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March 31, 2009
Are There Risks You Cannot Manage? Are They Becoming More Profound?
Dad was pretty smart. He never got upset about the weather, “because you can’t do anything about it.” Your father was probably the same way, and after years of farming they knew what risks could be managed and what could not. You have learned as well how to manage the risks that you can, and either don’t worry about those that are unmanageable or have your farm organization push the government to do something about it. But how do we really deal with those risks that are seemingly unmanageable by an individual farmer?
What are those risks that just can’t be controlled? How about adverse trade policy, or exchange rate reversals. How about the recession that dried up consumer demand, or energy price shocks that peaked late last summer. Those are all considered to be systematic risks, which individuals cannot manage no matter how good you think you are. At least that is the thought of several Purdue economists writing in the March edition of the Top Farmer newsletter.
You can manage many risks. Production risk can be managed with crop insurance or crop diversification. Price risk can be managed with futures, options, or cash forward contracts. Human risks can be managed with operational policies, business succession plans, training programs, and insurance policies. But systematic risks are common to all farms and cannot be eliminated with typical risk management measures.
Since the current recession is a systematic risk, how are commodity prices responding to it, and how did they respond in prior recessionary years? The Purdue economists gauged the volatility of five major commodities in relation to the overall market to find the answer.
Corn prices increased their volatility from 1956 to the present, with Iowa prices showing the greatest volatility, followed by US average prices, then Indiana prices and finally Illinois with the least volatility of the four.
Soybean prices showed the greatest volatility in Iowa and Indiana, followed by US average prices, and finally Illinois with the least.
Wheat prices were the most volatile for the national average, followed by Iowa, Illinois and Indiana, all of which were nearly the same.
Cattle prices were the most volatile for the national average price, followed by Iowa, Indiana, and then Illinois.
Hog prices were the most volatile for the national average and for Iowa, with Indiana and Illinois being the least volatile.
The Purdue economists say systematic risks have increased since 1973 when international exchange rates were altered. Levels of systematic risk for cattle and hogs have been consistently lower and less volatile than for corn and soybeans. Soybeans had the greatest volatility, followed by corn, wheat, hogs, and cattle over the past 50 years of the study.
Although we are in a recession, recessions do not consistently have an impact on systematic risk. The recession of the early 1970’s saw a decline in systematic risk for all five of the commodities, but the risk levels all increased for them in the recession of the early 1990’s.
While the Farm Bill offers the greatest chance at policy change, systematic risk has not been consistent after new farm policy became effective.
Since 2002, systematic risk has been increasing rapidly for all commodities, reaching record highs for both corn and soybeans. The Purdue economists say, “This indicates that agricultural producers are bearing heightened levels of risk which cannot be controlled through agricultural diversification.”
Summary:
Compared to a common agricultural commodity index, there is a great variation for the volatility of the five commodities. While that measure is growing larger, the systematic risk actually peaked in the 1970’s and then declined, it has only been exceeded in the past two years. While agricultural risks are increasing, producers are having to become creative in the ways they offset those risks.
Posted by Stu Ellis at 12:32 AM | Comments (0) | Permalink
March 30, 2009
2009 Corn, Soybeans, And The Question Of Profitability.
Your profitability for the 2009 corn and soybean crop may depend on when you purchased crop inputs, last fall or this spring. As we head toward the March 31 USDA Prospective Plantings report, many farmers, particularly with high cash rent, may find few opportunities to avoid a year filled with red ink on the balance sheet.
Whether you booked seed, fuel, anhydrous ammonia and other fertilizer last fall or this spring, the prospects for profitability are not assured. And even with a bounce in the market after the planting intentions report, there may not be enough pricing opportunity to offset the higher costs of production. That is the bottom line in the new crop budgets calculated by Gary Schnitkey, Farm Management Specialist at the University of Illinois.
His latest newsletter indicates that wholesale prices of fertilizer and energy have declined substantially, but whether they have declined as much at the retail level depends on when the dealer booked his inventory. Compared to fall prices of $1,000 per ton of anhydrous ammonia and DAP and $900 for potash, spring prices have fallen to $700 for anhydrous ammonia and$500 for DAP, with potash remaining at $900 per ton. Your price will depend on whether the dealer still has high priced inventory that is clogging the pipeline. Compared to fall fertilizer prices of $210 per acre for corn and $92 for beans, Schnitkey says spring prices are closer to $151 for corn and $83 for beans.
Prices may or may not have come down for fertilizer at your supplier. In parts of the Cornbelt where a late harvest and early winter prevented typical fall application, prices may remain high. Similarly with seed; where Schnitkey says changes in acreage may soften some seed prices. And costs of fuel are considerably lower. But the key is whether there are funds remaining after input and cash rent costs are paid. Schnitkey says if spring input costs are used, non-land costs are $476 for corn and $293 for soybeans on highly productive land, which will demand a high cash rent. Based on $3.75 for corn the return to operator and land (cash rent has to be paid from this) is $222. Based on $8.30 for soybeans, the return to operator and land (cash rent has to be paid from this) is $153. In other words, if cash rent is $180, 180 bushel corn provides a $42 per acre profit and a 51 bushel bean yield provides a $27 per acre loss. Schnitkey says, “Higher yields or higher prices will increase returns. Conversely lower yield or lower prices will decrease returns.”
Many farmers may be locked into 2009 acreage as a result of fertilizer application, but others may have discretionary acreage and have not yet decided whether to plant corn or soybeans. Comparing per acre revenue, Schnitkey says if your inputs were priced last fall, corn may provide slim revenue or even a loss. Soybeans may provide more revenue, when soybean revenue potential is subtracted from corn revenue potential. “For planting decisions, a key will be whether farmers are facing fall pricing versus spring pricing. In some areas, input prices have not fallen as much as in other areas. In areas where input prices have not fallen, soybeans may be more profitable than corn.”
When comparing returns that are calculated by subtracting soybean revenue from corn revenue, Schnitkey says, “Corn-minus-soybean returns decreased dramatically from September 2008 until February 2009. Since February, futures price changes indicate increasing profits for corn relative to soybeans.”
As you get in the tractor seat this spring, one issue to consider is cash rent for 2010. While you may have recently settled that for the current year, it is never to early to make long term plans, and 2009 profitability will certainly impact cash rent levels for 2010. Schnitkey downward pressure on rents as a result of lower operator and farmland returns this year. And he says if corn and soybean prices remain where they are, rents will have to decline if your profitability is going to return to historical levels.
Summary:
2009 profitability will depend in large part on input costs, and those will depend on whether suppliers are pricing fertilizer based on fall or spring wholesale prices. Spring prices have declined, but that may not benefit farmers in all areas of the Cornbelt. In some cases, high input costs and moderate cash rents will not be covered by current corn and soybean prices. Farmers who have yet to decide on a cropping pattern for 2009 may be able to adjust acreage based on costs of inputs. Future cash rents will have to decline, if commodity prices remain at current levels.
Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink
March 27, 2009
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
Buckle your seatbelt for the March 31 Prospective Plantings report, to be issued that morning by USDA. Statisticians interviewed thousands of farmers earlier this month on their acreage plans. The market is expecting corn acreage at 84.548 mil. acres, the average of an 81.4 to 89 mil. acre range. That compares to 85.982 mil. acres last year.
How many soybean acres will you plant? The market thinks it will be in a range of 75.9 to 81.5 mil. acres, with the average at 79.251 mil. That would be substantially more than the 75.718 mil. acres planted last year. Many observers who are weighing in on the forecast believe soybean acres will rise because of the greater chance for profitability.
Speaking of soybeans, cash prices have swung more than $2 since last December, including a substantial spurt last week. IL Extension’s Darrel Good says that resulted from higher energy prices, a weaker dollar, and a rally in financial futures. Read more of his newsletter.
South America should be dominating the bean market says Good, but with a smaller crop in Brazil and angry farmers in Argentina, export buyers continue to gobble up US supplies. That points to a record level of soybean exports, thanks in major part to China, which has purchased 58% of them. Exports will be pushing toward 1.2 bil. bu. this year.
Darrel Good says the size of the new crop will have a major impact on soybean prices, but there will still be uncertainty about that even after the Prospective Plantings report. The current weather in the upper Plains may throw planting into question in the Dakotas.
The rebound in soybean futures and the stronger basis are providing an opportunity for pricing old crop beans, but Good says it is a harder decision for the new crop, “November futures are slightly above the spring price guarantee for crop revenue insurance so there is some downside risk for unpriced new crop soybeans. That risk is small for the insured portion of the crop, but greater for the uninsured portion,” favoring frequent, small sales.
Marketing recommendations come from Extension’s Mike Roberts at Virginia Tech:
1) Corn: The time to get your old crop corn sold is NOW as this sales window is not expected to last. It is a very good idea to get the ’09 crop priced to 45% if you haven’t done so already. Feed purchasers should wait at least another week or two to buy.
2) Soybeans: It is a good idea to sell all old crop soybeans in the bin and get up to 35% of the ’09 crop priced now. A consensus of sources over the last few days has agreed it is not unreasonable to see loan rate soybeans before this market is done.
In the Quarterly stocks report Tuesday the market expects 7 bil. bu. of corn compared to 6.859 bil. a year ago, and beans at 1.322 bil. bu. compared to 1.434 bil. in 2008.
The Cattle on Feed report indicated feedlot inventory is 5.3% under 2008 levels, with February placements down 2.6% and marketings down 5.3%. Shane Ellis at Iowa State says the numbers should have been bullish, but the weakness in beef demand has sapped the strength in the market and consumers still prefer lower cost protein sources. More.
Cattle price forecasts are more of a function of oil prices than numbers in feedlots, says MO livestock economist Scott Brown, “When oil prices surge, more corn is diverted into ethanol for fuel, raising the cost of corn for feed. In turn, higher feed costs lower feedlot demand for calves. That means less money for cow-calf producers.” Brown also says a lower dollar will spur overseas demand for US beef, and 8% of US beef is exported.
Some beef producers will not survive, says Brown, “Beef producers surviving the economic downturn will be in position to profit in 2010 and beyond.” He adds, "Beef supply is not that plentiful. In a recovery, there won't be enough beef to meet the demand. That applies locally and around the world. Consumers in foreign countries want our beef. It just depends on whether their economies will support buying U.S. beef.”
A valuable commodity produced on many livestock farms and highly desired by gardeners and landscape aficionados now has a central trading point. Not as complex as the Board of Trade, and futures and basis are not involved, a manure exchange has been established by IL Extension livestock management specialist Randy Fonner. You won’t have to pay a brokerage commission here.
Harvesting corn residue may become profitable, but requires nutrient restoration. More.
1) Target corn residue harvest in fields that will be planted to corn next year.
2) Rotate fields so that residue is not removed from the same field every year.
3) Reduce tillage following residue harvest.
4) To restore carbon, use manure instead of or in addition to commercial fertilizer
5) Consider a winter cover crop after residue removal. Roots from winter cover crops are extremely effective at scavenging residual soil nitrate and adding carbon to the soil.
What is your target corn population? MN Extension agronomist Jeff Coulter says IL researchers found, “As yield potential increased from 135 to 225 bushels per acre, the economically optimum plant population increased from about 25,000 to 32,000 plants per acre.” In MN Coulter found, “Yield was maximized at 36,000 plants per acre, and a final stand of 32,000 to 34,000 plants per acre was necessary to maximize economic return. Read more.
What is your soybean planting rate? NE researchers used 30” rows for 3 years and planting rates from 90,000 to 180,000 per acre. “The 120,000, 150,000, and 180,000 yields were statistically the same (only a 0.3-bu. difference between the 120,000 and 150,000 rates) and were significantly better than the 90,000 seed-per-acre plots; however, note that the 90,000 plot yielded only 1.7 bu/ac less than 150,000 plot.” They said it was the ability of soybeans to compensate for reduced population. More.
The final recommendation from the NE research is to reduce populations by 40,000 to 120,000 seeds per acre. “This results in a savings of $10.66 to $18.57 per acre based on seed costs of $40-65 a bag.” They report that a 90% stand has been achieved.
Insect management in your corn and soybeans requires a “Do I need this” answer. That is the position of Ohio State entomologists who share your concern. More.
1) For corn after corn, take preventative action against corn rootworm larvae.
2) Crop rotation is still the preferred action in areas without the rootworm variant.
3) Take preventative action against corn borers if you have a history of borer problems.
4) Transgenic hybrids are recommended against borers if corn is planted after late May.
5) The use of transgenic hybrids requires the planting of a 20% refuge to non-Bt corn.
6) Seed treatments are recommended if the crop is being planted into weeds or alfalfa.
7) Seed treatments will not control black cutworm and are not recommended.
8) Where cutworm damage is common, use a soil insecticide at planting or Herculex.
9) Seed treatments on soybeans will not have any impact on controlling soybean aphids.
10) Unless high populations, seed treatments will not be economical for bean leaf beetles.
11) Seed treatments are warranted on food grade beans to prevent bean pod mottle virus.
If you are growing non-GMO soybeans, weed control should not be a major problem if you follow a 4-step program recommended by Ohio St. agronomists. More.
1) Start weed free at planting with tillage or a preplant herbicide burndown application.
2) Include a broad spectrum residual herbicide in the preplant burndown.
3) Once the beans have emerged, apply a post herbicide to small weeds.
4) Make a second post herbicide application for survivors or late emerging weeds.
Beware of the potential for weed patches in some fields to have developed resistance to PPO inhibitors found in Flexstar and Cobra/Phoenix say the Ohio St. weed specialists. And they say the really bad news is that herbicides being recommended for non-GMO soybeans may be driving more weed populations to become resistant to PPO inhibitors. That is because of the prevalence of weed populations that are also ALS resistant. Their solution is to plant non-GMO beans in a field only once every 3-4 years in a rotation.
If you are considering a foliar fungicide for wheat, WI Extension agronomists want you to first consider what disease resistance is carried by the variety of wheat planted. They say, “Economically, the decision to make a foliar fungicide application is dependent on crop yield potential, commodity prices, pesticide cost including application, and crop yield loss caused by wheel track damage. An adequate yield potential for soft red winter wheat would be in the 55-65 bu/a range. The goal when considering yield and economics is that you want to cover the total cost of the fungicide application.”
Have you been nurturing a young herd, flock, or whatever of soybean cyst nematodes this winter? They may be out of sight and out of mind, but they are hungry and can’t wait for you to plant soybeans. They are temporarily parked in fields with host plants of purple deadnettle, henbit, pennycress, shepherd’s purse, bittercress, & chickweed.
Posted by Stu Ellis at 12:04 AM | Comments (0) | Permalink
March 26, 2009
ACRE: Answering The Bottom Line Question On Whether To Sign Up.
There are a couple decisions awaiting your consideration. Initially, how much corn and soybean acreage will you be planting? Secondly, will you be signing up for the ACRE program effective for the 2009 crop? Your priority is on the first question, since that will determine your income for the year and decisions must be made on short order. The question about ACRE participation can wait until June 1, which is the deadline for 2009 participation. Undoubtedly, you will be thinking about ACRE while on the tractor seat this spring, so let’s get down to the basic question that you will need to answer.
The Average Crop Revenue Election (ACRE) is part of the 2008 Farm Bill and is designed to help farmers better manager their revenue risk. You have probably heard that signing up for ACRE means sacrificing 20% of your Direct Payments and 30% of your loan rate. (20% of counter-cyclical payment rates are also sacrificed, but few experts believe crop prices will be low enough to result in counter-cyclical payments.) The formula to determine ACRE payment rates is rather complex. If you are beginning the process to study it, a good study guide is provided by the University of Illinois.
With the knowledge that a sacrifice of $3.71 per acre in Direct Payments must be traded for ACRE participation, Ohio State ag economist Carl Zulauf says to make the decision about signing up for ACRE, there is one question that needs your answer:
“Does ACRE’s state revenue program improve management of revenue risk enough, compared to the price counter-cyclical program, to compensate for the 20% reduction in direct payments and 30% reduction in marketing loan rates?” Zulauf’s guide on the decision question indicates that a focus must be made on revenue risk management because the state price and yield formula and the potential decline in US cash prices are two issues that farmers cannot control.
Zulauf says for current expected prices, ACRE’s revenue guarantee is estimated to be at least 90% higher than the implied revenue target in the counter-cyclical program. First, ACRE updates yields annually, compared to the historical averages for the counter-cyclical payment. Secondly, ACRE updates price targets with a two year moving average, compared to a set price number in the counter-cyclical program. Thirdly, ACRE’s revenue guarantee is important when costs are increasing faster than productivity. Lastly, ACRE’s revenue guarantee cannot decline more than 10% from year to year, so it will be higher than the counter-cyclical program through the end of the program in 2012. Additionally, ACRE payments are tied to planted acres, not base acres, but the number of planted acres receiving ACRE payments cannot exceed base acres.
To refresh your memory about the counter-cyclical alternative to ACRE, payments will only be made if the US season average price is below $2.35 for corn and $5.36 for soybeans ($5.56 in 2010-2012). The marketing loan program will only provide benefits if the market price drops below the loan rate, which nationally is $1.95 for corn and $5.00 for beans. Before signing up for ACRE, consider whether market prices will drop below those rates.
Zulauf provides some other keys to making your decision:
1) The reduction in direct payment per planted acre usually will be smaller, the greater the share of base acres that are soybeans.
2) Compared to the counter-cyclical program, ACRE better matches current production risk because its payment is based on planted acres (up to the farm’s total base acres).
3) The higher a farm’s 5-year Olympic moving average yield, relative to the state’s 5-year Olympic average yield for a crop, the higher the farm’s ACRE revenue payment.
4) The more yield has increased the higher will be a FSA farm’s Olympic average yield.
5) The closer changes in yield on a FSA farm and state move together, the more similar is changes in farm and state revenue, implying better risk protection from ACRE.
Summary:
The ACRE program provides a revenue risk safety net, which is calculated from several elements, including state revenue and national average prices, neither of which can be controlled by a farmer. So to make the decision on whether to sign up for the ACRE program, one must determine if the ACRE program manages those risks better than what the traditional direct payments, counter-cyclical payments and loan rates would provide, keeping in mind that a small portion of those benefits are sacrificed when signing up for ACRE.
Posted by Stu Ellis at 12:45 AM | Comments (1) | Permalink
March 25, 2009
Planting Decisions, Marketing Decision, The USDA Report. What Should A Farmer Do?
You are less than a week away from, what could be, a significant USDA report that will have an impact on the market for enough time to change planting decisions for the 2009 corn and soybean crop. The Prospective Plantings Report will be released by USDA next Tuesday morning and will reflect what farmers have told statisticians what their cropping patterns will be based on information into the early part of the month. What could happen and how should you react?
The past two years have seen the grain markets buy acres throughout the winter prior to the planting season, but that did not happen this year. Most farmers who have discretionary acreage have indicated that soybeans will be the choice because high costs of corn production make soybeans a greater profit opportunity. If the USDA report indicates large soybean acreage, then either soybean prices will fall or corn prices will rise to balance out the demands of the market.
Michigan State University Extension Specialist Jim Hilker says the market will react to the base that the report provides. In his latest Outlook Hilker says, “If the last two years are any sign, even many farmers will not decide on exactly how many acres they will plant of each crop until their last planter has pulled out of the field. While this has always been true to some degree, if for no other reason weather conditions, I would argue that economic incentives since 2006 have made this even more true.” Hilker says the report will allow the market to adjust prices and farmers can react to those prices when they head to the field, “Bottom line, we could have some pricing opportunities after the release of the two reports, but the time period may be short. After the report the planting conditions will likely take over the market direction to a large degree.” With the market expecting a 1-5 million acre jump upward in new crop beans, Hilker doubts the report will be bullish for soybeans, “At what price would you be ready to pull the trigger, and at what time will you begin pricing regardless if they are over some minimum price? Being prepared to make/adjust soybean planting and pricing decisions is huge.”
Melvin Brees agrees that planting and marketing decisions for the 2009 crop are not easy ones to make. From his vantage point at the University of Missouri, Brees writes in his latest Outlook that grain markets have been hurt by many outside forces which have complicated marketing and final production decisions. He says one forecasting firm is using the production cost issue to predict that soybean acreage will surpass corn acres in 2009. Brees says regardless of the acreage predicted in the USDA report, it is imperative for producers to know their production costs; and if land is cash rented, that figure needs to be reflected in the total costs per bushel. Brees calculates a nearly $130 difference in corn and bean operating costs for 2009, suggesting that farmers stay with corn on discretionary acres.
Brees says in recent days soybean prices have climbed to the point of profitability on owned land, but not yet on rented land, and he says farmers without revenue crop insurance may want to stay with soybeans to avert any financial risk.
Whether or not you have revenue insurance, the crop still needs to be sold, and 17 months remain in the market for that to happen. Despite the long window, most farmers know the market provides a “tractor seat bounce” and there will be springtime marketing opportunities. Brees says, “The fact that current new crop bids already offer some profit also should not be ignored, especially ahead of possible surprises in the USDA’s Prospective Plantings report.” He says if you have revenue insurance, the issue is not as critical, but sales can be spread with some degree of comfort. But those without crop insurance will need to be more careful in spreading their sales, “When spreading sales it is likely that some sales will turn out to be disappointing, but it reduces risk. The profit margins may be much narrower than last year and decisions are not easy, but it is still possible to have a profitable year.”
Summary:
The USDA planting intentions report next week has the potential to move the market, based on expectations for corn and soybean acres, and the market could either add a premium to one commodity or discount another based on the forecast. Farmers may have a marketing opportunity immediately following the report, but pricing decisions will be difficult unless production costs are well known. Price targets should be set, but there are usually good chances in the spring to market grain, and spreading sales can also diminish marketing risk.
Posted by Stu Ellis at 12:41 AM | Comments (0) | Permalink
March 24, 2009
Farm Program Payments, Payment Limits, And Crop Insurance Subsidies? Will They Drop?
In an effort to reduce federal spending the Obama administration has proposed cuts in Direct Payments, lower payment limitations, and a reduction of the level of federal subsidy in crop insurance premiums. The proposals are part of the annual appropriation process, and need Congressional approval before the start of the 2010 Fiscal Year on October 1. The administration says it will save $16 billion over 10 years, and is not an attempt to re-open the Farm Bill. Will such a proposal impact you?
Agricultural organizations have expressed opposition to the plan, which may go to the Congressional budget committees, instead of the agriculture committees. If the budget committees endorse the plan, then the House and Senate Agriculture Committees will have to go along with it, or find savings somewhere else in the USDA budget says the Congressional Research Service (CRS). CRS has issued a briefing paper to Congress on the details of the proposal.
The President’s budget address last month specifically mentioned termination of direct payments, to what he called, “large agribusinesses that don’t need them.” His statements mirrored those of his predecessor who also called for reduced farm program payments and reduction of payment limits. The lightening rod issue of the handful of proposals seems to be the elimination of direct payments to farms with more than $500,000 in sales. CRS analyst Jim Monke says there are some Members of Congress who have spoken out against the proposal in part or in whole. Opponents will indicate that someone with $500,000 in sales may not be guaranteed any profitability in times of high production expenses.
CRS says the FY 2010 budget indicates that most of the $16 billion removed from farm safety net programs be used to offset a nearly $10 billion increase in child nutrition. CRS says the concept faces an uphill fight, since change would have to be sanctioned at some point by the Congressional ag committees, and if they feel it is an attempt to “re-open” the Farm Bill, they are not obligated to do so. But any continued effort to reduce farm spending would be modified before it becomes reality.
The four proposals of the administration to reduce farm spending call for elimination of the cotton storage program, and three others that have consequences in the Cornbelt:
1) The prohibition of direct payments to farmers with over $500,000 in sales would revise the payment limit rules and impact 8,159 farms in Iowa, 6,484 in Illinois, 5,299 in Minnesota, 5,069 in Nebraska, 3,559 in Indiana, 3,409 in North Dakota, 3,356 in Kansas, and 2,905 in Wisconsin. More than 76,000 farms would be affected according to 2007 statistics.
2) The move to tighten payment limits would put a $250,000 cap on total subsidies, which would impact marketing loan benefits, and tighten the amount of direct and counter-cyclical payments that could be received. The current law has a $210,000 limit for direct and counter-cyclical payments, but no limits on marketing loan proceeds.
3) The administration does not indicate how much reduction it proposes in crop insurance premium subsidies, but savings could also come from the compensation to crop insurance companies as well as commissions to crop insurance agents.
The CRS analysis indicates the $500,000 in sales eligibility limit would be on top of the present eligibility limits for FSA program participation. The CRS analyst indicates that farms with gross sales of $500,000 or more may have very little profit or even a loss. However, the recent highs in the grain market pushed more farms over the threshold. In the prior 9 years, only 3-4% of farms would gross more than $500,000 per year, but in the past two years the number has increased to 5.5%. It is expected to fall this year with lower prices, and if a net income threshold is used, it will fall even further because of the cost of production.
CRS says there were 76,500 farms in 2007 receiving government payments and having sales over $500,000. While 116,000 farms had more than $500,000 in gross sales, many of them were large fruit, vegetable, or livestock farms that did not receive subsidy payments. Because farms in the heart of the Cornbelt (IA, IL, MN, NE) are in both categories, CRS estimates that 17%-21% of corn and soybean farms would be impacted by the proposal.
Summary:
The administration proposal to reduce spending on agricultural program supports is focused at farms with more than $500,000 in gross sales, and proposed a total payment limit of $250,000, in addition to lower subsidies for crop insurance premiums. The plan is expected to be met with opposition in Congress and from farm organizations, but Congressional committees may be forced to either adopt parts of the plan or find other savings in USDA appropriations. The impact of the proposal will hit the heart of the Cornbelt and maybe as many as one in five corn and soybean farms.
Posted by Stu Ellis at 12:18 AM | Comments (0) | Permalink
March 23, 2009
Futures Contract And Cash Convergence: Is The Problem Resolved?
For more than 150 years the success of the commodity futures market was demonstrated when the cash and futures prices matched each other on the date and location of when the grain or other commodity was delivered from the seller to the buyer. That has not always occurred in the last several years, because cash corn, soybean, and wheat prices at delivery points differed from the futures price when the futures contract expired. The Chicago Board of Trade has tried to fix the problem, but has the change been successful?
Since late in 2005, the convergence of cash and futures prices has not been the norm, and that has created economic issues for grain buyers, sellers, and the merchandisers along interior rivers and Great Lakes ports who make it all happen. The imbalance in the value of the futures contracts threatened their usefulness, and if traders, hedgers, and others using the Chicago Board of Trade contracts lost confidence in their value, then the US commodity marketing system was in jeopardy.
The CBOT made some technical changes in the storage rates that define its futures contracts. A group of University of Illinois economists, Scott Irwin, Phillip Garcia, Darrel Good, and Eugene Kunda, evaluated the results to determine if the problem had been solved or if more changes were needed to restore confidence in the futures delivery system. Their analysis suggests partial success, but more work is needed.
What was the initial problem that caused the lack of converge between cash and futures prices? While there is not total agreement, the general reasons revolve around some structural issues in the delivery process and the fact that contract spreads reflected full carry for the most part. The large carry issue interfered with the attempted by futures and cash prices to converge. The structural issue was defined by the economists as the fact that corn and soybean contracts were delivered with a shipping certificate, while the wheat contract had been a warehouse receipt, until it was also changed to a shipping certificate beginning with the July 2008 contract.
The economists determined that if there was a large spread between two futures contracts at the time of delivery, then someone who was receiving delivery would tend to hold the contract until the next month, rather than loading out the grain. Consequently, the lack of load out at the delivery points interfered with the value of the cash grain matching the futures contract. Until 2005, the spread between contracts was generally 80% of the full cost of carry, such as interest and other economic factors. But beginning in early 2005, spreads began to expand to about 100% of the cost of carry. That made it profitable for those receiving the grain to hold onto it until the next delivery month. The Illinois economists report that convergence was poor when the carry exceeded 80% and better when the carry fell below 80% of the full cost.
To show that the proof is in the pudding, the economists point to recent events in the market. “Two other observations are particularly relevant regarding the most recent behavior of delivery location basis and carry. First, the recovery of corn basis levels in March 2009, soybean basis in January and March 2009, and wheat basis in September 2007, December 2007, and March 2008 tracks the decline in carry below 80%. Second, the large carry in wheat since May 2008 continues to inhibit convergence.”
The study also notes that futures and cash prices will never duplicate each other because of the existence of grain grading, location, and delivery times that may total 6-8 cents per bushel as the cost of delivery.
The Illinois economists say their findings for problems with the convergence of wheat futures and cash values were sharply different than corn and soybean problems. They said hedgers could not predict basis with any degree of certainty. Several reasons were found for the problems:
· Storage rates allowed by CBOT contracts were less than actual commercial storage costs and that allowed the spread to expand to full carry.
· Large index funds that only take long positions in the market were continually rolling to the next contract contributing to a permanently large carry.
· There was a significant “risk premium” built into the deferred futures contracts.
Commercial storage rates were the subject of a 2008 CBOT survey of grain elevators. Rates averaged 4.3¢ for corn, 4.6¢ for soybeans, and 7.1¢ for wheat. While the corn and soybean rates were similar to the 4.5¢ allowed by the CBOT futures contracts, the wheat storage rate was well above what the CBOT allows.
Regarding the impact on the market by the long hedge index funds, there was no indication their activities impacted the convergence problem. Additionally, the risk premium issue was not proven to be a factor.
The University of Illinois economists propose that storage rates be adjusted to reduce the likelihood that spreads will go to 100% carry and eliminate the motivation for grain buyers to receive and own shipping certificates. Another potential solution is to decouple cash and futures in delivery contracts and settle them by cash and limit the number of shipping certificates that can be held by an individual firm. They report that large carries in the corn and soybean markets have disappeared with the expiration of the January and March contracts, but problems remain with the wheat contract that adjusting the storage rate may not totally resolve. They say the CBOT will be increasing the storage rate for wheat to 8¢ beginning with the July 2009 contract.
The researchers evaluated the current delivery points, and reported declines in volume along the Illinois River, but since New Orleans was the primary export terminal, there was justification for the Illinois River to remain a corn and soybean contract delivery point. They reported Chicago grain facilities were not in the commercial flow, and the shuttle trains in northwest Ohio, and barge-loading points at Cincinnati and Memphis had not yet proven their usefulness. They propose the elimination of Chicago and Toledo as wheat delivery points and the establishment of anew wheat contract with the Mississippi River Waterway as a delivery point with shipping certificates and differentials linking them to the Illinois River and the New Orleans facilities. All classes of wheat could be delivered to satisfy the contract.
Summary:
Efforts by the Chicago Board of Trade to resolve the convergence problems with the corn and soybean contracts have been successful with modifications to the storage costs allowed for futures contract delivery. Problems remain with the lack of convergence in the Chicago wheat contract. A solution may be to phase out the present wheat futures contract and replace it with one that would accept all classes of wheat, higher storage rates, and use the Mississippi River as a delivery point with shipping certificates instead of warehouse receipts as the delivery instrument.
Posted by Stu Ellis at 12:47 AM | Comments (2) | Permalink
March 20, 2009
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
Will corn production match consumption needs for the 2009-10 marketing year? That is what Darrel Good is wondering in his latest newsletter, since consumption will decide ending stocks and influence your cropping pattern for next year. The IL Extension specialist says recent export demand has been strong enough to exceed USDA estimates.
Corn used for ethanol production in December was at a record level says Good, indicating recovery of the ethanol industry and more favorable margins. While USDA’s ethanol use projection is more optimistic than Good expects, he says the mandate for ethanol production is for 12 bil. gal. in 2010, requiring 500 mil. more bushels of corn.
Darrel Good says total corn consumption could reach 12.5 bil. bu. in the 2009-10 marketing year, so 12.2 bil. bu. will be needed this year. With a 152.8 trend yield, he says that will require 79.8 mil. harvested acres and 87 mil. planted. Good says USDA expects 86 mil. planted and the market is currently expecting less than 87 mil. planted. Read more.
Crude oil prices, the stock market, and the value of the dollar have been the main features in the commodity market in the eyes of South Dakota marketing specialist Alan May, “As long as the current recession remains in place, grain markets will be strongly influenced by those outside factors that may override the more typical supply and demand fundamentals of grain.” He said corn has rallied recently despite those.
Soybeans are tied to the hip of crude oil, believes Alan May at South Dakota St., “When crude falls, beans fall in value. When crude oil rallies, soybean prices have improved.” He says crude oil prices have seen a more consistent stabilization with the more recent trend (the last few weeks) being one of modest price growth.
ACRE answers were provided this week by FSA, along with the reminder that June 1 is the sign-up deadline for 2009 participation, and that all producers on the farm must agree to the ACRE participation. The Q & A provisions indicate there is no crop insurance requirement, and participation is allowed in future years, if you opt out of the program for this year. Read more.
ACRE was a question mark when economists at the Food and Ag Policy Research Institute calculated their 10-year projection for prices and production. There was uncertainty about how many farmers would sign up for the ACRE program or stay with the conventional rates for direct payments and market loans. FAPRI economists say ACRE pricing scenarios show advantages for producers of most crops in the Cornbelt.
The FAPRI 10-year baseline begins with acreage contraction in 2009 due to weak global demands that will not support the additional acreage seen last year. FAPRI expects 4 mil. fewer acres being planted this year to the 12 major crops. The FAPRI report on crops and livestock prices is here.
If you are starting the year behind the curve, save time and expense by eliminating tillage for soybeans after corn. Iowa St. researchers say there is an insignificant soybean yield response from tillage. The cost is $18-25 per acre for conventional tillage compared to no-till, and 6 years of research shows only 1 bu. per acre additional yield.
It must be spring, if black cutworms are being found in traps. Two adult moths were found in Southern IL on Mar. 10. Temperatures are important for larvae hatch, and weather stations have already recorded 200 degree-days just east of St. Louis, MO.
If black cutworms are a concern, Ohio St. entomologists say they do not recommend seed treatments for black cutworm control. They recommend scouting, then application of a rescue treatment if larvae are found. They say if the field has a history of black cutworms or a high population of winter annuals, then a preventative tactic that works can be used, such as using an insecticide at planting or using Herculex XTRA seed.
Is Integrated Pest Management (IPM) a priority? IL entomologists surveyed farmers:
1) 83% believe economic thresholds are still viable for insect pest management.
2) 73% say insect control decisions are based on economic thresholds.
3) 24% say insect control decisions are based on potential yield benefit.
4) 97% planted a Bt hybrid in 2008 seeking a yield benefit.
5) 80% would still plant a Bt hybrid even if corn borer or rootworm levels were low.
Call it horseweed or marestail, it has become a significant headache for many farmers as tillage declines. Capable of both a summer and winter life cycles, patches that are resistant to several herbicide families are becoming more common. IL Extension weed specialist Aaron Hager says it should be controlled before planting with tillage help. Find complete advice here.
1) If tillage is not an option, existing plants should be controlled before 6 in. in height.
2) Use glyphosate burndown with tankmix of dicamba, paraquat, and 2,4-D.
3) Ester formulations of 2,4-D are preferable over amine formulations.
4) Glufosinate can be used, and improved with tankmix of atrazine or metribuzin.
What is your weed crop in the field to be planted to non-GMO soybeans? Ohio St. weed specialist Mark Loux expects your weed issues to be difficult to control, since many weeds are becoming ALS-resistant. He says your general weed program may be:
1) Use tillage or a burndown to begin planting from the point of being weed free.
2) Include broad-spectrum residual herbicides in the preplant burndown treatment.
3) Apply a post herbicide to small weeds, and a second post application to late arrivals.
Did your wheat survive the winter? Fields with no ground cover or where plants failed to root adequately before the December cold snap are the ones of most concern to IL Extension’s Emerson Nafziger. Fluctuating temperatures can cause the soil to heave the crown out of the soil and expose roots to sun and wind damage, as well as freezing.
Wheat diseases are also a cold weather issue, particularly wheat mosaic virus that lives with a fungal organism that enters wheat roots. Cold spells last fall could have benefited the virus that infected the wheat. Pythium root rot is also a potential fungus if wheat was planted into wheat chaff and straw and wet soils. While a systemic fungicide can help against Pythium, both problems can be helped with using resistant wheat varieties.
Wheat that is greening up deserves a shot of spring nitrogen. Ohio St. agronomists say yields can be improved if the timing of the application came when the first stem node was visible, compared to an application when the wheat was turning green. Yields dropped 10-15% if the nitrogen application was delayed to the early boot stage.
High-yielding, irrigated continuous corn may be short on phosphorus says NE nutrient management specialist Charles Wortmann. He says current recommendations are to not add phosphorus when your soil test indicates it is over 15 parts per million. However his new research recommends applying up to 20 ppm of phosphorus on continuous corn.
But with phosphorus costing $1,000 per ton, is that something you can get along with out? Purdue fertility specialist Jim Camberato says, “Contrary to popular belief, more often than not the corn crop responds to the nitrogen component and not the phosphorous component of starter fertilizer.” He says the crop only benefits from 5-10% of the P.
What is your “footprint” for emitting greenhouse gases? The EPA is contemplating a monitoring program of industrial sources of methane, carbon dioxide and other gases, say MO Extension specialists. Included on the list for monitoring are manure storage facilities, but left off the list are manure composting facilities, tillage, farm burning, and the controversial “cow tax.” The specialists say there is no tax included in the monitoring proposal, but consider it a first step toward limiting greenhouse gas emissions. Read more.
320 acres of energy grass are growing on the largest bio-fuels research farm in the US, located at Urbana, IL, where miscanthus, switchgrass, corn, and restored prairie are under research to compare insect and disease challenges, environmental benefits, economic opportunities and potential energy per acre of each. The biggest challenge is planting the potato-like roots of miscanthus, and researchers are inventing planters and harvesters.
Corn is one of those biomass crops, but is being cultivated for its stover value instead of grain. IL researchers have rearranged the genes to produce a high sugar content grain, sugar in the stalk, and bulky biomass in the stalk. The plant uses very little nitrogen, and researchers say yields, even with low nitrogen, top production records for switchgrass.
Posted by Stu Ellis at 1:52 AM | Comments (1) | Permalink
March 19, 2009
Will Livestock Production Ever Return To Profitability?
The pork and beef industries have worked to reduce the swine and cattle herds over the past couple years to restore some degree of profitability. In fact, the beef herd at the end of 2008 was the lowest in a half century. But there is still red ink on balance sheets for livestock operators and the reason is not the supply, but the demand, and that is a factor of the economy.
The object of cutting back on production was to raise prices to the point of profitability, but all of those efforts have been negated by the diminished desire of the consuming public to spend money on high value meats, says Nebraska livestock economist Darrell Mark in the recent edition of Cornhusker Economics. Mark reels off the achievements in the recent past that have gone unrewarded:
· 50 year inventory low in cattle and calves
· Swine breeding herd reduced.
· Canadian feeder cattle, feeder pigs, slaughter cattle and hog imports have declined.
· Never before seen drop in broiler production in recent months
Darrell Mark says the US livestock industry has both a domestic and foreign market. And for the most part exported US meat has been a growth market with a 32% increase in beef and veal exports and a 49% increase in pork exports during 2008. In fact foreign buyers took 1 hog out of every 5 that went to market. But the reliance on the foreign consumer began to fail late in 2008 and the global recession curtailed the foreign taste for US red meats.
The exchange rate did not help any either, when the dollar began climbing in value the demand dried up. Banks became less interested in extending credit to companies engaged in the meat trade and customers turned away from the higher priced products. That deflated the beef and pork exports for not only steaks and chops, but also for hides and variety meats, which are typically popular in many developing nations. Even the hide market has softened because people are wearing their shoes longer and buying outerwear that is less expensive than a leather coat. Mark says steer hides that sold for $68 last August are now worth $30. Another kick on the shin is even the lower value of inedible products, such as tallow and greases, which are valued with the energy market. Mark says the record high of $12 per cwt for those products is now $6 per cwt.
In the US the consumer market is dominated by disposable income, and the millions who have lost jobs have opted for lower value meats, which not only shifts preferences from steak to hamburger, but also from beef to pork and poultry, or away from red meats completely. Last year, beef and pork consumption slipped nearly 4%, in part from fewer meals eaten away from home, a trend that has hurt the restaurant industry. Such a trend that cut fine dining by 80%, and casual restaurants by 50% also saw those dollars shift to fast food restaurants.
Darrell Mark says the outlook for beef and pork in 2009 remains uncertain, and it will take an improvement in the general economy and consumer outlook to increase the demand for animal proteins. But when that happens, Mark says the livestock industry is in a good position because of the reduction in supply. He says when the demand begins to grow, the market will not be over saturated with meats and prices will rise with the demand for pork and beef products.
Summary:
Despite the efforts of livestock producers to cut the supply in an effort to raise prices, the economy caused the demand to soften, both for domestic and foreign markets. Prices for the entire spectrum of livestock products have declined, and simultaneously, consumer preferences have shifted to lower quality products in an effort to conserve disposable income. Livestock producers will still face unprofitable prices until the economy improves and demand eventually increases with resulting higher prices.
Posted by Stu Ellis at 12:36 AM | Comments (0) | Permalink
March 18, 2009
Commodity, Food, Fuel Prices: What Goes Up Must Come Down, But, Really Now, Why Is That?
The rise in commodity price from 2007 into the spring and summer of 2008 sent food prices upward to the point of consumer complaints and finger shaking at farmers, farm policy, bio-fuels and anything they could imagine that might be to blame. Since that time commodity prices have retreated 50% or more, but food prices have fallen very little. We’ll put those commodity and food prices under the microscope to see what dynamics are or are not at work.
Thanks to the Farm Foundation, which sponsors analysis of agricultural issues for the benefit of Congress and the public, Purdue economists Chris Hurt, Wally Tyner, and Phil Abbott recently updated their 2008 study to find out why economic forces at work last year reversed course and what the results were. The March Update followed last year’s findings that said food prices were driven upward by global consumption outpacing production, the low value of the dollar, and the linkage between energy and agricultural markets. All contributed to tighter stocks of grain and oilseeds.
The 180 degree turnaround was the result of many factors, and not the least was supply and utilization. Low prices caused production declines and stocks diminished, resulting in some price rationing going into 2008. The higher prices spurred more production globally, and in the past 8 months production grew, consumption declined and ending stocks doubled for corn and wheat. While early 2008 production challenges did not seem to hamper crop yield, they caused markets to peak early as perceived shortages were resolved. The economists say higher production last year was an important factor in increasing stocks, particularly for wheat and soybeans.
The impact of price was felt after May 2008, say the Purdue researchers. First was the upward surge from perceived crop shortages, then growing conditions improved about the time the dollar was rising in value, and finally prices fell from declining demand for food and fuel. They say, “The financial crisis further reduced demand for grains and oilseeds for both food and energy uses as world income growth eroded.” They say USDA’s Supply/Demand report for May 2008 forecast an average $5.50 corn price based on a 6% stocks to use ratio, but by January 2009, stocks had climbed to 15% and prices had fallen to $3.90 per bushel of corn. The economists say with lower market prices now, and higher production costs, the low margin awaiting producers will result in reduced production.
The rising commodity and food prices in 2008 was also the result of the declining value of the US dollar which made our commodities less expensive to foreign buyers and that cut the inventory available to the US consumer. The lower dollar caused higher oil prices, which are quoted in dollars. The Purdue economists also report that global growth, the recession, and the financial crisis were responsible for not only the rise in commodity prices into last summer, but the dramatic decreases in commodity prices since then. While the dollar was falling, then rising, it was engaging in a volatile dance with other world currencies, even to the point of helping the balance of payments and reducing the trade deficit.
The economists say, “The recession, which is now expected to be longer and more severe than recent recessions, coupled with the financial crisis that has also spread across the globe, led to much weaker demand for energy and strengthening of the dollar.” Consequently, that weakened demand for agricultural commodities beginning at mid-summer 2008.
The bio-fuel demand served to drive corn, and to some extent soybean, prices, which were linked to the market for crude oil. Since ethanol is a substitute for gasoline, the price of gasoline will drive the price of ethanol, and subsequently the price of corn. But when crude oil rose to $140, taking ethanol and corn up with it, then fell to $40, the demand for corn to make a low margin ethanol quickly diminished. Many ethanol plants were either halted or production slowed because, “The price relationship between ethanol and corn became very important as plants opened or closed depending on margins driven mainly by these two prices.”
Significant to the discussion about the impact of ethanol on commodity prices are the federal policy issues of tariffs on imported ethanol, the blenders’ credit, and the 10% blending wall, which puts a 12 billion gallon upper limit on production. All have a potential impact on ethanol supply and demand.
The Purdue economists attribute the commodity price rise and fall to macroeconomic forces and say the depth and length of the recession will play a key role in how long food and crude oil prices stay where they are. They believe the inflation anticipated with a recovery will influence commodity prices, and the price of oil (along with ethanol and corn) will be linked to the exchange rate. They wonder aloud about the movement of crude oil and how that integrates with the renewable fuels mandate, the blending wall, and other policy issues. But they believe the big question is whether and when supply will catch up with increasing demand for food and fuel and where commodity prices will settle.
Summary:
The rapid rise in commodity prices in 2007 and early 2008 is attributed to several macro-economic forces including low stocks, increasing demand because of exchange rates, and the growth in the connection between food and fuel markets. But the collapse of commodity prices resulted from an unwinding of those forces, exacerbated by a global recession that diminished demand for both food and energy commodities. The gradual return to normalcy expected within a year will create a likelihood for some inflation and whether commodity supplies will be sufficient to meet the demand growth.
Posted by Stu Ellis at 12:54 AM | Comments (2) | Permalink
March 17, 2009
ACRE May Be A Farm Program, But It Is Also An Ag Policy Experiment.
A commenter about Monday’s posting on the SURE disaster aid program expressed exasperation about the complexity of SURE as well as the ACRE program that Congress designed to replace conventional direct and counter-cyclical payment programs. Probably many farmers have felt the same way after staring at the formulas and trying to determine whether it would be advantageous to sign up or not. Recently an agricultural policy analyst for the Congressional Research Service also looked at the ACRE program in an effort to explain to Members of Congress what they had done in creating it.
So far in the short life of the ACRE program, and even before sign-up has begun, there have been wide spread opinions on whether it will or will not benefit farmers. Many thoughts have come from farm organization and from agricultural economists who study Cornbelt farm programs. While most have advocated ACRE, a few have urged a wait and see attitude. But what about someone who is looking at ACRE from a totally different perspective, and not having any suggestion about whether farmers should sign-up or whether it will be a beneficial program or not?
Dennis Shields, an agricultural policy analyst for the Congressional Research Service, in his March 4th assessment offered several thoughts about ACRE that have not been heard frequently, and has not yet been posted on CRS websites. The main purpose of Shields is not to criticize the ACRE program or promote it, but to educate the typical Member of Congress about its purpose and impact on the federal budget.
Shields reviews the purpose of ACRE, which he says was designed to provide benefits to producers when farm revenues drop, not just yield or prices, but their combination. He also works through an explanation of state revenue trigger calculation, the farm revenue trigger calculation, and how the two are merged with other calculations. That is where the interests of farmers and the interests of the Members of Congress diverge. While farmers try to determine if ACRE would be of an economic benefit to their farm, the CRS analyst turns his focus on political and fiscal issues.
1) Shields says the World Trade Organization, which determines global trade rules, would not look kindly on ACRE and may penalize the US because it may spend more on farmers than allowed.
2) He notes that ACRE calculations are moving averages, determining benefits to farmers based on the prior year crops and prices, but with a 10% limitation on how much change is allowed.
3) Payment limits from ACRE are outlined in the report, which puts a $65,000 maximum per person, but raises total payment limits to $105,000 when the direct payments are added, and further raises it to $210,000 to allow for couples operating a farm.
4) Shields tells Congress that the key to the ACRE decision is a farmer’s expectation of prices over the next few years, “If prices are expected to remain high enough so that ACRE payments are not triggered, farmers may stay with traditional programs because they would not give up any direct payments.”
5) He says farmers whose plantings and base acres vary substantially may see an appeal to ACRE because he may not get as much money from counter-cyclical prices that are determined by his base acres. He also tells Congress that ACRE will have more appeal to dryland wheat farmers with high yield variability than to Midwestern corn farmers with sufficient rainfall and steady yields.
6) The CRS analyst also says budgetary outlays for ACRE on only estimated at $4.9 billion from Fiscal Year 2010 to Fiscal Year 2014, and that payments will not be made on the 2009 crop until 2011 after the marketing year ends.
7) He says the outlay estimate is based on declining prices of commodities, but that price levels will remain high enough not to trigger any load deficiency payments and marketing loan benefits.
8) Shields says since an ACRE payment must be triggered by both state and farm revenue deficiencies, farmers would probably chose revenue-based crop insurance to protect against the scenario of one being triggered, but not the other.
9) The ag policy analyst says the test of success will come when it is time for farmers to sign up for ACRE, and when 2009 harvest prices are determined which will give a hint about the effectiveness of the program and whether it will be called into question. He suggests that the time of the payments, which would be in early 2011 for the 2009 crop, would create issues.
10) Finally, he suggests that since farmers have to trade in some of the benefits from Direct and counter-cyclical payments and the loan rate, and that process may set a precedent for future years of trading benefits from one program in exchange for another, which may include: farm programs, crop insurance, and disaster programs or with environmental programs that include carbon sequestration and emissions of greenhouse gases.
Summary:
While the ACRE program is a new generation of risk management programs offered by USDA to reduce revenue risk, the outcome of the experiment is far from being determined, and it may prove to be insufficient. However, ACRE may also prove to be a precedent that allows farmers and USDA to trade for various economic and environmental benefits.
(The ACRE Report has yet to be posted on the CRS website.)
Posted by Stu Ellis at 12:31 AM | Comments (0) | Permalink
March 16, 2009
For Disaster Program Eligibility, Crop Insurance Is Required.
March 16 is the deadline for signing up for 2009 crop insurance for Cornbelt row crops, and farmers not electing crop insurance this year will also be denying themselves access to the SURE program, the USDA’s permanent disaster aid program. SUpplemental REvenue assistance payments are contingent upon the operator carrying crop insurance or FSA’s Non-insurable Crop Disaster Assistance Program (NAP) coverage. That is a change in the 2008 Farm Bill which many farmers may be unaware.
The new federal policy was implemented when advocates called for permanent disaster assistance legislation, instead of annual appropriations, which were not always guaranteed. However, the writers of the legislation determined that farmers eligible for the SURE program must be required to carry crop insurance, and March 16 is the deadline for obtaining that coverage for row crops across the Cornbelt.
The SURE program is detailed in a factsheet from Ohio State University’s Ag Manager. It indicates eligibility is contingent upon a disaster declaration in your county or a contiguous county, crop production under 50% of normal, and coverage by crop insurance or the NAP program for non-covered crops. Additionally, average adjusted gross income cannot exceed $500,000 in non-farm income.
Through a complex set of calculations, the SURE program would determine a disaster payment for eligible farms. In general terms, the payment guarantee is 60% of the difference between total expected revenue and total farm revenue. However, there is a $100,000 upper limit on payments to producers from the SURE program. That will be a significant limiting factor in some cases, but not for some smaller farms.
For some farms, on issue will be how much is included in the “total farm revenue.” It includes more than just a grain settlement check from a droughty crop. Total farm revenue includes estimated crop value, any indemnity payments from crop insurance, and payments from the non-insurable crop disaster assistance coverage, marketing loan proceeds, direct payments, any counter-cyclical payments, and any ACRE payments if the farm is signed up for ACRE.
According to an FSA worksheet that is detailed on the Ag Manager website, total farm revenue is subtracted from the expected revenue that SURE guarantees. The difference is then multiplied by 60% to obtain the final calculation.
The requirement for crop insurance or NAP coverage is known as Risk Management Purchase Requirement, in case you contact an FSA office to ask detailed questions about eligibility. Important among various questions and answers you might have, is the requirement for all crops of economic significance in the counties farmed to be covered by crop insurance. In other words, your corn and soybeans in one or more counties have to be covered to be eligible for any future disaster payment. Additionally, any replanted or subsequent crops have to have crop insurance coverage. If an operator has crop insurance coverage, but not a land owner, the operator is eligible for SURE program disaster payments, but not the land owner.
CAT (catastrophic) coverage is not sufficient to meet the SURE requirements, nor will hail and wind insurance, provided by private insurance carriers. The requirements specify federal crop insurance. If you carry Adjust Gross Revenue insurance, that is an acceptable alternative.
Summary:
The SURE disaster aid program will provide financial assistance to producers beyond normal crop insurance coverage, but federally-subsidized crop insurance policies or NAP policies must be in place to qualify for the SURE program. That requires producers to have signed up for crop insurance by the March 16 deadline.
Posted by Stu Ellis at 12:39 AM | Comments (4) | Permalink
March 13, 2009
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
The March 31 Prospective Plantings Report will confirm whether USDA’s estimate of fewer planted corn and soybean acres in the recent Outlook Conference was correct. IL Extension’s Darrel Good says the combination of 86 mil. corn and 77 mil. soybean acres appears low, given the 4.2 mil. acre cut in wheat and 2 mil. acre cut in cotton and rice.
Good says USDA believes planted acreage will decline as a result of lower returns, but farmers will have to confirm that in the survey now underway. He says the market will assess the intentions and decide if prices need to change to alter the intended acreage. He says unless acreage is reduced, there may be a potential surplus of one or more crops.
The Quarterly Stocks Report also will be released in two weeks, and Darrel Good says it will be more important for corn than for the bean market. Bean use is well known, and Good says March 1 stocks should be about 1.3 bil. bu. But he says conflicts between USDA and Census Bureau statistics on corn exports make the stocks estimates difficult to predict. He’s estimating 2nd quarter use at 2.6 bil. and March 1 stocks at 7.1 bil. bu. Read his newsletter.
USDA’s March Supply Demand Report forecast a 100 mil. bu. increase in corn demand by ethanol refiners, the result of improved profitability. Carryout dropped to 1.74 bil. bu. Export demand was lowered by 50 mil. bu. and feed demand held stead at 5.3 bil. bu. Corn exports are competing with other nations and feed quality wheat. USDA estimated the season average price at $4.10 from early season forward contracts.
USDA’s March Supply Demand Report forecast a 10 mil bu. drop in the soybean crush to 1.64 bil. which results from weaker demand for oil and meal. With bio-diesel facing low profitability, soy oil demand was reduced by 700 mil. lbs. Soybean exports remain strong, and export projections were raised to 1.185 bil. bu. thanks to Chinese demand. Carryout was dropped to 185 mil. and the season average price was reset to $9.35 per bu.
USDA’s March Supply Demand Report forecast higher carryover for the 2008 wheat crop putting stocks-to-use at 32%. While Kansas State’s Mike Woolverton says the report was bearish for wheat, USDA held the season price range steady at $6.70-$6.90. Woolverton says the global wheat crop grew with larger Australian yields.
Woolverton at Kansas State says the S/D report does not address any “demand destruction,” although exports are down. He says, “This is a more optimistic picture than we have been led to believe, given recent press coverage of bad economic news. If the stock market has indeed found its bottom, look for commodities to decouple from the decline in stock prices and attract more attention from traders in coming weeks.”
Commodity prices may be low now, but they will return to higher levels over the next 10 years say FAPRI economists at MO and IA St. Recovery is projected in 2010, helped by China, India, and Vietnam with 7-8% economic growth. They expect ethanol prices to fall because of lower crude oil prices, but bio-energy mandates ensure demand growth.
The FAPRI economists forecast soft wheat and corn prices into the 2009-10 marketing years, but eventually climb on increased demand. Weaker demand will also soften soybean prices, but world trade will grow by one-third in the coming decade helped by Chinese demand. Meat prices should be strong because of growing global demand.
Farmers considering the biotech endorsement for crop insurance, do not have to make that commitment by the March 16 crop insurance deadline. USDA’s deadline for the BE option is not until June 30th, which is the deadline for FSA planted acreage reporting. Anyone using the BE option must provide the agent with seed and planting records, says Stephen Johnson of IA St., who says hail and wind policies can be added after March 16.
Dryland farmers in the Western Cornbelt are being urged by Kansas St. economist Art Barnaby to obtain a minimum 70% CRC or RA-HPO insurance, or greater coverage for optional units. He’s recommending enterprise units for corn in a single county, which has a discounted premium and a higher USDA subsidy. Barnaby says an 80% coverage on enterprise units increases total guaranteed dollars and gains SURE disaster protection.
Barnaby says his reason for CRC or RA-HPO with the lowest premium cost is because they have no downside price limits, and the upside limit is 2 times the base price on all revenue products. Read more.
Don’t consider any shenanigans says Art Barnaby at Kansas St. if you are thinking about shorting fertilizer applications because your revenue crop insurance guarantee is more than your crop might gross. Barnaby says crop insurance policies require farmers to follow good farming practices, and an adjuster could deny a claim if it isn’t followed. Barnaby also says that will only serve to lower your APH for future years.
ACRE is strongly recommended by Mich. State ag economist Jim Hilker, instead of relying on Direct Payments, “ACRE is more like revenue insurance (although it is not a substitute for crop insurance), what are the odds there will be a payoff? My analysis at this point is that there is over a 50% chance that ACRE for corn will trigger at both the state and farm levels in 2009, and probably more than make up for the lost 20% of direct payments.” Read more of his Outlook.
While Hilker’s vantage point is the state of Michigan, he calculates that expected corn, soybean, and wheat prices would trigger payment from the ACRE program this year:
1) Corn: “It would only take a price a bit lower than the $3.60 estimate to trigger ACRE even with trend yields if the 2008-09 price remains at $3.90 or higher.”
2) Wheat: “If the $5.15 price forecast occurs, it would trigger ACRE for wheat with normal yields. The past two years’ average price is 22% higher.”
3) Soybeans: “The average of the 2007-08 and 2008-09 average annual weighted bean prices is $9.67. The $8.00 projection for 2009-10 is over 20% lower (compared to $9.67). Normal yields or less and we have another ACRE trigger.”
Farmers baffled by varying refuge requirements for BT corn with stacked traits may want to follow NE Extension recommendations, since rootworm BT is more restrictive than corn borer BT traits. Read the latest newsletter.
1) Plant one common refuge, void of Bt traits, instead of planting 2 separate refuges.
2) Plant the refuge in the same field as the Bt traits to help meet distance requirements.
3) Know the minimum required refuge size for a particular geography and Bt trait.
If charcoal rot is one of your soybean headaches, you will want to see how Doug Jardine of Kansas St. recommends identification and management. He’s featured on a free web-based program available until the end of March, and provided by the Plant Management Network, which publishes agricultural resource materials, such as Jardine’s webcast.
Dairymen are urged to tune into a web-based seminar at 12 Noon on March 20 about Feeding Strategies with Current Milk Prices. IL Extension’s Mike Hutjens will focus on feed benchmarks, impact of nutrient reduction, by-product feeds, and monitoring cow performance. Free registration.
Dairy operations with silage need to observe optimum planting dates. MN agronomist Jeff Coulter says milk per ton of silage was within 1% of the maximum when corn was planted April 15 to May 17 in WI, and milk per acre was within 1% of the maximum when planting dates were April 21 and May 6. He says silage dry matter increases with higher plant population, but dry matter yield slows when populations exceed 35,000. Read his newsletter.
Canadian hogs entering the US have slowed say MO livestock economists Glenn Grimes and Ron Plain. In fact feeder pig imports are down over 36%, in part because there are 10% fewer hogs in Canada and the breeding herd is down 7%. They also say the US COOL labeling law makes it less attractive to import live animals instead of meat.
Cattle feeders have suffered huge losses this winter say Grimes and Plain, with many closeouts in the red by over $200/head. The result is feed lots slowing down their rate of marketing to force up prices, but that forced up slaughter weights by 29 lbs this week.
After measuring carbon in the soil of 7 eastern states, OSU agronomists say carbon storage is greatest in the top 8 inches of no-till fields; but if you measure stored carbon down to 12 inches, more will be found in plowed fields than in no-till. Survey leader Rattan Lal says carbon storage is best done based on soil type, rather than by tillage.
Farms are still on the wrong side of the digital divide. The 2007 Ag Census indicates 57% have Internet access, up from 50% in 2002. Of those that have access, 58% have a high-speed connection, which increases farmers’ efficiency in using the Internet.
Posted by Stu Ellis at 12:49 AM | Comments (0) | Permalink
March 12, 2009
Are You Making Some Last Minute Risk Management Decisions?
If you remain befuddled about grain prices and crop insurance, beware that March 16 is the deadline for making crop insurance decisions on Cornbelt row crops, such as corn and soybeans. Last year crop insurance protected high grain prices with the spring guarantee. This year the $4.04 corn and $8.80 soybean base prices may again be the highs or could be the lows, but regardless, your investment in crop inputs needs to be protected. Not much time is left if you are unsure which of many choices to make. Here is one suggestion.
Farmers who are concerned about the potential for low market prices in a year that profitability will be challenged may want to review the proposal of University of Illinois Farm Management Specialist Gary Schnitkey, who makes a case for Group Risk Income Plan (GRIP). He says if lower commodity prices are your concern, a GRIP policy at 90% coverage “will provide superior protection compared to Crop Revenue Coverage (CRC) or Revenue Assurance (RA).” Given average yields, Schnitkey says, “GRIP will begin to make payments at higher harvest prices than CRC or RA. Moreover, GRIP will make larger payments than CRC or RA at the same harvest price.”
If that is an attractive proposition and your yields track with county yields, review the graph created by Schnitkey that net insurance payments under different harvest price scenarios at the previous web link.
Schnitkey says the GRIP option with CRC on enterprise units which carries a lower premium rate than on optional or basic units. Since enterprise policy premiums drop with larger acreage, Schnitkey uses an example with 500 acres and an APH of 185. That would require a $20.43 premium for 85% coverage at $5.67 premium for 75% coverage.
One of the keys to the success of GRIP is its dependence on a trend yield, which is current, as opposed to the Actual Production History yield, which is an average of anywhere from the last 4 to the last 10 years, and would arguably be a lower yield than what is currently being produced on the farm.
What is the payout for GRIP over CRC? Schnitkey says, “For GRIP, insurance payments occur for harvest prices below $3.64 and insurance payments exceed premiums at prices below $3.41. For CRC at 85% coverage level, payments occur for prices below $3.32, with payments exceeding premium at $3.30. For CRC at 75% coverage level, insurance payments occur at prices below $3.03 and payments will exceed premiums at $2.99 per bushel.” But when you look at his calculations, Schnitkey’s analysis is that, “GRIP at 90% coverage levels makes larger payments than CRC policies at harvest prices below $3.40. At a 100% protection level, differences between GRIP and CRC payments become larger for lower harvest prices.”
Moreso, Schnitkey says the example favors CRC because of the APH lagging yield issue and an average year will result in a farm yield exceeding the APH yield. He says GRIP’s trend line yields will not have the lagging problem.
The example is only one farm’s scenario, but could be typical for much of the Cornbelt. Other yields will result in other premiums and payments, and higher yields will result in lower indemnity payouts.
Crop insurance agents will be able to provide examples with yields and costs in your part of the country, if you discuss risk management business with them before the close of business on March 16.
Summary:
With the deadline quickly approaching for crop insurance sign-up for 2009, farmers undecided about what flavor of crop insurance to pick may want to explore the GRIP option if their yields closely track the yields in their county. Using a strong corn APH yield of 185 bushels GRIP policies, compared to CRC, will make larger payments if harvest prices drop below $3.40 per bushel, and the lower the market price the larger the GRIP payment will be compared to CRC.
Posted by Stu Ellis at 12:21 AM | Comments (2) | Permalink
March 11, 2009
The Lessons Of History May Provide A Perspective On The Future Of The Grain Market.
The bull market that lofted many commodity prices to unprecedented highs between 2006 and 2008 was unique in volatility, but parallel in other facets to similar bullish grain markets in the early 1970’s and the mid-1990’s. What was the economic environment present during those earlier events and can the lessons learned then be applied to today?
The explosive oil market that lifted ethanol and the corn prices on its shoulders may or may not be to blame for the price trends of the past two years, however the rapid rise in grain prices caught the world’s attention and drew parallels to the past. That is the thought of USDA economists May Peters, Suchada Langley, and Paul Westcott writing in the March 2009 issue of USDA’s electronic magazine Amber Waves. They attribute the more recent run-up of prices to “burgeoning food demand in developing and transition economies, sharply higher energy prices that boosted production costs of agricultural products, increased demand for corn and oilseeds for bioenergy, the depreciating U.S. dollar, production shortfalls due to weather, and policy responses of both importing and exporting countries.”
Were any of those factors present during past commodity price events?
The 1970’s included: export demand growth, slow growth in US production because of setaside programs, government food policies that created demand and reduced supplies, and weather-induced crop failures. At the same time, the dollar was depreciating, oil prices were rising, foreign reserves of petrodollars were accumulating, there was futures market speculation, and inflation was present.
The 1990’s included: export demand growth because of food demand, slow growth in production because of declining investments in research and land retirement programs, government food policies that created demand and reduced supply, and weather-induced crop failures. At the same time the economy was growing, the dollar was depreciating, and there was a financial crisis.
The USDA economists say a rapid increase in global demand for grain and oilseeds, triggered by the Russian wheat purchase, stimulated the 1970’s demand. Twenty years later, strong demand and increasing trade stemming from the newly industrialized Asian nations resulted in the spike in the mid-‘90’s. In those cases, as well as recently, a low stocks-to-use ratio contributed to rising prices.
In all three instances, one of the key factors was the rapid increase in foreign demand for US products, and recently that demand has increased 50% with most of the business coming from developing nations. But the recent price spike also included the new demand from biofuels, which was consuming 23% of US corn production and taking a significant bite out of soybean oil production, something not present in the earlier cases.
The 1970’s period of high prices ended as world consumption slowed along with a slowdown in global expansion and a monetary policy designed to control inflation. That resulted in global production growing faster than consumption and grain prices fell. In the 1990’s the Asian financial crisis quickly ended the price surge, softening food demand along with a dollar that was growing stronger.
Following the two historical examples, markets adjusted and prices declined. As before the value of the dollar increased and more land was brought into production to supply a demand that was decreasing. Unlike before, the oil price surge reversed itself and somewhat linked was the financial collapse, but this time in developed countries. The USDA economists say, “The length and severity of the current global economic slowdown will help determine how fast, how far, and how long prices retreat. As agricultural markets adjust in this weakened economic environment, price behavior may continue to be volatile.” But they are quick to add that the past does not necessarily predict the future. They believe that food demand in developing countries will accelerate and they account for more than 80% of the global population. They also expect additional demand strength if global policies favor biofuel development, and those factors will keep crop prices from falling as low as their pre-spike levels.
Summary:
The grain price rise and fall of the past two years can be compared to similar events in the 1970’s and 1990’s, because of parallels in supply, demand, and political policies. Additionally, a common factor was a low stocks-to-use ratio. New to the formula this time was the demand for biofuels, and a continuing global policy favoring biofuels will be one demand factor that may buoy grain prices. A second would be the food demand from the growing economies in developing nations.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
March 10, 2009
Farm Program Payment Eligibility: How Sure Are You?
Are you a farmer or landowner “living on the edge?” That is, on the edge of being ineligible for any farm program payments in the 2008 Farm Bill? While many farmers have looked at the income thresholds and found themselves to be eligible, there may be other aspects of the eligibility that could put some on the outside looking in.
Iowa State University agricultural law specialists Roger McEowen, Kelvin Leibold, and Erin Herbold reviewed the payment eligibility provisions and summarized them in their latest analysis. They observe that the new rules have important planning implications for individuals and farming entities.
1) Farmland owned by the public which supports public schools is eligible for farm program payment payments unless the state has a population under 1.5 million. For the Cornbelt, that excludes North and South Dakota, as well as 9 other states.
2) USDA will cross check social security numbers twice per year with the Social Security Administration to ensure payments are not made to the deceased.
3) If you have previously failed to comply with the payment limitation rules, you are ineligible for 2 years, but that increases to 5 years if you have engaged in fraud.
4) The most significant change affects cash rent tenants, and the Iowa State specialists say, “The cash rent tenant rule stays essentially the same, with clarification that a tenant under a cash lease who renders personal management, but not personal labor, is eligible for payments if the tenant makes a significant contribution of equipment.”
5) The “active engagement” test is important because it determines payment eligibility. Those who are “actively engaged” include: landowners whose contributed share is at risk; adult family members contributing labor or management; sharecropper with a contribution at risk; hybrid seed growers; recipients of custom farming services; a non-farming spouse with an ownership share at risk.
6) Regardless of acreage or yield variables, the Direct Payment maximum is $40,000, which will be adjusted downward by 20% or to $32,000 in the case of ACRE participation.
7) Regardless of acreage or yield variable, the Counter-cyclical payment maximum is $65,000, which will be adjusted downward by 20% in the case of ACRE participation.
8) There is no limitation on the amount of Loan Deficiency Payments that can be received; however, the loan rate will be lowered by 30% in the case of ACRE participation. Additionally, the marketing loan program is not subject to payment limitation.
9) The ACRE program reduces direct payment rates by 20%; loan rates by 30% and eliminates eligibility for counter-cyclical payments. Producers with multiple farms, and with one farm in ACRE and another out of ACRE, there is a $65,000 limit on ACRE and counter-cyclical payments.
10) The upper limits on income have been reset for farm program payment eligibility. For price support program a producer’s adjusted gross income must be less than $500,000 for direct and counter-cyclical payments, and an adjusted gross farm income under $750,000 for direct payments. For conservation payments, the adjusted gross non-farm income must be under $1 million, unless two-thirds of the adjusted gross income is from farming. The adjusted gross income is a three year average with the FSA requiring annual certifications from each individual or entity requesting farm program payments.
11) With the abolition of the three-entity rule, all farm program payments are now keyed to social security numbers, which eliminates the necessity of determining “a person.”
12) Both individuals in a marriage may also qualify, if they are both contributing to the operation with labor, management, or land ownership that is at risk.
Summary:
USDA’s new eligibility rules for farm program payments have reduced the potential for payments per individual because of using social security numbers, but have also clarified how individuals are actively engaged in farming. While payments can still be received under the conventional farm programs, as well as the new ACRE program, the limits under ACRE will be reduced. Changes have also occurred to ease the conflict with payments to cash rent tenants under the former farm program.
Posted by Stu Ellis at 12:04 AM | Comments (0) | Permalink
March 9, 2009
What Should US Obligations Be Toward Global Agriculture?
US food and agriculture priorities should be focused on small farmers, particularly the small farmers who make up 600 million starving people in Sub-Saharan Africa and Southern Asia. That is the opinion of nearly 11 hundred US adults, and nearly 200 Members of Congress, the executive branch, corporations, and both governmental and non-governmental organizations involved with international development projects. And why should the US help fund more than $8 billion over 10 years to do that, you ask?
The Chicago Council on Global Affairs, which has an agricultural leadership group composed of some potent thinkers, pushed Congress toward improvements in its international trade philosophy during Farm Bill debate. Now the group has issued a lengthy report on the challenges that the global food crisis presents to the developed nations of the world. The authors include a former Secretary of Agriculture, former under Secretary of State, several members with Congressional resumes, the head of the UN’s World Food Program, several noted academics, and several heads of global non-governmental organizations. It was chaired by agricultural economist Dr. Robert Thompson of the University of Illinois.
The group’s survey found concern for the hundreds of millions who live on less than $1 per day and depend on subsistence farming for their needs, all in the wake of declining resources for agricultural research and the need for another “Green Revolution.” Such an initiative is defined by the group as stimulating “agricultural productivity through agricultural education and extension, local agricultural research, and rural infrastructure so the rural poor and hungry can feed themselves and help support growing populations under increasingly challenging climate conditions.” And they say if America takes the initiative, then other nations will follow. Beyond empathy and compassion for the suffering, the authors of the study say the US “diplomatic, economic, cultural, and security interests will increasingly be compromised if our government does not begin immediately to change its policy posture toward the rural agricultural crisis.” The roadmap includes five policy recommendations and 21 specific actions, some of which have no cost, and other which have costs associated with them.
The major recommendations include:
1. Increase support for agricultural education and extension at all levels in Sub-Saharan Africa and South Asia.
2. Increase support for agricultural research in Sub-Saharan Africa and South Asia.
3. Increase support for rural and agricultural infrastructure, especially in Sub-Saharan Africa.
4. Improve the national and international institutions that deliver agricultural development assistance.
5. Improve U.S. policies currently seen as harmful to agricultural development abroad.
How is all of this going to be done? The proposal calls for foreign students to come to the US for education that can be taken back to their homes, where extension-style networks can spread the word about improvements in crop cultivation and livestock husbandry. US universities would share their research knowledge with universities in other parts of the world. And an agricultural “Peace Corps” would be established to assist local volunteers with their training. US ag scientists would have larger financial grants to conduct research that would be applicable on the ground in South Asia and Sub-Saharan Africa. The US cost would be $8.6 billion of the global $21.8 billion cost.
Dr. Thompson’s group anticipates a good reception from US political leadership, since the general concepts were part of the platforms of both presidential candidates in the 2008 election. And the report adds, “Among the public, 77 percent agree that “addressing global poverty by helping improve the productivity of poor farmers in developing countries” is an important policy priority and a very important way for the United States to improve its current standing in the world.”
Summary:
The US government is urged to provide leadership to a $22 billion global program that will increase agricultural research, train volunteers, and educate subsistence farmers in South Asia and Sub-Saharan Africa. The US would pay about 40% of the cost in an effort to protect US diplomatic, cultural, economic, and security interests in the world. Additionally, the World Bank and other nations would contribute to the program designed to solve daily hunger problems for nearly one billion people.
Posted by Stu Ellis at 12:37 AM | Comments (3) | Permalink
March 6, 2009
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
Soybeans may have a record year, says Iowa State’s Chad Hart, particularly if 77 mil. acres are planted to beans, which would be a record amount of land. He says USDA is projecting that level based on lower input costs compared to corn. The resulting 3.24 bil. bu. would also be a record, as would a projected 1.225 bil. bu. of exports. However, Hart says production will exceed use and stocks will increase with an average $8 season price.
Grain markets still have their sights on South American crops and how much production was lost to the dry spell over recent months, says Chad Hart. USDA thinks South American corn production will be down 21% and beans down 6%. With global trade shifting to South America, US weekly corn sales were down 66% and exports down 15% compared to the prior week. Soybean sales were down 69% and exports down 28%.
Corn prices have been hurt by some negative fundamentals says Mike Roberts at VA Tech. He says a drop in crude oil, plunging equity markets, and gains in the US dollar pressured prices, along with the fact Japan bought Romanian corn, “New surveys show that many producers have ’08 corn still in the bin. It would be a very good idea to get it sold at this time. It might be a good idea to price up to 45% of the 2009 crop.”
The soybean market is impacted by the same fundamentals says Roberts, who also says soybean prices are being pressured by the fact “The Argentinean government is interested in taking over their large soybean industry so they may regulate prices to their own buyers.” And Roberts adds, “Cash soybeans are steady to stronger. It might be a good idea to get all old crop beans sold and price up to 25% of the ’09 crop.”
A 50/50 chance. That’s what Iowa State Meteorologist Elwynn Taylor is giving for La Nina-derived weather problems in 2009. He says the current event shows signs of weakening, but there is no clear trend, which usually is apparent by mid-March to mid-April. So he says the chance of a neutral versus La Nina condition by June is 50/50.
What does a La Nina mean? Elwynn Taylor says the trend line corn yield for 2009 is 153.4 bushels per acre, with a Dec futures value of $4.53 at harvest. He says the historical response to the La Nina would give a 144 bu. yield with a Dec harvest value of $5.45. If La Nina shifts to neutral, he expects 155 bu. and a Dec futures price of $4.37.
USDA’s Risk Management Agency earlier this week certified the spring guarantees for revenue-based crop insurance such as Revenue Assurance (RA) and Crop Revenue Coverage (CRC). The spring guarantees are $4.04 for corn and $8.80 for soybeans. The sign-up deadline is March 16 for spring planted row crops in the Cornbelt, for anyone signing up for the first time or making substantial changes in a crop insurance program.
Some of the variables remain unknown for the ACRE program, including your farm’s performance and the final tally for state average prices from the current marketing year. However, IL Extension economist Nick Paulson has estimated Illinois guarantees:
1) For corn the yield component will be roughly 164 bu/acre and the price component is projected about $4.05 per bushel, implying a state-level revenue guarantee of $600/A.
2) Similarly, the current projections for the revenue guarantees for soybean and wheat acres for 2009 are approximately $400 and $345 per acre, respectively.
Evaluating several thousand farm records, Paulson estimates ACRE would have been triggered in 10 of the past 31 years for IL corn with average payments of $53. Payments averaging $37 would have been made on IL soybeans in 5 of the last 31 years. Read more.
Choosing ACRE requires awareness. Paulson says, “If farm yields tend to closely follow the (state) average, the farm trigger criteria will have a greater chance of being met in years when ACRE payments are triggered. The timing of payments should be considered. Because of the definition of the price component used by the ACRE program, the revenue guarantee will not be completely established prior to expected sign-up periods in the spring and the actual revenue measure used to determine ACRE payments in a given year will not be finalized until just before harvest of the following crop year.”
Supplemental Revenue Assistance, the permanent disaster aid program known as SURE, has been reopened for 2008 crop problems until May 18 at FSA offices. SURE required producers to have purchased crop insurance for all insurable crops that accounted for 5% or more of their expected gross value of crop production in 2008. The chance to pay a $100 per crop fee has been extended, but the coverage limit is 70% of the proven yield. Producers who enroll to make a 2008 claim must also enroll for 2009.
SURE payments, if a disaster is triggered, are bolstered by a crop insurance policy, says Ohio State Extension’s Chris Bruynis, “If a farmer chooses not to purchase crop insurance, they cannot participate in SURE. Essentially the SURE revenue guarantee will be 115% of the crop insurance coverage level plus 120% of the NAP coverage levels. If a 75% coverage level is purchased the SURE revenue guarantee will be approximately 86%. The SURE revenue guarantee is capped at 90% of expected crop revenue.”
With a wet fall and a possible wet spring, are you considering a switch to no-till to save time on field preparation? Iowa State agronomists suggest several considerations:
1) Check internal field drainage for ponds, plugged tiles, and plugged inlets.
2) Soil temperature is critical and strip tillage is one way to warm, but conserve soil.
3) Poor plant performance could reflect moisture or compaction problems below the seed.
4) N, P, & K needs are the same in no-till, but P & K mineralization is slower.
5) No-till does not change the economic returns for corn following soybeans.
Beware of problems that could spell danger on some newer anhydrous ammonia applicators. Iowa State ag engineer Mark Hanna says high N prices have lead to flow controllers that can shut off individual knives. But he says it traps pressurized ammonia at locations in the system, requiring the entire applicator to be bled before servicing. Read more.
Have all your decisions been made for your 2009 corn and soybean crops? What about:
1) Corn or beans?
2) Are your soil fertility decisions made?
3) Row width?
4) Seeding rate?
5) Planter maintenance?
It is too early to tell how the wheat crop survived the winter, says Ohio State University agronomist Pierce Paul, “March is always a very stressful time for wheat due to the rapid changes in air temperatures, potential for heaving, and flooding. However, what we've seen thus far is that the wheat seems to be coming out of winter in pretty good shape and that's largely because we had a good planting season and good snow cover.”
What about N for wheat? OSU agronomists say, “In general, if 20-30 pounds of nitrogen was applied at planting, wait until May 1 for more and don’t waste application money or risk loss of early N. Applications of 28% should be made with large flood jets and just enough pressure to produce a good application pattern, which produces a reduced number of very large droplets and reduced leaf burn. Stream bars for 28% application will also greatly reduce crop damage. Urea application rarely causes leaf burn.”
If the winter was cold in your part of the Cornbelt, that reduces the chances of survival of flea beetles which spread Stewart’s Wilt to corn seedlings. Regardless of how cold you got, OSU crop specialists are happy, “Because of a relatively cold January, much colder than normal, the index values are lower than we often see.” Risks may be low.
Grow it for silage and biomass, but not for grain yield. That is the low down on a new corn hybrid from IL plant geneticist Stephen Moose who says his work with the Glossy 15 gene shows the plant will get bigger at the end of the season, with more sugar in the stalks and fewer kernels on the cob. That means it is good for cellulosic ethanol plants.
Pork demand is up says MO livestock economist Glenn Grimes, “Surprising as it may seem to be our demand index for November 2008 through January 2009 shows about a 2% increase in pork demand and above a 1% increase in live hog demand. There appears to be a cycle in pork demand and the rate of decline in demand was decreasing through fall. Certainly, 3 months is not a long enough period to project a trend; but with the weak general economy, we will take stronger demand for any length of time we can get it.”
Pork producers can get on the “green” bandwagon with a spray of soybean oil inside their hog barns. Purdue researchers found it decreases methane emissions by 20%, and carbon dioxide by 19%, both of which are greenhouse gases. There was also a 65% drop in dust in the air. The researchers say cost issues and clean-up need to be resolved yet.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
March 5, 2009
Were Commodity Markets Being Manipulated During The 2008 Price Volatility?
During 2008, when markets were up limit one day and down limit the next, hedge funds and index traders caught the wrath of farmers, elevator grain merchandisers, and others who alleged improper activity and illegal market manipulation. So far the regulators have not hauled any one or any company off to jail for such improprieties. But why?
The market volatility last year was not the result of concerted efforts by traders or illegal activity says Dave Lehman, Director of Commodity Research and Product Development for the CME Group, which now operates the Chicago Board of Trade. Lehman’s presentation at the USDA Outlook Conference was designed to answer the questions of many farmers and others who looked upon the recent performance of the price discovery system with a jaundiced eye.
With research assistance by Informa Economics, 8 different contracts on 5 exchanges were analyzed and matched with data from the Commodity Futures Trading Commission, which regulates exchanges. The investigation covered commercial hedgers, managed money traders, commodity index traders, and non-reportable traders during the period of January 2005 through June 30, 2008, when the recent bull market peaked.
The Informa researchers found:
· Index traders had the most consistent trading pattern in the markets studied, getting into a contract 75 days before expiration and exiting 25 days before expiration.
· Money Managers were the most erratic, trying to profit by investing their pool of money.
· Commercial traders, such as grain processors, would enter the market early and maintain their positions, which were the largest positions.
During the 42 months studied:
· Liquidity increased for corn, Chicago wheat, natural gas, and crude oil futures.
· Liquidity decreased for Kansas City and Minneapolis wheat and cotton.
· There was no link to changes in liquidity and any group of traders.
Regarding market volatility:
· The corn, wheat, and cotton market volatility had some correlation between index traders and money manager participation, but no evidence their participation increased the volatility.
· There was an indication the corn, wheat, and cotton, correlation could be connected to the long positions of index traders and the money managers who follow the market trend.
Was there a connection between price and changes in trader positions?
· Changes in futures positions by any category did not cause a price change.
· Changes in price caused many categories of traders to change positions.
· Index trader and money manager activity did not drive price changes, but price changes drove their activity.
What was happening in the final 20 days of the life of a contract?
· No trade group consistently influenced price levels in the final 20 days of trading.
· Most of the agricultural futures contracts were more likely to be too cheap rather than too rich.
To corroborate the Informa study of the markets, Lehman pointed to USDA’s Amber Waves Magazine which evaluated similar volatile periods in the 1970’s and 1990’s, as well as a recent study by the Government Accountability Office which found that federal laws do not prohibit the type of commodity trading being used, and a 2006 University of Illinois study on contract performance following changes in speculative limits.
Summary:
An in-depth study of futures trading on several commodity exchanges over the past 3 and one half years has found no illegal activity, but moreso, found that recent volatility in the commodity markets was not the result of any group of traders or their typical practices. The volatility stemmed from the bull market, resulting from world demand and the low value of the dollar, but was not a function of trading activity.
Posted by Stu Ellis at 12:27 AM | Comments (0) | Permalink
March 4, 2009
Hog Prices: Are They Headed Toward Profitability?
Will 2009 restore profitability to pork producers, or will their balance sheets continue to be printed with red ink? Not long ago, 2009 appeared to bring a better day. However, demand has softened and supplies remain strong. There are some mixed thoughts about the potential for pork profits and we’ll offer those and let you decide.
In his March newsletter, Iowa State University livestock economist John Lawrence says 2009 will not be much of a recovery from 2008, which was the worst year for hog returns since 1998. He says since USDA’s last quarterly report, feed prices have decreased, but so has demand, and he is forecasting a loss of $15 per head for 2009.
On the other hand, Purdue livestock economist Chris Hurt’s latest newsletter says producers may be on the verge of returning to profitability, and he believes that will come with a decrease in feed costs and rising market prices in coming months. His calculation is a modest profit of $2 per cwt.
Where do these two eminent researchers diverge? While both expect lower production costs, Hurt seems to anticipate a bit less supply of pork than Lawrence expects, who sees about the same demand as Hurt.
The Lawrence crystal ball. Based on the latest Hogs and Pigs Report, he says market hog slaughter rates declined in the past 10 weeks, but a portion of that is accounted for by a reduction in Canadian hogs slaughtered in US plants. However, Lawrence says US finished hogs being slaughtered continues at the same rate as last year. He believes’ “Canadian imports mask sow slaughter even more than barrow and gilt slaughter.” And Lawrence says US producers are building the breeding herd according to his estimates and those of Glenn Grimes at Missouri. Interestingly, Lawrence attributes the decline in southbound hogs from Canada to the Country of Origin Labeling requirement. He says unless the Canadian consumer increases pork consumption or the exchange rate turns around, there will be significant shipments of hogs and pork entering the US market.
Regarding demand, Lawrence says the recession has reduced global purchasing power; all the while per capita supplies of pork are building in the US as exports decline. And he says that will result in lower prices. Lawrence acknowledges that supplies of competing meats will be smaller and that will be supportive of pork prices. He says if Americans, who have begun saving, will get to the point of using some of their cash to buy pork, then demand will rise.
The Hurt crystal ball. Chris Hurt agrees with the increased per capita supply of pork in the US, particularly with the slowdown in Chinese purchases of US pork. He estimates that at a 6% increase over last year. But on the supply issue, Hurt says domestic production will drop 1%-2% this year and the market thinks the supply will result in a first quarter live weight price average of $42.50, rising from there, and reaching into the low $50’s by summer and gradually declining into the end of the year.
Chris Hurt’s analysis of the corn and soybean market may push down production costs further than Lawrence. Hurt is using a $3.36 average price of corn and $261 per ton of soybean meal. Based on those costs, he estimates farrow to finish operations would lose $11 per head in the first quarter of 2009, with profits of $12, $15, and $6 in the following quarters. Hurt says that depends on a continuation of the decline in the breeding herd, and he suggest pork producers focus their management on a survival strategy, rather than looking for big opportunities.
Summary:
Pork profitability may still be a challenge for many producers in 2009. Despite lower feed costs, and lower pork prices in the meat counter to attract demand, margins may be slim to none. While the herd has been shrinking, there are indications of expansion in the near future. Feed prices are lower, but production costs will nibble away at profitability.
Posted by Stu Ellis at 12:54 AM | Comments (1) | Permalink
March 3, 2009
USDA Issues Its Forecast For Grain And Oilseed Supply And Demand For The New Crop.
The USDA won’t make an official supply and use projection for grain and oilseed crops until May 12, but the projections issued last Friday (Feb. 27) at USDA’s Outlook Conference will have to serve as a ball park estimate until then. While the market viewed the numbers as only marginally trade worthy, the forecast will serve as a benchmark for production and marketing purposes until some better statistics are released over two months from now.
The Grain and Oilseed Outlook for 2009 is a joint effort by the World Agricultural Outlook Board, the Economic Research Service, the Farm Service Agency, and the Foreign Agricultural Service, so quite a bit of energy was spent in creating the forecast. The economists say their outlook is driven by declining commodity prices and a net return outlook less favorable than 2008.
Because of the decline in prices, total acreage, weak global demand, market volatility, higher input prices, higher costs of fertilizer, and prospects for more global competition, the economists say the combination of corn, bean, and wheat acres will drop 3.8 million from last year to 221 million.
Corn acres will be unchanged at 86 million because of the net return outlook for corn versus soybeans, but the drop in net returns for corn will limit any sharp increase in acres. New crop production plus the carry-in from last year will make 14.170 billion bushels available for use in the 2009/2010 marketing year. The national average yield is projected at 156.9 bushels per acre. Domestic use is forecast at 10.6 billion bushels, up 4% from the current year due to higher ethanol demand. Feed use will be 5.2 billion, down 2% as livestock herd numbers drop and more corn is replaced by DDGS. Industrial use is forecast at 5.2 billion, up slightly, helped by a 14% increase in ethanol demand. While ethanol capacity is up to 12.4 billion gallons, 2009 operating capacity will be only at 10.5 billion gallons. Corn exports will be 1.85 billion bushel, with more competition from Argentina and less from Brazil. Ending stocks will be down 4% with a stocks to use ratio at 13.8%. The season average price is forecast at $3.60, held up by many producers previously benefiting from good prices in forward contracts.
Soybean acres will be up 1.3 million to 77 million, with nibbles at wheat, cotton, and peanut acres. Expansion is limited by lower soybean prices, and less double cropping. Soybean supplies will be 3.453 billion bushels, up 9% from last year, helped by increased production of 3.240 billion bushels. The increase in plantings will be outside the Cornbelt, with a national trend yield of 42.6 bushels per acre. Domestic use will be 1.848 billion bushels, up nearly 2% from last year. While the soybean crush is forecast at 1.675 billion, it is driven by anticipation of high meal exports replacing the drought-induced shortfall from Argentina. While meal will see more demand, consumption of soybean oil will drop slightly as biodiesel demand levels off. 2009 will bring the fifth consecutive year in which soybean oil has declined in the amount used in the food industry. Soybean exports will grow to 1.225 billion bushels, due to increased share of global oilseed trade and lower supplies available from South America. China will control the international demand, taking half of world trade. Ending stocks are forecast at 380 million, up 80% from the current estimate, pushing stocks to use ratio to 12% and the national average farm price down to $8 per bushel, compared to the $9.25 current year projection.
Wheat acres will be down because of a 4.2 million acre drop in winter wheat, and a 2.9 million acre drop in soft red winter wheat. In the northern Plains, spring wheat area is expected to decline with increased soybean plantings. The national average yield is expected to be 43 bu. per acre. Current crop conditions in the Southern Plains are less favorable than a year ago. Crop conditions in the Central Plains are better than last year. Conditions for the Midwestern soft red winter wheat crop are generally favorable. Wheat supplies are expected to rebuild from last year’s 60 year low. Domestic use will be up slightly to 955 million bu. due to the population growth. Exports are expected to decline 5% to 950 million bu. due to surpluses in competing countries. World production will decline from the 2008 record. Ending stocks are projected at 664 million, up 9 million, and a stocks to use ratio of 30%. The average farm price is projected at $5.15, down $1.65 from last year.
Summary:
USDA’s forecast for corn is steady acreage from the current year due to less profitability, despite increased ethanol use. Feed and export demand will both be lower, as will the average price based on higher stocks. The USDA soybean forecast is for increased acres, more exports, and a higher ending stock projection that will push down the average price. Wheat acres have declined due to more global competition as well as soybeans taking some wheat acreage. Both domestic and foreign use will decline, pushing down the season average price.
Posted by Stu Ellis at 12:12 AM | Comments (1) | Permalink
March 2, 2009
USDA's Chief Economist Provides His Take On The Farm Economy.
“What a difference twelve months make.” That is how USDA’s Chief Economist Joe Glauber began his presentation last Thursday at the USDA’s Annual Outlook Conference. Compared to 2008, when authorities questioned if sufficient supplies of agricultural commodities existed to meet the world demand, Glauber outlined his analysis of the current supply/demand picture for 2009.
The USDA’s conference drew a global audience for discussions about agriculture, which will be reported by the farm gate in coming days. However, Glauber’s viewpoint was stark, “This time last year, the outlook picture was quite different than today: prices for most commodities were near record highs and rising; farm exports and farm income were projected to be at record levels. There were concerns about whether there would be enough crop production to meet global demand. Livestock, dairy and poultry producers were seeing their operating margins squeezed, and food price inflation was being discussed with concern for the first time in almost 20 years.” Since then he said prices for most commodities have fallen 40-50%, with uncertainty about income in conjunction with the global economic slump.
Glauber’s export forecast for FY 2009 (ending in September) is $20 billion under the $95.5 billion record in 2008 due to increased competition from other wheat and corn producing nations. Soybean exports are expected to parallel last year. Exports of high value meats are expected to drop as well.
Glauber is looking for a 5.2 million acre reduction in 2009 cropland to 247.6 million acres. Soybean acreage is being forecast by USDA to increase 1.3 million to 77 million, corn acreage will remain flat at 86 million, and wheat will be down 5.1 million to 58 million acres. Global wheat production last year exceeded consumption by nearly 26 million metric tons so pressure to expand US wheat has diminished.
The reason USDA does not expect more corn acreage results from the dramatic fall in prices and lack of forward contracting opportunities. But Glauber says net returns for corn relative to soybeans remain favorable in most areas and the soybean to corn price ratio favors corn. But he is quick to acknowledge the decline in net returns is expected to limit corn planting, particularly outside the Cornbelt. He thinks the yield trend will increase production by 2%, and while feed demand will decline slightly, overall consumption will increase because of ethanol.
Glauber says the federal ethanol blending mandate requires 10.5 billion gallons during calendar 2009 and 12 billion during 2010, which is 11.5 billion for the crop year and a requirement for 4.1 billion bushels of corn. He notes the ethanol industry remains under financial pressure because of the current economy and volatile prices, causing the idling of more than 2 billion gallons of refining capacity.
Global oilseed production will be up 4%, because of acreage expansion for crops competing with soybeans. But he says lower soybean yields in South America will limit production. China’s soybean imports account for 49% of global trade, while the EU has seen a decline in soybean demand. US production in 2009 is expected to rise with more acres coming from reduced acres for wheat, cotton, peanuts, and rice. USDA is expecting the soybean supply to increase by 9% in the coming year.
Glauber says weakening domestic and global demand challenges the US livestock industry. Uncertain demand and high feed prices have caused producers to cut production about 2%. He says recent reports indicated cattle supplies in 2009 would be tighter and there would be lower beef production. That will come as exports should repeat 2008, but the value of the dollar will make beef, pork and other meats more expensive. Hog producers are and will be farrowing fewer sows, but litter rates have been higher and will offset the decline in farrowing. US pork exports expanded 50% last year because of strong Chinese demand ahead of the Olympics. But that demand is waning.
The USDA economist reiterated his department’s recent forecast of farm income, resulting from both revenue and expenses that are expected to be lower than 2008, but with a more narrow profit margin. Debt equals 9.1% of assets, which Glauber compared to more than 20% in the mid-1980’s. And he says recent Federal Reserve surveys have indicated the land market is softening.
Summary:
On the whole, the farm economy faces uncertainty with declines from the record highs of 2008, and the potential for adverse impacts on farm real estate values. The drivers from 2008 still exist and the farm economy will again benefit from high energy prices, ethanol mandates, and growth in emerging markets. Farm lenders are in good financial shape and so are farmers.
Posted by Stu Ellis at 12:03 AM | Comments (1) | Permalink
