Cover Crops and Risk

Cover Crops and Risk

Large-scale ecosystem benefits tend to drive policy interest in cover crops. However, incorporating cover crops in a farm management plan will also require them to generate on-farm returns. To date, findings of their ability to generate profits have been mixed with inconsistent results across several studies. However, returns in a broad sense of cover crops include potential impacts on risks in addition to their effect on profits. A year of substantial loss savings can offset or justify years of minimal to slightly decreased net profit outcomes. Especially true in areas where crop prices are countercyclical to yields. Therefore, if or how cover crops help manage risk is an important consideration for their inclusion in a farm management plan.

Cover crops and their ability to reduce soil erosion and provide increased root infiltration into the soil have been studied in the context of managing specific risks, extreme wet and extreme dry (drought) conditions. Roughly 83% of total crop insurance losses in the Mid-South were related to one of these two events with 70% being excess moisture related and the majority of those from prevented planting. Regarding extreme moisture risks, most studies indicate that cover crops reduce crop damage under specific conditions. Where nutrient leeching is an issue, which may be a feature on some irrigated fields, cover crops, particularly grass cover crops, have been found to reduce corn yield losses during extreme moisture events because of higher available carbon during the growing season. A study in Northeast Mississippi showed reduced effects of excess moisture in corn-soybean rotation fields. However, some studies also show that cover crops can create early season planting challenges getting the cash crop planted in wet fields. The additional time required to terminate the cover crop may not allow sufficient time to get the cash crop planted and established. This is especially true in conventional tilling systems and where planting green (planting the cash crop in a living cover crop) is not possible.

In NRCS Zone 4 cover crop regions, the effects of cover crops in drought conditions seemed to be more consistent. The findings suggest that cover crops reduced soil compaction, increased root infiltration, and in general, led to increased water availability for the cash crop, reducing drought damage. More studies are needed in the mid-south, but a few studies observing farmers in the Midwest during the 2012 drought saw farms with cover crops experiencing an eleven (11) percentage point increase in yields relative to farms without cover crops.

Overall, cover crops show potential for risk management, particularly for managing drought risk. However, outcomes appear to be highly related to the suite of management practices on the farm, such as the cover crop variety used, whether combined with no-till, the ability to plant green, and the planting dates of the cash crop in question. In the mid-south, a cover crop before planting cotton or soybeans may be more feasible than a cover crop before planting corn when considering planting dates and early season weather risks. Nevertheless, where risk management rather than yield is the goal, a conversation with a local agronomist may help determine whether cover crops may be a good consideration as a long-term risk management tool on your farm.

Mid–South Causes of Indemnities Crop Insurance: 2015 – 2020

Source: RMA Summary of Business

References:

Bergtold, J., Ramsey, S., Maddy, L., & Williams, J. (2019). A review of economic considerations for cover crops as a conservation practice. Renewable Agriculture and Food Systems, 34(1), 62-76. doi:10.1017/S1742170517000278

Bharat Sharma Acharya, Syam Dodla, Lewis. A. Gaston, Murali Darapuneni, Jim J. Wang, Seema Sepat, Hari Bohara, Winter cover crops effect on soil moisture and soybean growth and yield under different tillage systems, Soil and Tillage Research, Volume 195, 2019, 104430, ISSN 0167-1987, https://doi.org/10.1016/j.still.2019.104430

Blanco-Canqui, H., Shaver, T.M., Lindquist, J.L., Shapiro, C.A., Elmore, R.W., Francis, C.A. and Hergert, G.W. (2015), Cover Crops and Ecosystem Services: Insights from Studies in Temperate Soils. Agronomy Journal, 107: 2449-2474. https://doi.org/10.2134/agronj15.0086

Chalise, K.S., Singh, S., Wegner, B.R., Kumar, S., Pérez-Gutiérrez, J.D., Osborne, S.L., Nleya, T., Guzman, J. and Rohila, J.S. (2019), Cover Crops and Returning Residue Impact on Soil Organic Carbon, Bulk Density, Penetration Resistance, Water Retention, Infiltration, and Soybean Yield. Agronomy Journal, 111: 99-108. https://doi.org/10.2134/agronj2018.03.0213

G.S. Marcillo and F.E. Miguez, Corn yield response to winter cover crops: An updated meta-analysis, Journal of Soil and Water Conservation May 2017, 72 (3) 226-239; DOI: https://doi.org/10.2489/jswc.72.3.226

Connor, Lawson. “Cover Crops and Risk“. Southern Ag Today 2(34.3). August 17, 2022. Permalink

Supply Seasonality of Specialty Crops in the United States

Supply Seasonality of Specialty Crops in the United States

The rise of income levels, increased availability of nutritional information, and the pursuit of a healthier lifestyle have generated a shift in the preferences of American consumers over the past few decades. This has led to a steady supply of specialty crops throughout the year to meet a growing and more sophisticated consumer demand. However, due to seasonal patterns and specialization in the production of fresh fruits and vegetables, it is necessary to rely on imports from different regions of the world to provide U.S. customers with a more stable supply and less volatile prices of these products.

A selected group of fruits and vegetables (i.e., tomatoes, peppers, onions, apples, avocados, grapes, berries, and citrus) was considered to analyze their annual patterns of domestic supply, as well as their corresponding prices and imports from both the Northern and Southern Hemispheres of the continent. On average, between 2015-2019, the annual domestic production of these crops targeting the fresh market represented a total economic value of $11.37 billion, and an additional $11.74 billion were imported each year (USDA-NASS, USDA-FAS). The data used consisted of monthly imports from 2015 to 2019 obtained from USDA-FAS and monthly movements of local produce from all domestic districts (excluding imports and exports) obtained from USDA-AMS. For prices we used the corresponding USDA-AMS monthly average prices at Terminal Markets (wholesale prices). Weighted averages were used to combine subcategories within a crop to reflect a common unit of measure.

The overall supply and observed price throughout the year of the selected crops are presented in Figure 1. Note that for some crops there is strong seasonality in their domestic supply, with peaks in different months depending on the crop analyzed. Avocados and berries have a peak of domestic production during summer, while grapes, apples and citrus show a steady increase of production from fall. For most of the analyzed crops, the imports from different regions are required to maintain a stable and sufficient supply through the year. Imports from North America (i.e., Mexico and Canada) are the main source of fresh vegetables and fruits when local production is insufficient to meet the domestic demand. North America’s imports are particularly important for tomatoes, avocados, and peppers. For some other crops such as grapes and citrus, the imports from South America play an important role in maintaining produce availability and price stability during the year. The prices for each crop show an expected pattern according to the total supply of those products and to some demand considerations. Particularly, relatively higher prices are observed during the off-season of local produce.  

The market information summarized in this article could be used by local specialty crop producers and retailers to identify fundamental patterns in the availability of fresh fruits and vegetables and determine the existence of price effects derived from variations in the overall supply. This information could also help local growers design better production and marketing strategies aimed to reduce marketing risk by aligning production decisions with more favorable market conditions.

Figure 1. Supply and Price Seasonality of Selected Specialty Crops, Average 2015-2019

Source: USDA FAS, USDA AMS

Villavicencio, Xavier, and Samuel Zapata. “Supply Seasonality of Specialty Crops in the United States“. Southern Ag Today 2(33.3). August 10, 2022. Permalink

Profitability of Cover Crops

Profitability of Cover Crops

Research into cover cropping has shown some benefits to soil health and conservation. However, adoption of cover cropping has been relatively low due in part to uncertainty about its profitability. When considering whether to adopt this practice it is important to understand the associated costs.

            Seed and planting cost make up the bulk of additional costs of cover cropping. Table 1 shows examples of the cost of planting various cover crops from prices obtained in Mississippi. Seed costs range from $18.00/ac for oats to $43.80/ac for Austrian winter peas. Planting costs are estimated at $11.68/ac including direct expenses as well as indirect equipment costs (estimates derived from the Mississippi State Enterprise Budgets assuming a 20’ grain drill). Total costs of cover cropping range from $29.68/ac to $55.48/ac. Your costs will vary depending on local conditions, seeding rates, and equipment.  In some cases, an additional herbicide application is also needed to terminate the cover crop.

Table 1. Costs of Cover Cropping

CropSeed Cost $/lbSeeding Rate lb/acreSeeding Cost $/acPlanting Cost $/acCover Crop Costs $/ac
Austrian winter pea0.736043.8011.6855.48
Crimson Clover1.802036.0011.6847.68
Cereal Rye0.396023.4011.6835.08
Tillage radish2.40819.2011.6830.88
Oats0.365018.0011.6829.68
Rye+Clover (89/11 Mix)0.455022.3611.6834.04

For cover cropping to be profitable there needs to be a positive yield benefit to offset the added costs. However, research has shown that cover cropping may have no effect on yield or in some cases decrease yield. The impact on yield is highly dependent on which crop is being grown. Spencer et al. (2021) found that Austrian winter pea and cereal rye decreased corn yield by 37 and 45%, respectively, in the first year of implementing cover crops. In subsequent years there was no significant differences in yield found. But, net returns were significantly reduced in 2 out of the 4 years examined. Bryant et al. (2020) found that, relative to reduced tillage-subsoiling, a cereal rye cover crop had no impact on soybean yield but a radish cover crop reduced soybean yield by 12%. However, these results are atypical for what is usually observed in soybeans under cover cropping. Regardless, the lack of a positive yield response led to lower net returns under both the cereal rye and radish cover crops in that study. Lastly, Denton et al. (2021) found no yield response from cover cropping in cotton. This led to lower net returns of $20.34/ac to $124.64/ac under cover cropping. These studies show why cover cropping may not be profitable in the Mid-South.

One way to help alleviate the lack of profitability would be to secure Environmental Quality Incentives Program (EQIP) payments. As shown in Table 2, payments vary from state-to-state and by cover crop. Producers are only eligible for payments on land that is not currently under cover cropping. There are also limitations on payment amounts and duration. More information on your specific state’s EQIP payments can be found at: https://www.nrcs.usda.gov/wps/portal/nrcs/detailfull/national/programs/financial/?cid=nrcseprd1328426

Table 2. Environmental Quality Incentives Program Payments for Cover Cropping 2021

AlabamaArkansasLouisianaMississippiOklahomaTennesseeTexas
Practice EQIP Payments $/acEQIP Payments $/acEQIP Payments $/acEQIP Payments $/acEQIP Payments $/acEQIP Payments $/acEQIP Payments $/ac
Cover Crop-Basic
(Organic and Non-organic)
$52.36$50.22$50.05$51.73$48.60$52.14$33.74
Cover Crop-Multiple Species (Organic and Non-organic)$64.02$61.75$61.71$63.26$60.25$63.79$41.51

The results discussed here may differ from what is found on your farm. When deciding whether to adopt cover cropping it is important to test if the practice is profitable on a small area first. Once it is determined if it is profitable for you then larger scale adoption can be implemented. Your local NRCS office can also help with additional information about obtaining EQIP payments.

References

Bryant, C.J., Krutz, L.J., Reynolds, D., Locke, M., Golden, B.R., Irby, T., Steinriede, R., Spencer, G.D., Mills, B.E., & Wood, W. (2020) Conservation Soybean Production Systems in the Mid-Southern USA: II. Replacing Subsoiling with Cover Crops. Crop, Forage & Turfgrass Management. http://dx.doi.org/10.1002/cft2.20058

Denton, S.D., Dodds, D.M., Krutz, L.J., Varco, J.J., Gore, J., Mills, B.E., & Raper, T.B. (2021). Impact of Cover Crop Species on Soil Physical Properties, Cotton Yield, and Profitability. Journal of Cotton Science. 25:68-78.

Spencer, G.D., Krutz, L.J., Locke, M., Gholson, D., Bryant, C., Mills, B.E., Henry, W., & Golden, B. (2021) Corn productivity and profitability in raised, stale seedbed systems with and without cover crops. Crop, Forage & Turfgrass Managementhttp://dx.doi.org/10.1002/cft2.20142

Mills, Brian. “Profitability of Cover Cropping“. Southern Ag Today 2(32.3). August 3, 2022. Permalink

Estimating the Cost of a Grain Bagging System

Estimating the Cost of a Grain Bagging System

Storage can be a valuable risk management and marketing tool for Southern corn producers. Storage allows producers to reduce harvest delays, avoid seasonal price lows, expand the marketing window, and harvest grain at higher moisture – if drying or aeration is available. There are two main options to store grain: grain bins or grain bags. This article provides an overview of the benefits, ownership costs, and operating costs for a grain bagging system.

Benefits

Labor continues to be a major challenge for agricultural producers. One of the primary benefits to using a bag system is the ability to reduce harvest labor requirements, particularly trucking. Storing corn at the edge of the field reduces the number of trucks required to keep combines running, avoids long lines at elevators and barge points, and distributes hauling to terminal markets during times of the year when labor is more readily available. Additionally, the ability to harvest a crop quickly reduces the risk of losses due to adverse weather. Extending the marketing interval allows producers to benefit from post-harvest price rallies. For example, in Memphis Tennessee, the ten-year average corn price was 70 cents higher in March/April compared to the harvest low. Mid-south producers that have cotton in their crop rotation can use bagging systems to modify annual storage availability, thus avoiding capital investment in permanent grain storage infrastructure when planted acreage varies year-to-year.

Ownership Costs

A bagging system requires capital investment in a loader, unloader, and tractor. This equipment is in addition to grain carts/trucks to transport grain from the combine to bagger. Purchase prices vary however many loaders can be obtained for less than $50,000. Bag unloaders will also cost around $50,000. Most operations will have access to a tractor that can be utilized in a bagging system, however this cost should also be included. Cost of ownership will vary for each operation; however, cost estimates should include capital recovery (depreciation + interest), taxes, insurance, and housing (TIH). For example, assuming an interest rate of 6.5% and TIH of 2.0% of the equipment value, estimated ownership costs for 100,000 bushels of storage is approximately 14 cents/bushel. Storing more bushels will distribute fixed costs lowering the ownership cost per bushel. 

Operating Costs

Operating costs vary by system; however, producers should consider site preparation, purchase price of storage bags, labor (loading, unloading, and monitoring), insecticides, sensors, bag disposal, and machinery expenses (fuel, repair and maintenance). Additionally, producers should account for potential storage loss/risk. Wildlife damage, insect and rodent infestation, weather, and damage from humans present a risk for storage losses. Estimated operating costs based on the assumptions below in Table 1 are 17-22 cents per bushel. Costs are highly variable so producers are encouraged to estimate costs based on operation specific variables and assumptions.

Bagging systems may be a cost-effective method to store grain for Mid-south producers. Producers are encouraged to weigh the advantages and disadvantages of permanent storage (bin) and temporary storage (bag) systems to determine which system is best for their operation. Additionally, comparing ownership and operating costs with seasonal corn prices in your area will assist in determining if investment in storage is financially beneficial for your operation.

Table 1. Example: Operating Cost Assumptions

ValueUnit
Bag Size16,000bu
Bag Price$1,100$/bag
Labor Rate$22,000$/hr
Diesel Price$6.00$/gallon
Interest Rate (Operating)6.5%%
Repair and Maintenance5.0%% of purchase price

Resources:

Estimating Costs for Grain Storage: Bags and Bins- https://extension.tennessee.edu/publications/Documents/W1060.pdf

Spreadsheet: https://arec.tennessee.edu/grain-bag-and-bin-storage/

Duncan, Hence, and S. Aaron Smith. “Estimating the Cost of a Grain Bagging System“. Southern Ag Today 2(31.3). July 27, 2022. Permalink

Current Non-Real Estate Farm Debt

Current Non-Real Estate Farm Debt

Agricultural producers are currently having to manage numerous factors, including drought and rising input costs. In addition, the ag sector will see interest rates continue to increase as the Federal Reserve tries to reduce inflation. As the general economy and ag economy moves into a high interest rate environment, understanding agriculture debt becomes important. The majority of loans originate from the farm credit system or commercial banks. Every commercial bank in the U.S. submits quarterly performance reports. These reports include the number of agricultural loans and the status (on time or late) of the loans. Figure 1 displays the total loan volume, and total loan volume for all three late type volumes (30-89 days late, 90+ days late, Non-Accrual) for the last five quarters. The totals are for all the states in the Southern Region. 

Through the first quarter of 2022, loans that are non-accrual and 90+ days late have maintained their trend. Non-accrual loan volume continued to decrease, while 90+ days late loans stayed relatively steady. These are positive indications that delinquent loan debt hasn’t increased. Total loan volume is approximately $1 billion higher than a year ago. This is expected as input costs have increased. Total debt volume for loans that are 30-89 days late continued to increase. This increase was expected due to the seasonality of these loans. That is, the highest volume of late loans is seen annually in Q1 and the lowest annually in Q3. Interestingly, the total volume of these loans (30-89 days late) is $8 million lower than in 2021. This also is a positive sign that loans stayed current over the past year, even with the increased input costs.   

As we move into a high interest rate environment, the current status of commercial ag debt has some positivity. But this positivity could reverse for several reasons (i.e., drought continuation in areas). In the coming months, it is crucial that producers are efficient with their capital consumption and are mindful of their debt structure. 

Martinez, Charley, and Haylee Ferguson . “Current Non-Real Estate Farm Debt“. Southern Ag Today 2(30.3). July 20, 2022. Permalink

Careful on the Curves

Careful on the Curves

Interest rates and inflation are closely linked phenomena.  As we discussed last week, expectations about inflation can provide insights to the direction of our overall economy.  The yield curve is another place where the market interest rates reveal a sense of what the market expects with regard to inflation and future economic conditions.

The yield curve is simply the structure of market interest rates for instruments (treasury bills or corporate bonds) with varying maturity dates.  Ordinarily, the yield curve is expected to slope upwards: that is, as maturity length on a financial instrument increases, the yield on that instrument increases as well, reflecting the normal expectation that investors have to receive a higher yield to commit to longer-maturing investments.  In addition to the higher real interest and risk premiums associated with longer-maturing investments, expectations about inflation are embedded in the relationship between time to maturity and yield. 

A steep yield curve (longer term rates are much higher than shorter term rates) can suggest the market expects higher inflation, economic growth, and/or volatility.  A flatter curve (little difference between short and long term rates) can signal lower inflation expectations and more stability.  Sometimes the yield curve inverts or slopes downward, with yields declining as maturity increases.  An inverted yield curve signals expectations of deflation and is a fairly reliable indicator of an impending recession.  

Figure 1 shows the yield curve for Treasury bills/notes with maturities from one month to 10 years for the last day of April 2022 compared yield curves from February 2020 and November 2007. 

Figure 1.  Treasury Yield by Maturity: Selected Daily Yields, 2007 to 2022

Data Source: U.S. Department of the Treasury.  

Clearly, in the recessionary environments of 2007 and 2020, the yield on long-maturity instruments was much lower relative to short-maturity instruments than would generally be expected.

Recent changes in the shape of the yield curve trace out the development of inflation expectations in the post pandemic period.  Figure 2 shows the daily yield curve in two-month intervals beginning with the last trading day in August 2021. 

Figure 2.  Treasury Yield by Maturity: Selected Daily Yields, 2021 to 2022

Data Source: U.S. Department of the Treasury.  

Not only have rates increased since last summer, but the slope of the yield curve has changed.  For maturities ranging from 1-month to 2-years, the curve has grown considerably more steep as of June 2022, likely indicating expecations of a continued struggle with inflation in the near term.  However, for maturities over the range of 1-year to 10-years, the curve has become flatter (compare October 2021 with June 2022).  The yield curve has not inverted as, for example, in 2007, which would suggest strong expectations of an imminent recession.  However, the longer term portion of the curve becoming flatter suggests an outlook of at least a slowdown in the economy that eventually gets inflation under control. 

Klose, Steven and John D. Anderson. “Careful on the Curves“. Southern Ag Today 2(29.3). July 13, 2022. Permalink