The risk of a trade disruption for American Agriculture

Risk remains one of the salient features of commodity agriculture. We usually discuss weather or market price risk, but we also need to be mindful of policy risk. Macro-economic policy in the 1980s and more recently the Renewable Fuel Policy of 2007 are examples of policy decisions that shocked commodity prices. When I teach risk management, I tell students that risk = probability of a bad event x the severity of the event. Much of what challenges us in risk management is how to deal with the low probability but severe negative event.

Current discussion regarding NAFTA, recent withdrawal from the Trans-Pacific Partnership, and other looming threats make trade disruption increasingly probable events. However, if there is a sudden trade disruption in our crop sector, what happens to U.S. producers? Most economist suggest the price of our agricultural commodities could fall, perhaps dramatically. Trade disruptions may occur for a variety of reasons such as disease outbreaks, a trading partner’s economic turmoil, or war.
So here is the question. To what extent would our current farm safety net mitigate a sudden shock to crop prices due to a trade disruption?

Crop Insurance – Based on planted acres, crop insurance would protect against a price shock only if it occurred during the growing season. Since price guarantees are reset with the futures markets every year, a new lower equilibrium futures price in the following year would be used to value insurance losses. Thus, the economic adjustments to lower price levels would be unprotected by this program.
Agricultural Risk Coverage – To the extent base acres match planted acres, ARC would mitigate the decline in price, but would only cover a 10% band of crop value. ARC would provide some protection over the next few years, but the Olympic average used in ARC would gradually adjust over a 5 year period.

Price Loss Coverage – uses base acres as does ARC and protects against prices below a legislatively set reference price. If a medium term price shift occurred (3-5 years), these programs would provide a significant protection but at a high budgetary cost.

Ultimately, our farm safety net is not designed for such a shock. Maintaining trade flows and reducing barriers to trade has a strong economic justification. There are clear benefits to consumers and agricultural producers.

U.S. Beef Exports Continued Upward in June

The latest monthly meat trade data were released this morning and showed further increases in the amount of beef exported in June. U.S. beef and veal exports totaled 238 million pounds during the month of June. This was about a 12 percent (or 25 million pounds) higher than June of 2016. As shown in the chart, this continues the trend of boosted exports in 2017

The largest increase in exports was in Japan. Nearly 8 million more pounds of U.S. beef was exported to Japan in June of 2017 than in June 2016. This further highlights the potential impact of the increased tariff on U.S. beef in Japan (discussed here). Since it takes a while to collect the data, exports under the increased tariff will not show up in trade data for another 2 months.

Second and third on the increased exports are South Korea and Hong Kong. Just these three countries make up 18 million of the 25-million-pound increase in U.S. exports over last year. There are a few countries in which U.S. exports have actually decreased this year. Canada is the largest of these as one of our primary trade partners. Exports to Canada have decreased by about 3 million pounds from June of 2016.

The Use of Enterprise Units in Crop Insurance

The 2008 Farm bill provided for an alternative level of crop insurance subsidies for Enterprise Units relative to Basic and Optional Units.  As you can see in Table 1 the subsidy for enterprise units are sometimes as much as 20% higher than for the same coverage with basic and optional unit structures.

Coverage Level Basic & Optional

Subsidy %

Enterprise Unit Subsidy %
50% 67% 80%
55% 64% 80%
60% 64% 80%
65% 59% 80%
70% 59% 80%
75% 55% 77%
80% 48% 68%
85% 38% 53%

A brief review of unit structures is as follows:

  • Basic unit – All insurable acreage of the insured crop in the county on the date coverage begins for the crop year: (1) In which a producer has 100 percent crop share; or (2) Which is owned by one person and operated by another person on a share basis.
  • Optional Unit – Subdivision of basic unit.
  • Enterprise unit – All insurable acreage of the same insured crop or all insurable irrigated or non-irrigated acreage of the same insured crop in the county in which a producer has a share.

Importantly, because enterprise units are aggregated from basic units the base rates for enterprise units are generally lower than for the basic units from which they are aggregated.  Thus, higher subsidies and lower rates lead to significantly lower producer paid premiums for enterprise units.

A review of RMA participation data from 2009-2016 reveals the choices farmers have made.  The results are reported by crop.  For the six major row crops enterprise units have covered at least 27% of acres since 2009.  However, it appears enterprise units are far more popular for corn and soybeans than the other four crops.  More than ½ of corn and soybean acres have been insured with enterprise units.  In contrast, ½ of wheat acres have been insured at the optional unit level.

Percent of 2009-2016 Acres Insured with Basic, Enterprise, or Optional Units
Crop Optional Unit Basic Unit Enterprise Unit
Corn 28% 18% 53%
Cotton 42% 25% 33%
Rice 12% 54% 33%
Sorghum 34% 38% 29%
Soybeans 28% 20% 52%
Wheat 50% 23% 27%

Source: USDA RMA County Summary Data

Crop Market Update: June 13, 2016

Corn is mixed this week with Greenville cash corn currently trading $0.02 lower than a week ago and $0.51 higher than a year ago at $4.31/bu on Friday. July futures contracts are $0.05 higher on the week at $4.23/bu. Mississippi producers have 49% of the state’s corn crop silking, ahead of last year’s pace and ahead of the 5-year average of 44%. Mississippi’s corn crop is showing some signs of stress with 59% of the state’s crop rated in good or excellent condition. Favorable growing conditions have the U.S. corn crop looking good with 75% of the crop rated in good or excellent condition. The USDA also released the June World Supply and Demand Estimates on Friday, June 10, 2016. Corn ending stocks for the 2016/17 crop year were reduced by 145 million bushels, driven primarily by an increase in exports and lower carry-over.

Soybean markets are trading higher this week, with Greenville soybeans trading $0.46 higher at $11.70/bu on Friday. A year ago, Greenville soybeans were trading for $9.70/bu. Nearby July soybean futures are trading $0.46 higher than a week ago. Despite the recent rains, Mississippi’s soybean crop is some stress with just 65% of the state’s crop rated in good or excellent condition. Producers across the U.S. are slightly ahead of schedule in planting soybeans with 92% of the crop in the ground nationally compared to a 5-year average of 87%. The U.S. soybean crop looks good overall with 74% of the nation’s soybean crop rated in good or excellent condition. Friday’s WASDE estimates had soybean stocks for 2016/17 down 45 million bushels from last month mostly due to lower carry-over and higher exports.

July wheat futures are down $0.02 from a week ago at $4.95 while Greenville wheat prices are also down $0.12 on the week at $4.85/bu on Friday. A year ago, Greenville cash wheat was selling for $4.99/bu. Mississippi’s wheat crop is in mixed condition so far this year with just 46% rated good or excellent. A dry week has harvest progressing well in Mississippi with 56% of the state’s wheat crop harvested, slightly behind last year’s pace as well as the 5-year average of 59%. Nationally, the wheat crop is in relatively good condition with 61% of the U.S crop rated good or excellent, much better than last year when 43% of the U.S. crop was rated good or excellent. The U.S. winter wheat harvest is behind schedule with just 11% of the U.S. wheat crop harvested compared to a 5-year average of 18%.

Cotton prices finished the week higher with South Delta cash prices trading $0.83/cwt higher than a week ago at $65.00/cwt and $2.43/cwt higher than a year ago. Nearby cotton futures are lower with July Cotton futures closing at $64.75, up $0.83/cwt from last week. Mississippi producers currently have about 17% of the state’s cotton crop squaring, slightly ahead of a year ago and ahead of the 5-year average of 14%. This week 58% of Mississippi’s cotton crop is rated in good or excellent condition while 53% of the U.S. crop is in good or excellent condition. Nationally, 13% of the cotton crop is squaring, right on pace with the 5-year average of 13%.

For more detail on crop futures and Mississippi local cash prices click here.

Cattle Market Notes: Week Ending Feb. 20, 2015

Cash Cattle:

Cash fed cattle were mostly steady once again this week. The five-area fed steer price ended the week at $159.99, live, and $256.36, dressed; respectively, down $0.50 and up $1.21. Cash trades in Kanas were reported at $160 for live cattle. In Nebraska, dressed sales were mostly $253-$258 during the week, while live sales came in at $159-$160. Limited trade in the Western Cornbelt was reported with prices at $160 and $253-$256, respectively, for live and dressed.

Feeder steers in Mississippi auction markets were $5-$10 lower and heifers were mostly $5 lower. In Oklahoma City, feeder steers were steady to $4 higher, while feeder heifers were steady. Heifer calves sold $5-$15 higher.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Feeder and live cattle futures contracts were mostly steady throughout the week until Friday. Cash markets appeared to be holding the line and giving futures participants reason to do the same. Boxed beef prices added support as they moved slightly higher during the week. Friday brought about more bearish sentiment with regard to beef demand as the U.S. economy remains sluggish, while pork and chicken supplies look to be competitive. Friday afternoon USDA released their monthly inventory of cattle in feedlots. The report revealed 10.711 million head of cattle are in feedlots with a capacity of 1,000 head or more. This was even with one year ago and on par with the no-change that was expected. Cattle placed into these feedlots throughout January totaled 1.787 million head, down 11%, which was slightly higher than the expected 14% decline. Cattle sold during January totaled 1.625 million head, down 9% and on par with pre-report expectations. (More on the report will be available soon.)

Corn futures ended the week lower. Most contracts stayed within a five cent per bushel range throughout the week.

Beef:

Wholesale boxed beef prices were higher, and moved higher throughout the week. Choice boxes averaged $239.47, up $0.78. Select boxes ended the week at an average of $235.32, up $1.05.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

Cattle Market Notes: Week Ending Jan 30, 2015

Cash Cattle:

Cash fed cattle were steady to lower to end the week. The five-area fed steers price ended the week at $159.43, live, and $250.07, dressed; respectively, down $0.08 and $5.96. Nebraska traded cattle at $254 and $$160-$60.50, for dressed and live, respectively. Thursday sales in Kansas were recorded at $159-$160 live.

Feeder steers in Mississippi auction markets were steady, feeder heifers were called $7.50-$15 lower, steer calves were $5-$25 lower, and heifer calves were mostly $2.50 lower during the week. Cull cows and bulls were $3 higher to $4 lower. In Oklahoma City, feeder steers and heifers were $10-$15 lower, while calves traded mostly lower.

[ … For Livestock Prices and Production data and trends CLICK HERE … ]

Futures:

Cattle futures ended the week higher versus last week. Feeder contract prices were mostly $3 higher on all months except January. Live contracts were higher on all contracts traded through 2015.  Lower corn prices added incentive to bid up steer prices. The macro-economic picture remains a concern though. On Friday, USDA released their annual count of cattle in the U.S. and across states. The report revealed growth in the cattle industry and what looks to be continued to growth (for more information on the report CLICK HERE).

Corn futures were lower by the week’s end. For more on the market, click here >> (CLICK HERE).

Beef:

Wholesale boxed beef prices were lower, but these prices typically slip at this time of the year. Choice boxes averaged $246.69, down $10.16. Select boxes ended the week at an average of $239.89, down $8.75.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.

July 2014 Cattle on Feed Report

The United States Department of Agriculture’s National Agricultural Statistics Service (USDA, NASS) released their monthly Cattle on Feed report Friday afternoon (July 25). The report revealed that 10.127 million head of cattle were in U.S. feedlots with a capacity of 1,000 head or larger on July 1, 2014. Placements into feedlots during the month of June totaled 1.455 million head while marketings totaled 1.847 million head.

[ … For detailed numbers and charts CLICK HERE … ]

Placements totaled 1.455 million head, a decrease of 6.2% from June 2013 and a 8.2% decrease from the five-year average from 2009 to 2013. The average of analysts’ expectations called for a decrease of 4.4% from the June 2013 number and the range of expectations ran from a decrease of 8.1% to an increase of 3.5% (a rather wide 11.6% range!). So, for the first half of the year only January and February saw an increase in year-over-year placements, while all but January have had equal or below placements compared to the five-year average. Despite the market’s loud request for cattle (record level feeder calf prices) cattle did not show up and were lower than expected. This is a strong signal that the cattle supply has slowed to a mere trickle.

Only Iowa, Minnesota, Nebraska, and South Dakota experienced an increase in cattle placements last month. In Nebraska, where data are provided for placements by different weight groups, placements were steady or higher for all weight classes. Across the nation placements for cattle weighing 700 pounds or less were higher (up 19%, 40%, 15% and 19% respectively in Kansas, Nebraska, Texas, and collectively in the US). This is no surprise for two reasons. First, and obviously, the lower feed prices encouraged lightweight placements, but also heavy weight cattle were most likely very scarce as a result of the early year push into feedlots.

Cattle marketed in June totaled 1.847 million head, down 1.8% versus last year and down 6.9% compared to the average from 2009 to 2013. Pre-report expectations called for marketings to come in at a 1.9% drop, so the reported value was very much in-line with the average of expectations. This continues the trend of record low marketings being set in 2014. The current value is the smallest June marketings on record eclipsing the previous record set last year (1.88 million head), which eclipsed the previous record set the year earlier in 2012 (1.965 million head).

As a result, total inventories on July 1 were 10.127 million head, down 2.4% from one year ago and down 1.4% from the five-year average. Pre-report expectations called for a decline of 1.8% and fairly tight range from -2.8% to 0.8%, where the reported 2.4% decline is close to the low end of the range.

The July report also provides a breakdown of cattle on feed by gender. Steers on feed July 1 totaled 6.464 million head, a drop of 1.1% versus July 1, 2013. Heifers on feed totaled 3.603 million head, down 4.6% from last year. Finally, although small in overall quantity, the number of cows and bulls on feed totaled 60,000 head, down 2,000 from last year or a 3.2% drop. The drop in heifers compared to steers gives the impression of an effort to build the herd. This is similar to last quarter’s report where heifers on feed April 1, 2014 were 5.9% below the same period in 2013. So, it is possible that more heifers are being held off of feed with the intent of bringing them into the breeding herd.

The smaller than expected placements, which pulled the on feed number lower than anticipated, will provide a general sense of support to the market. However, the support will be segmented. Moving forward expect more cattle to be marketed in the coming month or two. The large volume of placements in January and February will soon be market ready (a few most likely have been sold). This will add a minimal amount of pressure in the near term although most of this has already been “priced into” the market (in other words, the marker has already taken this information into account). Also, the large volume of lightweight placements will surely pressure live cattle prices six to eight months out. On the other hand, the heavy pace of lightweight placements means fewer heavy placements will be available in the coming months which will provide support for feeder cattle prices. Longer-term, expect the red hot market to slow and then steady out as some level of herd rebuilding appears to be taking place.

A break down on the numbers can be found at this link: http://goo.gl/1M4YXv

Cotton Acres Bloomed, Price Shriveled

This past Monday (June 30), USDA released their annual Acreage report. The report is preceded by the March Prospective Plantings report with the difference being a more solid, confirmed acreage number in the acreage report compared to an expected, planned number in the earlier Prospective Plantings report.

For cotton, total U.S. acres are called at 11.369 million. This is 268,000 more than was projected in March and 962,000 more than was planted in 2013. Mississippi cotton acres were called at 400,000, up 20,000 from the March estimate and 110,000 compared to last year. Across the U.S. all states with cotton acreage were higher than the expected number reported in March, excluding Arizona, Missouri, New Mexico, and Tennessee (down 5,000, 10,000, 5,000 and 30,000, respectively). Soybeans most likely replaced the acres in the Missouri and Tennessee, while drought conditions were the likely culprit in the southwestern states.

Using the most recent estimate of per acre yield, the extra 268,000 acres would lead to roughly 460,000 more bales from the U.S. As a result, the market was under pressure on Monday following the report and then slid lower for the remainder of the week. Thursday’s rice dipped about 5 cents per pound for the December futures contract compared to Friday’s close.

Cattle Market Notes (Abbreviated): Week Ending Jul 03, 2014

Given the holiday shortened week due to tomorrow’s July 4th holiday, I’ll be brief this week…

Cattle markets remain on fire. Cash markets are largely leading the charge. The five-area price is currently at $157.40 for live and $249.45 for dressed on Thursday, both up more than $6 compared to last Friday. Beef markets moved higher through the week as well. Choice and Select carcasses averaged $247.43 and $239.48, respectively up $3.04 and $1.65 for the five trading days through Thursday.

Cattle futures followed the same path. Gains in live cattle futures were higher for the nearest (August) contract, up $3.70 versus Friday, and narrowed as the expiration month moved out. Feeder futures blazed ahead, gaining just under $4 on the nearby August to just over $2 on the deferred May 2015 contract.

Corn futures took a hit Monday as the quarterly Grain Stocks report revealed more grain in elevators across the U.S. than expected at 3.85 million bushels, 132 million more than expected. Also, on Monday, the USDA Acreage report revealed 91.64 million acres of corn planted. The big news from the report was that soybean acres are at 84.84 million, 2.7 million acres more than the average pre-report estimate and 840,000 more than the highest guess. For more on these reports check out Dr. William’s commentary HERE.

I hope everyone has a wonderful Fourth of July holiday!

Cattle Market Notes: Week Ending Mar 14, 2014

Cash Cattle:

Fed cattle cash prices ended the week mixed. The five-area fed steer price ended the week at $147.13 and $239.80, respectively for live and dressed, which was down $1.21 and up $1.51. Cattle in the Southern Plains traded at $148 on Thursday. In Nebraska, live sales were at $152 and dressed were at $240 on Friday. In the Western Corn Belt, Friday’s live and dressed cattle sold at $150 and $240, rspectvley.

Feeder steers in Oklahoma City were steady to $2 higher, while feeder heifers were called steady to $3 higher. Calves were $5-$10 higher. In Mississippi auction markets steers were mixed, with most weights about $2 higher, and heifers were mostly $5 higher. Cull cows and bulls were steady to $3 higher.

[ … For Livestock Prices and Production Information CLICK HERE … ]

Futures:

Cattle futures ended the week higher this week. Contracts were mostly $2 higher for the nearest April and June contract months, while more deferred 2014 contracts were about $1.50 higher. Feeder futures were also higher. Mixed economic news closed the week out. Retail sales increased 0.3%, which was higher than expected, but the producer price index declined 0.1% versus an expect increase of 0.2%.

Corn futures were mixed this week. The nearby May and July contracts were down about one nickel while more deferred contracts gained on the week. The uncertainty between Russia and Ukraine continued this week and will most likely continue to create headaches in the grain markets.

Beef:

Boxed beef rallied again this week Choice boxed beef finished with a weekly average of $240.72, up $7.32. Select averaged $236.77, up $5.70.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel, unless stated otherwise.