Analyzing a 1-cent MFP corn payment

The U.S. Department of Agriculture’s Farm Service Agency announced the Market Facilitation Program to provide payments to corn, cotton, dairy, hog, sorghum, soybeans and wheat producers starting Sept. 4.

Some analysts have questioned the difference in MFP corn payments versus grain sorghum payments? In addition, why is there MFP payments on soybeans and none on minor oilseeds?

Here, we will compare historical prices and futures prices to determine the price differences between crops. While only considered public price data is considered, one of the major risk faced by farmers is political risk.

For example, if public policy were to cancel the harvest price option in crop insurance that critics have proposed doing for years, then farmers with forward-priced grain would lose their hedge immediately.

China refused to import corn in 2014-15 and substituted grain sorghum, causing grain sorghum prices to exceed corn prices by as much as a dollar in some cases. Tariffs are only the latest example of government interference in the market place. Political risk is a risk that farmers must also include in their management plans, in addition to weather risk, price risk, liability risk, etc.

Soybean MFP

Given that USDA is forecasting a record soybean yield, it is not a surprise that soybean prices have fallen. The question is how much of that price decline was caused by tariffs on soybeans exported to China? USDA says the soybean price loss due to tariffs was $1.65 per bushel.

Therefore, soybean farmers will be paid $1.65 a bushel on half of the certified production or 82.5 cents on all production. USDA is leaving the door open to a payment on the other half of the production at a later date. It has been suggested that any second payment may be at different payment rate or even a zero rate.

There are no MFP payments for minor oil seeds. Soybeans are a much larger crop than the minor oilseeds and because of the size of the soybean crop, it drives the market for oil and meal. Many minor oilseed producers use the soybean oil futures contract to hedge their minor oilseed crop. Because of the soybean crop size, lower soybean prices will normally cause lower minor oilseed prices.

The MYA price for 2017-18 is an estimate, but the marketing year is complete and the 2017-18 MYA price will be published on Sept. 27. NASS publishes the MYA price about a month after the end of the marketing year, while minor oilseeds are published the following February.

The MYA price for sunflowers has declined more than soybeans. In 2015-16 sunflowers were $3.07 below soybeans with the basis widening to $4.26 in the following year. The forecasted 2017-18 MYA price for sunflowers is $4.11 below soybeans.

So over the recent period, sunflower prices have fallen more than soybean prices, based on NASS data. Therefore, to justify no tariff damage on the sunflower market one would have to argue that declining soybean prices, that include the tariff impact, had no impact on sunflower prices.

Only NASS prices are available for sunflowers, but canola has an actively traded futures contract that can also be compared with soybeans. Comparing future prices will give a more current view of the market. November 2018 canola futures have dropped from about $527.10 CAD per metric ton on May 29 to $495.60 CAD per metric ton on Aug. 31.

On the same dates, November 2018 soybeans declined from $10.42 to $8.43 per bushel. To compare the two markets, canola prices were adjusted for exchange rates between U.S. and Canadian dollars and converted to U.S. dollars per canola bushel. Canola prices have declined from $9.16 to $8.61 per bushel over the same time period. The price difference is a negative 18 cents ($8.43 soybeans vs. $8.61 canola), i.e. soybeans are trading at 18 cents below canola. Normally soybeans trade about a $1.20 over canola.

If one assumes nothing has changed other than the tariff, then a $1.65 MFP payment suggests the tariffs cost soybeans $1.65. Therefore, the Aug. 31 future price without tariffs would have been $10.08 ($8.43+$1.65=$10.08). In order to maintain the historical price relationship for canola of $1.20 under soybeans, it would require a canola price of $8.81 ($10.08-$1.20).

The Aug. 31 November 2018 canola price was $8.61, making the price about 20 cents lower than the historical price relationship. One could argue that canola prices are about 15 to 30 cents lower due to the tariff impact.

Justifying no tariff damage on the minor oilseed market would have required one to argue that declining soybean prices due to tariffs had no impact on canola and sunflower prices.

However, unlike sunflowers, canola has better price data to make comparisons, because canola has a publicly traded futures contract. For those who think the soybean tariff had no impact on canola prices, then they can take the opposite position in the futures market.

Corn MFP

Corn’s initial MFP payment will be a half cent cent on certified production harvested for grain, or 1 penny on half of the production. Many farmers in northeast Kansas and northwest Missouri will be very disappointed with their MFP payments on corn. MFP only pays on harvested bushels for grain.

So those farmers who had a poor crop and chose to salvage the drought-damaged crop by chopping it for silage will receive no MFP payments on corn. MFP will not pay on crop insurance appraised yield. Appraised yields are deducted from the crop insurance payments in additional to no MFP payment.

Corn that was planted for silage will also receive no MFP payments. Only corn harvested for grain will receive MFP payments. However, the folks at FSA who work directly with farmers were hedging their bets on that decision. Past FSA programs have paid on silage, because it could have been harvested for grain.

While there were no MFP payments on corn harvested for silage or crop insurance appraised yields and no MFP payments on minor oilseeds, the biggest surprise was an 86-cent MFP payment on grain sorghum. Given the correlation between grain sorghum and corn prices and both are feedgrain-alcohol stocks, this was the biggest surprise in the announcement.

NASS grain sorghum cash prices were higher than corn prices in marketing year 2014-15, but that was due to a China policy. China refused to import corn because of a GMO issue, but China imported grain sorghum as a substitute feed supply. As a result, grain sorghum prices were higher than corn and in some local Kansas markets, grain sorghum was selling for a dollar over corn.

Corn sold in 2014-15 is covered for price loss under the Syngenta’s class action lawsuit, with payments expected in the near future. The following two marketing years, grain sorghum returned to a “weak” basis. What is interesting is that corn and grain sorghum prices have returned to a more “normal” price relationship in the current marketing year and showing why corn is used to hedge grain sorghum.

Grain sorghum has no futures market to compare with corn, but based on NASS data, grain sorghum and corn prices have tracked together, especially in the current year. This suggests that corn suffered the same market tariff damage as grain sorghum, however the grain sorghum MFP was 86 cents versus 1 cent for corn on half of the production.

So the question is, how did USDA make the argument that the damage to the grain sorghum market was much greater than corn? If USDA assumed that without the tariff issue, the strong grain sorghum basis would have continued, then it could have accounted for the difference in MFP payment rates.

There was also a 14-cent MFP payment for wheat. There is no crop to compare with wheat directly.

Gainers and losers

The clear gainers are those soybean farmers with a big crop who sold their crop on new crop futures at prices over $10 and will receive MFP payments too. Even non-hedged soybean growers will be big winners, if USDA’s forecast of a record soybean crop is correct.

The same result holds for grain sorghum producers who have forward sold their 2018 crop. They will also receive larger payments if their yields are large.

Corn producers who forward sold their crop at this point will have gained and good yields always help. Some analysts are suggesting that lower corn prices are due to lower soybean prices dragging the whole market lower.

Farmers who believe that argument would want to re-own their corn by going long on the board, buying calls or storing their corn for later sale. If these analysts are right and corn prices recover in the new marketing year then USDA is justified with a 1 penny corn MFP payment (the author is making no recommendation; readers who decide to re-own their sold corn do so at their own risk).

Because most Corn Belt farmers are 50-50 corn and soybeans, they will fare better under the program than many western counties in the Great Plains who normally only plant corn. In addition, many of the dryland acres, especially as one moves north, have changed from grain sorghum to corn.

The clear losers on MFP are farmers with low yields. They will have fewer bushels on which to collect the MFP payment and neither crop insurance nor MFP will cover the deductible bushels. However, those corn farmers who salvaged a poor crop by chopping it for silage, will receive no MFP payments because MFP does not cover crop insurance appraised yields.

The farmers holding the short stick are those who planted corn for silage and had a good crop. MFP only covers corn harvested for grain but they could have taken the crop to harvest for grain. However, it is only a half cent per bushel payment so it is not a “big” loss.

All farmers should apply

FSA has stated that farmers should only apply after their harvest is 100 percent complete and they can report and certify their total 2018 production. Winter wheat producers should be able to apply for payments starting Sept. 4, because their harvest is complete. Farmers will be able to fill in part of the application earlier on all fall harvested crops, but they will need to later certify their production after harvest is complete.

Depending on the timing of when farmers file, they may not be paid until after Jan. 1, 2019. Some farmers, for tax reasons, will prefer the later payment date.

FSA is saying that all eligible farmers should apply for the MFP payment because the payment rate may change, if there is a second payment. This includes corn farmers with low yields who may think the payment is not worth the paper work. In some cases, the cost for the government to process the MFP corn payment on low yields and small-acre farms may be greater than the face value of the “check”. However, FSA is encouraging those who expect a very “small” payment to still file for the payment.

Eligible farmers

Farmers must have an ownership interest in the crop, be actively engaged in farming, and an adjusted gross income under $900,000. Farmers must be in conservation compliance in order to receive MFP payments. There is also a $125,000 payment limit.

However, this payment limit is in addition to the $125,000 payment limit for Price Loss Coverage-Agricultural Risk Coverage, for a total of $250,000. There is also a payment limit of $125,000 for swine and dairy in addition to the crop payment limits. A few crop-swine-dairy farmers will be able to collect up to $375,000 from all three programs.

Assuming yields will match USDA forecasts, some soybean farmers may hit the payment limit with 2,500 acres; grain sorghum growers will likely need over 3,500 acres; and corn will need over 130,000 acres to hit the limit.

Few corn farmers are likely to hit the $125,000 limit because with this size farm, likely the $900,000 adjusted gross income limit will make them ineligible for any MFP payments. These production acres are based on half of the production so if a farmer is over the limit, there will be no second payment for that farm, unless a new additional payment limit is applied to a second payment.