Is it Time to Sell Some 2017 Soybeans

by Todd Hubbs

January 23, 2017 - Soybean prices increased dramatically over the week ending January 20 on reduced production estimates for the U.S. and increased uncertainty in the prospects for South American soybean production. Old crop soybean cash bid prices in central Illinois ended the week at approximately $10.40. New crop cash bid prices for harvest in central Illinois range between $9.90 and $9.94. The 2016–17 marketing year for soybeans, as it is currently shaping up, has a striking resemblance to 2015–16 marketing year expectations at this time last year. Despite the positive price outcome in 2016, a prudent soybean marketing plan for this year may possess some selling of 2017 soybeans in this price rally.

Currently, soybean production estimates for the United States in 2016 of 4.307 billion bushels is down one percent from the November forecast of 4.36 billion bushels but is still a record level of production. December 1 soybean stocks of 2.895 billion bushels came in 40 million bushels below trade expectations and indicated strong demand. The stocks estimate for the first quarter of the marketing year indicates a disappearance of 1.61 billion bushels. First quarter 2016–17 marketing year estimates of exports and crush came in at 932.5 million bushels and 484.9 million bushels respectively. Both numbers indicated substantial increases from last marketing year.

At this time last year, expectations for an increase in the number of acres planted in soybeans during 2016 and a potential record South American crop set up a scenario of significant downside risk for prices through the marketing year. The USDA forecasted ending stocks of U.S. soybeans at 440 million bushels on January 12, 2016. U.S. exports were forecast to be 153 million bushels less than the previous marketing year. Brazilian and Argentinian production ended up to be 136 million bushels smaller than expected in the January forecast and the substantial increase in planted acres did not materialize. U.S. exports ended the marketing year 245 million bushels higher than projected in January 2016, and ending stocks came in at 197 million bushels. Soybean cash prices reflected these events as the monthly average price for central Illinois increased from $8.64 in the first seven months of the marketing year to $10.26 in the last five months.

Currently, the WASDE report forecasts soybean crush and exports for the U.S. at 1.93 and 2.05 billion bushels respectively. At 420 million bushels, the ending stocks forecast is the largest since the 2006–07 marketing year. Projections of the U.S. 2016–17 marketing year average price place it in a range of $9.00 - $10.00, which positions current harvest cash bid prices in the upper end of this range. Many market observers believe a dramatic increase in soybean acreage will materialize in 2017. Estimates see the possibility of soybean acreage eclipsing corn acreage in 2017 due to the lower cost of production and large price differential currently in place with corn. The January 12 Winter Wheat Seedings report offered some support to this notion. Winter wheat plantings of 32.38 million acres are down 3.75 million acres from the previous year. This is the lowest level of winter wheat planting since 1909, and one could expect some of those acres switching to soybeans.

Forecasts by the USDA of Argentine soybean production currently sit at 2.09 billion bushels for the 2017 crop year. Numerous reports out of Argentina indicate the substantial flooding in the region may reduce production by 100 to 150 million bushels. Argentina soybean export forecasts stayed constant at 330 million bushels while import levels increased by 25.7 million bushels. Alternatively, Brazilian soybean production forecast increased by 73.48 million bushels over the December forecast to 3.79 billion bushels. The expected increase in soybean production levels led to a 40 million bushels increase in the forecast for Brazilian soybean exports. Taken together, USDA forecasts 5.91 billion bushels of soybean production and 2.51 billion bushels of soybeans exports from Brazil and Argentina over the marketing year. Currently, a realization of substantial production losses in Brazil and Argentina are necessary for total production in the two countries to fall to the 5.63 billion bushels seen in 2016.

While possessing similarities to last marketing year, the possibility of a strong downward price movement through 2017 is substantial. Despite strong soybean demand and production issues in South America, the possibility of a large increase in soybean acreage planted and the continuation of excellent soybean yields hang over the rest of this year. The March 31 prospective plantings report will provide the next major indication for soybean acreage for 2017. With so much production uncertainty in the U.S. and South America over the next few months, the current bids for 2017 harvest delivery provide a pricing opportunity for locking in prices high in the expected marketing year average price forecast. If producers are considering increasing soybean acreage in 2017, the current prices offer an opportunity, at a minimum, to price soybeans on the expanded acreage.

USDA January Reports | an interview with Todd Hubbs

University of Illinois commodity grains analysts Todd Hubbs discusses the January 12th USDA reports including Crop Production, Grain Stocks, and WASDE.

New FarmDoc Tool Assesses Performance of Crop Insurance

by Gary Schnitkey
original source FarmDocDaily

A new “Product Performance” section has been added to the 2017 Crop Insurance Decision Tool. By using this section, users can examine per acre premiums and payments from alternative crop insurance products from 1995 to 2015, thereby allowing users to gain a feel for the historical performance of crop insurance products. For corn, users will notice that the 2012 drought had large impacts on crop insurance performance.

User Selections

From the 2017 Crop Insurance Decision Tool, users will select “product performance” from the menu and make the following selections (see Figure 1):

1. State. Any state in the nation can be selected.
2. County. Any county can be selected.
3. Crop. Information is available for corn, soybeans, and wheat.
4. Product. Data are available for Revenue Protection (RP), Yield Protection (YP), RP with the harvest price exclusion (RPwHPE), Area Revenue Protection (ARP), Area Yield Protection (AYP), and ARP with harvest price exclusion (ARPwHPE).
5. Coverage level. Choices are each available coverage level (50 to 85% for RP) and an “all” selection.

Figure 1 shows a Logan County, Illinois example where corn is selected. RP performance will be given for all coverage levels, meaning that data over the 50% to 85% coverage levels are averaged and reported.




Product Performance Output

Figure 2 shows output from selections in Figure 1. All data comes from Summary of Business, which is maintained by the Risk Management Agency (RMA). The 2017 Crop Insurance Decision Tool provides results from 1995 to 2015. Yearly performance rows will be blank if no use of the chosen product occurred during the year.




RP along with YP and RPwHPE came into existence in 2011. As a result, RP performance is reported from 2011 onward. Before 2011, Crop Revenue Coverage (CRC) and Revenue Assurance (RA) plans where in use. RP, CRC, and RA all are revenue insurances that allow guarantees to increase if harvest price is higher than projected price (RA had an option that excluded the guarantee increase, but this option was used rarely). Therefore, CRC and RA performance are reported for years prior to 2011.

The “product performance” section first reports acres insured using the selected combination. RP type products were first introduced in 1997 and 7,916 acres were insured in Logan County (see Figure 2). Use grew to 125,359 acres in 2014, decreasing slightly to 121,619 acres in 2015. RP is now the most used crop insurance product, having over 90% use in many counties (see farmdoc daily, January 4, 2017).

Next, the section reports premiums in three columns: total, subsidy, and farmer-paid premium. The subsidy represents the premium paid by the Federal government as specified by subsidy schedules written into statute. As its name implies, “farmer-paid premium” is paid by the farmer. Farmer-paid premium plus subsidy equals total premium. In Logan County, total premium was $40.56 per acre in 2015 (see Figure 2). Of the total premium, $19.79 per acre was subsidy and $20.77 per acre was farmer-paid premium.

Also given are per acre insurance payments. These are payments to farmers resulting from claims to crop insurance products. In 2015, insurance payments on RP products averaged $32.95 per acre.
The final two columns provide an evaluation of the crop insurance products. Insurance payments minus farmer-paid premium show insurance payments received from the products relative to farmer-paid premium. Positive values mean that insurance payments were larger than farmer-paid premium.

In high payment years, payments minus farmer-paid premium will be positive. For example, insurance payments were high in the 2012 drought year, resulting in payments minus farmer-paid premium of $302.26. In low loss years, payments minus farmer-paid premium will be negative. From 1997 to 2015, negative values occurred 13 out of 19 years. From 1995 to 2015, farmers received an average of $10.38 more in premium than in payments (see Figure 2). From 2006 to 2015, farmers received $22.55 per acre more in payments than they paid in premium (see Figure 2).

The loss ratio equals insurance payments divided by total premiums. In 2015, the loss ratio was .81. Loss ratios less than 1.0 mean that insurance payments were less than total premium. Conversely, loss ratios higher than 1.0 indicate that payments were greater than premium. Over time, RMA’s goal is to maintain a loss ratio near but below 1.0.

Interpretation

Past performance will not be entirely reflective of how the products will perform in the future. RMA makes adjustments to premiums over time. For example, continuing high payments on products will result in increasing premiums and vice versa. Moreover, RMA continually conducts studies of its rating procedures, which can cause premium changes. As a result, current premiums will vary from historical premiums even given identical conditions. As a result, future performance will not match historical performance.

Moreover, values are averages across many farms in a county. In 2015, average RP premium in Logan County were $20.77 per acre. Some farmers paid higher premiums depending on crop insurance choices and historical yields, and vice versa. The average RP payment in 2015 was $32.95 per acre. Again, payments vary across farms in the county. Some farmers did not receive payments in 2015 while other farms received payments much larger than $32.95 per acre.

Importance of 2012 in Illinois

The drought year of 2012 has a large impact on crop insurance performance. In 2012, the loss ratio for RP in Logan County was 5.84, much higher than the .89 average from 2006–2015 (see Figure 2). If 2012, had not occurred, the .89 average loss ratio for the 2006–2015 would have decreased to .46.

Payments minus farmer-paid premium averaged $22.55 per acre from 2006 to 2015. Without 2012 included, payments minus premium averaged -$8.53 per acre.

The drought has similar impacts on many Illinois counties. To illustrate, Panel A of Figure 3 shows average RP loss ratios for corn in each Illinois county for 2006 to 2015. The 2012 drought particularly impacted farms in southern and eastern Illinois, causing many counties to have loss ratios above 1.0. Panel B shows loss ratios for 2006–2015 with 2012 excluded. Without 2012, most counties had loss ratios well below 1.0.




These comparisons point out the importance of “extreme” years on overall crop insurance performance. Severe droughts like 2012 occur in the Midwest occasionally, with much debate concerning their frequency of droughts. The last drought of comparable magnitude to 2012 happened in 1988, 25 years previous to 2012, suggesting infrequent droughts. However, two additional, large yield shortfalls occurred in the 1980s: 1980 and 1983. Three severe events in a decade give a very different perspective on the frequency of droughts than the more recent history of the passing of 25 years. Which represents the future the best is an open question, with a blend of the 1980s experience and the recent more moderate losses likely to be the most appropriate answer.

Summary

The Product Performance section allows users to examine historical performance of crop insurance plans, thereby providing intuitions on the frequency of payments, the size of payments, and the net costs of the plans. While evaluating past performance is useful, future performance will not necessarily match historical performance as RMA is adjusting premiums over time. Moreover, the frequency of large-scale droughts has a large impact on insurance performance. Whether there are 0, 1, or 2 drought years in the next ten will dramatically influence crop insurance performance.

Revenue Protection (RP) Use on Corn in the Midwest

by Gary Schnitkey

Revenue Protection (RP) is the most used crop insurance plan for corn. Over time, RP use has grown to over 90% of corn acres insured in many counties in the corn belt (farmdoc daily, December 13, 2016). As illustrated by maps in this article, farmers in the corn belt typically select 80 and 85% coverage levels when using RP. Detailed statistics on a county basis are available from the “product use” section of the 2017 Crop Insurance Decision Tool). Overall, use suggests farmers prefer revenue insurances that allow guarantees to increase if harvest prices are above projected prices. Use of high coverage levels suggests farmers value protection offered by crop insurance.

RP Use

According to 2016 Summary of Business statistics from the Risk Management Agency (RMA), RP use on corn acres is over 95% in most counties around the western corn-belt. For example, over 95% use predominates in North Dakota, South Dakota, Minnesota, Kansas, Iowa, and Missouri (see Figure 1).




Many counties in Illinois, Indiana, and Ohio have lower RP use than in the western corn-belt (see Figure 1). In these eastern corn-belt counties, higher use of Area Risk Protection (ARP) occurs. RP and ARP are similar in that both are revenue insurances whose guarantees increase if harvest prices are above the projected prices. ARP uses county yields in determining payments while RP uses farm yields. In eastern corn-belt counties, the sum of RP and ARP use often is above 90%.

Two counties illustrate RP and ARP use in the eastern corn-belt. Sangamon County is in west-central Illinois and has 66% of its corn acres insured using RP, 32% using ARP, with the sum of RP and ARP use being 98%. Noble County is in the northeast Indiana. In Noble County, RP use is 43%, ARP use is 51%, and the sum of RP and ARP use is 94%.

Some counties outside the corn belt have more use of Yield Protection (YP) insurance, a yield insurance. For example, higher YP use occurs along the Mississippi River in Mississippi, Arkansas, and Louisiana (see Figure 1). Take Bolivar County, Mississippi as an example. RP is used to insure 71% while YP is used on 29% of the acres. Besides the Mississippi Delta, more use of YP also occurs in:

Counties in the middle part of Michigan, Western New York counties, Texas panhandle counties (see Figure 1). By far, RP is the plan most used to insure corn. In some areas, predominately in the eastern corn belt, ARP has significant use, with RP and ARP being used on over 90% of corn acres. In areas outside the corn belt, RP use often is above 50% of acres, but YP has a higher percentage of acres than in the corn belt.

RP Coverage Levels

In most counties, RP’s coverage levels range from 50% to 85% coverage levels in 5% increment. Figure 2 shows a weighted average coverage level for RP products in 2016. To illustrate weighted average coverage level calculations, suppose a county has 60% RP acres insured using an 80% coverage level and 40% using an 85% coverage level. The weighted average coverage level for this county is 82% (.6 use x .80 coverage level + .4 use x .85 coverage level).




Average coverage levels for RP in corn is over 80% in southern Minnesota, the northern two-thirds of Iowa, Illinois, and Indiana, and western Ohio (see Figure 2). Counties around this core of the corn belt typically have average coverage levels between 75% and 80%. Average coverage levels then decrease to between 70% and 75% the further away from the central core of the corn belt.

County Level Detail

More detail on crop insurance use is available from the 2017 Crop Insurance Decision Tool, a Microsoft Excel spreadsheet available for download from farmdoc. In the “product use” section, users make a state, county, and crop selection. Then, product use details are given.

Figure 3 shows an example of output for corn in Sangamon County, Illinois. In 2016, 197,535 acres of corn were insured. Of the acres insured, 66.3% of acres insured using RP, 32.0% used ARP, and 1.0% used YP. RP with the harvest price exclusion (RPwHPE) and Area Yield Protection (AYP) had much smaller percentages of acres. Within RP use, 47.9% of acres were insured using an 85% coverage level, 14.7% at an 80% coverage level, and 3.7% at lower coverage levels.




Figure 3 shows these use statistics for 2016. Users can change the year to any year from 1995 onward. The product use section of the 2017 Crop Insurance Decision Tool also includes graphs detailing crop insurance use over time.

Commentary

RMA offers different types of insurances including yield insurances, revenue insurances with harvest price exclusion, and revenue insurances with guarantee increase provisions. RP and ARP are both revenue insurances with guarantee increase provisions. High use of RP and ARP suggest that farmers prefer revenue insurances over yield insurances. Moreover, high use suggests that farmers value the guarantee increase associated with RP and ARP.

In the heart of the corn-belt, farmers typically purchase RP at high coverage levels. Weighted average coverage levels are above 80% in the center of the corn-belt, indicating that most acres are insured using either the 80% and 85% coverage levels. High coverage levels suggest that farmers desire risk protection offered by crop insurance.