If you’re reading this it means we made it! December 2020 was a wild ride in most agricultural markets. I’m not sure we should be surprised given the rest of 2020. I’ll dive in to several topics today including some information on crop prices, livestock prices, the weather outlook, and policy reminders. Remember to contact me if you have thoughts, suggestions, or questions at email@example.com
Dates and Deadlines
1/4/2021 – 2/12/2021 – CRP Enrollment
1/5/2021 – 1/7/2021 – Beltwide Cotton Conference Online
1/13/2021 – Southeast Panhandle Ag Conference
1/20/2021 – Northwest Panhandle Crops Meeting
1/20/2021 – 1/21/2021 – Red River Crops Conference
1/26/2021 – Dalhart Northwest Panhandle Crops Meeting
1/27/2021 – Dumas Beef & Range Meeting
1/28/2020 – Spearman High Plains Cotton Conference
1/27/2021 – 3/3/2021 Each Wednesday – Master Marketer Amarillo Online Program
1/30/2021 – LFP Signup
2/18/2021 – 2/19/2021 – USDA’s 97th Agricultural Outlook Forum
What I’m Reading
2020 Texas A&M AgriLife Bushland Forage Sorghum Silage Trial – Texas A&M AgriLife Extension
Top Blog Posts & Podcast Episodes of 2020 – Texas A&M AgriLife Extension
I thought it would be worth my time to dig up prices from this day last year. We can use those prices to frame where the market sits now. On January 3, 2020 the price of DEC ’20 Corn was $4.016/bu., NOV ’20 Beans were $9.70/bu., DEC ’20 Cotton was $0.71/lb., JUL Wheat was $4.902/bu., and the cash price of sorghum was in the neighborhood of $6.70/cwt. Its no secret that the prices of each of these High Plains staple crops have risen, in some cases quite dramatically. On January 4, 2021 the opening price of DEC ’21 Corn was $4.351/bu., NOV ’20 Beans were $11.174/bu., the price of DEC ’20 Cotton was $0.7511/lb., the price of JUL Wheat was $6.075/bu., and the cash price of sorghum was in the neighborhood of $8.50/cwt. ($4.80/bu.).
Clearly, a few fundamentals have shifted in the last 365 days. I gave a presentation on corn prices in July to a group of other economists. During that presentation I said that there was no fundamental reason for corn price to surpass $4.00/bu. About a month after that the WASDE report incorporated major supply revisions, shrinking grain stocks, and kicking off a significant price rally in grain markets.
At the same time, demand for imported feed grain in China will reach record levels this year according to USDA. In fact, there are reports that domestic corn price in China is above $10/bu., making our product the fiscally reasonable option for Chinese buyers. Chinese buyers are not only interested in corn. In fact, Chinese activity in the sorghum market currently has sorghum priced at a premium to corn. This is the first time the two prices have flipped in my short tenure with AgriLife. Cash sorghum prices currently sit at an approximately $0.50/bu. premium to corn price.
Chinese buyers are also in the wheat market. Kansas City Wheat is at a multi-year high, and with poor weather conditions persisting, there is discussion of Kansas City Wheat and Chicago Wheat inverting their typical price relationship in 2021. This is excellent news for our wheat producers as long as some precipitation will fall on our crop. More on the weather outlook below.
The rumor of decreasing local cotton acres persists into 2021. I’ve heard discussions for several months about poor yields and prices leading recent cotton converts back to grains. While I believe there is credence to the argument of decreasing local cotton acres, I think it will have as much to do with current price levels as recent poor experiences. I’m interested in hearing from you on this though. If you’ve recently switched from grain to cotton let me know about your experience (firstname.lastname@example.org)!
The ratio of corn price to cotton price is currently 5.8. Given their standard historical relationship we would expect about 13 million acres of cotton, a figure between 2012 and 2018 acreage. Cotton planted acres in District 1 in 2020 totaled 753 thousand against a nationwide total of approximately 12.25 million acres. I believe in the long-run, water is going to be the factor dictating cotton acreage, but based on the current sorghum-cotton price relationship, and their relatively closer water-usage, I expect much of our local cotton acreage to return to sorghum in 2021.
Ratio of CBOT CNZ20/ICE CTZ20 Futures, Three Month Average First Quarter, vs. June Cotton Planted Acreage Report
Image from Dr. John Robinson
Crop prices are by no means biofuel era-level, however they are the best prices I’ve been able to discuss since starting my job. Now, how stable are these prices? I can confidently say that supply side dynamics will keep prices above 2020 levels. Keep in mind that my confidence is the confidence of an economist, whatever that means to you. We know short supplies coupled with stable demand dictate higher prices. Until we have clear signals from planted acres in each crop, expect supply dynamics to remain stable. Demand dynamics are a bit more shaky. There is a significant premium in the crop complex from Chinese purchasing activity, and if the Chinese stop making those purchases, that premium may be liquidated. However overall, I believe that we can expect more positive pricing in 2021 than 2020.
Where crop prices have had a meteoric rise, cattle pricing news is more of a dull but steady climb. Supply side fundamentals suggest higher calf prices in 2021, but some mitigating factors might eliminate the opportunity for big profits. The cow herd is shrinking. National cow inventories were lower in 2020 than in 2019, and they will decline again. The January Cattle report will likely show a 0.5-1.0% decline in cow numbers compared to the same report in 2020. Fewer cows means fewer calves, and with a stable (and in many cases increasing) demand, we should expect a higher price for those calves.
January 1 Cow Inventor, U.S. Annual
Image from USDA NASS Data Compiled by LMIC
The “calf herd” lags the “cow herd” by a year, which means that the 2020 “calf herd” was the peak inventory level for calves. In general, the peak of inventories for cattle in calves is correlated with the low point of prices. While the upward movement is incremental, the room available to move is significant. Liquidation of some cows due to drought conditions in 2020 may mean a structural, unexpected adjustment in the calves available for placement on feed in the fall of 2021. While I do expect spring 2021 prices to exceed spring 2020 prices, even excluding damage from COVID-19, my real optimism for 2021 calves comes with the fall.
The factors limiting profits from increased prices include some factors we’ve already discussed. Grain prices are higher as we enter 2021 than they were in 2020. That means that supplementation will be more expensive, as will placing calves on feed. The margin-based business of fattening cattle means that as input prices increase, concessions must be made elsewhere, and a prime area for consideration is price paid for feeder cattle. Coupled with quickly rising grain prices is the damage from widespread drought across the Western U.S. Hay prices are spiking. Average local non-alfalfa hay price increased approximately $10/ton from June to December, but was as much as $30/ton up over the fall. With short supplies and difficulty finding successful local wheat pasture in some cases, expect to pay premiums to supplement cattle on forage.
This is an excellent year to try out risk management in livestock. Many of these tools see little to no use, though many are easy to use and accessible even for smaller herds. You can find resources for those tools here, here, and here. If you’ve used any of these tools in the past let me know what your experience was like and how you think they could work for others or what improvements you think are needed (email@example.com).
The biggest challenge facing agriculture in our region as we enter 2021 is the weather. Months of dry conditions are adding up, complicating the planting decision further. Texas is currently in the worst drought status since the first half of the 2010s. The state’s current Drought Severity Coverage Index (DSCI) is 266. At this time last year the DSCI for the state was 101. The most severe conditions are in the western half of the state.
United States Drought Monitor, Texas Map 12/31/2020
Image Compiled from United States Drought Monitor
The dry conditions are weighing on the wheat crop. The last Crop Progress Report had 68% of the Texas wheat crop in Fair condition or worse. In the same report Topsoil Moisture and Subsoil Moisture were reported as 61% and 63% short to very short, respectively. Texas’ size means that localized conditions are somewhat lost in the report, and I expect that local soil moisture profiles are much worse.
Compounding the potential challenges from current short moisture profiles is the prospect of little to no relief in the coming months. The National Weather Service Outlook Maps suggest that period-normal rainfall won’t return until at least May. The seasonal outlook map beginning in February indicates a 50% probability (equal chance) of below average rainfall for western Texas and a 40% chance of below average rainfall for most of the remainder of the state. The intervening maps do not suggest any better conditions. In general, do not expect rains to come before planting, and plan accordingly.
Monthly & Seasonal Color Outlook Map, February-March-April 2021
Image from the National Weather Service Climate Prediction Center
In the months between now and planting time, it is critical to examine your options judiciously. Consider drought tolerant crop varieties, examine your stand densities, and consider crops that are not water hungry. On the livestock side be sure to sign up for your Livestock Forage Program (LFP) payment by January 30.
Finally, we’ve got some important reminders coming from the policy world.
At the 11th hour the 116th Congress passed a $900 billion COVID-19 Relief Package that includes $13 billion worth of provisions for agriculture. There are a lot of detailed payment structures for specialty crops and non-cattle livestock, but we’re going to focus on row crop payments and cattle. In the current aid package, crops that were designated as flat rate or price trigger crops in 2020 are eligible for a $20/acre payment. Eligible crops include barley, corn, sorghum, soybeans, sunflowers, upland cotton, and all classes of wheat. This bill also included provisions for payments to processors of biofuel and cotton.
Livestock provisions included a one-year authorization of livestock mandatory reporting. There are also payments available for different classes of cattle based on inventories. Slaughter cattle: Fed Cattle are eligible for a $63/head payment. Feeder cattle weighing 600 lbs. or more are eligible for a $25.50/head payment. Slaughter Cattle: Mature Cattle are eligible for a $14.75/head payment. Feeder cattle weighing less than 600 lbs. are eligible for a $7.00/head payment. All other cattle are eligible for a $17.25/head payment.
There are plenty of other policy reminders as we open 2021. Remember that this is the first year in which you can choose ARC or PLC on an annual basis. We’ll examine that choice further as the deadline approaches. Conservation Reserve Program enrollment opens today. Finally, don’t forget those LFP applications, due on January 30th.
There is a lot to digest and prepare for as we begin 2021. We are facing some challenges, but I believe that the general price outlook is fundamentally better in 2021 than in 2020. There are plenty of tough decisions to be made, so be sure to reach out if AgriLife faculty can be any help. You can always find me at firstname.lastname@example.org