Traditional Stock-to-Use Ratios are of Little Value in Determining Peanut Prices

Traditional Stock-to-Use Ratios are of Little Value in Determining Peanut Prices

A common approach adopted by analysts and researchers is to investigate the relationship between the marketing year average price and the stocks-to-use ratio.  The stocks-to-use ratio (S/U) is often cited as an easy representation of the relationship between supply and demand.  When the S/U ratios are low, the supply of the commodity is low relative to the demand.  This is typically an indicator of high prices.  When the S/U ratios are high, the supply of the commodity is high relative to the demand.  Prices in these cases would be expected to be much lower.

The marketing year average price, as determined by the National Agricultural Statistics Service (NASS), is the weighted average of monthly prices of commodities surveyed during the marketing year, whereas the S/U ratio is computed as the ratio of ending stocks to total demand during the marketing year. The marketing year varies for different commodities. Corn and soybeans have marketing years from September 1 to August 31.  Peanuts has a marketing year of August 1 to July 31. 

We look at the relationship between S/U ratios and prices for corn and soybeans in figures 1 and 2.  During the period of 2003-2021, we clearly observe the expected downward sloping relationship for corn and soybeans.  As the supply increases, relative to the demand, the price of the commodity is lower.  Figure 3 shows the relationship between S/U ratios and the price of peanuts, or more precisely the lack of any relationship between these two indicators.  In other words, there is no relationship between current peanut prices and current measures of supply and demand.

The negative relationship in the corn and soybean market can be attributed to the size of the crop, significant number of spot market transactions and the existence of a futures market, with the latter two contributing to price discovery in the market.  However, the similarity between corn and soybeans and that of peanuts is that all are grown in the south – yet that is where it ends. The peanut crop is small relative to these larger commodities, with sales largely done through contracts between the growers and a concentrated sheller market. The absence of a futures market is also a factor that limits price discovery and transparency which could account for the lack of responsiveness in prices to current market conditions. So, while S/U ratios are helpful in explaining prices of many commodities, the same is not true for the peanut sector.

Figure 1. Corn Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Source: USDA National Agricultural Statistics Service (USDA-NASS) and USDA World Agricultural Supply and Demand Estimates (USDA WASDE) 

Figure 2. Soybean Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Source: USDA National Agricultural Statistics Service (USDA-NASS) and USDA World Agricultural Supply and Demand Estimates (USDA WASDE) 

Figure 3. Peanut Marketing Year Average Price and Stocks-to-Use Ratios from 2003-2021

Source: USDA National Agricultural Statistics Service (USDA-NASS) and Oil Crops Yearbook (USDA ERS)

Author: Festus Attah

Graduate Research Assistant, Auburn University

Author: Adam N. Rabinowitz

Assistant Professor, Auburn University


Trading Ranges and Volatility for November Soybean and December Corn Futures Prices

Trading Ranges and Volatility for November Soybean and December Corn Futures Prices

The 2021 and 2022 corn and soybean harvest futures prices for November and December had increased trading ranges (Figures 1 and 2). November 2022 soybean futures, from November 1, 2021, to contract expiration, had a trading range of $3.81 ($12.02 to $15.81; Figure 1). December 2022 corn futures, from December 1, 2021, to contract expiration, had a trading range of $2.23 ($5.43 to $7.66; Figure 2). Tight U.S. stocks, the Russia-Ukraine conflict, global inflation, supply chain disruptions, and drought in the U.S. and South America have propelled prices higher but have also increased volatility. In 2021 and 2022, the November soybean contract had 45 and 74 trading days, respectively, with a 20-cent up or down move. For the previous five years, the November soybean contract had a total of 64 days with a 20-cent up or down move. Similarly, the 2021 and 2022 December contracts had 49 and 65 trading days, respectively, with moves of 10 cents up or down. The previous five years had a total of 54 trading days with a 10-cent move.

Figure 1. November Soybean Futures Contract Price from November 1 to Expiration, 2010-2023*

Data Source: Barchart
* November 1, 2022, to January 19, 2023
Data Source: Barchart
* December 1, 2022, to January 19, 2023

What will 2023 bring for soybean and corn futures prices and how should this affect producers marketing and risk management decisions? As of January 19, the 2023 average daily closing futures prices for corn and soybean harvest contracts were near the top of the 2010-2022 price range – November soybeans averaged $13.89 and December corn averaged $5.98. As such, it would be reasonable to think that prices have more downside risk than upside potential, but this will be largely determined by weather. Additionally, there remains a tremendous amount of uncertainty in the global economy, geopolitics, and U.S. and global production for the 2023 crop year. It is likely that volatility will continue in corn and soybean futures markets. 

What should producers do? Protecting against downside risk seems logical given current market conditions. This can be accomplished using numerous marketing tools (futures, contracts, options, etc.). Put options provide an opportunity to establish a futures price floor. There are several strategies that producers can consider – at-the-money put options, out-of-the money put options, or a combination of put and call options to reduce premium expense. Each producer will have different risk tolerances, so there is no one size fits all approach. The key is to evaluate strategies and choose the one that makes the most sense for your individual circumstances. A simple example of an out-of-the money put option strategy (current December corn futures are trading at $6.00) is:

Buy a $5.50 December Put Option for 27 cents setting a $5.23 futures floor. This removes 87% ($5.23/$6.00) of the futures price risk, while leaving the upside open and the flexibility to set basis at a later date.

For producers interested in learning more about using futures and options to manage risk in grain and oilseed markets, the CME group has a self-study guide that explains several strategies.  The current uncertainty and volatility in corn and soybean futures markets necessitates downside price protection. Producers should evaluate strategies that can remove price risk for the 2023 crop. 

References

Barchart.com. December Corn and November Soybean Historical Daily Closing Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCZ23/historical-download and https://www.barchart.com/futures/quotes/ZSX23/historical-download

CME Group. 2019. Self-Study Guide to Hedging with Grain and Oilseed Futures and Options Accessed at: https://www.cmegroup.com/trading/agricultural/files/pm255_self-study-guide_hedging_en_2019.pdf

Author: S. Aaron Smith

Associate Professor and Extension Economist

University of Tennessee Institute of Agriculture


Smith, Aaron. “Trading Ranges and Volatility for November Soybean and December Corn Futures Prices.” Southern Ag Today 3(4.1). January 23, 2023. Permalink

The Demand Side of the Supply and Demand Balance Sheet

The Demand Side of the Supply and Demand Balance Sheet

Since the fall of 2020, grain prices have risen significantly (Figure 1). Production shortfalls in the U.S. (derecho windstorm in August 2020 and drought in 2022), drought in South America, increasing feed demand in China, followed by Russia’s invasion of Ukraine, pushed cash grain prices, in many cases, to near record highs. Late in 2022, cash prices were back down to pre-Russian invasion levels, but still historically high. 

Price forecasts for the 2023 crops will rightly focus much attention on planting intentions and yield prospects. High prices in the U.S. and globally provide market incentives for farmers to increase production.

But the other side of the supply and demand balance sheet deserves attention as well. Looking at the 2022/23 marketing year corn market in the U.S., feed and residual use and fuel use are the two largest use categories, 5.3 billion and 5.275 billion bushels, respectively. Next are exports at 2.075 billion bushels (Figure 2). Market conditions point to increased production in 2023, but what about use?

For the feed use category, data from USDA shows a decline in Grain Consuming Animal Units (poultry, pork, and cattle) over the last several years (USDA, ERS 2022). Gasoline demand, the foundation of ethanol use, is dampened by newer vehicles that use fuel more efficiently, or, in a growing segment of the automobile industry, do not use any gasoline at all (EIA, 2022). Export demand is impacted by the availability of exportable grain supplies from other major production areas, the value of the dollar, and global economic growth prospects. Grain use can go down when incomes and GDP slow down or decline. Global economic growth prospects will be slowed by the continued turmoil of the Russian invasion of Ukraine, broad inflation pressures, and lingering COVID pandemic effects (IMF, 2022). 

Early season grain budgets for 2023 show high prices and high input costs resulting in tight margins for farmers in many production areas. An increase in grain supplies in 2023 relative to use could result in lower prices that squeeze these margins even more as we head into summer and fall.   

Figure 1. Texas Cash Corn, Cash Sorghum, and Cash Wheat, Weekly, July 2020 to December 2022

Figure 2. U.S. Corn Use, 2005/06-2022/23

References

Energy Information Administration. “This Week in Petroleum”, available online at https://www.eia.gov/.

International Monetary Fund. “World Economic Outlook Report October 2022”, available online at https://www.imf.org/en/Home.

USDA, ERS. “Feed Grains Database”, available online at https://www.ers.usda.gov/data-products/feed-grains-database/.  

Author: Mark Welch

Professor and Extension Economist Grain Markets and Marketing, Risk Management, Production Economics


Welch, Mark. “The Demand Side of the Supply and Demand Balance Sheet.” Southern Ag Today 3(3.1). January 16, 2023. Permalink

The Peanut-Cotton Price Relationship

The Peanut-Cotton Price Relationship

Peanut production in the U.S. can be described as having a symbiotic relationship with cotton production as the two crops are produced in rotation throughout the southeastern states.  This can create a competitive environment between these crops, with prices a key factor in determining the number of acres to plant in a given year.  Since the peanut quota system was eliminated with the Farm Security and Rural Investment Act of 2002, peanut prices have been determined through market transactions with the first buyers of farmer stock peanuts, in what can be described as a highly concentrated market.  Alternatively, there is more transparency and price data available for cotton with the existence of a futures market.

Figure 1 shows the relationship between peanut and cotton marketing year average (MYA) prices from 2003 to 2021. The unusually high peanut prices in 2011 and 2012 are from weather-related supply issues.  While there is not a strong trend in the data due to some of the notable outliers, a visual inspection of Figure 1 highlights the positive relationship between these two commodity prices.  For example, when cotton prices have been above 75 cents per pound, peanut prices have been above $450 per ton.  

Figure 1. Peanut and Cotton Price Relationship: 2003-2021 Marketing Year Averages

A recent Southern Ag Today article, Navigating the “Winter” in Cotton Farming in 2023, projects an optimistic 2023 futures price for cotton to be 80-85 cents per pound.  Current December 2023 cotton futures prices have been hovering around 80 cents per pound.  At this futures price for cotton, history would suggest a peanut price between $450 and $500 per ton.  

While this can give farmers a good first estimate of expected prices it must be acknowledged that there can be significant deviation from this range as other factors may affect the price of one commodity that do not move the other prices in the same fashion.  For example, within the range of $450 to $500 per ton for peanuts, the cotton price ranged from a low of $0.478/lb in 2008 to a high of $0.914/lb in 2021.eanut

Author: Adam Rabinowitz

Assistant Professor & Extension Specialist 

adam.rabinowitz@auburn.edu


Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023. Permalink

Navigating the “Winter” in Cotton Farming in 2023

Navigating the “Winter” in Cotton Farming in 2023

Cotton prices in 2022 were like a roller coaster ride, including increased volatility and the highest price achieved for the past decade (Figure 1). Multiple rapid market rallies in the cotton market were observed in 2022, followed by a quick withdrawal of speculative money, resulting in an immediate plunge in cotton prices after the rally. The highest daily spot cotton price for 2022 was achieved on May 4th at 149.76 cents per pound, and the lowest daily spot cotton price in 2022 was observed on October 31st at 72.26 cents per pound. Several factors contributed to the price volatility in 2022, including stock market volatility, soaring inflation, supply chain disruptions, rising interest rates, appreciation of the U.S. dollar, and severe drought in major cotton production areas.

In 2022, the U.S. planted 13.6 million acres of upland cotton, the highest in 3 years. However, harvested acres are forecasted by the U.S. Department of Agriculture to be only 7.7 million acres, indicating an overall U.S. abandonment rate for upland cotton of 43.4%, the highest on record. Severe drought conditions hit major cotton production areas, including Texas, Oklahoma, Kansas, and Missouri. The abandonment rate is estimated to be 68% for Texas which accounted for 58% of total U.S. planted cotton acres (7.9 million) in 2022. Due to drought, cotton production in the U.S. plunged in 2022 resulting in a 2.37 million bale year-over-year decline in cotton exports. The December 2022 USDA World Agricultural Supply and Demand Estimates (WASDE) report projected U.S. cotton production at 14.2 million bales for the 2022/2023 marketing year, slightly below U.S. cotton demand – 12.3 million bales of exports and 2.2 million bales of domestic mill use. Globally, in 2022, cotton production is projected at 115.7 million bales, above the world cotton mill use at 111.7 million bales.

Looking ahead, 2023 could be a challenging year for cotton producers. According to the International Monetary Fund October 2022 World Economic Outlook report, global economic growth is expected to slow down to 2.7%, combined with high inflation worldwide at 6.5%. The reduction in economic activity and high inflation in 2023 will likely continue to reduce consumer demand for discretionary items, such as textiles and apparel, thus suppressing cotton prices. 

In response to high inflation, the Federal Reserve increased the federal funds rate from about 0% in February to 4.25-4.50% in December. The interest rate increases were the largest since the 1980s. The Federal Reserve’s commitment to bringing inflation back down to its target of 2% will likely result in higher interest rates for producers in 2023. The bank prime loan rate has risen to 7.5% in December, up 4.25% since the start of 2022. Rising interest rates further accelerated the appreciation of the U.S. dollar. Cotton is a global commodity; on average, over 80% of cotton produced in the U.S. is exported. The appreciation of the U.S. dollar increases prices paid by foreign consumers and makes U.S. cotton less attractive compared to other cotton exporting countries with a relatively weaker currency. This could result in a further decline in cotton demand from the U.S. and lower cotton prices for U.S. producers in 2023. 

U.S. cotton acreage and production are likely to decline in 2023, due to a lower relative price expectations compared to competing crops. Additionally, profit margins for cotton producers have been adversely affected due to high input costs and low prices. As of December 15, 2022, December cotton futures prices, CTZ23 (Dec’ 23), are currently at 79.29 cents per pound. An optimistic futures price for cotton in 2023 is 80 to 85 cents per pound, and a pessimistic price for 2023 is 69 to 75 cents per pound. For planning and budgeting projections, a price of 72 to 78 cents per pound is suggested for 2023. On a positive note, an economic recovery could occur in the fourth quarter of 2023, and the winter ice in the cotton market could start to melt during the cotton harvest in 2023. 

Figure 1. Cotton Cash Prices for the past decade.

Source: Board of Governors of the Federal Reserve System

Yangxuan Liu

Assistant Professor

yangxuan.liu@uga.edu

Quantifying U.S. Corn Exports to Mexico

Quantifying U.S. Corn Exports to Mexico

There has been a lot of recent concern regarding Mexico potentially banning genetically modified (GM) corn. The crux of the issue started in December 2020 when Mexico’s president, Andrés Manuel López Obrador, issued a presidential decree calling for GM corn for human consumption to be phased out by the end of January 2024. Details of this decree and how it would be implemented are scarce. The United States has also engaged in negotiations with Mexico on this issue.  The purpose of this article is not to debate the merit, or lack of merit, in Mexico’s decree to ban GM corn, it is to quantify the potential amount of corn trade that could be affected.

Mexico’s position revolves around the protection of native heirloom varieties and banning GM corn for human consumption.  The Mexican President’s position on GM corn used for animal feed and industrial use has softened recently however, the phrase “destined for human consumption” is opaque and subject to interpretation. Any potential ban is destined to have a two-pronged result. First, Mexico would pay more to secure the displaced U.S. corn (whether the replacement is U.S. non-GM or procured from another country), and second, U.S. corn would have to find an alternative market. 

From 2009-2022, Mexico consumed an average of 12.5 million metric tons (MMT) of corn more than it produced (Figure 1). During this time interval, 94% of the corn imported to make up the deficit came from the U.S. (Figure 2). For the 2022-2023 marketing year, Mexico is projected to import 17.2 MMT of corn. Trade data can be examined by Harmonized System (HS) code. HS code is a standardized numerical method of classifying traded products. Table 1shows the value of U.S. corn exports to Mexico by HS code. Over 90% of corn exports to Mexico are Number 2 Yellow Corn. Available data did not provide an indication of intended use (food, feed, industrial etc.) for U.S. origin corn.

Annually, the U.S. exports approximately 15% of total corn production. The top five export markets for U.S. corn over the past five years have been Mexico, Japan, China, Columbia, and South Korea. U.S. corn exports to Mexico represented 25% of all corn exports from 2009-2022. If access to Mexico’s market is restricted, then corn exporters would have to rely on alternative export markets or absorb the production domestically. Holding other factors constant, restriction of U.S. corn exports to Mexico would adversely affect domestic corn prices in the U.S.  Producers, Corn Growers Associations, and other stakeholders are rightfully concerned over attempts to restrict market access for U.S. corn exported to Mexico. The impact of any potential loss of access to Mexico’s corn market will be contingent on the details of the proposed restrictions. 

Figure 1. Mexico Corn Production, Imports, and Consumption, 2009-2022

Data Source: USDA-PSD

Figure 2. Corn Exports to Mexico, 2009-2022

Data Source: USDA-PSD and USDA-GATS 

Table 1. Value of U.S. Corn Exports to Mexico by HS code, 2021 and 2022 (Jan-Oct) 

 HS CodeDescription2021% of Total2022% of Total
1005902030Yellow Dent Corn (maize), U. S. No. 2, Except Seed4,350,527,44691.3%3,840,293,29992.4%
1005902035Yellow Dent Corn (maize), U. S. No. 3, Except Seed25,919,3950.5%58,556,4961.4%
1005902020Yellow Dent Corn (maize), U. S. No. 1, Except Seed37,924,0900.8%26,834,6230.6%
1005904049Popcorn, Unpopped, Except Seed, Others32,252,0310.7%31,747,5990.8%
1005904065Corn (maize), Except Seed, Yellow Dent Corn, Popcorn, Or White Corn, Others42,646,3640.9%24,584,5050.6%
1005100010Yellow Corn (maize), Seed27,033,2250.6%18,781,4620.5%
1005904055Corn (maize), White, Others229,351,3854.8%146,595,2033.5%
1005100090Corn Other5,089,8310.1%3,375,8910.1%
1005902070Yellow Dent Corn (maize), Except Seed, Others3,411,8390.1%2,732,2170.1%
1005902045Corn (maize), Other Than Seed Corn9,543,7610.2%2,450,5650.1%
  $4,763,699,367 $4,155,951,860 
Data Source: USDA GATS

References and Resources

International Trade Administration. Understanding Harmonized System Codes. https://www.trade.gov/harmonized-system-hs-codes#:~:text=The%20Harmonized%20System%20is%20a,International%20Trade%20Administration

U.S. Department of Agriculture – Foreign Agricultural Service (USDA-FAS). Global Agricultural Trade System. Available on-line at: https://apps.fas.usda.gov/GATS/default.aspx

U.S. Department of Agriculture – Foreign Agricultural Service (USDA-FAS). Production, Supply, and Distribution. Available on-line at: https://apps.fas.usda.gov/psdonline/app/index.html#/app/home


Author: Aaron SmithAssociate

Professor, Crop Marketing Specialist

aaron.smith@utk.edu


Smith, Aaron. “Quantifying U.S. Corn Exports to Mexico.” Southern Ag Today 2(53.1). December 26, 2022. Permalink