Still Uncertainty About New Crop Corn

The rain fall throughout the corn belt has built a great deal of uncertainty around the size of this year’s corn crop as predicted by the United States Department of Agriculture says University of Illinois Ag Economist Darrel Good. He thinks the amount of this “uncertainty” is more than usually the case.

Crescent City, Illinois corn field July 15, 2015

USDA released projections for the 2015–16 corn marketing year July 10th. The next update is due August 12th. The new crop corn marketing-year ending stocks of corn are currently expected to be 172 million bushels smaller, and the average farm price is expected to be $0.25 higher, than projected a month earlier. Those are the numbers in question. Both are related to the size of this year’s crop, and the ILLINOIS agricultural economist has some thoughts on the “unknowns” as it relates to risk and price.

Quote Summary - In years with substantial production uncertainty, prices tend to be above the subsequent marketing year average during the growing season, offering producers the opportunity to forward price a portion of the crop. That pattern seems to be unfolding this year. New crop corn prices are currently above both the spring price for crop revenue insurance and above the upper end of the range of the USDA’s marketing year average price projection. Still, prices could trade in a relatively wide range over the next 10 weeks. Pricing decisions remain difficult for producers, particularly for those with substantial production uncertainty.

This price risk for corn, says Darrel Good can be mitigated with a combination of incremental sales at higher prices and options-strategies that provide a floor above the crop revenue price of $4.15 for December futures.

The Consequences of a Foot of Rain in June

The rainfall in May and June has put the corn crop in a difficult position this growing season. Late in June the corn crop in eastern Illinois north of Interstate 74 was under water. It looked bad, really bad. Oh there was some of it that looked pretty good, but not much. Things across the border in Indiana aren’t much better, and neither, apparently, is a large part of Missouri and southern Illinois. The crop has just gotten way to much water says University of Illinois Extension Agronomist Emerson Nafziger.

Quote Summary - This is one of those times when the consequences of having a foot of rain in June is not something we would want to ever have and this year it is going to have a serious affect on the crop.

There are two primary concerns related to corn. The moisture is a great haven for the development of disease. The other concern, and this may be more important moving through July and August, is that the root system of the crop hasn’t had any need to develop…not just the roots of the corn under water, but of the whole corn crop from Missouri to Ohio.

The closer we get to pollination the slower this root regrowth is and the less potential there is to recover a healthy root system on this crop say Nafziger,

This could come back to hurt the crop later in the season because it won’t be very resilient during periods of dry weather. A crop in the first week of August cannot grow its root system deeper. It does not have that capability.

If the system has been damaged, even if there is nitrogen and water left deep in the soil, it may not be able to access it and produce higher yields. There in lies a new concern for the water logged corn crop. It looks now as if there may be a change in the weather pattern. Mike Tannura of tStorm Weather in Chicago has been talking about this on the radio.

Quote Summary - A hot area of upper level high pressure is going to drive the U.S. weather pattern over the next couple of weeks and probably beyond that. It’s location is key. Right now we think it will center somewhere near Nebraska / Kansas and on to the west, which would just keep things warm, but not too warm. Any deviation in that system would lead to dramatic changes in weather forecast over the next few weeks.

So, too much rain has stressed the corn crop from Missouri to Ohio. It’s about to pollinate, and then begin grain fill. Even if the weather only turns hot, it could be a compounding problem.

Higher Feed Costs Could Mean Pork Industry Losses

Weather damaged corn and soybean fields are also harmful to hog producers. Todd Gleason has more on the reason why.



Rising feed prices mean higher production costs for the pork industry. Recent higher corn and soybean meal prices have increased anticipated hog costs by about $10 per head says a Purdue University Extension ag economist. These higher feed costs shift the pork industry outlook from one of modest profits to losses says Chris Hurt of about $6 per head over the coming 12 months.

Rising feed costs is a new concern for producers. December 2015 corn futures, as an example, rose from about $3.80 on June 24 to about $4.30 on July 6. This increases the cost of hog production by around $2.25 per live hundredweight. In a similar time period, meal futures have risen about $40 PER ton, which increases cost by about $1.25 per live hundredweight. So, recent increases in corn and soybean meal prices have increased costs by about $3.50 per live hundredweight, or by nearly $10 per hog.

Weather is a primary driver of feed prices right now so no one knows if feed costs will get much higher or more moderate from here.

In June it costs about $50 to produce a hundred pounds of pork says Chris Hurt. With current higher feed prices, costs are expected to be closer to $53.50 for the last-half of 2015 and the first-half of 2016. He cautions, of course, that feed prices can change considerably depending on weather for the rest of the growing season. Right now it means pork producers will likely breakeven this quarter, and lose about $18 a head on those hogs marketed in October, November and December.

Hog prices averaged about $48 in the first quarter of this year, with an estimated loss of $11 per head. Second quarter prices were near $56, for an estimated profit of $14 per head. Third quarter prices are expected to average about $53 per hundredweight, which is near breakeven. The final quarter this year is expected to see prices drop to near $47 with losses estimated at $18 per head.

For all of 2015, losses are expected to average about $4 per head. Recent feed price increases are the primary reason the 2015 outlook has shifted toward expected losses. What is the outlook for 2016? Hog prices are expected to be around $47 per live hundredweight in the first quarter of 2016 and rise seasonally to $54 in the second quarter. Given current corn and meal prices, this would mean an estimated loss of about $17 per head in the first quarter and a profit of $10 per head in the second quarter.

Here’s how Chris Hurt puts all this data in perspective.

• First, he says pork producers and their allied industries are to be commended for dealing with the PED virus in late–2013 and 2014.
• Secondly, the industry is to be saluted for only modestly expanding the breeding herd after record high profits in 2014.
• Finally, Hurt says the higher price of feed should remind the industry to be cautious about expansion, and to follow through on intentions to reduce farrowings this summer and fall.

Farmers Overwhelmingly Choose ARC County

Original Article

The U.S. Department of Agriculture, Farm Service Agency (USDA, FSA) recently released enrollment data on commodity program choices made under the 2014 Farm Bill. This article summarizes how farmers split program acres between Agricultural Risk Coverage - County Option (ARC-CO), ARC - Individual Option (ARC-IC), and Price Loss Coverage (PLC). Overall, ARC-CO was the overwhelming choice. ARC-CO was elected on 76% of program acres. PLC was next with 23% of acres, followed by ARC-IC with less than 1% of acres. There were differences in program choices across crops, as discussed below.

Program Choices

Farmers choose ARC-CO for 97% of soybean base acres and 94% for corn base acres (see Figure 1). Analysis indicated that expected payment from ARC-CO were larger than from PLC for both corn and soybeans (see farmdoc daily January 27, 2015 for more detail), suggesting high use of ARC-CO. However, the fact that ARC-CO accounted for over 90% of program acres for both corn and soybeans is astonishing. The large share suggests:

• Farmers did not split decisions between ARC-CO and PLC. One strategy was to choose ARC-CO on some farms and PLC on other farms, splitting protection between a revenue program whose guarantee will change over time and a target price program with a fixed reference price. Most farmers did not follow the strategy of splitting choices.

• Farmers raising corn and soybeans placed little value on having the option to purchase Supplemental Coverage Option (SCO). SCO is a county-level crop insurance program that rides on top of individual plans. SCO is only available if PLC was chosen.

• When making decisions, the default was PLC. Farmers had to make an active decision to sign up for ARC-CO. Most farmers raising corn and soybeans made an active decision to choose ARC-CO.

• The large percentages suggest that farmers raising corn and soybeans were comfortable with revenue-based programs. Some questioned this because ACRE - a revenue program available in the 2008 Farm Bill that preceded ARC-CO - was chosen by few farmers. The decision to use ARC-CO also mirrors crop insurance decisions made by corn and soybean farmers, where farmers overwhelmingly choose to use revenue insurances.

  
  
  On corn, farmers used ACRE on 8.1% of base acres in 2013. Hence, revenue program use on corn increased from 8.1% in 2013 up to 94% after 2014 program choices. There are a number of reasons that could have caused this change:

• To enroll in ACRE, an individual had to give up 20% of direct payments and loan rates were reduced by 30%. Since direct payments were eliminate and loan rates were the same no matter the choice in the 2014 Farm Bill, this tradeoff did not exist for ARC-CO.

• ACRE was more complicated than ARC-CO, especially as ACRE required two triggers to be met before a farmer could receive payments. Farmers had to provide yields to FSA when enrolling in ACRE. This was not the case for ARC-CO.

• Given the elimination of direct payments and the choices posed in the 2014 Farm Bill, farmers likely gave the choices more consideration in 2014.

• Price expectations were different in 2014 than when ACRE decisions were made. There also are expectations for larger up front ARC-CO payments.

At the other end of the spectrum, near 100% of peanut and long grain rice base acres were enrolled in PLC (see Figure 1). These large percentages are not a surprise as studies suggested that PLC would make larger payments than ARC-CO for these crops (see farmdoc daily January 27, 2015 for more detail). Reference prices for these crops are well above market-level prices, leading peanuts and rice farmers to overwhelmingly choose PLC.

Perhaps the surprise in rice is the fact that ARC-CO was elected for a relatively high percentage of acres for Japonica rice. ARC-CO was selected on 34% of acres, ARC-IC was selected on 4%, and PLC for 62%. Note that yield and price dynamics are different for japonica rice than for long grain prices and Japonica’s reference price was set at 115% of the long and medium grain reference price. Also, all Japonica rice base acres are located in California, and the drought situation may be playing a role in program choice.

Wheat choices were split relatively evenly between ARC and PLC (see Figure 1). ARC-CO was used on 56% of base cases, ARC-IC on 2%, and PLC on 42%. Studies of expected payments suggested that ARC-CO and PLC were near one another, potentially leading to the relatively even split.

ARC-IC was used on the fewest program acres. Crops having the most use of ARC-IC include large chickpeas (11% of base acres), small chickpeas (9%), lentils (7%), dry peas (6%), mustard (6%), temperate japonica rice (4%), barley (4%), and safflower (3%). There is a geographical dimension to where these crops are raised, with most of the states being located in the northwest. Oregon had the highest share of base acres enrolled in ARC-IC, with 12% of base acres enrolled in ARC-IC. Oregon was followed by Montana (9%), Washington (4%), Idaho (4%), Wyoming (2%), Minnesota (2%), South Dakota (2%), North Dakota (1%), and Colorado (1%).

Geographic Distribution

Overall there was a geographical pattern to program choice, as would be indicated by signup by crop. Figure 2 shows states giving percentages of base acres enrolled in PLC. In general, PLC was used more in states in the south and west. Highest PLC use occurred in Arizona (95% of program acres), New Mexico (87%), Texas (84%), and Utah (82%). PLC use in Corn-Belt states were small. For example, PLC was used on 2% of program acres in Iowa, 3% in Illinois, and 2% in Indiana.

Summary

To a large extent, program choices followed predictions made prior to sign-up. Two facts, however, stand out. First, ARC-CO was the overwhelming program choice across program crops, particularly on corn and soybean acres. This suggests that farmers will use revenue-based programs, particularly those of relatively straight-forward design. The second was the relatively small use of ARC-IC. While ARC-IC has the desirable feature that it protects farm yields, ARC-IC also is a more complicated program relative to ARC-CO and PLC, combining all crops when determining payments and requiring farmers to report yields to be FSA. These complications may result in its unpopularity.