A topic that has been on many crop farmers minds is the derecho that took place in much of Iowa on 10 August. Steve Johnson, Iowa State University Farm Management Field Specialist, recently reviewed what is known and unknown about the damage done by the derecho. Initial reports indicated 10 million acres damaged in 57 Iowa counties. USDA’s Risk Management Agency estimated 8.2 million acres of corn and 5.6 million acres of soybeans were damaged. Later satellite imagery used by the Iowa Department of Agriculture estimated that 36 counties had serious damage on 3.57 million acres of corn and 2.5 million acres of soybeans. Initial estimates indicate a possible 150 million bushel corn production decline. Heat and drought in part of the area have added to the probable crop reduction.
Farmers now have more price uncertainty than we thought likely 3 weeks ago. Some of the damaged acres will produce some crop but no one knows how much. Some of the pictures of the Iowa derecho damage lead one to suspect some cornfields will only be able to be harvested in one direction. Some die back is evident from the satellite images released. Moreover, there is a question about whether soybeans will be more or less resilient to the derecho damage that occurred. Another issue though is the loss of millions of bushels of crop storage. Iowa coops estimate replacement will cost $300 million.
One piece of information we do have is corn crop ratings. These are lower in Iowa, Chart 1, than any year since 2012. But that isn’t the full story as Chart 2 shows. US corn crop ratings are still above 2017 and 2019. It may be possible that much of the Iowa damage will be offset by very good yields in Il, NE and MN.
Chart 1: Iowa Corn Crop Ratings.
Chart 2: US Corn Crop Ratings
Additional information will come to the market slowly. Producers should watch for solid information to plan post-harvest sales, which could put Nebraska farmers in a better financial place than we thought at the beginning of August.
One component of commodity prices for corn and soybeans during the growing season is planted acreage. Both NASS and FSA report planted acres. The data for these reports comes from two different sources. NASS surveys all corn and soybean growers in a statically designed procedure. FSA, since 2011, requires all growers enrolled in farm programs to report planted acres of program crops by July 15 of each year. Later planted acre reporting by farmers is done with a late fee. FSA reports planted acres monthly beginning in August. Due to COVID-19 the 2020 late fee has been waived for 30 days. This waiver might influence the 2020 FSA data series reliability until later in the summer. January of each year FSA publishes a final report of planted acres for the commodity program crops administered by the agency.
These different data sets and acreage reports, NASS and FSA, allows for analysis and comparison. U of IL Farmdoc Daily recently published such an analysis from Irwin and Hubbs. Not all crop acres are enrolled in USDA farm commodity programs but their analysis shows that the FSA reports from 2011-2019 account for just over 98% of the NASS final planted acres report. The Irwin and Hubbs analysis for 2020, indicates NASS probably have overestimated total planted acres while FSA reporting has been slow and probably under-reported due to COVID19. This leaves a lot of uncertainty, combined with the Iowa derecho, about total crop production for 2020.
Let’s state the obvious, this isn’t a typical year and we all know it. For farmers, it is a survival year. Why and what might be done to make it through to the other side of the COVID-19 pandemic? This article will discuss how to build a marketing strategy to assure that the farm continues to the next crop year.
SITUATION
The prominent factors that are influencing our agricultural economy are also affecting the broader economy, COVID-19 and oil prices. COVID-19 has caused world oil usage to decline starting in late 2019. (Figure 1) The U.S. Energy Information Agency (EIA) projects a decline of over 25% worldwide. World production and consumption of oil stayed mostly in balance until Q4 of 2019 when COVID-19 presented and spread worldwide causing oil consumption to decline. (Figure 2) Many countries prohibited non-essential land travel and air travel dropped to very low levels. This much reduced transportation fuels usage has unbalanced supply and demand and so far, oil production levels have not dropped to reflect reductions in demand. Oil prices likely will not recover until oil stockpiles begin to decline. Since corn usage is approximately 40% to ethanol, transportation and oil are linked to corn demand and price. When the situation will change is unpredictable.
Figure 1. World Oil Usage and Forecast
Figure 2. World Oil Product vs Use
MARKETING PLANNING
This year’s corn and soybean planting is underway in the Midwest with excellent planting weather across most of the region. Planting for most should be completed on time with minimal interruptions. That leads to the possibility of a good to excellent crop if weather after planting cooperates. If most of the nation meets or exceeds their actual production history (APH), this could place greater downward pressure on grain prices. You may be able to survive an average to high yield year, even with low prices. But what if you have a yield shortfall, and grain prices do not recover? With survival in mind, let’s discuss steps in marketing planning
First, review your input expenses. Cash flow planning earlier this year probably did not consider COVID-19 impacts. Reassess that cash flow and adjust as appropriate. There are two sides to the cash flow expenses and income. Analyze each input expense to ensure you are achieving optimum, not maximum,maximum; yields based on current prices and input costs. Be certain to include cash expenses such as property taxes, lease payments, and family living.
After reassessing your input expenses, r review the potential income sources for your farm. The first source of income should be grain sales. Calculate a minimum cash price for each crop for a range of expected yields. TheseThis cash flow price should be the lowest price you need to obtain in order to pay for your input expenses. If these cash flow prices are above current or expected market prices, review costs again and make additional cuts without dramatically sacrificing yield.
Another source of income may be off-farm income. The final source of income for your farm may be U.S. government programs. However, payment each farm or ranch may receive is unknown right now. Some of these programs include the Paycheck Protection Program, the Pandemic Unemployment Assistance program and cash payments from the U.S. Department of Agriculture. Farm Bill programs, and crop insurance may also provide additional income if markets remain low.
If no further costs can be reduced or off-farm income can be earned, make an appointment to meet with your lender to discuss what to do if higher pricing opportunities don’t seem likely. In this environment, loan consolidation, especially at low interest rates, can be an appropriate action. Shorter-term loans might be collateralized with real estate to stretch loan payments and improve cash flow.
Next, develop a written plan that includes prices at or above your cash flow price per bushel and date triggers to help you sell throughout the year. Keep yourself accountable by sharing your plan with grain buyers, family and farm partners. The minimum prices and bushels planned to be sold need to bring in as much cash as you will need for the year. Crop producers should not ignore making sales at higher prices when available, but are trying to make sure they recapture all of their cash expenses first.
Finally, implement the marketing plan and do not let emotions derail the plan. Most years prices will follow a pattern where prices peak in June or July and later prices will trend down into harvest. In this economic environment, crop producers will want to maximize income. Trying to guess when the market peaks is difficult and likely to be incorrect, and may have already done so.
CONCLUSION
This year is shaping up to be a survival year for crop producers. Crop producers need to know at what crop price they will recapture all of the cash they will spend this year. Implementing a marketing plan to ensure that takes place is a survival strategy that can keep the farm business intact with no additional debt for a better year next year.
Due to large global ending stocks of corn (340.41 MMT) and soybeans (99.05 MMT), news of flood damage has not affected the futures price of these commodities as one might have expected it to. This is a challenge for farmers facing flood damage, as your revenue will be impacted by both lower than usual yields and possibly lower prices and cost incurred due to flooding. This article will discuss ways to write and implement a pre-harvest grain marketing plan that considers greater yield uncertainty due to flood damage.
Farmers effected by 2019’s
early spring flooding are likely to have increased yield risk from changed soil
characteristics, excess moisture or late planting. The following are steps for
planning 2019 grain sales.
Assess anticipated production – Depending the extent of the damage and the size of the
farm, there are likely to be four categories of yield variation.
Category
1: likely normal production – use actual production history (APH) as yield
estimate.
Category
2: damaged but likely or planted normally – production may be slightly reduced
from APH.
Category
3: damaged, late planted – production will occur, but too many variables are
present to estimate production.
Category
4: damaged, prevent plant – no production or crop planting is after the
insurance period.
Once you
have categorized the damage, estimate the total production in each category.
Determine the marketing percentage – The most difficult decision for flooded farmers will
be the percentage of estimated production that you are going to market. Contracting
more grain than you produce can result in a lower revenue if you have to pay a “buy
back” fee to the elevator, or buy bushels from a neighbor to fulfill your
contracts.
Remember, you
do not have to sell any grain prior to harvest. However, corn and soybean
prices are traditionally higher during the growing season than at harvest. You may want to adjust your marketing
percentage throughout the year as you see how your crop progresses.
Basis. Areas impacted by the flood may offer a
larger than normal basis to incentivize shipments of grain from a further
distance to their elevator. Use this to
your advantage by contracting basis if the offered harvest basis is higher than
the expected harvest basis. Your basis
marketing percentage will be held back by expected production.
Determine the
marketing contract – There are
several types of contracts you can use to sell grain, some of which require
delivery of the grain and others that do not. If you are less confident in your
yield estimate, you may want to use options and futures hedging which provide
price protection, but do not require physical delivery of the commodity.
If you are
comfortable with guaranteeing delivery, you can use a forward
pricing contract, hedge to arrive (HTA), minimum price contract or basis
contract. These contracts
are often available through your local elevator.
Set price targets – Given greater yield uncertainty, it is important for your
pre-harvest marketing plan to set realistic price targets. If you set your
price targets too high, you may miss opportunities to price grain at its
seasonal high. According to the April
USDA World Agriculture Supply and Demand Estimates (WASDE) predicts cash corn
prices to be $3.40 to $3.70 per bushel and cash soybean prices to be $8.35 to
$8.85 per bushel.
Set sales deadlines –The December corn contract and the November soybean contract have
slowly been trending lower since January 1. If your early 2019 price targets have
not triggered sales, you will want to set a secondary trigger in the form of
deadlines to insure that some grain is sold during the growing season when
prices are traditionally higher.
Red Willow Farm and Ranch Management 