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  • Understanding Basis When Managing Feeder Cattle Price Risk

    Understanding Basis When Managing Feeder Cattle Price Risk

    Price risk management for beef cattle producers is an important tool in navigating cattle markets. As last week’s Southern Ag Today article on livestock marketing showed, many more producers are using Livestock Risk Protection (LRP) insurance, which correlates to program changes and a run up in cattle prices. LRP and many other price risk management tools, including futures and options contracts, mitigate futures price risk, however, it does not set the actual cash selling price for a producer. The difference between the cash price and the futures price is called basis. Basis varies from year to year, by time of year, location, weight class, and other factors.

    Figure 1. Range of Basis Values for 500-600 lb Steers in Georgia and the Average Range of Feeder Cattle Futures Prices, 2018-2022

    Source: LMIC using data from USDA-AMS and CME Group

    LRP and other price risk management tools that lock in a futures price still leave the producer exposed to basis risk. Producers are often more comfortable with taking on basis risk because basis risk is generally much smaller than futures price risk. Figure 1 presents the average range of monthly basis values and feeder cattle futures prices by month over the last five years for 500-600 lb steer calves in Georgia. As seen in Figure 1, the range of futures prices is much larger than the average range of basis values. Data from other states show similar gaps between basis variability and feeder cattle futures price variability.

    LRP, futures, options, and other price risk management tools provide protection from futures price changes but basis fluctuation may still affect the final cash selling price making it important to understand basis risk and to include it when making risk management decisions.  

    Secor, Will. “Understanding Basis When Managing Feeder Cattle Price Risk.” Southern Ag Today 3(45.2). November 7, 2023. Permalink

  • Corn and Soybean Yield Trends 

    Corn and Soybean Yield Trends 

    With the US harvest concluding, markets will focus on South American weather forecasts and crop progress. For the 2023/24 marketing year, Brazil and Argentina are projected to account for 53% of global soybean production and 15% of global corn production. By comparison, the US produces 32% of the world’s corn and 28% of the world’s soybeans. Combined, these three countries dominate corn and soybean exports. The three countries account for 89% of soybean exports and 75% of corn exports. As such, production in these three countries has major implications for global prices. This article examines trendline corn and soybean yields for Argentina, Brazil, and the US.

    Figure 1. Average Corn Yield by Country, 1977/78 to 2023/24

    There are major differences between Argentina, Brazil, and US corn yields. Differences in corn yield can be partially explained by production practices, such as Brazil corn production occurring largely as a second crop after soybeans. For 2023/2024, US corn yield is projected at 173 bu/acre – 83% higher than the global average; Brazil at 90 bu/acre – 5% below the global average; and Argentina at 123 bu/acre – 31% above the global average (Figure 1). Trendline yields also reveal significant differences. Over the past 33 years, Argentina has added 1.92 bu/acre/year, the US has added 1.85 bu/acre/year, and Brazil has added 1.61 bu/acre/year. Since 2014/15, yields for all three countries have flattened substantially, with average increases of less than 0.25 bu/acre/year. Yield variation is also an important feature. Since 2000, Argentina corn yields have been substantially more volatile than Brazil or the US. Argentinian volatility may be partially attributed to a greater impact from extreme weather and economic instability in Argentina, creating greater challenges with input availability, cost, and utilization.

    Figure 2. Average Soybean Yield by Country, 1977/78 to 2023/24

    Soybean yields across the three countries are more uniform. Projected yields for 2023/2024 are 44 bu/acre, 53 bu/acre, and 50 bu/acre for Argentina, Brazil, and the US, respectively (Figure 2). Brazil has led the way with annual yield improvements, increasing trend line yield by an average of 0.69 bu/acre/year, followed by the US at 0.50 bu/acre/year, and Argentina at 0.29 bu/acre/year. Similar to corn, Argentina and US trend line yields have flattened in the past ten years; however, Brazil’s average yield gain has increased to 0.78 bushels per acre per year over the last decade. The variation in Argentina’s annual yields is significantly greater than that of Brazil or the US.

    Yields (along with harvested acres) will be important in determining production in each country and potentially their share of the export market, particularly for soybeans, as a larger share of global production is concentrated in three countries. If yields are forecast below trendline it would be supportive of higher prices and vice versa. Changes in projected yield and production from USDA, CONAB (Companhia Nacional de Abastecimento, National Supply Company, Brazil), and private companies have the potential to influence market direction.

    References and Resources

    USDA Foreign Agricultural Service – Production, Supply and Distribution. https://apps.fas.usda.gov/psdonline/app/index.html#/app/advQuery

    CONAB – https://www.conab.gov.br/

  • US Supreme Court Will Not Hear North Carolina “Ag Gag” Appeal

    US Supreme Court Will Not Hear North Carolina “Ag Gag” Appeal

    Last week, the United States Supreme Court denied a Petition for Certiorari filed by the State of North Carolina and the North Carolina Farm Bureau Federation seeking review of a decision striking down a portion of the state’s Property Protection Act, often called an “ag gag” law.

    The law, passed in 2015, punishes “any person who intentionally gains access to the nonpublic areas of another’s premises and engages in an act that exceeds the person’s authority to enter.”  Activities that “exceed” authority include (1) capturing, removing, or photographing employer data, records, or documents in order to breach the person’s duty of loyalty to the employer, (2) capturing images or sound occurring on the premises in order to breach the duty of loyalty to the employer, (3) placing an unintended camera or electronic surveillance device on the employer’s property to record images or data, and (4) committing an act that substantially interferes with the ownership or possession of real property.

    The lawsuit was initially filed by People for the Ethical Treatment of Animals, the Animal Legal Defense Fund, and other animal rights groups who claim the law violates their First Amendment rights.  Earlier this year, the United States Court of Appeals for the Fourth Circuit held that the Property Protection Act was unconstitutional as applied to “newsgathering activities.”  As there will be no Supreme Court review, that decision will stand. 

    These “ag gag” laws have faced litigation around the country in an attempt to prohibit trespassing and falsifying information to gain access to agricultural facilities to conduct undercover surveillance.  To date, 11 states have passed some version of an “ag gag” statute.  The US Court of Appeals for the Eighth Circuit is considering whether to uphold a lower court decision striking down an Iowa law making it a crime to record video or audio on a “trespassed property.”  Portions or all of “ag gag” statutes have also been stricken as unconstitutional in Idaho, Kansas, Utah, and Wyoming.  The only statute to be challenged and fully upheld was Arkansas’ statute after a Motion to Dismiss was granted in the lawsuit challenging its constitutionality.

    For a compilation of all “ag gag” statutes and legal challenges, click here.  To listen to a discussion of these statutes and legal challenges, click here.

    United States Supreme Court Petition Information:  Stein v. PETA, 22-1150; North Carolina Farm Bureau Federation, Inc. v. PETA, 22-1148.

    Lashmet, Tiffany. “US Supreme Court Will Not Hear North Carolina “Ag Gag” Appeal.” Southern Ag Today 3(44.5). November 3, 2023. Permalink

    Photo by Jaxon Matthew Willis (Highpoint, NC): https://www.pexels.com/photo/aerial-photography-of-green-trees-and-body-of-water-13591082/

  • Angola: U.S. Chicken Exports Facing Increasing Competition in this Leading Market 

    Angola: U.S. Chicken Exports Facing Increasing Competition in this Leading Market 

    The U.S. is the largest chicken meat producing country in the world. According to the U.S. Department of Agriculture, production in 2022 was almost 21 million metric tons (MT) (ready to cook equivalent), with the next largest country (Brazil) producing around 14.5 million MT. While most of this production is consumed domestically, between 10% and 20% of total production is exported each year (USDA, 2023a). In 2022, U.S. exports of poultry products – including chicken, turkey, and other fowl – accounted for $6 billion in global sales, making poultry products a top ten U.S. agricultural export. The leading poultry export for the U.S. is frozen chicken leg quarters (henceforth leg quarters), which accounted for $1.9 billion in export sales in 2022, nearly a third of all U.S. poultry exports (USDA, 2023b).

    Important to U.S. poultry exports is the country of Angola, which is located on the western Atlantic coast in the South African region. In 2022, Angola was the leading foreign destination for U.S. leg quarters in terms of value ($219 million) and the second largest foreign market in terms of volume (168 thousand MT). However, U.S. leg quarter exports to Angol have varied significantly over the last decade (See Figure 1), decreasing from a peak in 2014 ($243 million) to only $83 million in 2016. After 2016, U.S. exports recovered but immediately fell again during the pandemic in 2020. Since 2020, U.S. leg quarter exports to Angola significantly increased to $219 million in 2022. However, as Figure 1 shows, this was mostly due to higher chicken prices.

    Unfortunately, the U.S. is facing increasing competition in Angola from rising domestic production as well as competition from Brazil. In 2022, for instance, Angola’s imports of frozen chicken cuts (including leg quarters, other cuts, and offal) from the U.S. were up 23% (volume) in 2022, whereas imports from Brazil were up 32% (UN Comtrade, 2023). Despite U.S. leg quarter exports to all destinations being down by only 8% in terms of volume in 2023 (year-to-date as of August), exports to Angola were down 25% (USDA, 2023b). Figure 2 shows Angola’s frozen chicken cut imports in 2021 ($201 million) by exporting source. The U.S. was the leading supplier, accounting for 63%; Brazil accounted for 22%. 2023 year-to-date data for the U.S., as well as 2022 data for Angola, suggest that Brazil will likely account for more than a third of total imports by the end of 2023, while the U.S. share will likely decrease to slightly more than 50%.

    Figure 1. U.S. frozen chicken leg quarter exports to Angola: 2010 – 2022

    Source: U.S. Department of Agriculture (USDA, 2023b).

    Figure 2. Angola frozen chicken cuts imports (including leg quarters, other cuts, and offal) in 2021 by Source ($201 million)

    Source: Observatory of Economic Complexity (OEC) (2023).

    References

    Observatory of Economic Complexity (OEC). 2023. https://oec.world/en

    United Nations Comtrade Database (UN Comtrade). 2023. https://comtradeplus.un.org/

    U.S. Department of Agriculture (USDA). 2023a. Livestock and Poultry: World Markets and Trade. Foreign Agricultural Service, Washington, DC.

    U.S. Department of Agriculture (USDA). 2023b. Global Agricultural Trade System (GATS). Foreign Agricultural Service, Washington, DC. https://apps.fas.usda.gov/gats/default.aspx

    Muhammad, Andrew, and Md Deluair Hossen. “Angola: U.S. Chicken Exports Facing Increasing Competition in this Leading Market.” Southern Ag Today 3(44.4). November 2, 2023. Permalink

  • South-Wide Timber Market: Pine Sawtimber Prices Stabilize as Pulpwood Prices Continued to Decline 

    South-Wide Timber Market: Pine Sawtimber Prices Stabilize as Pulpwood Prices Continued to Decline 

    The South-wide average pine sawtimber stumpage price has held steady during the third quarter of 2023, showing no significant fluctuations when compared to the levels observed in the previous four quarters. Pine sawtimber prices in the region averaged $25.98/ton. ranging from approximately $20/ton in Virginia to $32/ton in Florida (TimberMart-South, 2023). The figure was roughly $2/ton lower than the recent high in early 2022 but remained $2/ton above the pre-pandemic level. South-wide average hardwood sawtimber price rebounded slightly to $32.39/ton after three consecutive quarters of decline. 

    The recent decline in pine sawtimber prices can be attributed primarily to the softened demand for lumber. Pine sawtimber prices had a rally from mid-2020 to early 2022, primarily driven by robust demand for lumber. However, factors such as rising interest and mortgage rates, deteriorated housing affordability, and worries of an economic slowdown have cooled the general housing market since then. Single-family housing starts —a major driver for lumber and structural panel products— in September were at a seasonally adjusted annual rate of 963,000 units, falling below the long-term average of 1.1 million units.  

    The South-wide average stumpage prices for both pine pulpwood and hardwood pulpwood fell sharply over the past four quarters. Pine pulpwood stumpage prices averaged $7.59/ton in the third quarter of 2023. This represented a significant 21% year-over-year decline and a substantial 31% drop from the recent high recorded in early 2022. The decrease in wood fiber prices can be attributed to several factors, including the product shift in the paper sector, a rise in the utilization of recycled fiber, and a surge in the supply of mill residues resulting from recent expansions in lumber mills. The decline was even more pronounced in certain timber regions (e.g., South Carolina and Western North Carolina) due to the recent closure of paper mills. 

    The average delivered prices for sawtimber and pulpwood products fared relatively better than their stumpages prices, with only slight year-over-year declines in the range of 2% to 5%. Notably, the gap between delivered and stumpage prices for all timber products has significantly widened since 2020. The widening gap can be attributed to multiple factors, including inflation in fuel and material prices. Furthermore, the persistent decline in the logging crew of the region has played a significant role in the margin increase. Employment in the logging industry dropped 34% from 38,200 in 2000 to 25,300 in 2022 (U.S. Census Bureau, 2023). While improvements in productivity have helped mitigate some of the losses, this ongoing downward trend has left a lasting impact on the industry and the delivered prices.

    Looking forward, pine sawtimber prices in the South are expected to continue its slow recovery from the 2008-2009 recession, driven by the anticipated growth in single-family housing starts and the expanding lumber production in the region. The historical low in existing housing inventory, coupled with homeowners maintaining their properties with low-rate financing, highlights the pressing need for the expansion of the new housing market in the foreseeable future. 

    Softwood lumber production capacity in the South has increased 25% since 2017 and reached 26.9 billion board feet (bbf) in 2022 (Forisk, 2022a). Announced greenfield construction and existing mill expansion suggest that the capacity could reach 28.5 bbf by 2025 (TimberMart-South, 2023; Forisk, 2022b). However, the 10-year accumulation of underbuilding and the resulting oversupply of sawtimber will likely continue to put downward pressure on pine sawtimber prices. Pine pulpwood prices are likely to remain flat or trend lower as lumber production increases and the structure change in the paper sector continues. 

    It is important to note that timber markets are largely local. Timber prices for a specific timber stand are influenced by various factors, including the timber species, quality and size of the trees, site accessibility, local timber inventory, mill types and capacities, logging capabilities, transportation capacity, and many other local considerations. 

    References

    Forisk. 2022a. Forisk North American forest industry capacity database.

    Forisk. 2022b. Forisk Research Quarterly: Fourth Quarter 2022.

    TimberMart-South. 2023. Market news quarterly. 

    U.S. Census Bureau. 2023. QWI Explorer.