Ep. 7 Arkansas Crop Market Update

[00:01] Introduction: Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence, presenting conversations and analysis about risk and risk management for food and agriculture, supply chain decision makers from farmers to consumers and everyone in between. This is relevant risk.

[00:19] John Anderson: This is John Anderson, director of The Fryar Center for Price Risk Management with another Relevant Risk podcast here today with my center co-director Andy McKenzie. Andy, how are you doing today?

[00:29] Andy McKenzie: I’m doing good, John. Good to be here again.

[00:31] John Anderson: And we have a guest joining us by Zoom, Scott Stiles. Scott, I’m probably going to take some liberties with your title and call you an extension economist with Cooperative Extension Service in the University of Arkansas Division of Agriculture. Is that close enough?

[00:46] Scott Stiles: Sounds good- Sounds good to me, John, and great to be with you.

[00:50] John Anderson: Yeah, we’re glad to have you, Scott. So, Scott, you and I talk a lot about markets. I know that you have considerable professional and personal expertise in commodity markets. And we’re sitting here as we record this- it’s April 21^st– and commodity markets have become even more interesting than they have been, I would say, and they’ve been pretty interesting to begin with. And that’s kind of what we want to talk about today. So if you wouldn’t mind giving us kind of a quick summary of what you see out there in the major commodity markets that are of interest, interest to our Arkansas producers and maybe what you hear producers really having on their minds right now.

[01:35] Scott Stiles: Right. Well, you know, if you look, at all the major crops that we grow, I mean, prices for each one of those are at historic highs. And I was looking, you know, at current prices earlier today. And look at corn, it’s back at those historic highs we always talk about back in 2012 John where we had we set record highs that year in 2012, so corn the highest we’ve seen since September 2012, soybeans are the highest we’ve seen since 2012, and we’ve also got cotton and rice at historically high levels that we saw back in 2011. So that kind of gives you some perspective about how long it’s been since we’ve seen commodity prices at these levels and so that gives our growers a lot of you know good options they can- based on their equipment complement and experience that they have or that the crop makes that they traditionally like to stick with- you know prices for each of these commodities are offering a profitable level.

[02:45] John Anderson: Yeah. So you’re raising a good point 2012 is definitely I think the analog that everybody has in mind when we look at what’s going on in the markets this year. And I want to do a little bit of compare and contrast and I had kind of a rude awakening this morning honestly Scott realized that 2012 was ten years ago. Kind of hard to believe but for a context for for for those who may not be as old as we are thinking through these markets 2012 was a major drought year in the Midwest. We’d come through a period of really strong demand and global stocks had been low, kind of rebuilding by that time, but still in a pretty strong fundamental market position and then 2012 hit us with a really severe drought in the heart of the Corn Belt and markets really took off and so that’s sort of the backdrop for 2012. Now one thing that- a couple of things that I think are different that may be worth talking a little bit about today and I’ll ask Andy to come in when we get into this a little bit more but you mentioned those higher price points being at harvest time so we were realizing in 2012 at harvest time or right before harvest time how bad the effects of the drought were, what that implied for production, and that provided a lot of support to markets. We’re- we’re at those price levels were very high price levels now with planning going on, and from a risk management standpoint that’s a very different time on the calendar. So you know, what opportunities does this create for producers and what do you see producers out there doing in terms of trying to manage risk as we’re at the very beginning of the production cycle right now?

[04:31] Scott Stiles: Right. I think growers have probably been more aggressive marketing this. You know, they are they’ve been more aggressive marketing earlier than the year than they normally would be and visiting with growers they’re- many of them are already in the range of 30 to 40% sold some even more aggressive than that. And I think you know a few people have few growers have even got as aggressive as being 50% sold and which is really aggressive for this time of year. But when you think about as you said you know the historically high price levels that we’re at you know taking some risk off the table this early makes sense, and so I’d say that on average most growers are in that range of 30, 40% sold at this point and but I mean marketing you know they have been making some marketing decisions for some time I think you know I think some sales started in late 2021 you know in December and end of January. And then they’ve been, you know, scaling into this rally you know, for the last four months. And you can’t really blame them when you think back to, you know, if you’re looking at growing soybeans in December, you know the South American crop got planted early. It was off to a great start. And so it looked like that crop had record potential. And here at home you said, you know, input costs are going to be record high and that would probably drive a big shift towards soybeans anyway. So taking some price risk off the table three or four months ago made sense at the time.

[06:35] John Anderson: Right. Right. And I think that’s interesting you talk about scaling up into the rally. I mean, a lot of times when we’re talking about that, we’re talking about a strategy during the growing season, you know, the weather’s getting dry, crop condition is deteriorating. And we’re looking at those weekly crop condition reports and the market’s responding to that. And that’s an opportunity to price. I mean, we’re talking about scaling into a rally really before most people are even planted.

[06:59] Scott Stiles: Right. Right.

[07:01] John Anderson: And that is that obviously, it makes a lot of sense given where price levels are. But we do still have production risks out there. Andy, anything you want to add to that or questions for Scott?

[07:13] Andy McKenzie: Well, you know, I think you’re right. I mean, typically we see summertime is where you see the highest prices pre-harvest that you can get. So, yeah, this is somewhat of a unique opportunity. And I will echo what I heard from my friends recently on The Elevator’s Cut podcast. They’re talking about taking some of the cookies at least off the plate. And I think that makes a lot of sense. And as you say, Scott, people are being fairly aggressive on, I guess, forward contracting. So do you see this continuing throughout the next couple of months?

[07:46] Scott Stiles: I think I think so. I think that if you’re a grower and you’re 30 or 40% sold at this point, that’s probably a comfortable place to be. Historically, we like to do, you know, make some additional sales in the second quarter of the year. And I like June as a month historically that has given us some opportunities so if you look at seasonal tendency over the last 20 years, two-thirds of the time we’ve had higher prices in June and we did at harvest time. So so when you look at the seasonal tendency in corn and beans, June is historically been a good month to make some sales. And you know, for what it’s worth, I mean we had our season you know, our growing season highs were made in June last year and corn and soybeans and and and that’s what we see in the majority of years. So so at that point, you know, in the second quarter we may take some more price risk off the table and make some sales then and we’ll be smarter at that point about, you know, what potential the crop has. We’ll know more about Midwest, you know, growing conditions and, you know, whether there’s a develop- there is a developing drought in the Western Corn Belt, and we’ll know- we’ll have more information about things like that. So we’ll see how aggressive we want to be in June and whether we want them to take a lot of risk off the table or we want to wait and watch the markets.

[09:26] John Anderson: You know, I want to get to production risk in just a second. Scott, before I do that, I mean, I do want to be a little more explicit about this 2012 comparison that we started talking about. You know as I remember 2012 the in terms of pricing opportunities in terms of the income potential of the crop it was a very different situation, even though we’re talking about very similar price levels now, it was a very different situation in that as we looked at 2012 when we were at this time of year in 2012 and even earlier as we were kind of getting production notes in order and making seed purchases and, and making acreage decisions, every expectation was that the bull market was over that prices were going to come down, that wherever we were and I can’t remember exactly where the market was at that time of the year, there was nothing but downside at that point. And so as I recall people were fairly aggressive in pricing in 2012 kind of for an opposite reason. The prices were pretty good and had been pretty good. But every expectation is they were coming down. The point of that is when we got to those big harvest prices, a lot of people had already booked, a lot of that, a lot of that, that, that that year’s production had been priced at considerably lower prices earlier in the year before the effects of the drought were known. So we’re in almost the opposite situation here where we’ve got really good early season prices and probably a very difficult market to predict. I feel like it’s a very difficult market to predict, but we’re looking at some very good prices and who knows what’ll happen between now and harvest, but that seems to me to be a fairly significant difference in terms of the risk management decision that a person has now versus 2012, even though we’re looking at pretty similar price levels. Does that make any sense?

[11:20] Scott Stiles: It does. And I guess you know, we’ve got more to be concerned with and watch and in 2022, it’s a unique year in the sense that you’ve got the situation in Ukraine that’s unique and to this year and a little bit different but you got, there are some parallels with 2012, you get you to know potentially a developing drought in the Western Corn Belt and certainly you know you see that drought in the southern plains area but there’s talk that that may expand so you’ve got this corridor of production from Texas to the Dakotas that is projected to be dry. You know that that area is going to have a dry bias through August and so you have that to watch and then you have these unknowns with how much production will take place in Ukraine this year. And so we don’t know you know, we can just estimate at this time what that may be. I saw the UN numbers this week said their corn acreage may be down 30%. And of course, that was their estimate. So so that you know, we don’t there’s a lot of unknowns about how much they’ll produce and how much they’ll export, how much of this year’s wheat crop will get harvested. So there’s a lot we don’t know. But that’s an added dynamic to the market this year.

[12:48] John Anderson: Yeah, absolutely. A lot of risks. One of the risks that I think is very much kind of in front of our Arkansas farmers right now is the risk on the production side related to planting. This is kind of a touchy time of year. Tell us a little bit about what you see over in the Delta related to crop progress.

[13:06] Scott Stiles: Well, it’s as you know, it’s been wet. We’ve had above average rains. I was-  this spring, I was looking at rainfall totals since March and Little Rock, we’re 131% of normal on rainfall. We’ve had about- well not quite nine and a half inches of rain since March 1st. So now that’s just in Little Rock. But there’s been isolated areas of the state that got four or five inches of rain a week ago. We got more rain here in Jonesboro, where I’m based. We got another inch of rain yesterday. We got more rain in the forecast for Monday. And so April is going to get by- you know, get away from growers. And and at this point we’re, as you talked about, you mentioned corn, we’re 26% planted on corn as of Monday- or Sunday- against the five year average of 51. So we’re, we’re basically half of- you know- our progress is half of what it would normally be on corn planting. And then another risk management topic we could bring into this on corn is the prevent plant date for most Arkansas is April 25th for corn.

[14:24] John Anderson: Okay. Good point.

[14:25] Scott Stiles: So- yeah- so April 25th is coming up fairly soon and so that covers most of the state. You got that prevent plant need is May 1st for counties in north, extreme northeast Arkansas- but April 25th will- applies to most of the state. So at that point growers may opt to you know take preventive planning or they can plant 15 days past that but their coverage, you know the amount of insurance coverage they have is dropping one-

[14:55] John Anderson: The guaranteed declines-

 Scott Stiles: One percent a day.

 John Anderson: -once you go past that date.

 Scott Stiles: Yeah, so.

John Anderson: Right. I would my guess Scott is that given where prices are people aren’t going to really worry a whole lot about that that that date and they’ll go ahead and plant at least certainly for that 15 day window. I mean does that make sense, what do you think?

[15:15] Scott Stiles: Yeah that’s a consideration especially if they forward contracted already. So, you know, everybody just has to kind of make that decision, you know, through their, you know, when they’re, you know, look at their personal their marketing situation, if they’ve forward contracted bushels already. And that may be the deciding factor whether they take prevent plan or not.

[15:37] John Anderson: Right. Right. But that’s a great point. And I guess corn is the crop that we are probably feeling the most pressure on right now in terms of planting date, is that right?

[15:48] Scott Stiles: Yep. Yep. Corn, certainly. And then rice, you know, we’d like to be farther along on rice planting. We’d like to- at least over the last five years, we’ve had about we’re about a third of our rice planted at this point. And we’re 9% planted from the numbers that we saw in Monday’s report. So 9% versus 34 average.

[16:14] John Anderson: Yeah. Significantly behind there, too.

[16:16] Scott Stiles: Yeah. So we’ve- you know 2019, 20, 21- we’ve all been wet during the spring and we’ve gotten used to planting a lot of rice in May, so we’re used to it at that point. So, so maybe not as much concern about what rice yield potential might be if we, if we plant into May, we’d prefer not to but we’ve gotten by with it the last few years.

[16:48] John Anderson: Well you know none of us are agronomists, we’re all economists, right. But I think with, with corn, it concerns about, you know, being in critical growth phases during hot weather. That really is a pretty serious issue with corn, maybe not so much with rice.

[17:03] Scott Stiles: Well, I think you know, that planting later may have had some impact on milling, you know, in last year’s rice crop. But that’s a good Jarrod Hardke question.

[17:15] John Anderson: That’s right, yeah. We have people for that, right?

[17:17] Scott Stiles: That’s right.

[17:20] Andy McKenzie: So, Scott, let me ask you this. Given the relative prices and potential returns we’re seeing on our real crops, do you see any potential shifts in acreage from previous years?

[17:33] Scott Stiles: Well, I think the input cost was part of the growers’ decision to cut corn acres at least, you know, at least and well, I mean, not just in Arkansas, but across the U.S. as well. But our, you know, projected corn acres is supposed to be down 12% from last year and probably input cost probably factored into that. Across the U.S., corn acres are projected to be down 4%. So you know below 90- just below 90 million. So so input cost I think you know played you know certainly played a part in decisions there, same with rice. I think our rice acres are projected to be down maybe 2% from a year ago. So these higher input crops like corn and rice I think you know, the fact that we’ve seen just, you know, huge increases in fuel and fertilizer over the past year has probably affected growers’ decisions about what to plant.

[18:43] John Anderson: So Andy’s bringing up a really good topic and one that we’ve touched on before on this podcast- this input price situation really does have a lot of people’s attention right now. So these prices that we’re seeing, we’ve already talked about, they’re historically high. Another difference maybe with the last round of strong commodity prices that we had in 2012 which we’ve referenced is that this time we’ve got probably a, I’m assuming we’re looking at a record cost of production Scott, and so that obviously has impacts on profitability despite the fact that we’re dealing with high prices. What do you, what are you hearing out in the country about that? I mean with these high prices, are people feeling reasonably comfortable with margins, do they feel like they’re being squeezed, or are they still in a situation, of uncertainty?

[19:37] Scott Stiles: Right. You know, the last time we saw fertilizer and fuel prices as high as, you know, as high as they currently are, that was back in 2008. And this year, we’ve seen fertilizer prices make new highs. And so so yeah, we’re looking at record production cost this year. Some commodities have done a better job of keeping up with production costs better than others. Cotton for one, we talked about the historic highs in cotton. I mean today cotton prices trading around $1.20 at that level. So cotton is one that the price is appreciated enough that it’s doing a fair job, I mean actually better than fair it’s it’s keeping up with production cost. You know corn has made up a lot of a lot of ground in terms of what it needed to do to keep acreage since the March prospective plantings. That was a surprise report that of you know, that I think the trade was looking for corn acres being maybe 2, 2 and a half million acres higher and and and you know following that surprised shock report, well you know corn prices began to rally, and they rallied, you know almost $0.95 since the March perspective planning. So that’s it’s you know it’s helped corn be more competitive with soybeans, maybe- you know bought back some acres, so, but it needed to, I mean it was obvious that growers were, you know they were concerned about you know, the level of input cost. And they had planned to cut acres back. Now corn is making a late, late bid for acres.

[21:34] John Anderson: Right- that’s a very, that’s a very late bid for acres isn’t it?

[21:37] Scott Stiles: It is. And so, you know, with growers that have already got their financing arranged and made their seed selections, and, you know, purchased some of these inputs and that, you know, I don’t know. I don’t I don’t know if there’s any change, any way for growers to change their plans at this point.

[21:56] John Anderson: Yeah. That you know, that that that ties in a lot to all sorts of production decisions related to scheduling and logistics and what kind of fertilizers or chemicals have already been put down or what you’ve got purchased that may not be available now. Could you even get the seed you wanted if you wanted to make a shift now? So, you know, there’s a lot that goes in. We talk about this all the time. I mean, this comes up every year, you know, how much flex really is there when you get late in the game in terms of of making an acreage change? And I’m sure there is some amount of acreage that is on that margin that can still be moved. But it’s probably not a huge number.

[22:39] Scott Stiles: Right.

[22:41] Andy McKenzie: I think it’s fair to say, Scott, though, that certainly with these new crop prices, if you do lock those in, you’re going to get pretty healthy returns, right, even with the higher input costs.

[22:51] Scott Stiles: That’s true. I mean, you know, even with the high input costs that we’re looking at this year, we are projecting, you know, positive returns over variable cost. There is a wide gap, though, between, you know, the highest returns and the lowest. But right now, you know, if I was to rank, you know, which crops have the highest- which crop has the highest return, cotton’s number one for us, and then corn, soybeans, and then rice. So, each will generate some return over a variable. But there’s, you know, a tremendous gap really between you know, the returns to cotton and rice, like cotton returns over variable might be between $400 and $450 an acre. And rice sits back at 100, to you know, maybe $125 an acre. So there’s a huge gap. But there is some margin there.

[23:54] John Anderson: Is that before, before rent is paid?

[23:57] Scott Stiles: That is based on an 80/20 share, if we look at, on quarter-share rent, you know our returns over the variable for cotton are about 380 and rice maybe 70 to 80. It just depends, it varies from the one you know seed technology to the next. So, so there is some return there for rice but it’s, but it’s quite, quite a bit lower than soybeans cotton or corn.

[24:29] John Anderson: Scott, I think we’ve covered commodity prices. We’ve covered crop progress. We’ve covered input costs. Andy, what have we not covered?

[24:40] Andy McKenzie: I think we pretty much covered the lot, other than maybe Scott venturing as to what he thinks different marketing alternatives farmers can do.

[24:52] John Anderson: Yes. So what do you see, Scott, in terms of, in terms of pricing options, what, are you seeing preferences out there, hearing preferences from our producers?

[25:01] Scott Stiles: You know when we talk about what we can do on paper through the futures or options, we need to think a little bit about our attitude toward risk or what our risk tolerance is. And if we’re willing to accept a lot of risk or some financial risk, we may look at just doing, you know, a pure hedge selling futures and using that as a means to lock in a floor. If we have, if we’re a bit more risk-averse, we may want to look at a put option strategy, where we know all our risk upfront and just pay a premium for that. And that’s all the exposure that we have. So, we have to think a little bit about ourselves and, and, and how much risk, how much financial risk we can take on when we’re making futures and options decisions, and we have to do our homework. Options are really expensive. I looked at option premiums yesterday, John, at the money puts for September corn were $0.65 a bushel-

[26:09] John Anderson: Well, you just anticipated my- you just anticipated my question, Scott, because I was going to ask, at high price levels and a high degree of volatility, I mean Andy is our futures market instructor here. He’s sitting here doing the Black-Scholes model math in his head and he’s thinking that’s got to be a higher premium.

[26:27] Andy McKenzie: Yeah. I mean, with the risk and volatility in the market, you’re going to expect high premiums on options.

[26:34] John Anderson: Yep. So I interrupted you. $0.65 a bushel on corn. What are the others looking like?

[26:39] Scott Stiles: Well, at the moment, the puts for soy- November soybeans were $1.03 yesterday. And at the money put for December cotton was a little over $0.12, almost $0.13. So. Well, to put that you know, in perspective, I mean if your premium was basically a dollar, a dollar a bushel, for an at the money put on soybeans, that’s five you know that’s $5,000 and so that’s, and then 5,000-bushel contract, just looking at the average yield in the state, 50 bushel- so you’ve got one foot for every hundred acres. You know [laughing]

[27:34] John Anderson: Yeah. I was just sitting here thinking that, I mean $5,000 for one contract is pretty rich. I mean we got a lot of folks out there hitting you know 70 bushels an acre of soybeans. So what you’re talking about, is less than 80 acres worth there on a contract and if you had a couple of thousand acres out there that you, you better have some financing lined up I guess to do that.

[27:56] Scott Stiles: That’s true. So that’s the other thing that we have to think about was that you know, we need a credit line to do our hedging and and and preferably a credit line separate and apart from the operating loan that we’re using to cover our input costs. So so maybe a separate line of credit that we can use for deposited margin, or covered margin calls, if we’re doing a straight futures hedge and, or we can, you know, need a credit line to cover all our option premiums. So, so yeah, we need to you know, you need to plan ahead and get your financing needs set up well in advance of you to know before you make some marketing decisions with futures and options.

[28:48] John Anderson: But certainly potentially money very well spent with as high as our input costs are and as much money is on the table at these commodity price levels.

[28:59] Scott Stiles: When you’re at historic highs, decade highs as we’ve talked about, you want to assume in your mind that there’s more downside risk than upside. And it could be a substantial amount of downside risk, so when you think about it, let’s just use one example. Let’s say that following the invasion of Ukraine, wheat prices spiked an excess of $2 a bushel. So there’s that geopolitical, that risk premium that was put in the market just because of that one event.

John Anderson: Right.

Scott Stiles: And so so of course, we want to see an end to this conflict, but growers need to stick it in their mind that that the day that a cease-fire is arranged or this conflict ends, then a certain amount of risk premium, maybe in wheat, maybe $2 a bushel, a risk premium may come out of that market very quickly.

[30:04] John Anderson: Right. And that wouldn’t just affect the wheat market, obviously. That would affect commodities across the board if- with- if that risk premium drains away.

[30:12] Scott Stiles: Right. And some’s going to come out of corn, you got the oilseed aspect, too. I mean, you know, when you look at global oilseeds, it all kind of moved in unison. So soybeans have gotten some support from the conflict there as well.

[30:30] John Anderson: Andy, any other questions?

[30:32] Andy McKenzie: I don’t think so. I think we’ve covered just about everything here.

[30:35] John Anderson: Yes, I think so. Scott, I really appreciate your time. It’s always good to talk to you, always appreciate your insights on commodity markets. And it is still obviously early days in this production cycle, so, I hope that we can count on having you back as the year unfolds and talk more about this.

[30:59] Scott Stiles: It’d be great to visit with you again, and I appreciate you having me on today.

[31:03] John Anderson: All right, Scott, thanks for joining us. Andy, thanks as always for being here. This is John Anderson with the Relevant Risk podcast. Join us again next time.

Conclusion: Thanks for listening to the Relevant Risk podcast. A production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas system. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural Food and Life Sciences at the University of Arkansas in Fayetteville, and research and extension activities through the University of Arkansas System Division of Agriculture. Visit https://fryar-risk-center.uada.edu/. For more information. Thanks for listening!