Updated Prevented Planting Decisions & Related Government Payments Info (KSU Ag Economics)

An Update on Prevented Planting Decisions and Related Government Payments

Monte Vandeveer (montev@ksu.edu) – K‐State Department of Ag Economics 

Daniel O’Brien (dobrien@ksu.edu) – K‐State Department of Ag Economics

Address of Article on the KSU AgManager Website:

http://www.agmanager.info/crop-insurance/risk-management-strategies

May 2019

 

     Last week we posted an article on KSU’s AgManager.info website which discussed Prevented Planting rules and options for producers facing wet planting conditions for their insured corn crop. A number of new developments, particularly the May 23rd announcement of additional Market Facilitation Program payments, call for an updated discussion of farmer options.

Prevented Planting Dates and Deadlines

     To review, many Kansas producers who insured their intended 2019 corn acres are nearing or already past the “Final Planting Date” (FPD) deadline, which marks the latest date for which they can plant their corn crop and still obtain the full level of crop insurance coverage. The FPD was May 15 for southeast Kansas, May 25 for central and northeast Kansas, and May 31 for western Kansas. Refer again to the map in last week’s article to see which zone includes your county.

     Once the FPD passes, producers enter what is called the “Late Planting Period” (LPP), during which corn may still be planted, but the level of insurance coverage will decline day by day. In particular, the production guarantee (= APH yield x % guarantee level) will decline 1 percent for each day after the FPD that a particular acre gets planted.

     An example: consider a non‐irrigated corn producer who has an APH yield of 120 bushels per acre and has chosen the 75% coverage level. His/her production guarantee for acres planted up through the FPD is 90 bushels per acre (= 120 bu/a APH x 75% coverage). For acres planted, say, 10 days into the LPP, the production guarantee is reduced by 10 percent (= 90 bu/a x 90% = 81 bu/a).

    Producers who DO plant corn during the LPP must keep a running tally of which acres are planted day by day, since each day’s planted acreage will have a different production guarantee.

     For corn in Kansas, the LPP extends another 20 days after the FPD. This means the final day of the LPP is June 4 for southeast Kansas, June 14 for central and northeast Kansas, and June 20 for western Kansas. If insurable causes of loss continue to delay planting past the LPP, corn may still be planted and insured after the LPP ends. Acres planted at this point would receive a production guarantee of 55 percent of the original APH yield. Our example producer above would thus have a production guarantee of 120 bu/a x 55% = 66 bu/a.

Announcement of Market Facilitation Program payments

     On May 23, 2019, the Trump Administration announced it would provide additional Market Facilitation Program (MFP) payments for agricultural producers affected by lost markets in the ongoing trade disputes with China and other countries. These direct payments to farmers are expected to total $14.5 billion dollars and will be provided for producers of more than 20 covered commodities. Many details have yet to be released, but the May 23 announcement did include some important bits of information.

     Most importantly, affected producers will receive one per‐acre payment based on a single county rate, rather than separate rates by crop as done under the 2018 MFP payments. This single county rate will be based on planting patterns of the affected crops in the county, reflecting the mix of crops seen there. The USDA statement points out that, those per acre payments are not dependent on which of those crops are planted in 2019, and therefore will not distort planting decisions. Moreover, total payment‐eligible plantings cannot exceed total 2018 plantings.”

     A crucial change in the 2019 approach is the use of a single payment rate for a county, rather than the per‐bushel payments on actual crop production used in 2018. The 2018 program provided $1.65/bu for soybeans, $0.86/bu for grain sorghum, $0.14/bu for wheat, and $0.01/bu for corn, based on bushels actually produced in that crop year. One of USDA’s goals in 2019 clearly was to not favor planting of one crop over another.

     In our article last week, we assumed an MFP payment would be based on the 2018 approach, where soybeans and grain sorghum might receive much larger payments than corn. Those calculations indicated that an MFP soybean payment of about $1.50/bu (slightly less than the 2018 payment rate of $1.65/bu) could be enough to tilt the planting decision toward soybeans. However, the single payment rate approach for 2019 payments should not favor the planting of one crop over another.

     But it must be noted that the MFP payments will still require actual 2019 planting. That is, acres which do not eventually get planted to any crop will not be eligible for the MFP payment. This favors the planting of something (corn, soybeans, grain sorghum, or some other eligible crop) over nothing.

     Planting nothing would allow the insured producer to collect the full corn PP payment from insurance, which should equal 55% of the original production guarantee. For our example farmer with a 120 bu/a APH yield, a 75% coverage level, and this year’s Projected Price of $4.00/bu, the full corn PP payment would come to:    

120 𝑏𝑢/acre    x    $4.00/bu   𝑥 75% 𝑐𝑜𝑣𝑒𝑟𝑎𝑔𝑒   𝑥   55% 𝑃𝑃 𝑟𝑎𝑡𝑒   =    $198 𝑝𝑒𝑟 𝑎𝑐𝑟𝑒

     In our examples from last week’s article, an MFP payment of about $30/acre could tip the decision toward planting a late corn crop over taking the full corn PP payment for Kansas producers.

     Yet another complication is the prospect for disaster aid for agriculture as part of a larger disaster relief package making its way through Congress. On May 23rd, the Senate passed a disaster aid package aimed mainly at victims of Hurricanes Michael and Florence, but also covering a variety of agricultural losses, including a specific provision for “crops prevented from planting in 2019.” See a farmdoc article from the University of Illinois for more details. While press reports indicate President Trump would sign the package into law if it clears Congress, it has been delayed in the House of Representatives (as of May 28).

     Some see these disaster payments as a way to assist producers who will never be able to plant anything in 2019 – that is, for the places where wet conditions persist through the entire planting season. One rationale for these additional payments is that providing MFP payments only on planted acres penalizes those producers who were unable to plant through no fault of their own. The counter‐ argument, however, is that these disaster payments could create another incentive not to plant anything in a year when corn acres could end up desperately short. About $3 billion were appropriated for agricultural losses in the May 23 Senate version of the disaster aid bill, but it is unclear how that amount might be spread over the various affected crops and regions, should the bill finally pass the House.

Effect of late & prevented plantings & effects on markets & prices

     A final factor to consider is the effect of all the late planting concerns on market prices. One would expect both total planted corn acres and actual corn yields to decline in the aggregate, but the extent of these changes is of course still guesswork. A farmdoc article examines the potential effect of fewer acres and lower yields for corn prices. It speculates that as many as 35 million acres of corn may remain unplanted as of the May 28 crop progress report, and traces this effect through the rest of the market “balance sheet” (acres, yields, exports, other usage, final stocks, etc). 

     See a similar analysis from Kansas State University on KSU AgManager.info titled       “U.S. Corn Market Outlook in Late-May 2019 – Tight Supply-Demand & Higher Corn Prices in “New Crop” MY 2019/20″ 

http://www.agmanager.info/grain-marketing/grain-market-outlook-newsletter)

     In our Kansas planting decision, the role of rising market prices for corn is to raise the value of those bushels that do get produced. A rising market value of expected actual corn production crops would tend to favor late planting of corn relative to no planting at all.

     Again, producers are encouraged to develop their own calculations, based on their own expected yields, costs, etc. Last week’s article provides examples that could be a useful starting point.

     Producers are also reminded to keep in close contact with their crop insurance agents as they evaluate options, to be sure they remain in compliance with their insurance policies and to discuss the alternatives.

*****

For more information about this publication and others, visit AgManager.info.

K‐State Agricultural Economics | 342 Waters Hall, Manhattan, KS 66506‐4011 | 785.532.1504

www.ageconomics.k‐state.edu

Copyright 2019: AgManager.info and K‐State Department of Agricultural Economics

Prevented Planting Options in 2019 for Kansas Corn Growers-Revised as of 5/23/2019 (To be updated when MFP 2.0 County Payment Rate Details Released)

Prevented Planting Options in 2019 for Kansas Corn Growers-Revised

Monte Vandeveer (montev@ksu.edu)

Kansas State University Department of Agricultural Economics – May 2019

http://agmanager.info/crop-insurance/risk-management-strategies/prevented-planting-options-2019-kansas-corn-growers

 

     Wet conditions the past few weeks have slowed planting progress for Kansas corn producers. The May 20 Crop Progress Report from the National Agricultural Statistics Service indicated that Kansas corn acres planted were only at 61 percent, behind last year’s planting progress of 80 percent, which also matches the five-year average on this date.

     Some crop insurance deadlines are looming for Kansas farmers who have Revenue Protection, RP with the harvest price option, or Yield Protection coverage, and one deadline has already passed for southeast Kansas farmers. This deadline is the “final planting date,” and it marks the final day on which crops can be planted and receive their full insurance coverage.

     Final Planting Dates (FPDs) vary across the state for corn, with three regions represented. Figure 1 shows a map of these regions. Fourteen counties in southeast Kansas had a FPD of May 15th, another 60 counties in central and northeast Kansas have a FPD of May 25th, and 31 counties in western Kansas have a FPD of May 31st.

A second important insurance term here is the “late planting period” (LPP). The LPP allows the farmer to still plant the original crop and receive insurance coverage, but the level of coverage will decline. Specifically, the production guarantee declines 1 percent for each day that planting is delayed after the FPD.

As an example, consider a non-irrigated grower with an APH yield of 120 bushels per acre. With a 75% coverage level, the grower’s production guarantee is 90 bushels per acre. Acres planted on the fifth day into the LPP by this grower would have their production guarantee reduced by 5 percent, or 4.5 bushels per acre.

For corn in Kansas, the LPP extends for 20 days after the FPD ends. Hence, the final day of the LPP is June 4, 2019 for southeast Kansas, June 14, 2019, for central and northeast Kansas, and June 20, 2019 for western Kansas.

Producers who expect they will not be able to complete their corn planting by the Final Planting Date in their county need to alert their crop insurance agent. Farmers in this situation have several options available, but they need to coordinate with their agent as they move forward. Prevented Planted payments are subject to an adjuster and not a guarantee.

Readers looking for more details on Prevented Planting from RMA can consult the following resources:

– RMA’S main web page related to Prevented Planting
– An RMA fact sheet about PP provisions related to flooding
– RMA’s page for Frequently Asked Questions related to flooding and PP
– The RMA Prevented Planting Standards Handbook
– The Common Crop Insurance Policy document; the section on Prevented Planting is Section 17, beginning on numbered page 25

*****

Below, we describe and evaluate some of the options for corn acres not planted by the FPD. We list five here:

1. Acres that were not planted due to an insured cause of loss can be left unplanted and receive a full Prevented Planting payment, equal to 55 percent of the original production guarantee (or 60% if they bought-up on PP coverage)

2. These acres may also be planted to a cover crop during or after the end of the LPP. These acres will also receive the full Prevented Planting payment so long as the cover crop is not hayed or grazed before November 1. The cover crop may not be harvested otherwise at any time (for silage, grain, seed, haylage, etc.).

3. Acres unplanted by the FPD may still be planted to corn. For acres planted during the LPP, the corn crop is still insured but the production guarantee will decline by 1 percent each day, as described above. No Prevented Planting payment is made in this case.

If insurable causes of loss continue to delay planting, corn could still be planted after the end of the LPP. Acres planted at this point would receive a production guarantee of 55 percent of the original APH yield. Prospects of late maturity and other production issues may make this a less attractive option.

4. These acres may be planted to another crop. This could be soybeans or grain sorghum for many Kansas producers. In this case, no Prevented Planting payment is received. Crop insurance is available on this second crop if coverage has already been purchased for this crop on other acres in this unit.

5. The grower may take 35 percent of the corn Prevented Planting payment and plant another crop for harvest, but this second crop must be planted after the corn LPP ends. In this option, the farmer must pay still 35% of the corn premium.

 

Some conditions must be met to satisfy Prevented Planting rules. These include:
Acres must be eligible for PP acres. This means the PP acres must be 20 acres or 20 percent of the insurable crop acreage in the unit, whichever is less.
– The farm must have a history of planting corn and those historical acres will affect the amount of PP acres a producer can claim

Producers should also be aware if they take 35% of the corn payment and then plant a 2nd crop that acres designated as PP will get a yield equal to 60 percent of the approved yield for the first insured crop to calculate the average yield for subsequent crop years. If they take the full PP payment and do not plant a second crop, APH will not be affected.

COMPARING PREVENTED PLANTING OPTIONS

The following section develops some simple examples to compare all these options and consider which might be most advantageous for Kansas producers. As an example, it looks at the following case:

– Producer located in north central Kansas (corn Final Planting Date is May 25th, LPP ends June 14); soybean FPD is June 15

– The producer has a Revenue Protection policy with a guarantee of 75%, APH yield of 120 bu/acre, and a premium cost of $18 per acre

– Corn planting has been delayed; soybeans are considered for a second crop

– Weed control costs are $30/acre if corn acres are left unplanted, $15/acre if a cover crop is used

– Planting costs (seed, fuel, etc.) for a cover crop are $15/acre

– Corn Projected Price for insurance is $4.00; expected cash prices at harvest are $3.43 for corn and $7.27 for soybeans

– Expected corn yield at normal planting times is 120 bu/a; expected corn yield declines to 108 bushels (10%) for acres planted in the LPP

– Expected soybean yield for late May/early June planting is 41 bu/a, expected yield for mid-to-late June planting is 30 bu/acre

*****

     Tables 1 and 2 show the two options possible when the full Prevented Planting payment is collected.

     Table 1 indicates a net return of $150 per acre, based on a PP payment of $198 per acre (= 120 bu/a x $4.00/bu x 75% guarantee x 55% PP payment factor). From this return, the producer would need to subtract weed control costs of $30 per acre and an $18 crop insurance premium for corn.

Table 1: Full Prevented Planting Payment, No Cover Crop

Prevented Planting payment factor                                                      55%
Prevented Planting payment                                                           $198.00
Weed control costs per acre                                                             $30.00
Crop insurance premium per acre                                                    $18.00
Net returns ($ per acre)                                                               $150.00

*****

   Table 2 shows the case of collecting the same PP payment as the first option, but a cover crop is used instead of leaving the land fallow. Weed control cost is set at $15 per acre, and cover crop planting costs are $15 per acre. This example also produces a net return of $150. These weed control and cover crop expenses have been artificially set to produce equivalent outcomes, in order to highlight the importance of these costs. That is, if the producer decides to collect the full PP payment, they must consider their weed control and cover crop costs more closely to see if one offers a clear benefit. Some producers will be interested in the other benefits of cover crops such as potential improvements to soil quality, less erosion, and possible forage value after November 1.

Table 2: Full Prevented Planting Payment, Cover Crop Planted

Prevented Planting payment factor                                                      55%
Prevented Planting payment                                                           $198.00
Weed control costs per acre                                                             $15.00
Planting cost for cover crop                                                              $15.00
Crop insurance premium per acre                                                    $18.00
Net returns ($ per acre)                                                               $150.00

*****

     Table 3 shows expected costs and returns for Option 3, the producer who still plants corn but does so in the Late Planting Period. No Prevented Planting payment is collected, and the producer will also find his/her insurance coverage reduced, according to the number of days past the FPD on which these particular acres get planted. The example assumes a reduced corn yield, an expected local cash price at harvest of $3.43/bu and an expected Harvest Price for insurance of $3.70/bu.

     The acres considered here are planted on May 31, 6 days into the LPP. As a result, the production guarantee is reduced by 6 percent, from the original 75% guarantee of 90 bu/acre to 84.6 bu/acre. As a result, the revenue guarantee is also adjusted, down to $338.40 per acre (calculated as 84.6 bu/acre x $4.00/bu). The producer still owes the original crop insurance premium for corn of $18/acre.

     On the return side, expected cash sales at harvest are $370.44 per acre (= $3.43/bu x 108 bu/acre). No crop insurance indemnity is expected. Despite the lower expected Harvest Price, actual harvest revenue using the expected yield of 108 bu/acre would exceed the adjusted revenue guarantee for insurance.

     On the cost side, expenses are based on the 2019 KSU Farm Management Guides for non-irrigated corn in north central Kansas. In this case, costs of N fertilizer, its application, pre-plant burndown herbicides and related spraying costs are considered “sunk costs”, and are deducted from the totals in the KSU budgets. These expenses come to about $57 per acre, and they are not included because they have already been spent and don’t affect returns to any option going forward. Harvesting costs reflect the expected yield of 108 bu/acre. Total (remaining) costs come to $248/acre, producing an expected net return of about $122 per acre. This is about $28 per acre below the expected return for taking the full PP payment, as seen in Options 1 and 2.

Table 3: Corn planted during LPP

Planting date                                                                                       5/31
Adjusted production guarantee, bu/a                                                 84.6
Expected Harvest Price for insurance                                                $3.70
Adjusted revenue guarantee, $/acre                                             $338.40

Percent reduction in expected yield                                                    10%
Expected yield, (bu per acre)                                                               108
Expected actual revenue for insurance                                          $399.60
Crop insurance payment                                                                   $0.00

Expected cash price, $ per bu                                                            $3.43
Expected crop revenue, $ per acre                                                $370.44
Total revenue, $ per acre                                                           $370.44

Input costs, $ per acre                                                                   $170.61
Machinery & field operations                                                         $28.62
Harvesting costs                                                                             $48.96
Crop insurance premium                                                                $18.00
Total expenses                                                                            $248.18

Expected net returns ($ per acre)                                             $122.26

*****

     Table 4 shows the expected costs and returns of switching to another crop after the Final Planting Date. This option considers the case where soybeans are planted before the expiration of the Late Planting Period, foregoing any share of the corn PP payment. These acres are assumed planted on May 31 and can achieve an expected yield of 41 bushels per acre. The local “new crop” cash quote for soybeans is $7.27/bu. Expenses are based on the KSU Farm Management Guide budget for non-irrigated soybeans in north central Kansas. As before, costs from those budgets are adjusted to reflect what has already been spent for N, fertilizer application, and burndown herbicides.

     The only revenue on these acres are the soybean cash sales proceeds of $298 per acre. Total costs, including a $15/acre crop insurance premium for soybeans, come to about $210/acre, leaving an expected net of about $88 per acre.

 

Table 4: Plant soybeans, skip corn PP payment

Planting date                                                                                              5/31
Expected yield, (bu per acre)                                                                         41
Expected cash price, $ per bu                                                                   $7.27
Expected crop revenue, $ per acre                                                        $298.07
Crop insurance payment                                                                           $0.00
Total revenue, $ per acre                                                                   $298.07

Input costs, $ per acre                                                                             129.06
Machinery & field operations                                                                    29.04
Harvesting costs                                                                                        36.86
Crop insurance premium                                                                           15.07
Total expenses                                                                                    $210.02

Expected net returns ($ per acre)                                                        $88.05

MFP payment needed to match Option 1                                               $61.95
MFP $/bu needed to match Option 1                                                       $1.51

 

Another source of revenue may be possible for the case of soybeans, namely another Market Facilitation Program (MFP) payment from USDA. The 2018 MFP payment for soybeans was $1.65/bu, and while the Administration has indicated there would not be MFP payments for 2019, falling prices from the continuing trade war could still create pressure for such payments.

     The calculations at the bottom of Table 4 show how large an MFP payment would be needed, given actual production of 41 bu/acre, for this option to match the return of $150/acre seen for Options 1 and 2. The MFP would have to total about $62 per acre, or $1.51/bushel.

*****

    Table 5 shows the last option, that of taking 35 percent of the corn PP payment and then waiting until the Late Planting Period ends in order to plant soybeans. The example assumes soybeans planted on the Final Planting Date for soybeans of June 15. This later planting date for soybeans reduces the expected soybean yield down to 30 bu/acre. Production costs are adjusted as before, and harvest costs decline slightly, due to a lower yield.

     Soybean cash sales are about $218/acre, and the 35% PP payment from corn comes to $69.30 per acre, making total revenue about $287 per acre. Total costs are $212 per acre, making for an expected net return of $75 per acre. This is slightly below the expected returns to Option 4, and still about $75 per acre less than those options which take the full PP payment for corn. In considering a possible MFP payment, it would take an MFP payment rate of about $2.50/bushel on the 30-bushel expected yield to produce a return comparable to the full corn PP payment option.

Table 5: Take 35% corn PP payment, plant soybeans late

Planting date                                                                                           6/15
Expected yield, (bu per acre)                                                                      30
Expected cash price, $ per bu                                                                $7.27
Expected crop revenue, $ per acre                                                     $218.10
Crop insurance payment (35% of corn full PP)                                    $69.30
Total revenue, $ per acre                                                                $287.40

Input costs, $ per acre                                                                          129.06
Machinery & field operations                                                                29.04
Harvesting costs                                                                                    32.68
35% of corn insurance premium                                                             6.30
Crop insurance premium, soybeans                                                      15.07
Total expenses                                                                                 $212.14

Expected net returns ($ per acre)                                                    $75.26

MFP payment needed to match Option 1                                           $74.74
MFP $/bu needed to match Option 1                                                   $2.49

 

*****

FURTHER DISCUSSION

     These examples attempt to compare the Prevented Planting options for a non-irrigated corn producer in Kansas. Producers need to consider how their own results may vary, using yields, cash prices, and production costs that more closely match their own situation. But the examples in Tables 1 to 5 do suggest some items to watch closely.

     First, the yield penalty one expects for corn planted after the FPD plays a role. These examples assumed a 10 percent reduction in yield, and the option ended up with an expected net return below the full PP payment. If a producer is only 2 or 3 days late and doesn’t expect a big yield reduction, then planting corn looks more attractive.

     In the absence of any MFP payment for soybeans, then planting corn or taking the full corn PP payment appears more advantageous than either of the options which planted soybeans here. The option of planting soybeans later and collecting 35% of the corn PP payment offered just slightly less return than the timely planted soybeans.

     The prospect of an MFP payment, however, would make soybeans more appealing. An MFP payment of $1.50/bushel would raise returns on soybeans planted in the LPP competitive with taking the full corn PP payment, assuming normal soybean yields could be achieved.

     Having the MFP payment as such a wild card means producers will need to make a judgment quite soon about the likelihood and size of any such payment. If prospects for a large MFP payment fade and the appeal grows for the full corn PP payment, producers will then need to decide whether they want to leave the land fallow or go with a cover crop.

KSU AgEcon: “The Impact of U.S.-China Trade Conflict on U.S. Corn Prices”

The Impact of U.S.-China Trade Conflict on U.S. Corn Prices

Daniel O’Brien – Extension Agricultural Economist, K-State Research and Extension

May 17, 2019

 

Overview

Estimates of the impact of U.S.-China trade conflicts from outside University sources range from $0.13-21 per bushel on the high side to $0.08 per bushel.  An analysis by Kansas State University Ag Economist Daniel O’Brien based on an analysis of seasonal price patterns estimates that average monthly impact from January through – mid May 2019 averaged $0.20 per bushel per month.

Underlying CFTC position of traders data confirms the record “bearish” short sale aggregate position of Managed Money (Spec) traders that began in January 2019 and trended to record bearish levels in April.

That market prospects for U.S. corn declined during the January – early May period is in evidence from the USDA World Agricultural Supply and Demand Estimates (WASDE) reports during this time.  The USDA increased its projected U.S. corn ending stocks-to-use from 11.85% in January to 14.45% in May 2019 for the “current crop” 2018/19 marketing year for U.S. corn.  During that time the only changes affecting U.S. corn supply-demand balances were adjustments on the usage side – with market expectations for U.S. corn use declining.  The U.S. corn projected season average price declined $0.10 per bushel from $3.60 in February down to $3.50 per bushel in the May WASDE report.

Crop revenue insurance coverage levels are an additional important factor to consider in assessing the impact of low U.S. corn futures prices during the January through early May 2019 period. The planning price for corn crop revenue insurance in year 2019 in Kansas was determined by taking the average of DEC 2019 Corn futures during the month of February 2019.  The calculated corn planning price for crop revenue insurance in Kansas for conventional (non-high amylose) corn was $4.00 per bushel.

To the degree that U.S.-China trade conflicts may have led to lower DEC 2019 corn futures prices during the February period, then Kansas and U.S. corn producers’ 2019 crop revenue insurance planning prices and revenue coverage are lower than would have occurred otherwise.  In a year with significant 2019 crop production risk to date, negative effects on U.S. corn producers’ crop insurance revenue coverage levels are likely to be a critically important factor.

*****

Introduction

Since December 2018, U.S. corn prices have been moving in a pattern contrary to normal seasonal price pattern found in Kansas, with essentially no seasonal price increases.  During the January 2019 through projected estimated May 2019 period, on a monthly basis U.S. corn prices were from $0.07 to as much as $0.34 / bushel under the levels they would have been if normal seasonal average price patterns prevailed that we have seen historically in Kansas corn markets.

The main idea of this article is that market perceptions about the progress of U.S.-China trade negotiations or lack thereof seem to have had a negative effect on U.S. corn markets from January through mid-May 2019 – at least until U.S. corn planting concerns began to predominate.

Following is a timeline since June 2018 of a U.S-China trade conflict actions and reactions, quoted from a Reuters article on May 8th, titled “Timeline: Key dates in the U.S.-China trade war”,

https://www.reuters.com/article/us-usa-trade-china-timeline/timeline-key-dates-in-the-u-s-china-trade-war-idUSKCN1SE2OZ

July 10, 2018 – S&P 500: +0.35% , United States unveils plans for 10% tariffs on $200 billion of Chinese imports.

Aug. 1, 2018 – S&P 500: -0.10% , Trump orders USTR to increase the tariffs on $200 billion of Chinese imports to 25% from the originally proposed 10%.

Aug. 7, 2018 – S&P 500: +0.28% , United States releases the list of $16 billion of Chinese goods to be subject to 25% tariffs. China retaliates with 25% duties on $16 billion of U.S. goods.

Aug. 23, 2018 – S&P 500: -0.17% , Tariffs on goods appearing on the Aug. 7 lists from both United States and China take effect.

Sept. 7, 2018 – S&P 500: -0.22% , Trump threatens tariffs on $267 billion more of Chinese imports.

Sept. 24, 2018 – S&P 500: -0.35% , U.S. implements 10% tariffs on $200 billion of Chinese imports. The administration says the rate will increase to 25% on Jan. 1, 2019. China answers with duties of its own on $60 billion of U.S. goods.

Dec. 1, 2018 – S&P 500: +1.09% (Monday, Dec. 3) , U.S. & China agree on a 90-day halt to new tariffs. Trump agrees to put off the Jan. 1 scheduled increase on tariffs on $200 billion of Chinese goods until early March while talks between the two countries take place. China agrees to buy a “very substantial” amount of U.S. products.

Feb. 24, 2019 – S&P 500: +0.12% (Monday, Feb 25) , Trump extends the March 1 deadline, leaving the tariffs on $200 billion of Chinese goods at 10% on an open-ended basis.

May 5, 2019 – S&P 500: -0.45% (Monday, May 6) , Trump tweets that he intends to raise the tariffs rate on $200 billion of Chinese goods to 25% on May 10.

May 8, 2019 – S&P 500: -0.16%

From this it seems that the DEC-JAN period started off quite positive for the U.S.-China trade negotiations, with a temporary 90 day halt of tariffs.  Then by the time we get to late February, there is a negative announcement in the market – apparently being interpreted by corn market participants that limited positive progress had been made in the negotiations.

 

Flat vs Seasonal Prices in the “Current Crop” 2018/19 Marketing Year

If monthly differentials are averaged across the December 2018 through projected May 2019 period, the average monthly price difference between a regular seasonal pattern of U.S. corn prices and what occurred is estimated to be $0.20 per bushel per month based on cash and futures prices available through May 16, 2019.  If the next step is taken to weight these prices by USDA estimates of monthly U.S. percent of cash corn sales, then the average monthly U.S. corn price difference is scaled down to $0.07 per bushel per month.  Which approach to take – weighting by average monthly sales percentages or not, is a matter of debate.

Figures 1abc and Figures 2a-b illustrate this pattern in futures and cash corn prices.  Figures 2a and 2b especially and Table 1a show specific details of how during January through mid-May 2019 U.S. cash corn prices have been less than would be occur should average seasonal price patterns occur based on historic seasonal corn price patterns in Kansas.

 

“Bearish” Corn Market Impact Shown in CFTC Commitment of Traders Data

The bearish tone of the U.S. corn market during the January to mid-May 2019 period is well documented, as shown by the Commodity Futures Trading Commission (CFTC) commitment of traders data in Figures 3a-d.  Note especially the record bearish or “sell” position of Managed Money Traders as shown in Figures 3a and 3d.  The implication is that grain market speculative traders held record bearish positions during parts of January to mid-May 2019.

The CFTC data for the aggregate trading positions of Managed Money Traders (Specs) or MMT-Specs shows something of the “effect” of a change in market sentiments about a positive resolution to the U.S.-China Trade conflict beginning to occur during January 2019 and continuing through mid-May 2019.

The CFTC Commitment of Traders data indicate that December 2018 was a time of relative optimism for MMT-Specs, as their long positions for the weeks ending 12/2-12/31 were net long by a range of 200-246 million bushels.

Progressing forward, January 2019 showed MMT-Specs week ending positions ranging from 246 mb long on 1/8/2019 to 49 mb short on 1/29/2019.

In February 2019, short positions of MMT-Specs grew from 33 mb short on 2/5/2019 to 590 mb short on 2/26/2019.

In March 2019 the trend to short positions for MMT-Specs accelerated, from 964 mb on 3/5/2019 to a range of 1.092 – 1.415 billion bushels the rest of the month.

Then in April 2019 new records were set for short positions for Corn futures, with a range of 1.319 bb to 1.721 bb for the month, with the record large net short position of 1.721 bb set for the week ending 4/23/2019.

For the week ending May 7, 2019 net short positions for corn futures traders were 1.480 bb.  Since then, planting concerns have taken over and MMT-Specs have been moving away from their short positions and rebalancing toward the long side.

This CFTC commitment of traders information indicates that corn market Managed Money (Spec) traders’ sentiments turned or transitioned to being decidedly bearish as time moved from the beginning the December 2018 through January and February 2019.  And that the bearish trend continued on to record short or “bearish” levels in April 2019 and early May 2019.

The implication here is that the lack of success in U.S.-China trade negotiations have been a primary causal factor in that occurring.   The success of the 2019 Brazilian 2nd corn crop also contributed – likely in a sort of “piling on” negative, confirming manner.

 

 “Direct” Impact on Soybeans Effect Expected Corn Market Supply-Demand & Prices

The primary news affecting grain markets during that period was the ongoing status of U.S.-China trade negotiations.  While U.S. corn exports to China have not been a main driver in U.S. grain markets and trader sentiments, sharp reductions in U.S. soybean exports to China as a result of these trade tensions had increased the likelihood of reductions in U.S. soybean planted acreage in 2019, and compensatory increases in U.S. corn acreage.

This is consistent with the USDA’s analysis at the 2019 Agricultural Outlook Forum in Arlington, VA in February 2019.  The direct effects on the U.S. soybean market from reduced U.S. soybean exports to China resulted in strong negative indirect secondary impacts on the U.S. corn market, as the USDA and the grain trade expected U.S. corn acreage and production to increase – with prices moving sharply lower for U.S. corn in fall 2019.  And that sentiment has held sway among the corn trade until recently in mid-May 2019 when 2019 U.S. corn planting problems became serious enough to cause corn futures prices to begin trending higher.

 

Evidence from USDA WASDE Report Projections

Also, it is noteworthy that in its World Agricultural Supply and Demand Estimate (WASDE) reports, since November-January 2019 the USDA has lowered its forecast of U.S. Corn season average prices by $0.10 per bushel from $5.60 to $5.50.  Note that this is calculated as a season average price “weighted by % monthly sales” basis by the percent of annual grain marketings projected for all 12 months of the “current crop” 2018/19 marketing year – starting September 2018 and lasting through August 2019.  So, the USDA’s price projection for “current crop” MY 2018/19 of $5.50 per bushel relies in large part on the accuracy of the USDA’s estimates of past monthly weightings of sales.

If in this marketing year, U.S. farmers have delayed sales during the harvest period of September-November in greater proportion than normal until later (say during December – April).  IF that occurred, THEN the estimated monthly percent of marketings used by the USDA’s calculation method would underestimate the impact on U.S. corn producers of the flat or non-seasonal price action that occurred during the January through mid-May 2019 period.

 

Impact on Crop Revenue Insurance Planning Prices from February 2019

An important factor to consider for the sake of U.S. corn producer’s risk management purposes is how the corn futures market’s bearish reaction U.S.-China trade issues potentially affected crop revenue insurance payments for the 2019 crop.  Revenue insurance planning prices for 2019 crops are calculated by taking the average of daily closes for DEC 2019 corn futures during the month of February 2019.  Therefore, to the degree that there was a negative effect on DEC 2019 Corn futures from U.S.-China trade negotiations, then planning prices for revenue-based crop insurance coverage for all U.S. corn producers will have been diminished – since DEC 2019 Corn futures prices were negatively affected by U.S.-China trade conflicts during February 2019.

 

Evidence from Other University Sources

KSU Agricultural Economist Nathen Hendricks cites other analyses that are for the most part consistent with these findings.  Hendricks cites the following studies and results:

  • Researchers at Iowa State University estimate that corn prices decreased by 4-6% or $0.13-$21/bushel as a result of the U.S.-China trade conflict. See p. 8 of their study: https://www.card.iastate.edu/products/publications/pdf/18pb25.pdf . They use a partial equilibrium model that essentially has supply and demand curves to simulate the impact of the tariffs.
  • Researchers at the University of Illinois estimate that corn prices decreased by $0.08/bushel in 2018 due to the U.S.-China trade conflict. See table 1 in their study: https://farmdocdaily.illinois.edu/2019/04/the-trade-conflict-impact-on-illinois-agriculture-in-2018.html. They use regression analysis where they effectively compare how much prices dropped from spring to fall 2018 and how much larger the price decrease was than would have been predicted based on the relatively large yield in 2018.

 

Joe Janzen of Kansas State University has also addressed some of these and other related issues on KSU Agriculture Today radio on Wednesday, May 15th.  Janzen discussed the probable impact of another round of trade aid for U.S. farmers.  In particular Jaznen examined the probable impact of direct trade mitigation that occurred for farmers through the first round of Market Facilitation Payments (MFP) as a compensation to U.S. farmers for the negative affect of incomes from the U.S.-China trade conflicts.

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2019 Kansas Grain Sorghum Net Returns at $3.94 /bu RMA Projected Prices

The following article is available on the www.AgManager.info website at the following web address:

http://www.agmanager.info/finance-business-planning/research-papers-and-presentations/2019-kansas-grain-sorghum-net-returns

This article focuses on Kansas Grain Sorghum profitability in 2019 at USDA Risk Management Agency projected prices of $3.94 per bushel.

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2019 Kansas Grain Sorghum Net Returns @ RMA Projected Pricess

Daniel O’Brien and Greg Ibendahl – Extension Agricultural Economists

K-State Research and Extension

March 8, 2019

A. Release of the 2019 RMA Sorghum Projected Price of $3.94 /bu

With the month of February completed, in early March 2019 the USDA Risk Management Agency (RMA) recently released it’s 2019 projected prices corn, grain sorghum, soybeans, and hard red spring wheat.  For grain sorghum, the RMA projected price for 2019 crop revenue insurance coverage is calculated as the average of 98.5% of 2019 DEC Corn futures closes during February 2019.

The RMA projected price for 2019 grain sorghum revenue insurance coverage is $3.94 per bushel (/bu), up marginally from $3.83 /bu in both 2017 and 2018, and from $3.72 /bu in 2016 (Figure 1).   In October 2019 the RMA will calculate the October 2019 average of closing prices for DEC 2019 Corn futures, and apply a similar adjustment factor to is (likely 95.8% again) which will be identified as the harvest price for RMA revenue calculations.

Following a series of average to large U.S. feedgrain crops over the 2013-2018 period, RMA projected prices have been higher than RMA harvest prices by a range of $0.27-$1.22 /bu over this same period.   During years 2015-2018, October RMA harvest prices for adjusted DEC Corn futures have been below the previous February average for adjusted DEC Corn by $0.27-$0.46 /bu (Figure 1).

 

B. 2019 AVERAGE YIELD Non-Irrigated Sorghum Returns @ RMA Proj’d $’s

Concerning non-irrigated sorghum enterprises in Kansas, the net returns from RMA revenue insurance on AVERAGE yield projections will be examined.

KSU Extension Crop Budget Estimates: Cost of production estimates for year 2019 from Kansas Farm Management Guides are used in these RMA price versus cost of production comparisons.  These Non-irrigated crop production budgets provide “low”, “average”, and “high” yield scenarios.

These KSU Farm Management Guide Crop Budget estimates for irrigated sorghum enterprises across the state can be found on the KSU AgManager.info website (www.AgManager.info) at the following web address:  http://www.agmanager.info/farm-mgmt-guides/2019-farm-management-guides-non-irrigated-crops

A Brief Explanation of Percent (%) APH Coverage: Note that in RMA terminology, “APH” stands for Actual Production History.  Kansas farmers can select coverage levels on sorghum enterprises ranging from 50% of APH yields up to 85% of APH Yields.  In this article, it is assumed that a 75% APH Coverage level is selected for these Revenue Insurance coverage examples.  When considering ALL bushels produced on non-irrigated sorghum enterprises in Kansas, the full $3.94 price of 2019 RMA projected price coverage extends ONLY to the elected APH bushels – in this example equal to 75%.

2019 RMA Price Coverage Results for ONLY APH Covered Bushels: At AVERAGE yield projections, for the non-irrigated grain sorghum bushels that Kansas sorghum producers choose to provide crop insurance coverage for via their choice of % APH yield insurance level, the $3.94 /bu RMA price almost covers full estimated production costs including machinery & land charges (Figures 2a & 2b).

Defacto 2019 RMA Price Coverage Results for ALL Bushels of $2.96 /bu (at 75% APH Coverage):  When considering ALL bushels on a farm, if a producer chose to buy revenue insurance coverage for 75% of the APH yield, then the other 25% of their APH yield has NO direct Revenue Insurance coverage.  However, by adjusting the RMA projected price by the selected percent APH coverage level, an implicit or “defacto” RMA projected sorghum price over ALL APH bushels can be calculated.

In this example, with 75% APH Revenue Insurance coverage, the 2019 $4.00 RMA projected price on sorghum for the “APH covered” bushels provides a $2.96 /bu “defacto” level of price coverage across ALL or 100% of the APH bushels (i.e., 75% x $3.94 /bu plus 25% x $0.00 /bu).

At this “defacto” ALL bushels coverage $2.96 /bu projected price level of sorghum bushels for AVERAGE yield projections, net returns cover full costs by $0.27-$0.27 /bu in North Central & South Central Kansas, and by 0.04 /bu in Northeast Kansas.  However, net returns fall short of covering full costs by $0.26-$0.88 /bu in Northwest, Southwest, and Southeast Kansas (Figures 2a & 2b).

C. 2019 HIGH YIELD Non-Irrigated Sorghum Returns @ RMA Projected $’s

Again concerning non-irrigated grain sorghum enterprises in Kansas, the net returns from RMA revenue insurance on HIGH yield projections will be examined. These KSU Farm Management Guide Crop Budget estimates for non-irrigated sorghum enterprises across the state of Kansas can also be found on the KSU AgManager.info website (www.AgManager.info) at the following web address:  http://www.agmanager.info/farm-mgmt-guides/2019-farm-management-guides-non-irrigated-crops

2019 RMA Price Coverage Results for only APH Covered Bushels: For the non-irrigated sorghum bushels directly covered by crop insurance via their choice of % APH yield level, under HIGH yield scenarios the $3.94 RMA price uniformly covers full estimated production costs including machinery and land charges across the state (Figures 3a & 3b).

Defacto 2019 RMA Price Coverage Results for All Bushels of $2.96 /bu (at 75% APH Coverage):  In this 75% APH yield coverage example with average yields, this “defacto” ALL bushels coverage level of $2.96 /bu RMA projected price level, at HIGH non-irrigated yield levels, net returns cover full costs by $0.58-$0.62 /bu in North Central & South Central Kansas, and by 0.25 /bu in Northeast Kansas.  However, net returns fall short of covering full costs by $0.42-$0.46 /bu in Northwest & Southwest Kansas, and by $0.10 /bu in Southeast Kansas (Figures 3a & 3b).

 

D. Final Thoughts

While the projected RMA price of $3.94 /bu for grain sorghum in the U.S. in 2019 is a vitally important component of the overall set of tools used by Kansas farmers to manage revenue risks on sorghum enterprises, it is NOT the only tool.

If the U.S. average loan rate for U.S. grain sorghum of $2.20 /bu in the latest farm bill was considered as a “price floor” for the remaining bushels NOT covered by RMA Revenue Insurance coverage, then instead of $2.94 per bushel being the implied or “defacto” floor price across ALL bushels (i.e., both 75% APH bushels and the remaining 25% uncovered amount of production, then the implicit floor would be higher at $3.51 /bu.

New Defacto Floor$2019 = (75% APH Covered Bu. x $3.94) + (25% Non-covered Bu. x $2.20 /bu)

= $3.51 /bu

This one calculation alone presents a moderately more positive perspective on sorghum enterprise profitability in Kansas.  Other elements of this sorghum enterprise income risk management picture can be presented by including USDA payments for ARC (Agricultural Risk Coverage) and/or PLC (Price Loss Coverage).

The final point is that these revenue coverage levels for irrigated and non-irrigated sorghum in Kansas are at best “covering costs” but not providing strong profitability as is needed by many farmers in the state who have been “grinding” through a period of breakeven at best revenues arguably since 2014.  As a “safety net” these programs are protecting the “down side” as many argue they are designed to do.  But these programs that were designed to be a “safety net” are not providing any large amounts of net returns over costs.  Cost competition, efficiency, and “surviving to farm another year” are the norm now among the larger part of Kansas sorghum producers.

 

2019 Kansas Corn Net Returns at $4.00 /bu RMA Projected Prices

The following article is available on the www.AgManager.info website at the following web address:

http://www.agmanager.info/finance-business-planning/research-papers-and-presentations/2019-kansas-corn-net-returns-rma

This article focuses on Kansas Corn profitability in 2019 at USDA Risk Management Agency projected prices of $4.00 per bushel.

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2019 Kansas Corn Net Returns @ RMA Projected Prices

Daniel O’Brien and Greg Ibendahl – Extension Agricultural Economists

K-State Research and Extension, March 8, 2019

A. Release of the 2019 RMA Corn Projected Price of $4.00 /bu

With the month of February completed, in early March 2019 the USDA Risk Management Agency (RMA) recently released it’s 2019 projected prices corn, grain sorghum, soybeans, and hard red spring wheat.  For corn, the RMA projected price for 2019 crop revenue insurance coverage is calculated as the average of 2019 DEC Corn futures closes during February 2019.

The RMA projected price for 2019 corn revenue insurance coverage is $4.00 per bushel (/bu), up marginally from $3.96 /bu in both 2017 and 2018, and from $3.86 /bu in 2016 (Figure 1).   In October 2019 the RMA will calculate the October 2019 average of closing prices for DEC 2019 Corn futures, which is identified as the harvest price for RMA revenue calculations.

Following a series of average to large U.S. corn crops over the 2013-2018 period, RMA projected prices have been higher than RMA harvest prices by a range of $0.28-$1.26 /bu over this same period.   During the 2015-2018 period, October RMA harvest prices for DEC Corn futures have been below the previous February average for DEC Corn by $0.28-$0.47 /bu (Figure 1).

 

B. 2019 RMA Projected Price Returns of Kansas Irrigated Corn

KSU Extension Crop Budget Estimates: Cost of production estimates for year 2019 from Kansas Farm Management Guides are used in these RMA price versus cost of production comparisons.  These irrigated crop production budgets provide “low”, “average”, and “high” yield scenarios with estimates of irrigation water applied.  These multiple irrigation water availability and associated yield scenarios have become important for western Kansas irrigation enterprises as available subsurface groundwater supplies have dwindled and regulatory limitations on the amount of irrigation water applied in western Kansas have been or or beginning to be adopted.

These KSU Farm Management Guide Crop Budget estimates for irrigated corn enterprises in Northwest, Southwest and North Central Kansas can be found on the KSU AgManager.info website (www.AgManager.info) at the following web address:  http://www.agmanager.info/farm-mgmt-guides/2019-farm-management-guides-irrigated-crops-0

A Brief Explanation of Percent (%) APH Coverage: Note that in RMA terminology, “APH” stands for Actual Production History.  Kansas farmers can select coverage levels on corn enterprises ranging from 50% of APH yields up to 85% of APH Yields.  In this article, it is assumed that a 75% APH Coverage level is selected for these Revenue Insurance coverage examples.  When considering ALL bushels produced on irrigated corn enterprises in Kansas, the full $4.00 price of 2019 RMA projected price coverage extends ONLY to the elected APH bushels – in this example equal to 75%.

2019 RMA Price Coverage Results for only APH Covered Bushels: For the irrigated corn bushels that Kansas corn producers choose to provide crop insurance coverage for via their choice of % APH yield insurance level, the $4.00 RMA price almost uniformly covers full estimated production costs including machinery and land charges (Figures 2a & 2b).

Defacto 2019 RMA Price Coverage Results for All Bushels of $3.00 /bu (at 75% APH Coverage):  When considering ALL bushels on a farm, if a producer chose to buy revenue insurance coverage for 75% of the APH yield, then the other 25% of their APH yield has NO direct Revenue Insurance coverage.  However, by adjusting the RMA projected price by the selected percent APH coverage level, an implicit or “defacto” RMA projected corn price over ALL APH bushels can be calculated.

In this example, with 75% APH Revenue Insurance coverage, the 2019 $4.00 RMA projected price on corn for the “APH covered” bushels provides a $3.00 /bu “defacto” level of price coverage across ALL or 100% of the APH bushels (i.e., 75% x $4.00 /bu plus 25% x $0.00 /bu).

At this “defacto” ALL bushels coverage $3.00 /bu projected price level, the RMA the irrigated corn bushels, net returns fall short of full costs by $0.38-$1.02 /bu depending on the area of the state (Figures 2a & 2b).

 

C. 2019 AVERAGE YIELD Non-Irrigated Corn Returns @ RMA Projected $’s

Concerning non-irrigated corn enterprises in Kansas, the net returns from RMA revenue insurance on AVERAGE yield projections will be examined. These KSU Farm Management Guide Crop Budget estimates for non-irrigated corn enterprises across the state of Kansas can be found on the KSU AgManager.info website (www.AgManager.info) at the following web address:  http://www.agmanager.info/farm-mgmt-guides/2019-farm-management-guides-non-irrigated-crops

2019 RMA Price Coverage Results for only APH Covered Bushels: For the non-irrigated corn bushels directly covered by crop insurance via their choice of % APH yield level, under AVERAGE yield scenarios the $4.00 RMA price again almost uniformly covers full estimated production costs including machinery and land charges (Figures 3a & 3b).

Defacto 2019 RMA Price Coverage Results for All Bushels of $3.00 /bu (at 75% APH Coverage):  In this 75% APH yield coverage example with average yields, this “defacto” ALL bushels coverage level of $3.00 /bu RMA projected price level, at AVERAGE non-irrigated yield levels, net returns fall short of full costs by $0.25-$1.03 /bu depending on the area of the state (Figures 3a & 3b).

 

D. 2019 HIGH YIELD Non-Irrigated Corn Returns @ RMA Projected $’s

Again concerning non-irrigated corn enterprises in Kansas, the net returns from RMA revenue insurance on HIGH yield projections will be examined. These KSU Farm Management Guide Crop Budget estimates for non-irrigated corn enterprises across the state of Kansas can also be found on the KSU AgManager.info website (www.AgManager.info) at the following web address:  http://www.agmanager.info/farm-mgmt-guides/2019-farm-management-guides-non-irrigated-crops

2019 RMA Price Coverage Results for only APH Covered Bushels: For the non-irrigated corn bushels directly covered by crop insurance via their choice of % APH yield level, under HIGH yield scenarios the $4.00 RMA price uniformly covers full estimated production costs including machinery and land charges across the state (Figures 4a & 4b).

Defacto 2019 RMA Price Coverage Results for All Bushels of $3.00 /bu (at 75% APH Coverage):  In this 75% APH yield coverage example with average yields, this “defacto” ALL bushels coverage level of $3.00 /bu RMA projected price level, at HIGH non-irrigated yield levels, net returns are positive in North Central and South Central Kansas, but fall short of full costs by $0.54-$0.78 /bu in Northwest-Southwest Kansas, and by $0.14-$.33 /bu in the Northeast-Southeast part of the state (Figures 4a & 4b).

 

E. Final Thoughts

While the projected RMA price of $4.00 /bu for corn in the U.S. in 2019 is a vitally important component of the overall set of tools used by Kansas farmers to manage revenue risks on corn enterprises, it is NOT the only tool.

If the U.S. average loan rate for U.S. corn of $2.20 /bu in the latest farm bill was considered as a “price floor” for the remaining bushels NOT covered by RMA Revenue Insurance coverage, then instead of $3.00 per bushel being the implied or “defacto” floor price across ALL bushels (i.e., both 75% APH bushels and the remaining 25% uncovered amount of production, then the implicit floor would be higher at $3.55 /bu.

New Defacto Floor$2019 = (75% APH Covered Bu. x $4.00) + (25% Non-covered Bu. x $2.20)

= $3.55 /bu

This one calculation alone presents a moderately more positive perspective on corn enterprise profitability in Kansas.  Other elements of this corn enterprise income risk management picture can be presented by including USDA payments for ARC (Agricultural Risk Coverage) and/or PLC (Price Loss Coverage).

The final point is that these revenue coverage levels for irrigated and non-irrigated corn in Kansas are at best “covering costs” but not providing strong profitability as is needed by many farmers in the state who have been “grinding” through a period of breakeven at best revenues arguably since 2014.  As a “safety net” these programs are protecting the “down side” as many argue they are designed to do.  But these programs that were designed to be a “safety net” are not providing any large amounts of net returns over costs.  Cost competition, efficiency, and “surviving to farm another year” are the norm now among the larger part of Kansas corn producers.

 

“A First Look at the Agricultural Improvement Act of 2018 (Farm Bill 2018)” from KSU Ag Economics

A First Look at the Agricultural Improvement Act of 2018 (Farm Bill 2018)

Robin Reid (robinreid@ksu.edu), G.A. “Art” Barnaby (barnaby@ksu.edu), Rich Llewelyn (rvl@ksu.edu), and Mykel Taylor (mtaylor@ksu.edu)
Kansas State University Department of Agricultural Economics
December 2018
After a long and heated debate, the 2018 Farm Bill is finally becoming law. While the 2014 Farm Bill had new farm programs and major changes, the 2018 Farm Bill is largely status quo with some improvements to Title I programs that should benefit farmers during these tough times in agriculture.
Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) are again offered, with ARC having a county and individual farm option, as before. Notable changes affecting both programs include:
Producers will elect a program per commodity for 2019 and 2020, but then have ANNUAL elections beginning in 2021. This will alleviate much of the pressure in having to make a 5-year decision, as it was for the previous farm bill. Producers can change their program preferences based on more current market conditions.
Base acres that have been planted to grass or pasture and planted none of their base acres to program crops for all years of 2009-2017 will effectively be “suspended” from receiving payments, but still maintain their historical base. These base acres will be eligible for the CSP grasslands program however and can receive a payment of $18/acre. These suspended acres will also be considered “planted” to program crops during this farm bill so it will maintain the base for future legislation. The definition of “grass” is uncertain at this time and will have to be interpreted by the Secretary.
Just as a side note: Senator Roberts was absolute in his statement that no farmer would lose base acres. Under this compromise, the intent is no loss of base. Freedom to Farm, sponsored by Senator Roberts in 1996, allowed farmers to plant for the market rather than being required to plant the program crop in order to receive payments. This made the payment more in line with WTO trade rules, but also allowed farmers to plant forages for livestock and not be required to plant a program crop in order to receive payments and maintain their base.
Farmers who are currently planting non-program crops on base acres are likely at some future point to risk losing base. In 1996, economists were arguing that it was good economics to allow farmers to plant for the market and not as requirement for payments.
In the current debate, some economists are now arguing farmers who don’t plant program crops shouldn’t receive payments. Acres that have been converted to hay and grazing are mostly wheat base. Corn belt acres are too valuable to grow forages, so the reduction in base acres and payments would come from wheat base. This idea was being pushed in the Corn Belt to generate more funds for ARC. As long as Senator Roberts is in the Senate, I think the loss of base is no great threat, but who knows under new leadership?. This was a major change from the House language, but it is likely just the first step, and more crops will be added the list of crops that can’t be planted on base acres and receive payments. The original House version would have eliminated base on acres planted to alfalfa, so this compromise greatly reduced the economic impact from the House planting restrictions and very few farmers will see any impact on their farm at this time.
  • Effective reference prices (ERP) now include a formula & could go up as much as 15% if commodity prices improve

Statutory reference prices remain the same, as follows:

Statute reference Maximum Effective reference (115%)
CORN $3.70 $4.26
SOYBEANS $8.40 $9.66
WHEAT $5.50 $6.33
GRAIN SORGHUM $3.95 $4.54

To set the effective reference price for both ARC and PLC programs, an Olympic average of the last five Marketing Year Average prices (MYA’s) will be multiplied by 85%. If this is higher than the statute reference price, this number will be used up to the maximum of 115% of the statutory reference prices.

For example:

Soybean MYA prices for the last 5 years were: $10.10, $8.95, $9.47, $9.33, and $8.60- (projected). An Olympic average of these MYA’s would be $9.25, which would be multiplied by 85% and become $7.86. Since this is less than the $8.40 statute reference, $8.40 would be used.

Because of the lower commodity prices in the last 5 years, the likelihood of this formula reference price becoming effective for our major Kansas crops is low.

  • The individual payment limit remains the same at $125,000, but allows the definition of family to extend to nieces, nephews, and first-cousins.

  • The Adjusted Gross Income cap remains at $900,000.

Some provisions that have changed specific to PLC:

  • All producers will get an opportunity to update their payment yields with the 2020 crop year.

The formula is somewhat complex. Average individual producer yields per planted acre from 2013 through 2017 crop years will be multiplied by 90% and then multiplied by a “detrending” ratio of the national average yield from 2008-2012 divided by the national average yield from 2013-2017.

There is also a 75% county plug yield that will replace any year that an individual producer yield is low. 

While this sounds complicated, the payment yield update decision will be easy.  If this formula yield is higher than the current PLC yield, then a producer will want to update.  This will increase PLC payments in the future, if they are made.

 

Some provisions that have changed specific to ARC-County:

  • ARC-County payments will be calculated based on the physical location of the farm, not the administrative county.
  • USDA Risk Management Agency (RMA) yields per planted acre will be used as the first source of county-yield information to set revenue guarantees and calculate payments.
  • The benchmark yield to set the ARC-County guarantee will again be an Olympic average of the last 5 years of county yields, but low years will be replaced by 80% of the transitional yield, AND a trend-adjustment factor will be
  • USDA Farm Service Agency (FSA) will be required to publish the source of data used to calculate the county yield along with the number and outcome of occurrences in which that yield was reviewed, changed, or determined not to
  • Approved insurance providers (AIP’s) will be required to submit producer yields 30 days after the final reporting date, hopefully speeding up the process of publishing a county yield value and allowing producer and lenders to estimate an ARC payment for cash flow This is particularly helpful for wheat, meaning that the yield and price for ARC should be known by July 1, allowing farmers and lenders to have a very good estimate of their ARC payment for wheat several months before the end of the marketing year, June 30 for wheat.

The Marketing Assistance Loans (MAL) and Loan Deficiency Payments (LDP) programs remain the same with rates increasing to the following:

CORN $2.20
SOYBEANS $6.20
WHEAT $3.38
GRAIN SORGHUM $2.20

 

  • Title I programs also includes Dairy Margin Coverage, which has undergone significant changes already with the Bipartisan Budget Act of 2018, reducing premiums and improving risk coverage for dairy farmers. A detailed discussion of dairy policy from Dr. Andrew M. Novakovic (Cornell University) and Dr. Mark W. Stephenson (University of Wisconsin) can be found at: https://dairymarkets.org/PubPod/Pubs/BP18-02.pdf

 

  • The Conservation Title saw some heated debate and changes in the 2018 Farm Bill. The CRP acre cap will be increased over time from 24 million acres currently to 27 million acres by 2023, but rental rates will be reduced to 85% of the average county rental rate for general sign-ups and 90% of the county average for continuous CRP enrollment.

 

  • The Conservation Stewardship Program (CSP) will be phased out as a standalone acre-based program and be administered with the current Environmental Quality Incentives Program (EQIP).

 

  • The Crop Insurance Title saw very little change, which will be a relief to most farmers who consider this their number one risk management tool. Enterprise units are now allowed across county lines. One other change involves how cover crops are handled and may increase the use of cover crops in some areas.

 

  • Also of interest to Kansas producers is the establishment of a federal vaccination bank with priority to Foot and Mouth disease.

 

  • The nutrition title (Title IV: SNAP), the most controversial part of the bill, which held up passage earlier in the year due to revisions regarding work requirements in the House version, ended up with virtually no change.

More from the 2018 Ag Commodity Futures Conf, Overland Park, KS, April 5-6 – Experts Overstate Crop Insurance Competition with CME

The 2018 Agricultural Commodity Futures Conference was held in Overland Park, Kansas on April 5-6, 2018.  This meeting was sponsored by the Commodity Futures Trading Commission and the Center for Risk Management Education and Research in the Kansas State University Department of Agricultural Economics.

The agenda for this conference and a number presentations are available at the following web location:

http://www.k-state.edu/riskmanagement/conference.html

Following is the second of two articles by KSU Agricultural Economics Art Barnaby and Daniel O’Brien discussing the findings of the conference – with a focus on the relationship between crop insurance and grain futures.  This article is also available at the following web address on the KSU AgManager.info website:

http://www.agmanager.info/crop-insurance/risk-management-strategies/experts-overstate-crop-insurance-competition-cme

 

Experts Overstate Crop Insurance Competition with CME

Prepared by

G. A. (Art) Barnaby, Jr. (barnaby@ksu.edu) , Professor, Dept. of Agricultural Economics

Daniel O’Brien (dobrien@ksu.edu), Extension Agricultural Economist

K-State Research and Extension, Kansas State University, Manhattan, KS 66506

April 18, 2018.

Summary

Kansas State University and the Commodity Futures Trading Commission (CFTC) recently held a joint conference on the lack of convergence in grain futures.  In addition to hedges, convergence is required for crop insurance claims to work properly.  Many in the grain industry still think revenue-based crop insurance tools compete with their grain futures contracts.  Making this argument even more confusing is a new report from Harvard and other Law Schools[i].

[i] Art Barnaby’s Disclaimer.  Harvard Law did contact me and asked me to put together a group of people to discuss these Farm Bill and risk management issues.  I don’t want to speak for the group, but as for myself, I agree very little in this report.  We gave them the other side of the crop insurance, commodity titles, and hedging story, but those comments were not included in their report.

Issue #1: Crop Insurance

As a group, there are still a large number of traders who think government-backed crop insurance competes with them for the farmer’s risk management dollar.  Many of these misunderstandings originated from academic researchers, and more recently by a group of Law Schools. 

The FBLE group (see list of Farm Bill Law Enterprise (FBLE) member institutions in AgManager article) argue the existing Harvest Price Option (HPO) subsidies encourage over-exposure to the futures markets and farmers should not forward price more than a third of their expected crop. 

However, Smith, et al., argue that price coverage is available via private futures market exchanges, therefore revenue insurance is unnecessary.  See Smith, Vincent H., Joseph W. Glauber, and Barry K. Goodwin, “Time to Reform the US Federal Agricultural Insurance Program”, American Enterprise Institute, 2017.    As a result, one academic expert suggests farmers should use futures, and another academician says no, farmers are over-exposed to the futures.

However, both are wrong.  Once farmers plant their crop or hold unpriced inventory they are 100% exposed to the real cash market of potentially falling prices.  Following the one-third argument, farmers would still have two-thirds of their crop exposed to downside price risk.

Issue #2: Limited Put Competition

The USDA-backed revenue insurance provides limited competition to Chicago Mercantile Exchange (CME) traded puts, but not calls.  About 79% of Revenue Protection (RP) insured corn acres are insured at 80% or less.  An 80% RP insured farmer currently has an effective “put” strike at $3.17 (80% X $3.96 for 2018) on new crop corn.  Farmers insured with 80% RP coverage and an average crop will need an October average closing December 2018 corn futures price below $3.17 to trigger payments. 

However, this insurance “put” is way out of the money with current new-crop corn futures trading over $4, so the competition with CME is “small”.   If yields are above average, then the effective RP “put” strike is even lower.  Farmers can always produce their way out of a RP indemnity claim.

Note that the $3.96 corn strike price and October settlement price applies to crop insurance in Kansas, Northern Great Plains states, and Corn Belt states for the 2018 crop insurance contract.  The crop insurance strike price is set earlier and the settlement price is determined earlier in Southern states. 

Issue #3: Call Options

Revenue Protection is mis-named because when prices increase above the base price, RP is no longer a revenue contract.  RP turns in to a yield-protection contract only.  At that point, the only difference between RP and Yield Protection (YP), is that YP indemnifies guaranteed bushels at a below-market price, while RP indemnifies the same lost bushel at the current market price. 

This is only complicated because the critics make it complicated in order create confusion among decision-makers, when it is actually simple.  Should farmers be paid for their crop losses at a below-market price, or at the current market price?

Issue #4: Put Option Competition with Commodity Programs

The Farm Service Agency’s (FSA) Price Loss Coverage (PLC) provides a free “put” on old crop held in “inventory”.  While the crop has been harvested, the PLC payment rate is applied to 85% of the farmer’s base acres times the historical program yield and subject to sequestration cuts.  This payment procedure removes any yield risk, unlike the new-crop out-of-the money “put” in RP.  The PLC “put” corn strike of $3.70 is based on the after-harvest 12-month national Marketing Year Average (MYA) price.  USDA’s MYA price is normally about 15 to cents lower than futures and PLC payments are made about a year after harvest, if any. 

Agricultural Risk Coverage (ARC) also provides some old crop “put” protection, but it is more complicated than PLC because the payment is tied to the county yield and the strike price is a 5-year Olympic average of the USDA-determined price.  The current Olympic average USDA price is $3.95 X 86% setting the effective corn “put” strike at $3.40 with an average county yield.  Both PLC and ARC have a price stop-loss at the loan rate.  There can be a little slippage because the ARC-PLC trigger payments are based on NASS prices and loan payments are triggered by the FSA-determined county price (explained below). 

For those who are “concerned” about small farmers, their crop yields are less likely to be highly correlated with the county yield.  If a farmer were to farm the entire county, then there is no difference between their enterprise unit yield and the county yield.  Nearly all farmers can cite cases where they received no ARC payments, but the county across the road did receive an ARC payment.  So as a replacement for put option price protection, ARC is a bit iffy, especially on small farms.  Again, any ARC payments are made only on 85% of the base acres, about a year after harvest, and subject to sequestration cuts, if any ARC payment is due.

Issue #4: Marketing Loans

At very low price levels, the FSA loan rate is effectively a free “put” on all farmer-produced bushels with no effective payment limit.  The current national loan rate for corn is $1.95 and $5.00 for soybeans, therefore the loan provides a “put” that has been way out-of-the-money for years.  Effectively, the loan rate on corn and soybeans provides a “put” with a near zero value.  However, the wheat national loan rate of $2.94 did trigger in Kansas and many other counties after the 2016 wheat harvest, and created an in-the-money “put”.  Note that the loan rate price is set by county.  Rather than requesting an FSA loan at the loan rate, farmers can elect to take Loan Deficiency Payments (LDP).  An LDP payment is the difference between the loan rate and the FSA-determined Posted County Price (PCP).  The PCP is a daily USDA price and is not the same as the NASS MYA price. 

Most farmers just claim the LDP, but farmers can take a loan on all harvested bushels at the county loan rate price.  Unlike a put where farmers pay premium for a CME put, farmers can take the loan and receive cash.  They will receive the loan in cash and at the end of 9 months they can pay off the loan at the lesser of the PCP or PCP plus interest, keep the difference, and avoid the payment limit.  Farmers have the option to pay the loan off early.  This is a non-recourse loan, therefore at the end of 9 months, farmers can forfeit the grain to the government and keep the loan proceeds.  Most farmers don’t forfeit grain because they gain more by repaying the loan at a PCP price that is normally lower than the loan rate.  The loan gain, similar in concept to loan right down, will approximately equal to the LDP.

The loan puts a price floor in the market for farmers, but not the market.  Because farmers can pay the loan off at the PCP, the farmer’s minimum price is the loan rate, but the cash market can still go lower and did on 2016 wheat.  There were days when the Kansas LDP wheat payment was over 40 cents a bushel.  During this period the loan rate was providing a deep in-the-money free “put” and was in direct competition with CME traded puts.

In most years, the LDP payments are not a factor.  The corn and soybean loan rates are so far out-of-the-money and provide almost no competition with CME traded puts.  The only recent exception was 2016 wheat when the LDP did trigger on wheat in many counties.  When prices are near the loan rate, there is no reason farmers would purchase puts when they are effectively receiving “free” puts from FSA.

Issue #5: Whole Farm Crop Insurance (WRCI)

WFCI contracts are whole-farm insurance with RMA premium discounts and guarantees based the farm’s prior 5 years of tax return incomes.  The WFCI should not be used by farmers that use CME traded futures and options, because the gains are not counted in the historical 5 years of income that set the guarantee.  However, hedging losses in one’s brokerage account are not included in a claim settlement, resulting in a lower indemnity payment.  WFCI insured farmers who want to manager some of their price risk will need to use derivatives offered by elevators such as forward contracts. 

One should not rule out the possibility that a WFCI insured farmer could set up a separate LLC organization to hold one’s futures trades and remove those trades from the farm tax return.  This would require professional help from an attorney and tax accountant to keep futures gains-losses separate from farm income.  This is another example of government policy generating unintended consequences.

The CME could argue the WFCI provides direct competition for their farmer customer who uses private tools to manage price risk.  However, at this point, WFCI has been sold mostly to farmers growing crops that are not traded on the CME or in locations where the price basis is unpredictable, providing another example of why it is important that convergence occurs and gives some predictability to the cash basis.

Conclusions

FSA’s PLC and Marketing Loans provide direct competition with CME-traded puts WHEN markets are extremely low.  However, currently the “strike” for these program are low enough that the “put” protection is way out-of-the-money for corn and soybeans, but these USDA programs have provided recent “put” protection on wheat.     

Revenue insurance and ARC provide limited competition with CME traded puts, but currently these “put” derivatives are out-of-the-money on corn and soybeans.  If policy makers want to eliminate any “small overlap” with traded puts or the commodity programs, they would remove the “put” (revenue) from RP and retain the HPO.

The HPO is NOT competition with calls.  HPO turns the revenue insurance product into a yield guarantee only.  When HPO triggers, the RP is the same guarantee as YP, but YP indemnifies the lost bushel at a below-market price while RP indemnifies the lost bushel at the current market price.  As a result, RP is a complement to futures because it maintains the hedge on forward-priced bushels.  Both YP and RP contracts require a yield loss greater than the yield guarantee to trigger any payments.