January 10, 2017

Revenue Protection (RP) Use on Corn in the Midwest



by Gary Schnitkey

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

RP Use

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




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

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

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

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

RP Coverage Levels

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




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

County Level Detail

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

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




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

Commentary

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

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


January 09, 2017

Prospects for 2017 Ethanol Usage

Ethanol production in the United States ended the year on a record-setting note. It could mean an even bigger number for the corn-based fuel in 2017.

The U.S. ethanol industry ended 2016 on a high note. Ethanol production for the week ending Dec. 30 set a new ethanol production record with an average of 1.043 million barrels per day. The March futures price for corn moved higher last week to close at $3.58 in large part due to strength in the ethanol sector. Ethanol production and exports returned strong numbers over the first quarter of the marketing year. Currently, the World Agricultural Supply and Demand Estimates report forecast for corn consumption for ethanol production is 5.3 billion bushels. According to University of Illinois agricultural economist Todd Hubbs, when taking into account an increase in projected gasoline consumption in 2017 and robust ethanol export levels, the ability to surpass this projection is a strong possibility.

“Domestic ethanol consumption in 2017 will be influenced by domestic gasoline consumption, due to the ethanol blending requirement and the biofuels volume requirement associated with the Renewable Fuels Standard,” Hubbs says. “The EPA final rulemaking for the Renewable Fuels Standard for 2017 was released on Nov. 23 and is discussed in greater detail in the farmdoc daily article posted Nov. 30. In brief, the renewable fuels volume requirement is set at 19.28 billion gallons for 2017, which is up from the 18.11 billion gallons required in 2016.

“The conventional ethanol requirement is set at 15 billion gallons for 2017, 500 million gallons larger than 2016 and equal to the statutory requirement level,” Hubbs says. “If the gasoline consumption forecast used by the EPA is correct, the E10 blend wall will be 14.36 billion gallons in 2017. The EPA believes an ethanol supply of 14.56 billion gallons is reasonably attainable in 2017. Within the 14.56 billion gallons, E15 and E85 blends are expected to be 107 and 204 million gallons respectively. The ability to attain the E15 and E85 blend levels remains to be seen, but the increase in ethanol requirements provides support for greater corn usage in 2017.”

U.S. retail gasoline prices averaged $2.14 per gallon in 2016, which is 12 percent less than the price experienced in 2015 and is the lowest price since 2004. The December Energy Information Agency Short Term Energy Outlook projected an increase in gasoline prices for 2017 to $2.30 per gallon. Despite the projection of higher gasoline prices, gasoline consumption is forecast at 143.60 billion gallons in 2017, which is up from the 142.72 billion gallons consumed in 2016. Ethanol production is forecast to be 1 million barrels per day.

“If the EIA projection is correct, approximately 15.3 billion gallons of ethanol will be produced in 2017,” Hubbs says. “When considering the robust ethanol export trade currently in process, the U.S. ethanol industry is expected to produce a record level of ethanol in 2017.”

Ethanol export numbers are available from U.S. Census trade data for 2016 through November. U.S. exports of ethanol thus far are at 948 million gallons, which is up almost 27 percent from the similar period in 2015.

According to Hubbs, for 2016, the prospect of ethanol exports exceeding 1 billion gallons is not unreasonable.

Canada, China, and Brazil imported approximately 67 percent of the ethanol shipped from the U.S. through November. “The increase in ethanol exports is driven largely by increased volumes sent to China and Brazil,” Hubbs says. “China imported 179 million gallons through November, which far exceeds the 73.8 million gallons imported during the entirety of 2015. Brazil imported 224 million gallons through November, which is almost double from 2015. As we progress into 2017, the increases are expected to persist in Brazil because high sugar prices are expected to decrease ethanol production as mills allocate cane for sugar production in 2017. There is concern that China could raise ethanol tariffs and reduce ethanol imports in 2017 due to a possible trade dispute with the new administration.”

Hubbs says the implications for corn consumption during the 2016–17 marketing year can be seen in the USDA Grain Crushing and Co-Product Production report released on Jan. 3. Grain crushing for fuel alcohol is available through November. For the first three months of the marketing year, 1.34 billion bushels of corn has been processed for ethanol. This is up 3.2 percent from 2015 processing numbers.

“If corn used for ethanol production maintains this pace, 5.37 billion bushels will be processed in the marketing year,” Hubbs says. “Using EIA weekly ethanol production numbers, December ethanol production averaged over 1 million barrels per day. These production levels place corn use for ethanol production in a range of 455 to 460 million bushels for the month if corn use maintains the pace of the three previous months. With a conservative estimate of corn crush in December, total corn consumption for ethanol production through the first third of the marketing year would be above the current WASDE projection.

“Lower corn prices, strong ethanol exports, and greater blending requirements combine to make 2017 appear to be a strong year for corn consumption in ethanol production,” Hubbs concludes. “If the U.S. ethanol industry produced over 1 million barrels per day for the entire year, the ability to blend at requirement levels under an expanded gasoline consumption scenario and meet potential export market demand bodes well for corn use in the sector for 2017.”


January 05, 2017

Brazil Soybean Update | an interview with Kory Melby

The soybean crop in Brazil looks to be mostly in good condition, however, as you’ll hear in this interview by Todd Gleason some areas are under performing.


Kory Melby, Brazilian Ag Consulting Service - Goiania, Brazil


January 05, 2017

Tropical Bird Populations to Change | an interview with Jeff Brawn

Jeff Brawn, Animal Biology - University of Illinois College of ACES NRES

The future of the red-capped manakin and other tropical birds in Panama looks bleak. A University of Illinois research project spanning more than three decades and simulating another five decades analyzes how changes in rainfall will affect bird populations. The results show that for 19 of the 20 species included in the study, there may be significantly fewer birds if conditions become dryer.


January 04, 2017

Two Percent More Pork & Higher Prices

The last USDA Hogs and Pigs report issued in December estimated this year’s supply of pork will be larger than most analysts expect. Todd Gleason has more on how that will happen.

U.S. pork producers, in the last quarter of 2016 set a pigs per litter record,10.63. For the whole of the year, the new annual record is 10.5 pigs per litter. Every sow is having more pigs. Given these numbers, the industry will increase pork output by about three percent this year says Purdue University Extension Agricultural Economist Chris Hurt.

Quote Summary - And that will be to 25.7 billion pounds. This represents a 12 percent increase since 2014 when PED reduced production and contributed to record high hog prices. Pork production will rise by two percent in the first-half of 2017 and by about four percent in the last-half.

What does this mean for the price of hogs? With three percent higher production one might expect annual prices to be lower, however there are additional items to consider

First, retail prices did drop in 2016, but there is opportunity for those prices to come down more. Lower retail prices will stimulate the quantity of pork that consumers purchase. Secondly, USDA expects exports to expand by five percent which will move more of the increased production to foreign customers. Finally, with the addition of new processing capacity, the farm-to-wholesale margins are expected to drop. Lower margins at the processing stage may contribute to stronger bids to hog producers.

Live hog prices are expected to be about $48 in 2017, $2 higher than in 2016. Chris Hurt predicts prices will average $45 in the first quarter, the very-low $50s in the second and the third quarters, and then drop to $43 in the final quarter of 2017. A range of $2 higher or lower would be reasonable for price projections. He expects costs of production are expected to be around $50 on a live weight basis in both 2016 and 2017 based on current feed price expectations.

This means the industry operated at an estimated loss of about $12 per head in 2016 and is expected to have losses that average about $6 per head in 2017. Losses in the first quarter of 2017 are expected to be about $13 dollars per head. Modest profits may return in the second and third quarters. Then with a return to the largest losses of the year in the final quarter maybe around $18 per head.

Because the 2017 outlook is for weak returns the Purdue number cruncher says it is important hog farmers keep further expansion to a minimum. This will be difficult with new processing capacity coming in 2017 as those plants will want to stimulate some added production to fill their lines.


December 24, 2016

Celebrating a 40 Year Career with Darrel Good

Forty years ago Darrel Good hired on at the University of Illinois as a commodity markets and grains specialist. He has written more than 1500 Weekly Outlooks and done countless thousands of interviews over this same time frame. Please take time to send Darrel an email thanking him for his service.


November 30, 2016

2016 Gross Farm Revenue & Income

It looks like this year is going to be better than last year for farmers in central Illinois. Todd Gleason explores how gross income has changed for row croppers in the middle of the prairie state.



The gross revenue for corn is $292 per acre. It is tallied from three income sources. The crop is worth $262. There was a $20 farm safety net payment from the ARC-County program and a $10 crop insurance indemnity. The total, again $292, is lower than last year says University of Illinois Agricultural Economist Gary Schnitkey, “Even though we are putting in a very high yield, we are using 231 bushels to the acre for the corn average - the same as in 2014, revenues will be down for corn in 2016 as compared to 2015”.



Schnitkey calculated the gross revenue figures for the farmdocdaily website.

The soybean figures add up in a similar fashion. The gross revenue is estimated to total $718 per acre. It’s a figure much higher than the 2015 gross says the agricultural economist, “We are including very high soybean yields for 2016. Record-breaking yields, in fact, of 73 bushels to the acre. The price is above $9.50, and this may actually turn out to be low as prices continue to climb. Overall, revenue on soybeans will be up from last year and much higher than total costs. So, our bright spot for the 2016 year will be revenue and income from soybeans”.



All in all, on the highly productive soils of central Illinois, 2016 will go down as a high-yield low-income year. Another year in which farmers just-get-by says Gary Schnitkey.

Quote Summary - Get-by year, but better than it could have been without the high yields. Most farmers will maintain equity, but may see some working capital declines. The declines will be more pronounced on farms working a higher percentage of cash rented land. It is better than 2015, but still not up to sustainable levels for the long-run. We need to see higher returns, particularly for corn prices in the future.

There are a series of graphics detailing 2016 central Illinois row crop farm gross income on the farmdocdaily website.


November 28, 2016

EPA Renewable Fuels Standard Rallies Soybean Oil Prices

Source | Darrel Good, Agricultural Economist - University of Illinois

The price of soybeans rallied about 10 percent from mid-October to mid-November. It came,despite the record sized crop harvested in the United States.



Farmers have been in awe of the soybean market since mid-August. There have been a few reasons for it to rally; a short crop out of South America and a drought constrained supply of palm oil coming from Indonesia for instance. Still, this U.S. soybean crop is big, mighty big in fact. Yet, the price of soybeans has gone higher.

Darrel Good writes about it in this week’s Weekly Outlook. You may read it online at FarmDocDaily.

There are two unusual things about this price rally. Well, one really, but it is driven by the first. The rally has come because the world seems to be short of vegetable oils. Soybean oil is among those. Here’s the important part, soybean oil lead rallies generally do not last. Darrel Good thinks this one might and that it could change the dynamics of the soybean complex. The change is driven by the Renewable Fuels Standard. The RFS did the same thing for the corn market when it began to ramp up ethanol production in the United States more than a decade ago.

The soy complex is made up of three parts; the price of soybeans, the price of soybean meal, and the price of soybean oil. The last two are the products derived from the soybean when it is processed, crushed.

The EPA RFS announcement, made last week, initially resulted in a surge in soybean oil and soybean prices. Increasing soybean oil consumption for mandated advanced biofuels, in this case biodiesel production, this year and beyond may require the domestic soybean crush to be larger than previously thought concludes Darrel Good. He says this could lead to some long-term pricing questions.

Historically, the domestic crush has been driven by soybean meal demand. If it is driven instead by soybean oil demand, this could result in lower soybean meal prices. Soybean meal has a short shelf life. Its price would need to be low enough to for it to be used quickly.

The impact of higher soybean oil prices and lower soybean meal prices on the price of soybeans is difficult to anticipate. However, a “surplus” of soybean meal, says Good, might result in lower soybean meal prices relative to feed grain prices. It could cause the soybean meal to corn price ratio that has ranged from 2.55 to 3.2 in recent years to decline. The historical range is 2.0 to 2.5.


November 21, 2016

Could Soybean Stocks Grow to 580 Million

Depending upon how you do the numbers there could be an enormous supply of soybeans in the U.S. by the time the fall of 2018 rolls around.



The large soybean crop in the United States hasn’t, yet, pummeled prices in Chicago. However, farmers are a bit worried the hammer blow will be struck. For now, much of the focus is on the potential size of the 2017 South American crops and the implications for demand for U.S. grown soybeans. Increasingly, however focus will shift to 2017 production prospects here in the United States.

The over-riding question is whether surpluses and low prices will persist for another year. Although University of Illinois Agricultural Economist Darrel Good says it is a bit early to speculate on supply and consumption prospects for the 2017–18 marketing year, he thinks some scenarios can be considered.

For soybeans, there is a general expectation that U.S. producers will increase acreage in the year ahead. An increase of about five million acres, to 88 million harvested acres, seems to be a common expectation right now. The extremely high soybean yields of the past three years raise some questions about a potential increase in the trend yield. However, if the 2017 U.S. average soybean yield is near our calculated linear trend value of 47.5 bushels and acreage is increased as expected, the 2017 crop would total 4.18 billion bushels, 181 million bushels less than the 2016 harvest. If soybean consumption during the 2017–18 marketing year remained at the elevated level of 4.108 billion bushels projected for the current year, stocks would grow by about 100 million bushels.

So, at the end of the 2017–18 marketing year there could be 580 million bushels of soybeans left in the supply category as ending stocks. The upshot writes Good in his Weekly Outlook is that with a trend yield of 47.5 bushels and a constant level of consumption, any increase of more than 2.85 million acres next spring would result in some further growth in year ending stocks.

Quote Summary - On the other hand, a five million acre increase in soybean area along with a constant level of consumption means that an average yield of less than 46.3 bushels would result in some increase in marketing year ending stocks.

There are obviously multiple potential acreage, yield, consumption, and ending stocks scenarios for the 2017–18 U.S. soybean marketing year. The most likely scenarios tend to favor a modest to large increase in marketing year ending stocks of soybeans. However, the soybean market is apparently not convinced that stocks will continue to grow next year, with the January 2018 futures price only $0.06 lower than the January 2017 price.

The soybean market, concludes Good, then appears to be reflecting some production risk. He thinks this perceived risk may stem from current drought conditions in the southeastern United States and/or uncertainty about potential impacts if a La Niña episode unfolds in South America.


November 19, 2016

US Corn Ethanol Market | an interview with Carl Zulauf




Ethanol was a factor in both the price run-up that began in 2006 and the price run-down that began in 2013. Tepid growth replaced explosive growth. The question for the future is, “What is ethanol’s organic growth rate (growth without government policy stimulus)?” Recent history suggests growth will continue in the corn ethanol market, but it likely will be notably lower than the growth in yields. Thus, upward pressure on corn prices is less likely.

Corn Ethanol in Historical Perspective
US Department of Agriculture data on US corn processed into US ethanol begin with the 1980 crop. It is reported monthly in the World Agricultural Supply and Demand Estimates. Corn processed into ethanol grew at an average annual rate of 6% between 1985 and 2000, exploded to a 24% annual growth rate between 2000 and 2010, then slowed to 1% per year after 2010 Ethanol Growth vs. Yield Growth. The explosive growth in the first decade of this Century largely coincides with the impact of government policies. These policies first led to the use of ethanol as an oxygenate additive in gasoline, then to the use of ethanol as a substitute for gasoline and by extension oil The latter was accomplished through mandates on market size enacted by Congress in 2005 and 2007.

Return to Equity for Processing Corn into Ethanol
Since January 2005, Iowa State University has issued a monthly report on the costs and returns to processing corn into ethanol. The report is based on (1) a model plant created using best available information and (2) current prices for corn, ethanol, natural gas, and distillers dried grain. Among the measures calculated is a return on equity. Figure 2 reports the average of monthly returns to equity by crop year. Even though growth in the ethanol market slowed dramatically after 2010, average return on equity remained positive for the 2011–2015 crop years (13%). As expected, return on equity was higher for the 2005–2010 crop years (30%). For additional discussion of the return to processing corn into ethanol, see Irwin, 2016.



Ethanol Growth vs. Yield Growth
A measure of growth in demand (growth in corn processed into ethanol expressed as a percent of corn production) is compared with a measure of growth in supply (growth in US corn yield). To illustrate the calculation of these measures, 3.71 billion bushels of corn was processed into ethanol in the 2008 crop year, 0.66 billion bushels more than processed in the 2007 crop year. US production of corn in 2007 was 13.04 billion bushels. The growth in corn processed into ethanol was +5.1% of 2007 corn production (0.66/13.04). US yield of corn per planted acre was 151 bushels in 2008 vs. 149 bushels in 2007. Rate of growth was +1.3% [(151/149) - 1]. These two measures were calculated for each crop year.

Yield growth strongly exceeded the growth in corn used to produce ethanol relative to corn production before 2000 and after 2010 (see Figure 3). The two measures increased at about the same rate (2%) between 2000 and 2005. Between 2005 and 2010, growth in corn used to produce ethanol relative to production strongly exceeded growth in corn yields. Not only did corn processed into ethanol increase dramatically during the latter period, but the growth in corn yields was also abnormally low. Reinforcing these bullish price factors was China’s rapidly growing demand for soybeans (see Zulauf, 2016).



Summary Observations

  • From the perspective of 2016, expansion of the US corn ethanol market was largely squeezed into the 10 years from 2000 to 2010 (83% of the expansion occurred in these years).

  • The squeeze was largely driven by US policy decisions.

  • At the same time that policy was strongly pushing demand, growth in corn yields suddenly slowed, with a likely explanation being a multiple year period of suboptimal growing conditions.

  • However, the increase in demand for corn ethanol spurred by policy would have exceeded the growth in yield even during the high yield growth period of 1980 to 2000.

  • The result was not just an increase in corn price but an explosive increase in corn price.

  • This price increase increasingly looks unsustainable as yield growth returns to a path closer to history and ethanol growth returns to a level more consistent with long term organic growth due to market incentives, not policy factors.

  • If the preceding point holds, agriculture will need to make painful adjustments as it enters a world that will likely look more like 1980–2000 than 2005–2010.

  • Nothing in the historical review suggests that the corn ethanol market would not have developed. The continuing positive return to equity since 2010 suggests the market is sustainable. In particular, ethanol appears to have carved out a role as a competitive source of octane for gasoline, which is translating into a growth in exports of ethanol. For additional discussion of this topic, see Irwin and Good, 2016. But, annual organic growth is slower and unlikely to exceed the growth in yields.

  • This 35 year story does however raise caution about using policy to expand markets.

  • In particular, the design of such policy needs to respect the underlying private market, including attributes such as sustainable non-publically subsidized growth; role of competing demand components, such as livestock in the case of ethanol; and the scope and magnitude for supply growth to be uncertain and how this uncertainty may interact with policy induced demand growth.

  • Interesting, important, but probably unanswerable questions are what would be the current state of the corn ethanol market and by extension corn prices if government policy had not intervened and more narrowly if the 2007 mandate had not been enacted. The answers to these questions may tell us more about the future of corn and other field crop prices than any other set of questions.


Page 11 of 20 pages ‹ First  < 9 10 11 12 13 >  Last ›