Farm Policy

Will Price Volatility Continue in the World Wheat Market?  

By: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

Wheat Price Volatility and Global Stocks

In a recent blog from the International Food Policy Research Institute (IFPRI), former USDA Chief Economist Joseph Glauber detailed the disruption that Russia’s invasion of Ukraine has had on the world wheat market over the past year (https://www.ifpri.org/blog/assessing-tight-global-wheat-stocks-and-their-role-price-volatility).  Compared to the recorded price spikes of 2007/08, 2010/11, and 2012/13, wheat futures prices remained relatively stable until Russia invaded Ukraine in February 2022 (see figure).

 

While world food prices have retreated significantly over the past 11 months (Bloomberg News, March 19, 2023), price volatility in the wheat market is likely to continue with tight global stocks.  When global supplies are negatively affected by an armed conflict such as Russia’s invasion of Ukraine, the availability of stocks should aid in moderating any impact on prices. However, if stocks are tight, their price-smoothing effect is limited, and volatility tends to be exacerbated.

 

 

Typically, market analysts measure the tightness of global stocks through the stock-to-use ratio (SUR), defined by ending stocks as a percentage of consumption, which is then multiplied by 365 days to give stocks as days of use.  The SUR for wheat can be measured in several ways: total global stocks, total global stocks minus China, and stocks held by the major exporters (US, EU, Argentina, Australia, Canada, Kazakhstan, Russia, and Ukraine).  If China is excluded from the calculation, projected stock levels for 2022/23 range from 58 to 26 days of use, the lowest level since 2007/08 (see figure).  Not surprisingly, the combination of low stocks, continued uncertainty about the war, and the potential for future supply shocks, means that concerns about global food security have not dissipated (World Bank Food Security Update, March 23, 2023).

Uncertainty Over Continuation of The Black Sea Grain Export Deal and Russian Exports

Key to reducing price volatility is continuation of the grain export deal signed by Ukraine, Turkey, Russia, and the United Nations (UN) on July 22, 2022 (USDA, Foreign Agricultural Service, Grain: World Markets and Trade, August 2022), which was then renewed last November for 120 days (Reuters, March 14, 2023).  Despite the UN and the Ukrainian and Turkish governments stating the deal had been extended for a further 120 days on March 18, 2023, the Russian foreign ministry indicated it had only agreed to a 60-day extension, and that it wanted to see an expansion of its own grain exports to the world market (Financial Times, March 18, 2023).

Not surprisingly, conflicting signals over the timeline of the deal’s extension affected the market, wheat futures rising by 2 percent before March 18 (Bloomberg News, March 14, 2023), falling back the week after the deal was announced, although market analysts expect a risk premium (Bloomberg News, March 20, 2023).  A similar pattern of price volatility occurred prior to and after the deal was renewed in November 2022 (Bloomberg News, November 2, 2022), and no doubt will happen again when the deal next comes up for renewal.

Despite the Ukrainian focus of the grain export deal, the sticking point for the Russians is how to increase their own grain exports.  Russia is now the world’s leading wheat exporter (Bloomberg News, March 31, 2023) (see figure), its strong harvest last year helping to reduce wheat futures prices (Bloomberg News, March 29, 2023).  While Russian crops are not subject to any explicit trade sanctions, companies that trade wheat and other grains must deal with restrictions on both Russian banks and state companies (Bloomberg News, March 29, 2023).  A recent development has been the announcement by major commodity traders Cargill and Viterra that they will stop exporting Russian grain as of July 1, 2023, with Archer-Daniels-Midland also considering exiting its Russian operations (Bloomberg News, March 31, 2023).  How this affects Russian exports to the world market remains to be seen, although some observers think little will change as local traders replace global traders, the Russian government continuing to collect grain export taxes (Bloomberg News, March 30, 2023).

Outlook for Wheat Price Volatility

Low global wheat stocks along with Russia’s repeated procrastination over the Black Sea grain export deal, suggest price volatility will continue for the foreseeable future.  At the same time, grain exports by Ukraine to central European states has affected farm revenues in Poland, Romania, Slovakia, Hungary and Bulgaria, eroding political goodwill (Bloomberg News, April 2, 2023), placing pressure on the European Union (EU) for tariffs to be restored on imports from Ukraine (Reuters, March 31, 2023), which would likely push down wheat and other grain prices.

Wheat on the Chicago Mercantile Exchange (CME) is currently hovering around $7.00 per bushel, in line with the estimate used in the OSU Extension Wheat Production Budget for 2023.  As of April 5, 2023, CME prices are $6.94/bushel for July 2023, $7.25/bushel for July 2024, and $7.26/bushel for July 2025.  The OSU Extension wheat budget estimates $7.00/bushel and evaluates four yield scenarios (59 bushels/acre, 74 bushels/acre, 89 bushels/acre, and 92 bushels/acre).  Estimated returns at each yield level more than cover the variable costs, but the numbers are negative when evaluating returns above total costs.  Straw sales can improve the returns, but there is the additional concern of the value of nutrients removed.

We encourage you to keep informed of market movements and projections, and utilize OSU Extension enterprise budgets (https://farmoffice.osu.edu/farm-management/enterprise-budgets) when making farm management decisions.

 

Trends in Ohio Government Payments During the COVID-19 pandemic

By: PhD student Rabail Chandio and Professor Ani Katchova, Farm Income Enhancement Chair, in the Department of Agricultural, Environmental, and Development Economics (AEDE), OSU, Anil Giri, Research Agricultural Economist and Dipak Subedi, Agricultural Economist at the Economic Research Service, USDA, and Nick Paulson, Professor and Gardener Hinderliter Professor in Farm Management in the Department of Agricultural and Consumer Economics at the University of Illinois, Urbana-Champaign.

In 2021, net cash income for the US and Ohio farms were higher than the 21-year average. As expected, a major component of farm income was the government payments for various support programs, including the coronavirus pandemic support. This report provides details on how government payments evolved for farmers in Ohio and the US in the recent past after a record high in 2020.

USDA – Economic Research Service data released on Feb. 7, 2023, show Ohio producers had a record high net cash income of $4.65 billion in 2021 coming from a gross cash income of $13.63 billion in inflation-adjusted 2023 dollars. In inflation adjusted dollars, both the net and gross cash incomes were higher than the 21-year averages of $3.1 billion and $11.5 billion, respectively. Net cash farm income encompasses gross cash farm income (cash receipts from farming as well as farm-related income and government payments) minus cash expenses. It does not include noncash items—including changes in inventories, economic depreciation, and gross imputed rental income of operator dwellings—reflected in the net farm income measure. Therefore, a major contributor to the high net and gross cash incomes in 2020 and 2021 was not only high commodity prices leading to higher cash receipts but also the record high government payments.

At the onset of the pandemic, the supply chain disruptions and uncertainty in the market signaled lower incomes and uncertain prices, creating the need for higher PLC and ARC payments to farmers in addition to COVID-support payments. As commodity prices rallied beginning in August 2020, the PLC and ARC programs triggered lower levels of total support in 2021. Moreover, adhoc disaster assistance payments remained the largest component of government payments in 2021. As the US agricultural sector entered a period of higher income with higher commodity prices, ARC and PLC program payments are expected to be lower for 2022.

Link to the report: https://aede.osu.edu/sites/aede/files/publication_files/OhioGovernmentPayments2023.pdf

 

 

USDA to Aid Distressed Farmers Facing Financial Risk

by: Chris Zoller, Extension Educator, ANR in Tuscarawas County

Beginning in April, USDA will provide approximately $123 million in additional, automatic financial assistance for qualifying farm loan program borrowers who are facing financial risk.  Funding is through the Inflation Reduction Act (IRA) and builds on the same program announced in October 2022.

Like the program announced in October 2022, qualifying borrowers will receive an individual letter detailing the assistance as payments are made. Distressed borrowers’ eligibility for these new categories of automatic payments will be determined based on their present circumstances. More information about the new categories that make up the $123 million in assistance and the specific amount of assistance a distressed borrower receives can be found in this fact sheet, IRA Section 22006: Additional Automatic Payments, Improved Procedures, and Policy Recommendations.

USDA will provide information and training to program participants about the potential tax consequences of the funding program.  USDA will also sponsor a webinar featuring farm tax experts to review the program and answer questions.  Further information about tax implications of USDA program is available here: farmers.gov/taxes.

If you have further questions, please reach out to your local USDA Farm Service Agency office.  If you are unsure where of the location of the nearest office, please use this tool: https://offices.sc.egov.usda.gov/locator/app.

 

 

 

 

Coffee and Grain Market Conversation Slated for April 14, 2023

OSU Extension invites Ohio grain producers to grab a cup of coffee and join the next edition of a quarterly grain market conversation with Dr. Seungki Lee, Assistant Professor in the Department of Agricultural, Environmental and Development Economics (AEDE) from 7:30 to 8:00 a.m. on Friday, April 14, 2023.

During this webinar held via Zoom, Dr. Lee will provide his insights on the World Agricultural Supply and Demand Estimates (WASDE) crop report. “These early morning webinars will be a great way for Ohio farmers to learn more about the factors impacting the corn, soybean, and wheat markets” said David Marrison, Interim Director for OSU Extension’s Farm Financial Management and Policy Institute.  Producers are encouraged to bring their questions to this early morning conversation.

Click here for the program flyer 

There is no fee to attend this quarterly webinar session. Pre-registration can be made at go.osu.edu/coffeewithDrLee.

Additional sessions will be held on September 15, and November 17, 2023.

These webinars are sponsored by: OSU Extension, Farm Financial Management & Policy Institute (FFMPI), and the Department of Agricultural, Environmental and Development Economics (AEDE) all located in The Ohio State University College of Food, Agricultural, and Environmental Sciences (CFAES).

Where Could the U.S. – Mexico GM Corn Dispute End Up?

By: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University;  Seungki Lee, Assistant Professor, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

Background to the Dispute

The recent announcement by the Office of the US Trade Representative (USTR) that it was requesting technical consultations with Mexico under the Sanitary and Phytosanitary Measures (SPS) Chapter of the United States-Mexico-Canada Agreement (USMCA), is the latest step in the ongoing dispute over Mexican efforts to ban imports of genetically modified (GM) corn (Office of USTR, March 6, 2023).

The dispute has its origins in a decree issued by the Mexican President Andrés Manuel López Obrador on December 31, 2020, calling for GM corn for human consumption to be phased out by the end of January 2024 (Reuters, February 13, 2023).  Not surprisingly, given Mexico is the second-largest export market for US corn totaling $4.792 billion in 2022 (USDA/FAS, 2021) (see Figure 1), with about 17 million metric tons of yellow corn crossing the border annually (USDA/ERS, December 13, 2022), the original decree ratcheted up trade tensions between the two countries.  Following US pressure, Mexico scrapped the 2024 deadline banning GM corn for animal feed and industrial use on February 13, 2023, all the while retaining the ban on its use for human consumption (Reuters, February 13, 2023).

Despite these changes, the recent move by USTR is essentially the first step in the process by which the USMCA dispute settlement mechanism is triggered, once other efforts/mechanisms to resolve the issue have failed – specifically, in its response to a letter from USTR, Mexico did not “…allay U.S. concerns with Mexico’s measures concerning [genetically engineered] GE corn….Therefore, the United States does not consider that further use of other mechanisms would resolve the matter…”  (Ambassador Katherine Tai, USTR, March 6, 2023).

Dispute Settlement under USMCA

Like the World Trade Organization (WTO), USMCA has a defined legal process by which trade disputes involving its member countries are to be settled.  Once other procedures have been exhausted, technical consultations are the first stage of the process, USTR appealing to Chapter 9 of the USMCA addressing SPS measures,

“…Pursuant to Article 9.19.2, the United States requests technical consultations with Mexico with regard to Mexico’s measures concerning genetically engineered (GE) corn and certain other GE products.  These measures may adversely affect U.S. trade with Mexico and appear to be inconsistent with Mexico’s commitments under the Sanitary and Phytosanitary (SPS) Measures chapter of USMCA…” (Ambassador Katherine Tai, USTR, March 6, 2023)

Substantively, USTR is arguing that in seeking to implement its regime on GM corn imports, Mexico is violating its commitment to ensure any SPS measures are “…based on relevant scientific principles…” (Article 9.6.6(b)), and an “…approval procedure that requires a risk assessment…” (Article 9.6.4 (a)). Therefore, the United States and Mexico should meet with “…the aim of resolving the matter cooperatively…” (Article 9.19.3)

If this fails, under Chapter 31 of USMCA concerning dispute settlement, the United States can seek establishment of an independent panel to investigate and rule on Mexico’s measures relating to GM corn, which, once constituted, would be expected to present its initial report within 150 days (Article 31.17.1).  After a further period of 60 days, allowing for country comments and finalization of the report, the report would be made public (Article 31.17).   Assuming the panel rules against Mexico, resolution of the dispute should then occur within 45 days, Mexico either removing its GM corn measures, providing compensation to the United States, or provision of some other remedy (Article 31.18.2).  If Mexico fails to implement the panel ruling, the United States would be allowed to suspend trade benefits with Mexico equivalent to the damage caused by the latter’s GM corn measures (Article 31.19.1), most likely in the form of a tariff(s) against specific Mexican products.

How Might a USMCA Panel Rule?

In thinking about how a USMCA panel might rule, it is important to note the chapter on SPS measures draws heavily on the approach applied in the WTO’s own SPS Agreement, the definitions contained in the latter being incorporated into the USMCA chapter on SPS measures.  Therefore, while the United States is not expected to file a complaint against Mexico under WTO rules, it seems reasonable to argue the 2006 WTO ruling in favor of the United States against the European Union’s (EU) regulation of GM crops would likely influence any USMCA panel ruling.  The WTO panel found the safeguard measures implemented by six EU member states against the import of specific GM crops, were not based on a risk assessment as required under the WTO’s SPS Agreement (Sheldon, Brown Journal of World Affairs, 2007).  In other words, a USMCA panel is very likely to find for the United States against Mexico on the grounds that Mexico has not applied scientific principles and appropriate risk assessment in seeking to ban the import of GM corn.

Implications for the Ohio Corn Market

The direct economic impact of not resolving this dispute on the Ohio corn market would likely be modest, given the modest reported value of Ohio corn exports to Mexico over the past two years, as compared to the 10-year average of $6.64 million, and the small proportion of white corn in US corn exports (see Figure 1). Specifically, over the last two years, Mexico accounted for only 2 percent of corn exports from Ohio, while Canada and Asia accounted for the largest shares at 39 and 35 percent respectively (see Figure 2). There are two reasons for these export market shares: Mexico’s import diversification and increased use of Brazilian corn (S&P Global Commodity Insights, December 29, 2022), and strength of the US dollar.

However, two broader factors could result in substantial indirect impacts on Ohio farmers.  First, there would likely be a “ripple” effect as additional supplies are diverted to the domestic market, driving down corn prices.  As a result, Ohio corn farmers would likely see increased risk of a squeeze on their margins.  Second, and more broadly, if this dispute is not resolved in favor of the United States, it would introduce considerable regulatory uncertainty, with the potential of undermining the stable operation of commodity markets. This could increase the cost of any risk management measures such as hedging and options, placing further financial strain on Ohio grain producers.

Figure 1. Corn Exports to Mexico (MX)

Note: Corn export graphs (bars and scatters) correspond to the left-axis. Exports from US to MX are in billion dollars, and exports from Ohio to MX are in 10 million dollars. The line graph stands for the portion of white corn in total corn exports to MX and corresponds to the right-axis.

Source: US Census Bureau

Figure 2. Corn Exports from Ohio

Source: US Census Bureau

Planning for 2023

This latest development is another example of volatility in commodity markets and shows how world events impact US and Ohio agriculture.  As you plan for the 2023 planting season, we encourage you to know your cost of production and understand the impact to your returns if the commodity market drops.  How do a five, ten, and twenty percent drop in price impact your bottomline?

We encourage you to invest time developing cropping budgets.  If you are looking for guidance in budget development, please see the 2023 OSU Extension Production Budgets available here: https://farmoffice.osu.edu/farm-management/enterprise-budgets#2022.

 

Don’t Miss the March Madness Edition of the Farm Office Live on March 17

The OSU Extension Farm Office team invites you to attend the March Madness Edition of the “Farm Office Live” Webinar on Friday, March 17 from 10:00 to 11:30 a.m. This monthly webinar allows Ohio farmers and agribusiness personnel to learn more about current farm management and agricultural law issues.

In this month’s webinar, the Farm Office Team will present the following topics:

  • Federal & State Legislative Update (Peggy Hall)
  • New Postnuptial Agreement Legislation (Robert Moore)
  • Marital and Non-Marital Assets (Robert Moore)
  • Selling Timber- Call Before You Cut (Dave Apsley)
  • Update on Crop Input Costs and Crop Budget Outlook for 2023 (Barry Ward)
  • Sales Tax Exemption Issues (Jeff Lewis)
  • 2023 Spring Crop Insurance Update (Eric Richer)
  • Emergency Relief Program (David Marrison)

There is no fee to attend this webinar.  However, registration is required at go.osu.edu/farmofficelive

Check out farmoffice.osu.edu for all your farm management and ag & resource law needs.

Coffee & Grain Webinar Recap- Tight Supply Drives High Commodity Prices

On Monday morning’s Coffee and Grain Zoom, Dr. Seungki Lee (Assistant Professor in the Department of Agricultural, Environmental and Development Economics) discussed  the grain market outlook and the new crop prospects based on the USDA February World Agricultural Supply and Demand Estimates (WASDE) report. In all three major crops – corn, soybean, and wheat, strong prices are projected in the 2022/2023 market mainly due to the tight supply. Additionally, Brazil was singled out as its production can swing both the 2022/2023 and 2023/2024 commodity markets.

Click here to read Dr. Lee’s Summary Report

15 Ohio Counties Eligible for Emergency Farm Loan Assistance Through Ohio Farm Service Agency

By David Marrison, OSU Extension Field Specialist- Farm Management

Farm operations in 15 Ohio counties are eligible to apply for emergency credit through the U.S.D.A. Farm Service Agency’s Emergency Farm Loan program. These loans can be used to meet various recovery needs including the replacement of essential items such as equipment or livestock, reorganization of a farming operation or the refinance of certain debts.

The Emergency loan program is triggered when a natural disaster is designated by the Secretary of Agriculture or a natural disaster or emergency is declared by the President of the United States under the Stafford Act. These loans help producers who suffer qualifying farm related losses directly caused by the disaster in a county declared or designated as a primary disaster. In addition, farmers located in counties that are contiguous to the primary designated county may also qualify for this loan program.

Ohio Counties Eligible:

A declaration was made for Brown and Clermont Counties on November 4, 2022 with the following contiguous counties eligible: Adams, Clinton, Hamilton, Highland and Warren Counties. This declaration was made for excessive rainfall that occurred from May 1 to June 16, 2022. The application deadline for these counties is May 29, 2023.

A declaration was made for Licking County on February 9, 2023 with the following contiguous counties eligible: Coshocton, Delaware, Fairfield, Franklin, Knox, Muskingum, and Perry. This declaration was made for excessive rainfall and moisture that occurred from April 1 to September 15, 2022. The application deadline for these counties is August 21, 2023.

More Resources

More information about the Emergency Loan program can be found at: https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2019/emergency-loan-program.pdf

Additional information can be obtained by contacting your local  USDA Service Center.

Farm Office Live Webinar to be Held on February 17 at 10:00 a.m.

Ohio’s farm and agribusiness industry are invited to attend OSU Extension’s  “Farm Office Live” webinar on Friday, February 17, 2023 from 10:00 to 11:30 a.m.  The Farm Office Team providing farm management and agricultural and resource law updates during this webinar.

This month’s session topics and featured speakers include:

Ohio Land Values and Cash Rents- Barry Ward

Making the 2023 Farm Bill Decision- Chris Bruynis

Legislative Update- Peggy Hall

Understanding Farm Insurance Policies – Robert Moore

Farm Accounting: Chart of Accounts with a Purpose- Bruce Clevenger

Pandemic Assistance Revenue Program (PARP) & USDA Disaster Declarations- David Marrison

There is no fee to attend this session. Register or watch replays at: go.osu.edu/farmofficelive

Farm Bill Decisions and Risk Mitigation in 2023

Source: Chris Bruynis, Extension Educator, Ross County

If I could accurately predict the future, I would then know which Farm Bill decision to elect for my farm. Even without knowing future yield and prices, I can determine what risks I face, and which are mitigated by the different farm bill programs. Each farm might have its own inherent risk related to yield and price, making the farm bill program election different for each FSA farm number.

Price Loss Coverage (PLC) – PLC is considered a disaster loss program and covers price risk when the market year average price falls below the reference price. The reference price can adjust over time, but even with the higher prices in recent years, they will remain the same for 2023 at Corn $3.70; Soybeans $8.40; and Wheat $5.50.  The market year average price (MYA) for the 2023 crops is from harvest to the following year’s harvest (July through June for Wheat and September through August for Corn and Soybeans).  PLC is paid on 85% of program (base) acres not planted acres as well as the program (base) yields not actual yields. If your actual planted acres vary significantly from the base acres, this may not cover your actual risk. In a November 2022 article from Chad Hart, Extension Economist from Iowa State University, prices were projected to be $5.70 for corn and $13.00 for soybeans click here .  These projections are clearly above the PLC reference prices for corn and soybeans.

Agricultural Risk Coverage County (ARC-CO) – ARC County is a revenue risk management program compared to the price loss component of PLC. It is considered a shallow loss program that works well when there is a 1- or 2-year revenue decline. Is compares actual revenue to a calculated county revenue guarantee which is different in each county.  The ARC-CO benchmark revenue is the 5-year Olympic average MYA price multiplied by the 5-year Olympic average county yield. Benchmark yields and MYA’s are calculated using the 5 years preceding the year prior to the program year. The ARC-CO guarantee is determined by multiplying the ARC-CO benchmark revenue by 86%. Payments under this program are also tied to 85% of the base acres and not actual planted acres. Calculating the eighty-six percent of the revenue guarantee, using an Ohio average yield and the estimated MYA for 2023, results in a $645.65 guarantee for corn and $466.35 guarantee for soybeans.  With the previously mention projected prices, it is unlikely that ARC-CO will make a payment for the 2023 crop year unless there are significant production issues.

Agricultural Risk Coverage Individual (ARC-IC) – ARC Individual is similar to ARC County with a few adjustments. This program still compares a benchmark revenue calculated the same way as ARC County with the 86% reduction factor. The difference is this program uses 65% of the base acres to calculate payments. Additionally, the actual revenue is based on the actual planted crops, not the base acre crops, tying this closer to actual crop income. This is a good option under certain circumstances such as high year-to-year production variability or relatively large acreage of fruits and vegetables.

2023 Program Year Decision – If crop yields and market prices were predictable, then electing the farm bill program that protects the farm business best would be easy. The question one should be asking is which component of revenue am I more concerned with, price or yield. If one believes that prices will not fall below the reference prices, then one of the ARC programs would be a better election. This is especially true if one believes that yields in 2023 may be reduced by weather conditions such as a widespread drought. However, if one uses the Supplemental Crop Insurance (SCO) product in their crop insurance portfolio, then PLC would need to be elected. The reason is that SCO insurance and ARC Farm Bill programs cover similar risk and the USDA will not permit farms to participate in both at the same time on the same acres. Either Farm Bill election, PLC or ARC, is not expected to make a payment with the current price and trend yield projections for 2023. The real question is will price and yield expectations be realized in 2023?  If you want additional information on the Farm Bill programs, go to https://www.fsa.usda.gov/programs-and-services/arcplc_program/index.