In last week’s Southern Ag Today article, Andrew Griffith discussed whether the ranchers should feed or breed their heifers in the current market. He stressed the relevance of feed, capital, and labor costs. Here, I briefly discuss the prices of two crucial feed inputs: corn and hay. Along with pasture quality, these inputs are essential for herd recovery and expansion.
While cattle prices continue to have an upward trend, corn markets show a different pattern. Global ending stocks (311.05 MMT) and plentiful production in the U.S. (15.1 B bushels) are driving corn prices down (Figure 1). Last August, corn prices hovered above $7/bu. Recently, corn is trading below $5.50/bu. Of course, lower corn prices boost feeder prices.
The price and availability of hay is also crucial to the decision to retain animals. Hay is the 3rd largest crop in the U.S. by number of acres harvested (USDA-NASS). Figure 2 contains U.S. average hay prices. Fertilizer and fuel costs swelled forage production costs and drought cut production in many areas of the country. Higher hay prices than last year suggests we are still suffering from the effects of drought.
Figure 2 – Hay Prices
Sources: USDA – NASS
USDA’s latest hay production report indicates some growth in hay inventory. Nationwide, hay supplies are expected to rebound about 5 percent compared to last year. But, longer term, hay production has declined 24 percent over the past 20 years. Yields have declined from 2.48 to 2.29 tons/acre during the same period.
While much of Louisiana and Texas remain in drought, most of the rest of the South is drought free. Less expensive feed and better pasture conditions may provide opportunity for some herd growth.
Producers can keep track of their price risk protection through revenue insurance in a given growing season by comparing the Harvest Price to the Projected (Spring) Price determined by USDA-RMA. This article examines the price protection offered by Revenue Protection (RP), Supplemental Coverage Option (SCO), and Enhanced Coverage Option (ECO) crop insurance for corn and rice.
The liability covered under an RP insurance policy is based on the product of the farm-level Actual Production History (APH), a futures price, and a coverage level. The futures price is based on the higher of the Projected Price and the Harvest Price determined by USDA-RMA. Please visit the RMA Price Discovery Tool to find current Projected and Harvest Prices by location. RP has eight coverage level options to choose from, ranging from 50-85% in 5% increments.
Area-based (i.e., county-level) crop insurance products like SCO and ECO can be paired with Yield Protection (YP), RP, or RP with Harvest Price Exclusion (RP-HPE). The liability insured by SCO and ECO is calculated using the same parameters as RP (e.g., APH and futures prices), with the notable exception being that SCO offers a coverage level of 86%, and ECO offers coverage levels of 90% and 95%. Unlike RP – which triggers indemnities based on farm-level losses – SCO and ECO trigger indemnities based on county-wide losses. ECO will trigger a full indemnity when county-level revenue losses fall to 86%, and SCO will trigger a full indemnity once county-level revenue falls to the coverage level of the underlying RP or RP-HPE policy.
Consider implications for rice price risk protection in 2023 for the Louisiana Harvest Price at $15.84/cwt. Expressing this price as a proportion of the Projected Price for the same futures contract (i.e., $16.90/cwt) gives us 94%, which implies ECO would begin to trigger assuming harvest yield does not increase. However, assuming average yields, neither SCO nor any coverage level of RP would trigger at the current Harvest Price. Producers might consider purchasing area-based insurance next year, such as SCO or ECO, in addition to their underlying RP or RP-HPE policy since yield risk is not as prevalent in rice compared to other crops grown in the southeast (Biram and Mills, 2023).
Doing the same exercise of finding the proportion of the Harvest Price to Projected Price for corn in Arkansas would give us a percentage of 81% which is found by taking the ratio of the Harvest Price of $4.83/bu and the Projected Price of $5.94/bu (i.e., $4.83/$5.94 = 81%). Under this scenario, ECO at both 90% and 95%, SCO, and RP at 85% would all trigger an indemnity assuming average yields. Extending this exercise to all southeastern states producing corn shows that this pattern continues (Figure 1). Since southern corn producers face more yield risk relative to rice, one might consider adding area insurance to a risk management strategy in 2024.
Implications for marketing unsold grain near harvest depend on the local cash prices being offered in a specific delivery window. Producers with crop insurance can decide to forward contract with delivery in a specific month based on the exercise outlined above. This can be done by taking the ratio of the cash price being offered in the desired month of delivery to the Projected Price and comparing the percentages. If the percentage found using the local cash price is lower than the percentage found using the RMA Harvest Price, then producers can forward contract knowing there is a price guarantee which can be used to offset any non-delivery fees. For example, if the local cash price for corn with September delivery in Arkansas is $4.72/bu, then the ratio would be 80% (i.e., $4.72/$5.94 = 80%), which falls within the 81% ratio found above. This implies that even if there are unexpected harvest losses resulting in non-delivery, there will be an added layer of protection provided by the underlying revenue crop insurance.
Figure 1. RMA Corn Harvest Price as a Percentage of the Projected Price (Sales Closing Date: February 28th and March 15th)
Farmers markets represent a unique market channel with specific implications for specialty crop production support systems. The vast majority of vendors are small scale producers, but increasingly require production and management skills quite different from their commercial scale counterparts. Farmers markets play important roles within many communities as the face of food and agriculture to many who are otherwise disconnected. Food access and nutrition are key issues, but these markets also provide vendors with an important platform to develop attractive niche enterprises, value-added products, and connect with consumer groups holding shared food values.
Nationally, we have seen farmers markets demonstrate considerable resilience in production, organization, and distribution, becoming nimble and creative in an effort to help their community patrons access their products. Farm markets, like other food retailers, were deemed essential businesses early during Covid because of their role in providing many food access. Covid has sparked a lot of change and innovation, to be sure. While many markets and vendors struggled with the economics of Covid, there has been a strong resilience and resurgence; now over 9,000 farm market sites are active nationally.
The growing complexity of farmer-vendor and consumer interactions is a major point of concern, but also an opportunity. Darlene Wolnik, Program Director for the Farmers Market Coalition, provided five broad themes to think about regarding emerging challenges facing farmers markets, specialty crops, and the U.S. South. We can relate them to our experiences with farmers markets in Kentucky in connection with the Center for Crop Diversification.
Very few (any?) states in the U.S. South have an organized state farm market association. These have been critical in other parts of the country (WA, IL, MI, NY) to close the gaps for market innovation, create a voice for policy/research needs, and operationalizing data/program sharing across a network of markets. Some coordination work has been attempted through LFPP and FMPP projects across the South, but this kind of coordination does not substitute for strong grassroots member-driven organizations. States with active state associations were in much better position to coordinate during a time of crisis, but also can speed market innovation, lead vendor advocacy, coordinate around data sharing and aggregation, can support wide vendor business development, and pursue various grants as a collective.
Climate adaptation for specialty crops is especially acute in the South both for farms, markets, and market infrastructure. This is becoming a key issue as it relates to new plant pests and diseases, but also season extensions and climate zone plant viability.
Many state agencies across the South have maintained a focus on commodity agriculture. Programs for direct marketing of specialty crops, value-added products, and direct meat marketing require very different expertise. New regulatory/certification issues, marketing programs, technical assistance with small-scale production systems, and community engagement facilitation are required. Many “new farmers” in direct markets have less ag background and more experience in marketing or other first careers and their needs are different. Many respond well to social media but have no idea how to use enterprise budgets or where to look for small scale production management questions. Commodity producers looking to diversify into direct markets are often in the opposite situation.
Markets have many diverse needs for technical assistance, including bringing on youth and new vendors, learning how to build collective appeal to the market through season extension, new products and varieties, and value-added products. Many of the needs of young and beginning direct marketers don’t fit as well with traditional publication and basic lecture-based trainings familiar to extension and technical assistance providers—they require more tailored education and support like the ‘Marketing for All Program’ which allows them to choose their own needs and path, but even that program is not as flexible and individualized as it could be to meet these very unique needs.
Pricing for markets is not always intuitive. Input costs are certainly higher and these costs are compounded by the lack of scale economies connected with small farms. Other costs, like management and risk, are difficult for many vendors and consumers to understand. More farmer education and consumer public relations are needed to recognize these costs. There are many different types of markets and even different types of consumers that may shop within the same market. Helpful work is emerging exploring different market taxonomies, but, like many markets, research needs are growing with increases in data, shopping formats, digital sales, and patron demographics. The price reports we offer through the Center for Crop Diversification are very helpful to many producers, but there is a great need for a supporting base of knowledge and education to be able to apply them accurately, and setting prices based on the reports is certainly not a guarantee of profitability. This is especially important in the current environment when there is so much input cost volatility and risk.
The farmers market space will continue to create opportunities for farmers of all kinds of products as a key platform in the direct-to-consumer marketing model. New technical assistance needs relating to the issues above will need to be developed in support of this growing community. These markets will continue to be a high profile interface for agriculture with the public and will evolve. The opportunities to facilitate stronger collective market performance remain, especially in the South, through a variety of approaches that can help both vendors and community patrons.
The ongoing conflict between Russia and Ukraine, which began in February 2022, has had substantial humanitarian and economic implications. Among these repercussions is the disruption of trade, especially in agricultural markets. Ukraine’s grain and oilseed exports contracted by around 80% at the onset of the conflict. This has led to notable price fluctuations, particularly for crops like wheat and corn. For instance, wheat futures prices increased by up to 35% in response to the armed conflict. Despite these market changes, the price increases have been less significant than initially anticipated. To facilitate the movement of agricultural products, the European Union established the EU Solidarity Lanes in May 2022. Additionally, the Black Sea Grain Initiative was established with the support of Turkey and the United Nations to alleviate the challenges of blocked Black Sea ports due to the conflict.
Research into market reactions to major events is extensive, but fewer studies have examined how conflicts impact crop prices. Some research on this conflict suggests that crop prices did rise, but not due to overreactions. Moreover, the initiatives to improve transportation and unblock ports had limited influence on traders’ perceptions of the market. The price of wheat was more affected than corn, indicating concerns about broader disruptions in Black Sea shipments. Interestingly, other crops like soybeans responded less to the conflict or the port unblocking initiative.
Figure 1 shows how the futures price index for select grains and oilseeds responded weeks after the invasion and when the Black Sea Grain Initiative was established. The results in panel (a) show that within the initial nine weeks of the conflict, future prices of agricultural crops were about 16% higher compared to a hypothetical scenario without the conflict. As seen in panel (b), after the introduction of alternative transportation routes, the futures price index experienced a gradual decline. This suggests that the transportation initiative had a positive impact by reducing market uncertainty. However, the broader market sentiment was not significantly altered by the Black Sea Grain Initiative, and prices did not decrease further. A similar pattern is seen for the grain deal renewal in the Fall of 2022. These findings are significant for southern agricultural producers involved in the decision-making and trading of these commodities, highlighting the complex dynamics of market responses to geopolitical events and mitigation efforts.
Figure 1: Agricultural Commodity Futures Market Response to the Russia-Ukraine War and the Black Sea Grain Initiative.
Learn More
Carter, C. A., & Steinbach, S. (2023). “Did Grain Futures Prices Overreact to the Russia-Ukraine War?” MPRA Paper No. 118248. Available at: https://mpra.ub.uni-muenchen.de/id/eprint/118248.
Goyal, R., & Steinbach, S. (2023). Agricultural Commodity Markets in the Wake of the Black Sea Grain Initiative. Economics Letters, 111297. Available at: https://doi.org/10.1016/j.econlet.2023.111297.
Since March 2022, The Federal Open Market Committee (FOMC) has enacted eleven interest rate hikes accounting for a 525-basis point (5.25%) increase (FRED, 2023). We discuss how increasing this rate impacts agricultural lending in 2023.
The Fed Funds rate indirectly impacts the cost of other market interest rates such as those for agricultural operating loans. The FOMC influences rates by managing available cash (money supply) in the financial sector. In terms of supply and demand, if cash is limited then the cost to borrow available cash (interest) increases, and borrowing is deterred. The Fed utilizes these tools, in either direction, to slow down the economy in times of rising inflation or to reinvigorate economic activity in recessionary times.
According to the Kansas City Fed (2023), operating loan rates are typically higher than the effective federal funds rate. A survey of lending terms to farmers for the tenth financial district showed that, on average, a producer is paying an 8.03% interest rate compared to 3.66% the previous year. Agricultural lending has become increasingly expensive, creating additional financial stress in the agricultural sector. Table 1 is derived from budgets across the southern region. Included are estimates of primary pre-harvest expenses that might be included on an operating loan.
Table 1. Southern Region, Select Pre-Harvest Production Costs
Cost Category
Corn ($/Acre)
Cotton ($/Acre)
Rice ($/Acre)
Peanuts ($/Acre)
Seed
$104.00
$118.00
$44.00
$97.00
Fertilizer
$303.00
$192.00
$178.00
$64.00
Pesticides
$88.00
$197.00
$151.00
$77.00
Fuel (Irrigation & Equipment)
$25.00
$37.00
$23.00
$68.00
Q2 2023 Interest (8.03%)
$41.76
$43.68
$31.80
$24.57
Q2 2022 Interest (3.66%)
$19.03
$19.91
$14.49
$11.20
Note: 2023 and 2022 rates are based on prevailing operating loan rates in the second quarter of each respective year.
Interest costs for Q2 2022 and 2023 (see Table 1) represent the cost of borrowing the capital needed to cover the listed production expenses at either 2022 or 2023 rates. Interest is estimated by totaling the select per acre production costs and multiplying it by the prevailing interest rate ($520*0.0803 = $41.76). It’s worth noting that these expenses are only a subset of production costs. The impact on interest expenses will increase as individual operating loans include other costs of production. Additionally, higher interest rates are putting considerable pressure on the financing cost of equipment and land ownership.
Producers are now faced with paying over double the cost per acre in interest for 2023 than if they were to take out the exact same loan in 2022. Keep an eye on decisions out of the September FOMC meeting as it may hint to the Fed’s future choices to raise rates through 2023. If inflation continues to decrease and underlying economic activity slows, the need for further interest rate hikes may diminish.
References
Board of Governors of the Federal Reserve System. (2023, July 27). Open Market Operations. Retrieved July 27, 2023, from https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
Federal Reserve Bank of Kansas City, (2023, July 19). Ag Credit Survey. Retrieved July 19, 2023, from https://www.kansascityfed.org/agriculture/ag-credit-survey/.
