The U.S. Department of Agriculture’s recently released spring crop-insurance prices for corn and soybeans were among the worst in the past 10 years. Cotton prices decreased as well, by almost 7 percent from the previous year.
Crop insurance is a key risk-management tool for farmers. And creditors often use the spring crop-insurance prices and revenue to establish a minimum income level, along with other farm financial indicators, to determine how much credit they will extend to a farmer. And many monitoring the markets use spring prices to evaluate potential corn- and soybean-acreage shifts.
Each year in advance of the planting season, USDA’s Risk Management Agency recalibrates crop-insurance protection based on expected commodity prices and risk in the market. During a month-long February survey period, market expectations for prices are averaged to determine the spring crop-insurance price. When combined with a farmer’s yield history, spring prices and yield determine the level of revenue protection available during the crop year.
Providing an indemnity payment in the event of a crop loss or a decline in crop revenue, crop insurance is an important risk-management tool for producers. The spring crop-insurance guarantee is also important because creditors often use it to help establish the borrowing capacity they are willing to extend to a farmer.
Anecdotally many lenders will extend to a borrower a line of credit that’s equal to 70 percent to 80 percent of the crop-insurance revenue guarantee – the minimum income level. For example a $4-per-bushel corn price and a 200-bushel-per-acre yield with 80 percent crop-insurance coverage could allow a borrower to receive financing of $448 to $512 per acre. That’s equivalent to $2.24 to $2.56 per bushel.
But crop insurance is not the only financial barometer a lender may use. Lenders certainly review many farm financial indicators such as debt-to-asset or debt-to-equity ratios among others to determine the lending volume. Nevertheless reduced crop-insurance spring prices do reduce the borrowing capacity of farmers because the minimum guaranteed income is less.
There have been two consecutive crop years with retaliatory tariffs. There are expectations for record corn production and increasing stockpiles in 2020. And it’s expected there will be a significant rebound in soybean acreage and production this year. Plus large domestic and global supplies of cotton are expected. With all that the Risk Management Agency’s Crop Insurance Price Discovery tool revealed reduced spring crop-insurance prices for corn, cotton and soybeans in 2020.
The 2020 corn-crop-insurance price was announced at $3.88 per bushel, a decrease of 12 cents or 3 percent from the previous year. The 2020 spring price is the worst since 2016’s $3.86 per bushel. It’s the second-worst in the past decade. For soybeans the spring price was announced at $9.17 per bushel, a decrease of almost 4 percent or 27 cents per bushel. The spring soybean price is also the second-worst in a decade, only worse than 2016’s $8.85 per bushel. The spring cotton price was announced at 68 cents, a decrease of 5 cents per pound – and almost 7 percent less than 2019’s price.
Historical spring and harvest prices for corn, soybeans and cotton are highlighted in Figure 1. Those crop-insurance prices and thus the revenue guarantees were determined by averaging the Chicago Board of Trade corn and soybeans futures as well as the Intercontinental Exchange cotton futures contract-settlement prices during a month-long price-discovery period. Spring prices for corn, cotton and soybeans are determined by averaging the new-crop futures contract-settlement prices during the month-long February price-discovery period. December was used for corn and cotton; November was used for soybeans.
Spring prices clues for acreage
While the spring price discovery is important for crop-insurance policies, many in the trade also use spring prices to evaluate potential acreage shifts for corn and soybeans during the upcoming crop year. USDA’s recent Agricultural Outlook Forum provided a first look at acreage projections for cotton, grains and oilseeds for the 2020-2021 crop year. Corn acres were projected at 94 million acres, an increase of 4.8 percent or 4.3 million acres from the prior year. Soybean acres were projected at 85 million acres, an increase of almost 12 percent or 8.9 million acres from 2019. Corn and soybeans together are expected to add more than 13 million acres in 2020.
A scatterplot of the spring soybean-to-corn price ratio relative to the percent change in planted acreage for corn and soybeans indicates that a price ratio of more than 2.4 leads to fewer corn acres. A ratio at more than 2.2 leads to additional soybean acres. The reduced R-squared indicates that the linear regression models are a poor fit and have a wide variance around the trend line.
The 2020 spring soybean-to-corn price ratio was 2.36, a slight decrease from the previous year’s 2.39 and the least since 2016’s 2.29. The last time the spring price ratio was as low, in 2016, planted area of corn increased by 6 million acres or 7 percent. Soybean acreage increased by 1 percent or 790 million acres. The USDA is currently on the greater end of the historical trend, projecting large increases in both corn- and soybean-planted area in 2020. The likely reason is the record prevent-plant acreage in 2019 makes acreage changes year-over-year an outlier for 2020.
The USDA’s Risk Management Agency recently released spring crop-insurance prices that were reduced in 2020 for corn, cotton and soybeans, due to trade-related demand disruptions, large inventories and record corn production anticipated in 2020. The corn crop-insurance price was announced at $3.88 per bushel, soybeans were $9.17 per bushel and cotton was 68 cents per pound. In the case of corn and soybeans, the spring prices were among the worst in the past decade and are likely to adversely impact farmer borrowing capacity in 2020.
Importantly those price guarantees are not fixed. Many producers elect to purchase the harvest price option, which utilizes the maximum of the spring or harvest price to determine if a farm has suffered a loss. It may assist growers by indemnifying at the replacement value of the crop if the harvest price is greater than the spring price. The potential exists for harvest prices to increase during the growing season if there is another adverse weather event or demand accelerates on the back of recently signed trade agreements. Harvest prices could also decrease if supplies are larger than anticipated, or demand is less than currently projected – the latter being an outcome that is increasingly likely for each day that COVID-19 weighs on markets and global supply chains.
John Newton is a chief economist with the American Farm Bureau Federation’s Market Intel. Visit www.fb.org/market-intel for more information.