futures contract price.  This is especially true when production fluctuates due to weather conditions or when governmental policies dictate a diversion of sugar into ethanol production. 

    Worldwide sugar deficits have occurred in three out of the last four years. In turn, a tightening global stocks-to-use ratio has supported world sugar prices. As world raw sugar prices have moved upward, so too have U.S. raw sugar prices, which are reflected in the Sugar No. 16 futures contract price (Figure 1). The Sugar No. 16 futures contract does include transportation costs associated with delivering sugar to the destination port and, thus, the contract incorporates physical delivery into its price.

    Figure 1. Sugar No. 11 and Sugar No. 16 Futures Contract Prices, their relationship, and the Tier 2 Tariff, 2020 to 2024. Source USDA ERS, 2024.

    At present, Mexico’s ability to export sugar to the U.S. is hindered by drought, and Mexican production is expected to be significantly reduced again this year. As such, Mexican sugar exports into the U.S. market are expected be at a decade-and-a-half low at only 497,000 tons, according to the May USDA (2024) World Agricultural Supply and Demand Estimates report.

    Under the terms of the World Trade Organization (WTO) and several free trade agreements, sugar imports are allowed duty free under a Tariff-rate Quota (TRQ) system. In situations where raw sugar is imported outside of the TRQ, importers must pay a 15.36-cents-per-pound tariff in addition to the world raw sugar price plus transportation costs. This tariff is referred to as a tier-2 sugar import tariff and is shown as the green line in Figure 1. 

    The red line in Figure 1 demonstrates the world raw sugar price plus transportation costs to the U.S. plus the tier-2 tariff. If the expected U.S. sugar supply falls and pushes domestic prices up to the point that they exceed that level, higher levels of tier-2 raw sugar will be attracted to the U.S. Thus, the red line represents the effective cap on U.S. raw sugar prices. For example, the existence of substantial demand for sugar beyond what Mexico can supply has resulted in large amounts of tier-2 imports [see Deliberto et al. (2024) for more information]. Those imports will enter the U.S. whenever the price for world sugar plus transportation costs plus the tier-2 tariff (red line, Figure 1) falls below the cost of procuring raw sugar supplies from preferential-access imports or domestic supplies (including Mexican production). Again, that relationship effectively caps the wholesale price of domestic raw sugar in the U.S. (red line, Figure 1).  

    Conversely, if supply was expected to rise relative to demand in the U.S. (e.g., due to higher-than-expected domestic production or imports from Mexico) then the demand for tier-2 sugar would fall, bringing domestic prices further below the tier-2 cap. But, so long as demand for tier-2 sugar exceeds zero, the price in the U.S. for raw sugar will be driven by world prices plus transportation costs plus the tier-2 tariff of 15.36 cents per pound (red line, Figure 1). It should be noted that the figure depicts monthly prices as well as a static assumption of transportation costs of five cents per pound. There have been significant amounts of tier-2 sugar entering the U.S. over the past several years, which likely represents arbitrage opportunities to bring in tier-2 raw sugar due to pricing relationships or transportation cost adjustments that are occurring on a daily basis.

    We observe that the same relationship frames the prices for wholesale refined sugar in the U.S., which is capped at the world price, or the Sugar No. 5 futures contract price for refined sugar plus the tier-2 refined tariff (16.21 cents per pound) plus transportation costs of shipping refined sugar to the U.S. With falling world refined prices coupled with the expectation of near-record high sugarbeet production, the U.S. wholesale refined sugar price has recently followed the world Sugar No. 5 price downwards. Midwest refined beet sugar spot prices have ranged between 55 to 58 cents per pound. When pricing the 2024 expected crop, refined sugar prices have held steady in the 53 to 55 cent range, which is considerably lower than prices in the prior 18 months that reached as high as 70 cents per pound. 

    Overall, raw and refined sugar prices in the U.S. are currently driven by transportation costs associated with shipping bulk raw sugar and containerized refined sugar to the U.S., and factors that are affecting the global sugar market. Those factors include, among others, foreign subsidies [e.g., World Trade Organization (2024)], demand for ethanol as a transportation fuel [e.g., Bloomberg (2024)], and global growing conditions for sugarbeets and sugarcane crops [e.g., USDA FAS (2024)].

    References

    Bloomberg. 2024. Tereos Brazil to Keep High Sugar Output as Peers Endure Drought. Retrieved from: https://www.bloomberg.com/news/articles/2024-04-01/tereos-brazil-to-keep-high-sugar-output-as-peers-endure-drought

    Deliberto, M., K.L. DeLong, and B. Fischer. “Navigating U.S. Sugar Imports From 70 Countries.” Retrieved from: https://southernagtoday.org/2024/04/18/navigating-us-sugar-imports-from-70-countries/

    Intercontinental Exchange. 2024. Sugar No. 11 Futures. https://www.ice.com/products/23/Sugar-No-11-Futures  Date accessed: May 3, 2024.

    USDA. 2024. May WASDE. Retrieved from: https://www.usda.gov/oce/commodity/wasde

    USDA ERS. 2024. “Sugar and Sweeteners Yearbook Tables.” Retrieved from: https://www.ers.usda.gov/data-products/sugar-and-sweeteners-yearbook-tables/ Date updated: April 2, 2024. Date accessed: April 18, 2024. 

    USDA FAS. 2024. Global Agricultural Information Network: Sugar Annual. Retrieved from: https://apps.fas.usda.gov/newgainapi/api/Report/DownloadReportByFileName?fileName=Sugar%20Annual_Managua_Nicaragua_NU2024-0002.pdf

    U.S. Department of Commerce. 2024. “Census Bureau Projects U.S. and World Populations on New Year’s Day.” Retrieved from: https://www.commerce.gov/news/blog/2024/01/census-bureau-projects-us-and-world-populations-new-years-day#:~:text=The%20projected%20world%20population%20on,the%20U.S.%20and%20world%20populations. Date updated: January 3, 2024. Date accessed: April 18, 2024. 

    World Trade Organization. 2024. India’s Measures to Provide Market Price Support to Sugarcane. Retrieved from: https://web.wtocenter.org.tw/downFiles/12294/398060/00k37djfolGb0l5OnjSaA8xFnrwmAEQAiLp0Y7SoysK00000tZTwiAmB3qaIG9YFD0000073wLiCTUqy9oiKW087r8sHXz4A==

    Deliberto, Michael, Karen L. DeLong, and Bart L. Fischer. “Analyzing World and U.S. Sugar Price Dynamics.” Southern Ag Today 4(21.1). May 20, 2024. Permalink

  • Why Don’t We Start More Cooperatives?

    Why Don’t We Start More Cooperatives?

    The cooperative business model has been very successful in the U.S. and cooperatives are particularly successful in the agricultural sector.  Many U.S. agricultural cooperatives are approaching or exceeding 100 years of existence.   Despite that historical success we are starting relatively few new agricultural cooperatives.  Many of our existing agricultural cooperatives started with a handful of producers joining together to address a common need.  We don’t see that same type of activity today or, if we do, it is not structured as a cooperative business.  That raises the question of why we don’t start more cooperatives.

    The first reason for the infrequency of new cooperatives is lack of understanding of the cooperative business model. Even producers who are members of a cooperative likely do not know that a cooperative is a corporation, how to incorporate a cooperative or all the details of the cooperative financial model. Even if a producer knows that incorporating as a cooperative is an option, they likely feel that the process is more opaque, mysterious, and complicated relative to other options.  That leads to the second impediment to cooperative development, most producers and professional advisors are more familiar with Limited Liability Companies and investor-based business forms. A student could graduate with a business degree and go on to get an MBA while never hearing the word “cooperative”.  Advisors, attorneys, and accountants are more likely to understand LLCs relative to cooperative corporations.  That makes LLC formation the path of least resistance.

    The final factor limiting new cooperative development is access to capital.  Most existing U.S. agricultural cooperatives are capitalized from decades of retained profits.  New opportunities for cooperatives often require substantial amounts of up-front capital.  There are cooperative models, such as the closed membership cooperative and the hybrid member-investor model that address those issues.  The formation of those types of cooperatives requires not only an understanding of their structures but also the ability and willingness to make substantial up-front investment.  

    I can think of many agricultural situations from machinery sharing, to condo grain storage to feral hog trapping operations where small scale cooperatives could be logical and successful. Those small cooperatives could be formed under the closed membership cooperative model with members receiving a usage right (bushel of grain stored, acre of machinery use, one week usage of trapping equipment) for a share of membership stock.  By receiving patronage in proportion to use the members would achieve services at essentially an at cost basis and the cooperative could issue stock patronage to fund any necessary re-investment in equipment and infrastructure.  Members wishing to exit the cooperative could sell their share and usage rights to another eligible producer with approval of the cooperative board.  The cooperative model would provide economies of scale and let the members receive a service at much lower cost than they could achieve on their own.   Opportunities for new agricultural cooperatives exist but we rarely hear them discussed.  Perhaps we just need to recycle some good old ideas!

    Kenkel, Phil. “Why Don’t We Start More Cooperatives?” Southern Ag Today 4(20.5). May 17, 2024. Permalink