Refinement of U.S. Cotton Production Forecasts

Refinement of U.S. Cotton Production Forecasts

The picture painted by the U.S. Department of Agriculture (USDA) of U.S. cotton production has been reframed several times this year already.  In August, USDA cut a historically large three million bales off of their previous month’s forecast.  The direction of that adjustment was not a surprise to anybody, but the size of it surely was.  Then, in September, USDA’s National Agricultural Statistics Service (NASS) reversed themselves and added a million and a quarter bales back to their estimate of U.S. cotton production[1], now at 13.83 million bales of all cotton (i.e., upland and pima combined).   

Hopefully, and happily, we can expect the forecast to get more accurate going forward.  The reason for this is rooted in three sources of future information.  First, as we saw in USDA’s September forecasts, available USDA Farm Service Agency (FSA) certified acreage data were used to revise forecasted planted acreage.  This was the main reason for the September upward revision to U.S. cotton production this year.  New data on certified acres from FSA sometimes arises later in the fall or winter, so this remains a possible source of refinement.

Second, NASS surveyed more than 7,000 U.S. producers, including major cotton producing states.  This survey process includes what they call “objective yield surveys” for major crops.  For cotton, this means boll counts from randomly selected field samples in September, October, November, and December.  So again, this data flow suggests a more accurate forecast of U.S. cotton production over time.

Third, NASS also reports monthly on cumulative bales ginned, which is another independent (albeit lagged) measure of U.S. cotton production.  Altogether, we can expect fewer surprises and an increasingly clearer production picture.  This expectation is supported by historical data in Figure 1.   Figure 1 shows the percent deviations of USDA’s U.S. cotton production forecasts in August, September, November, and December, relative to the final production estimate at the end of the marketing year (i.e., the following July).  As expected, the spread of the percent deviations shrink across the fall season, presumably informed by the previously described data flow.  It is also apparent from Figure 1 that USDA tends to overestimate the crop size, at least in the September through December time period.

The marketing implication of this refinement is a fading production risk premium in U.S. cotton prices, all other things being equal. 


[1] https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/qr46s7546/kd17f282m/crop0922.pdf

Robinson, John. “Refinement of U.S. Cotton Production Forecasts“. Southern Ag Today 2(41.1). October 3, 2022. Permalink

Marketing Strategies if Producers Do Not Have Access to On-Farm Storage

Marketing Strategies if Producers Do Not Have Access to On-Farm Storage

Several articles have discussed the benefits of on-farm storage for southern producers (Maples, 2022 and Duncan and Smith, 2022). However, there are marketing strategies that producers can investigate if they do not have on-farm storage. These include delayed pricing contracts, commercial storage, and using futures or options to establish a re-ownership position for the commodity sold.  

Delayed pricing contracts allow ownership of the grain to be transferred to a local elevator, barge point, or other purchaser without establishing the price. Delayed pricing contracts allow the producer to fix the price after delivery at a future point in time. As with any legal contract, attention to detail is important to fully understand the differences in terms and conditions offered. Additionally, counterparty risk should be investigated. Counterparty risk is the probability that the other party in a transaction may not fulfill its part of the deal and may default on the contractual obligations.

Commercial storage is another option that can be investigated. Commercial storage requires the producer to pay a monthly storage fee, while maintaining ownership of the grain. Storage fees are highly variable, based on facilities provided and local availability. Not all producers will have access to commercial storage in their location. Similar to delayed pricing contracts, terms, conditions and counterparty risks for commercial storage agreements should be fully understood. 

Futures and options can be used to establish a re-ownership position after the sale of the crop. Producers can buy a futures contract or a call option for a deferred contract month and experience financial gains if the futures contract price appreciates after the cash crop is sold. For example, buying a March corn contract at $6.90 can provide a financial gain if the March futures contract, between purchase date and expiration, increases (buying low and selling high). This is a speculative position and can result in losses if the contract price declines. This strategy also requires a margin account to cover any losses incurred by the futures position.

Buying a call option allows a producer the opportunity to profit if prices go higher with a limit on losses if prices decline. The cost of this opportunity is the upfront premium paid. For example, on September 7, 2022, a $6.80 March corn call could be purchased for 47 cents, thus the March futures contract would need to trade above $7.27 before a financial benefit is received by the purchaser. Premiums can be high, so producers may want to offset the premium cost. Selling a call option can reduce the upside potential but save the producer premium costs. Figure 1 shows a simple strategy of selling a $7.50 March corn call for $0.29 and buying a $6.80 call option for $0.47. The net result is a maximum loss of $0.18 and a maximum gain of $0.52. The return to the producer will be contingent on the price of the March corn contract and when options are exercised. The risk and reward should be fully understood before a producer enters any futures or options position. 

Figure 1. March corn option example: buying an at-the-money call option and selling an out-of-the money call option

References and Resources:

Barchart.com. Corn Options Prices. Accessed at: https://www.barchart.com/futures/quotes/ZCH23/options?moneyness=20

Biram, Hunter, and S. Aaron Smith. “The Option to Augment the Crop Insurance Price Floor.” Southern Ag Today 2(35.1). August 22, 2022. https://southernagtoday.org/2022/08/the-option-to-augment-the-crop-insurance-price-floor/

Duncan, Hence, and S. Aaron Smith. “Estimating the Cost of a Grain Bagging System“. Southern Ag Today 2(31.3). July 27, 2022. https://southernagtoday.org/2022/07/estimating-the-cost-of-a-grain-bagging-system/

Maples, William E. “On-Farm Grain Storage in Southern States“. Southern Ag Today 2(38.1). September 12, 2022. https://southernagtoday.org/2022/09/on-farm-grain-storage-in-southern-states/

U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era

U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era

Feed and residual use has long been the largest consumption category in the USDA supply and demand tables for U.S. corn (Figure 1)[1]. That began to change with the passage of the Renewable Fuel Standard Program in 2005[2]. Corn for fuel increased over the next several years, from under two billion bushels in the 2005/2006 marketing year to over five billion bushels in 2011/2012 when it overtook corn for feed as the number one use category.  Since then, fuel and feed have competed for the top spot for corn consumption.   

Additionally, the price of corn has been increasing in the biofuel era. From the increased planting flexibility in the Freedom to Farm Act in 1996 to the passage of the Renewable Fuel Standard in 2005, prices averaged $2.15 per bushel with a low of $1.82 in 1999 and a high of $2.71 in 1996. From 2006 to 2021, the average price more than doubled to $4.33 per bushel with a low of $3.04 in 2006 and high of $6.89 in 2012. Currently, the price estimate for the 2022 corn crop is $6.65, reflective of a 54% increase in one year alone.

The peak in corn for feed consumption came in the 2004/2005 marketing year at just over six billion bushels. After the passage of the Renewable Fuel Standard in 2005, feed use began to fall, and the price of corn began to increase (Figure 2). From 2013 to 2019, the price of corn appears to be associated with an increase in feed use. Since 2020, feed use has fallen with increases in corn price.

There is more to the corn story than the inverse relationship between feed input demand and prices, and the implications of relatively higher corn prices are always looming. In spite of the fall in corn for feed use in 2006 associated with the RFS, an ethanol fuel co-product became available known as distiller’s dried grains with solubles (DDGS).  Each bushel of corn (56 pounds) used for fuel produces about 16 pounds of DDGS which adds to feed grain production, providing some price relief to cattle, pork, and poultry producers.  In addition, the size of the livestock and poultry industries, measured by grain consuming animal units (GCAUs), has grown from about 75 million in the 1980s to 101.7 million GCAUs in 2019 (Figure 3). Another trend in the feed use category we can draw from GCAUs is the inverse relationship between corn prices and feed use. There was a rebound in use as prices fell from their record highs in 2012 with a peak in 2014. Even with relatively low and stable prices, energy feed plus DDGS per GCAU has been on a downward trend. That points to an increasingly efficient meat sector producing more pounds of protein on fewer pounds of feed.  

What does this mean for corn prices moving forward? From the demand side of the balance sheet, the feed use category near term looks to be limited by lower overall GCAUs and declining feed use per GCAU. As livestock and poultry numbers increase and as grain prices go down, we may not return to previous levels of use. Improved feeding efficiencies may dampen the feed use response in future supply and demand balance sheets.   

Figure 1. U.S. Corn Use

Figure 2. U.S. Corn Feed and Residual Use and Season Average Farm Price

Figure 3. Grain Consuming Animal Units (GCAU) and Energy Feed per GCAU

Welch, J. Mark. “U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era“. Southern Ag Today 2(39.1). September 19, 2022. Permalink

[1] For an explanation of the feed and residual use category used by USDA in their supply and demand tables, see “Implications of an Early Corn Crop Harvest for Feed and Residual Use Estimates”, FDS-12f-01, Economic Research Service/USDA July 2012.

[2] Details of the Renewable Fuel Standard Program authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 can be found at https://www.epa.gov/renewable-fuel-standard-program.

On-Farm Grain Storage in Southern States

On-Farm Grain Storage in Southern States

On-farm grain storage can provide multiple benefits to producers. One of the major benefits is increased marketing flexibility. Grain storage allows producers to take advantage of the seasonal nature of grain prices. Typically, grain prices are at the lowest point shortly after harvest when supplies are the greatest, and then prices increase as supplies draw down throughout the rest of the marketing year. Figure 1 shows this seasonal change in grain prices in the Mid-South Delta for corn and soybeans. On average, from 2014-2021, corn prices were nearly 25% higher in the month of June compared to October, and soybean prices were nearly 15% higher in June compared to October. While the idea of seasonal grain prices holds, on average, each year is different. For example, in 2019, June corn prices were 19% lower than October, and June soybean prices were 3% lower. The next year, 2020, saw large returns to storage — corn prices increased by 79%, and soybean prices increased by 43% from October to June. Having the ability to include storage in a marketing plan provides the possibility for higher returns for most years.

Figure 1. Monthly Delta Corn and Soybean Cash Price Indexes as a Percent of October Prices, 2014-2021 Average

Source: Barchart, Delta Corn Price Index, Delta Soybean Price Index

On-farm grain storage also provides greater flexibility where grain can be sold. Many southern states have large poultry, distilling, ethanol, and livestock industries that buy grain throughout the year but may not have substantial on-site storage. Having on-farm storage allows producers to take advantage of these on-demand markets. It is important for producers to know the on-demand markets in their area and be on contact lists for those purchasers. 

Harvest can also be completed faster with the addition of on-farm storage. Given harvest risks, such as hurricanes in the Southeast, valuable time can be saved by not having to transport grain to an off-farm storage facility or wait in lines at elevators, barge points, or other end users. 

While on-farm storage provides greater flexibility, it does come with some disadvantages. The biggest disadvantage is the size of the initial investment needed to build a storage facility. Additional considerations must be given to the cost of extra drying, shrinkage, quality deterioration, and increased handling costs.    

Since 2000, southern states have added 28.5 million bushels of on-farm storage capacity. Figure 2 shows the on-farm storage capacity as of December 2021, and the average total corn, soybean, and wheat production from 2017-2021 for each southern state. Kentucky has the highest on-farm capacity with 240 million bushels, which is 66% of the state’s average corn, soybean, and wheat production. Georgia has the highest percentage of on-farm storage capacity as a percent of production at 87% followed by Arkansas at 81%, likely driven by historically well-established poultry industries in each state. On-farm storage capacity is not reported for Florida, Louisiana, and South Carolina. Overall, many southern states have room to expand on-farm storage opportunities given the current level of grain production. 

Figure 2. 2021 On-Farm Storage Capacity and Average Total Corn, Soybean, and Wheat Production from 2017-2021 by State

Source: USDA-NASS Quickstats: USDA/NASS QuickStats Ad-hoc Query Tool
Note: On-Farm storage capacity not reported for Florida, Louisiana, and South Carolina.

Maples, William E.. “On-Farm Grain Storage in Southern States“. Southern Ag Today 2(38.1). September 12, 2022. Permalink

High Abandonment Acres for U.S. Cotton Projected Due to Drought

High Abandonment Acres for U.S. Cotton Projected Due to Drought

Every year, the U.S. Department of Agriculture’s (USDA) National Agricultural Statistics Service (NASS) releases its projected harvest acres for U.S. cotton starting in August. The report provides updated information about expected U.S. cotton production. In 2022, the U.S. planted 12.3 million acres of upland cotton, the highest in 3 years, which was mainly due to historically high cotton prices during the decision-making and planting window. 

However, in 2022, the overall U.S. abandonment rate for upland cotton is estimated at 43.4%, which is the highest on record since 1953. The abandonment rate, which measures the percentage of unharvested acres compared to total planted acres, provides an estimate of the number of failed acres versus the number of acres that will be harvested. Severe drought conditions hit the largest cotton production regions in the Southwest (Texas, Oklahoma, and Kansas) and the West (California, Arizona, and New Mexico). The abandonment rate for Texas (Figure 1A) reached 69%. Texas planted 7.1 million acres of cotton in 2022 –  by far the largest of any state – representing 57.6% of total U.S. planted acres (Figure 1B). By contrast, drought impacts were less severe in the Delta (Missouri, Arkansas, Louisiana, Mississippi, and Tennessee) and Southeast (Alabama, Georgia, Florida, South Carolina, North Carolina, and Virginia). 

As a result of the drought conditions this year, upland cotton harvested acreage in the U.S. is projected at 7.0 million acres, which is the lowest amount of harvested acreage in over 150 years. The projected high abandonment rate in the U.S. reduced expected cotton production to 12.2 million bales, compared to the 10-year average of 16 million bales, according to USDA’s Foreign Agricultural Service. If realized, it would also be the smallest U.S. crop since 2009. U.S. cotton demand (mill use plus exports) for the 2022 crop is forecast at 14.3 million bales, exceeding production. As a result, ending stocks in the U.S. are expected to decline to 1.8 million bales, the lowest on record since 1960. The low supply of U.S. cotton provides support for domestic cotton prices. For the 2022/2023 marketing year, upland cotton prices are forecast at 97 cents per pound. If realized, it would be the highest price on record since 1909. 

Figure 1A. Abandonment rate for cotton-producing states in the U.S. in 2022

Figure 1B. Planted acres and harvested acres of the cotton-producing states in the U.S. in 2022 Abandonment Rate = 1 – Harvested Acre/Planted Acre

References and Resources:

U.S. Department of Agriculture. 2022a. Production, Supply, and Distribution Database. Washington, DC: U.S. Department of Agriculture, Foreign Agricultural Service. Available online: https://apps.fas.usda.gov/psdonline/

U.S. Department of Agriculture. 2022b. Quick Stats. Washington, DC: U.S. Department of Agriculture, National Agricultural Statistics Service. Available online: https://quickstats.nass.usda.gov/

Liu, Yangxuan. “High Abandonment Acres for U.S. Cotton Projected Due to Drought“. Southern Ag Today 2(37.1). September 5, 2022. Permalink

2022 Peanut Production Projections

2022 Peanut Production Projections

With the peanut harvest set to begin, USDA-NASS released the first set of forecasts for this year’s crop in the August Crop Production report. U.S. peanuts are expected to yield 4,129 lb. per acre, which would about equal the value from 2021. Predictions for the top-four peanut states are mixed, with record or near-record yields projected in three states. Georgia – the leading peanut producer – is expected to yield 4,500 lb. per acre, which would be its highest value since 2012. Alabama and Florida are forecast to yield 4,000 lb. and 4,300 lb. per acre, respectively. If realized, this would tie Alabama’s 2012 record and beat Florida’s 2014 mark of 4,000 lb. per acre. On the other end of the spectrum, Texas – mired in severe drought – has a forecasted yield of just 2,100 lb. per acre, which would be its lowest value since 1995. 

One question to consider is whether the August forecast will equal the yield calculated at the end of the year. As shown in the figure, the August forecast has exceeded the final calculated yield in each of the past eight years, amounting to an average overestimate of 172 lb. per acre per year. Peanut crops with high yield potential have often seen their fortunes turn due to tropical storms and other weather-related issues across the South. Therefore, it is important to remember that these yield estimates could change before harvest.

Data Source: USDA-NASS. Crop Production. August 12, 2022.

If the current yield estimates are realized, total U.S. production would fall by 3% this year to 3.1 million tons driven by the lower planted (and expected harvested) acreage, as shown in the table. In total, 97% of the 1.54 million planted acres in the U.S. are expected to be harvested this year. Among the top-producing states, only Alabama is expected to see an increase in harvested acres, with the top-four states projected to see forty thousand fewer acres harvested than last year. Overall, this slight decline in production should not have too much of an impact on the peanut market. It would likely take larger abandonment or a sizeable yield decline to see a significant effect on the market given the existing peanut stocks.

Forecasted Peanut Production and Harvested Area for Top-producing States and U.S. Total, 2022 vs. 2021

Data Source: USDA-NASS. Crop Production. August 12, 2022.

Sources:

USDA National Agricultural Statistics Service. 2022. “Crop Production.” August 12, 2022. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/tm70mv177/n5840309g/2n49v849f/crop0822.pdfUSDA National Agricultural Statistics Service. 2022. “Acreage.” June 30, 2022. Available at: https://downloads.usda.library.cornell.edu/usda-esmis/files/j098zb09z/0z70b374s/w9506686w/acrg0622.pdf

Sawadgo, Wendiam. “2022 Peanut Production Projections“. Southern Ag Today 2(36.1). August 29, 2022. Permalink

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