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  • A Charlie Brown Christmas for Cattle Prices

    A Charlie Brown Christmas for Cattle Prices

    Cattle markets finished October on a weak note with the CME Feeder Cattle Index around $237 per hundredweight. This price represents a $17 per hundredweight decline compared to the peak value, which occurred in September. However, the decline in prices is not the worst of it. The worst of it was that many cattle producers missed out on the opportunity to hedge cattle to be sold in the fourth quarter of 2023 and the first eight months of 2024 and will likely receive lower prices.

    Traders and market participants clearly had high expectations for feeder cattle as can be seen in Figure 1 with most contracts finding their life of contract high in September. Most contracts are $20 to $30 off their contract high as of this writing with more weakness evident in the market. Despite a favorable opportunity to hedge the sale of cattle in September and early October, not all hope is lost. One could easily compare the Christmas tree in A Charlie Brown Christmas with cattle market prices, but most would look at it from the glass half empty perspective instead of the glass half full perspective. One could certainly sulk in the losses and the missed hedging opportunities, but one must remember that markets are still alive just like the Christmas tree Charlie Brown chose. This means there are opportunities for gains in the current market.

    The first aspect to consider is that feeder cattle futures are still offering a favorable price to hedge the sale of feeder cattle through most of 2024. If a profitable price can be achieved with current futures prices, it could still be a wise move to secure those profits. If there is concern of missing out on larger profits if the market price strengthens, then there are strategies using put and call options to capitalize on a stronger market. The primary objective is to be an active marketer instead of passive.

    Figure 1. Daily feeder cattle futures close price by contract month.

    Griffith, Andrew P. “A Charlie Brown Christmas for Cattle Prices.” Southern Ag Today 3(46.2). November 14, 2023. Permalink

  • U.S. Cotton Cost Trends and Implications

    U.S. Cotton Cost Trends and Implications

    It is important for farmers to have accurate knowledge of their costs of production.  Having a historical baseline of production costs gives producers a standard for managing their operation.  Accurate knowledge of production costs is also the basis for developing a marketing plan, i.e., identifying break-even price levels to target your price risk management or selling.

    There are tools available to assist producers.  There are commercial software products that provide useful database management and financial calculations.  Some Extension agricultural economists provide support using standard accounting programs like Quickbooks.  Extension agricultural economists in major cotton producing states also publish planning budgets, often in spreadsheet formats, to guide producers in developing their own customized cost and returns estimates. Lastly, the USDA Economic Research Service (ERS) also conducts regular grower surveys of production costs, by region, and publishes research reports based on this information (Figure 1).

    Figure 1 summarizes annual data on U.S. average annual cotton production costs.  The data depict two measures of historical profitability:  1) short run profitability, reflected as the value of cotton production less specified variable costs, and 2) long run profitability, calculated as the value of cotton production less specified variable and fixed costs.  The value of production shown does not include farm program payments or crop insurance indemnities.

    On the face of it, these data reflect U.S. cotton as a marginal proposition.  While there appears to be an economic rationale to operate in the short run, and partially contribute to fixed costs, the long run profitability implications of U.S. cotton appear poor. The possible implications for long term viability of U.S. cotton include the following.  1) The cotton growing operations that will be left are likely of a scale that implies lower than average fixed costs, particularly machinery costs. This may involve beneficial leasing terms that are unavailable to smaller scale producers.  2)  The larger scale operations may also benefit from volume discounts on purchases of variable and capital inputs.  3) Some operations may generate above average value of production.  On the yield side, this perhaps is being achieved by the early adopters of yield enhancing technology and production systems.  On the price side this could involve better risk management and marketing that captures some of the upside price risk that is available in most years. Lastly, the picture implied by Figure 1 reinforces the need for the buffering effects of federal farm programs and crop insurance. 

    Figure 1. Cotton U.S. Net Return Cost Trend

    References and Resources

    Beginning Quick Books Online Training for Farmers and Ranchers. https://amarillo.tamu.edu/files/2023/08/QuickBooks-Online-Course-Flyer.pdf.

    Texas A&M AgriLife Extension. Cotton Budgets. https://agecoext.tamu.edu/resources/crop-livestock-budgets/by-commodity/cotton/.

    University of Georgia. Department of Agricultural and Applied Economics. Budgets. https://agecon.uga.edu/extension/budgets.html.

    University of Arkansas Cooperative Extension Service. Crop Budgets for Arkansas. https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx.

    USDA Economic Research Service. Commodity Costs and Returns. https://www.ers.usda.gov/data-products/commodity-costs-and-returns/.

    Robinson, John. “U.S. Cotton Cost Trends and Implications.” Southern Ag Today 3(46.1). November 13, 2023. Permalink

  • Do We Have Enough DEA-Registered Labs to Implement Hemp Program?

    Do We Have Enough DEA-Registered Labs to Implement Hemp Program?

    As hemp growers finish harvesting the 2023 crop, they should plan for 2024. In 2024, the USDA will fully enforce the Domestic Hemp Production Program rules, requiring all hemp to be tested by DEA-registered facilities beginning January 1, 2024. Initially set for 2023, this rule was postponed due to a lack of testing capacity. The USDA’s Agricultural Marketing Service (AMS) has compiled a directory of DEA-registered testing facilities for controlled substances, including hemp testing. This directory aids growers in locating nearby DEA-registered facilities for compliance.  Labs fluctuate, but in general, the number of testing facilities has increased since the 2018 Farm Bill/inception of hemp production in America.

    Federal regulations outline hemp testing requirements within state and tribal production plans. These rules necessitate samples taken by sampling agents within 30 days of expected harvest to test total delta-9 THC concentration, which should be below 0.3% on a dry weight basis. A 95% confidence level ensures that no more than 1% of plants exceed the permissible THC levels (greater than 0.3% delta-9 THC on a dry weight basis).

    Thinking about this for the future, how does the current testing infrastructure track with reported planted acres?  Looking at the 2022 Farm Service Agency’s (FSA) reported acreage, there is no statistical relationship between the number of hemp acres and the proximity of a county to a DEA-registered testing facility on the AMS directory. However, with the new requirement for all hemp to be tested in registered facilities, we will likely see a shift in future county hemp production to correlate more closely with testing facility proximity.

    Without a correlation between hemp acres and testing facility location at the county level, we turned to evaluate the relationship between reportage acreage and access to DEA-registered testing facilities by state.  The map highlights reported hemp acres planted in 2022 by state and the number of hemp testing sites by state. Those states with considerable hemp acreage and less testing infrastructure are shown as light green in color (Montana, South Dakota, Missouri, Oklahoma, Kansas), and states with adequate testing infrastructure for the state’s sizeable hemp acreage as dark sea green (Texas, Colorado, Kentucky, and North Carolina). As the industry begins to mature, we expect planted hemp acres to be more correlated to the location of registered testing facilities.

    The numerical values on each state on the map are the calculated ratio of 2022 reported hemp acres planted /divided by the number of testing facilities in the state. For example, in Texas there are 133 acres of hemp planted per testing facility. Note that the states without a ratio label represent states that do not have any testing facilities despite having hemp acres planted in 2022.

    This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2021-68006-33894/project accession no. 1025097, 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.

    Goeringer, Paul and Elizabeth Thilmany. “Do We Have Enough DEA-Registered Labs to Implement Hemp Program?” Southern Ag Today 3(45.5). November 10, 2023. Permalink

  • What Would Our Clean-Slate Safety Net Look Like?

    What Would Our Clean-Slate Safety Net Look Like?

    Over the last year we have spoken at more than 100 farm policy meetings across the United States.  This week a simple but thought-provoking question was posed during Q & A after a farm bill presentation at the Council for Agricultural Science and Technology (CAST) Annual Meeting.  The question was simply: if you had a clean slate to create a strong producer safety net, what would it look like? 

    In general, the role of a policy economist is typically not to suggest what Congress should do, but rather to help evaluate the impacts of policy proposals on producers and other stakeholders, estimate costs, and try to discern any unintended consequences of the proposal.  It is the job of Congress to consider all the relevant information and make informed decisions.  Think about all of the meetings with producer groups, hearings, and listening sessions that members of the House and Senate agricultural committees and their staffs have held to determine what should be in the next farm bill.  It is their job to determine what they believe is best for their constituents and producers in general.

    With that said, combined we have more than 50 years of experience working in agricultural policy; surely we have some thoughts on the matter.  Upon some reflection, the three-legged stool of price loss coverage (PLC), marketing assistance loans (MAL), and crop insurance constitutes an effective safety net.  Together they provide a counter-cyclical, low-cost, and adaptable safety net for U.S. crop producers.  Let’s look at why each of these characteristics are important.

    • Counter-cyclical.  These programs step in and help when conditions warrant because of low prices (PLC and MAL) or low yields/revenue (crop insurance), and payments go away when conditions are good.  The U.S. fiscal situation demands that the limited resources made available to agriculture are used wisely and efficiently.  This is why our clean-slate safety net would not continue ARC, which essentially covers the same losses as the Supplemental Coverage Option (SCO), an area-wide insurance policy.
    • Low-cost.  The safety net is not designed to make producers whole from an expected gross receipts standpoint.  Reference Prices that trigger PLC payments due to low prices have been established well below the full cost of production, and MAL Loan Rates are less than one-half the full cost of production for the 23 covered commodities.  While Congress is anticipating increases for both Reference Prices and Loan Rates, the levels under discussion are still well below average costs of production. Payment yields are well below budgeted yields for most producers, and the 85% payment factor further reduces producer payments.  Crop insurance utilizes a substantial deductible that producers have to lose before insurance begins to pay.  And more importantly, with respect to crop insurance, producers pay premiums that are higher or lower depending upon the level of risk in their area/crop and the coverage level chosen.
    • Adaptable.  The components of the safety net need to be adaptable.  While more could be done to ensure that Reference Prices keep up with inflation going forward, Reference Prices have the ability to increase along with market prices due to the Effective Reference Price changes made in the 2018 Farm Bill.  As for crop insurance, coverage is based on prevailing prices in the futures markets and policies can be established/adjusted to keep pace with the changes in cropping practices and risks faced by producers.

    There are a number of other elements or considerations that we could discuss, but it is worth noting that the clean-slate safety net that would ensure producers can weather the tough times is very similar in structure to what we have now.

    Outlaw, Joe, and Bart L. Fischer. “What Would Our Clean-Slate Safety Net Look Like?” Southern Ag Today 3(45.4). November 9, 2023. Permalink

  • Estimate and Manage Your Largest Cost as a Cow-calf Operator

    Estimate and Manage Your Largest Cost as a Cow-calf Operator

    As we move further into fall, winter feeding will move into the forefront of cow-calf operators’ minds. Most cow-calf operations have already begun feeding hay or will do so very soon.  Winter feed costs are likely the largest cost for a cow-calf operation and are impacted by the number of days an operation feeds hay, the cost of the hay (or other feeds) that is fed, and the efficiency of the feeding program. 

    The number of winter feeding days is largely a function of stocking rate and pasture conditions throughout the grazing season. At the national level, the percentage of pasture rated poor and very poor has been lower than last year, but higher than the average of the previous 5-year period. In the Southeast, pastures are generally in worse condition than last year and considerably worse than the 2017-2021 average. In my home state of Kentucky, a lot of cow-calf operations have been feeding hay for a while and will see a higher than normal number of feeding days this winter.

    Hay values are not always easy to estimate because most operations produce their own hay. Much of the hay market consists of private transactions, so there is limited public data on market price. Hay is also unique in the sense that there can be wide ranges in quality, as well as, value across regions due to the high costs associated with moving hay from one area to another. For these reasons, producers really have to put a value on the hay they feed based on what it cost them to produce it or what they paid for it, if purchased.

    Finally, feeding efficiency is sometimes the forgotten factor in winter feed costs because it can be hard to observe and quantify. There is always a loss associated with feeding as cattle don’t utilize 100% of the hay that is produced or purchased. This is typically a function of hay storage and feeding method and there is merit in looking for economical ways to limit losses at these two points.

    I use the table below in Extension programs as a way to discuss the variation in winter feeding costs based on hay values and losses associated with storage and feeding. Costs are expressed on a daily basis with the assumption of a 1,300 lb cow consuming 2.25% of her body weight each day. The number of hay feeding days can be multiplied by the daily costs to estimate hay cost per cow through the winter. 

    Over the last couple of years, hay values in my area have seemed to shift from the left half of the table to the right half and that has had a significant impact on the cost of wintering cows. For illustration, a $20 per ton increase in hay value leads to an increase of $0.34 per day at the 15% loss level and increases at higher loss levels. Similarly reducing storage and feeding losses from 30% to 15% results in a savings of $0.37 per cow per day when hay is valued at $100 per ton and increases as hay becomes more valuable. Having a feel for winter feeding costs can be a crucial first step in understanding cow-calf profitability and is definitely something that cow-calf operators should seek to manage.

    Winter Hay Cost Per Cow Per Day

      Estimated Hay Cost Per Ton
      $60 per ton$80 per ton$100 per ton$120 per ton
    Storage and Feeding Losses15%$1.03$1.38$1.72$2.06
    30%$1.25$1.67$2.09$2.51
    45%$1.60$2.13$2.66$3.19
    Assumes 1300 lb cow consumes 2.25% BW per day

    Burdine, Kenny. “Estimate and Manage Your Largest Cost as a Cow-calf Operator.” Southern Ag Today 3(45.3). November 8, 2023. Permalink