It doesn’t take a PhD to know that rice supplies are well burdensome for the amount of demand we have.
For most producers, if not all, the current cash rice prices represented at the mill or barge-loading facility are below the cost of production. Not a great place to be in, and fortunately we have programs in place like the Price Loss Coverage program (PLC) to help supplement producers’ income to help pay bills and renew operating lines so they may continue their operations.
First, a reminder that the PLC is a federal subsidy program designed to reimburse producers for loss of income when market prices fall below a certain reference price. PLC is very akin to the old counter-cyclical program in the former farm bill.
Payments are triggered when the Marketing-Year-Average price (MYA) falls below the Reference Price (RP) for a certain commodity. RPs are permanent throughout the life of the farm bill. MYA will fluctuate in price in response to the supply and demand of that commodity market.
Payment amounts are calculated by taking the farm’s total production (which is calculated by 85% of the base acres enrolled in the program, enrolled acres multiplied by 90% of the farm’s updated yield history and multiplying the difference in the reference price to the MYA).
Total payments are capped at $125,000 per entity (or $250,000 per couple). Payments, if triggered, are made regardless of whether the actual PLC crop is planted in that production year. Actual payments are made about one year after the official marketing year season.
As an example, let’s look at a 3,000-acre rice and soybean farm in the Mississippi River Delta. The farm in 2017 is going to plant 1,000 acres of rice (expected to produce an average yield of 175 bu/a) and 2,000 acres of soybeans (expected to produce an average yield of 60 bu/a).
The farm entity structure is a General Partnership, consisting of a husband and wife.
It has 1,000 acres of rice base and 2,000 acres of soybean base. The farm has enrolled both rice and soybean in the PLC program. The farm has a PLC established yield of 150 bushels per acre (bu/a) for rice and 42 bu/a PLC established yield for soybeans. Let’s assume a MYA for rice at $9.50 per hundredweight and $9.50 per bushel for soybean (very close to where prices are at the time of this writing).
The RPs for rice and soybeans are $14.00 per cwt and $8.40 per bu respectively. Under these conditions, the PLC payment for rice is $242,250 and $0 for soybeans. There would be no payout for soybeans because the MYA is above the RP.
For rice, the calculations are as follows: 150 bu/a X 850 acres (85% X 1,000 acres) = 127,500 PLC bushels; then multiply 127,500 by the difference of the $14.00 cwt RP - $9.50 cwt MYA = $4.5 cwt. Take $4.5 cwt and divide by 2.2 (to convert from $ per hundredweight to $ per bushels). After deducting a 6.8% sequestration rate ($0.15 per bushel), that leaves you with a $1.90 per bushel PLC payment rate.
The total gross payout of $242,250 is very much needed because most producers would agree the cash selling price of rice in this scenario is most likely below the cost of production.
Here is where important decision-making comes into play. There are several considerations.
(1) This farm is very close to the payment cap. Downside price protection for both crops must take the highest priority because there is no longer a price support mechanism if prices keep going lower. You need to be fully aware of how to utilize cash contracts, futures, and options or a combination of all three to their full potential.
(2) Just because one of this farm’s commodities is receiving payments doesn’t mean we walk away from our marketing plans. The physical commodity still has to be marketed. Decisions to sell should be premised on the concept that we believe market prices have stopped going up or fear that market prices may fall further.
Apply the same tools and indicators in bull markets as in bear markets.
In addition, on a bushel-per-bushel basis, the PLC payment is only protecting a portion of total production. In this scenario, total production is 175,000 bushels (1,000 acres X 175 bu/a), but PLC is only protecting 127,500 bushels. There is still work to do.
(3) Remember that payments are made an entire year after the actual crop was produced. Projected future payment amounts need to be addressed on this farm’s balance sheet. Characterize this payment as a receivable from 2016 crop year on the balance sheet.
(4) Consider strategies that are akin to covering short hedges. After all, this is essentially a put option for the farm funded by the federal government. As with any hedge or forward contract, the decision to cover hedges or buy back cash contracts should be market-based.
If you are going to make a decision make it with the awareness that you know what to risk if you are wrong and participate in maximum reward if right.
As an example, let’s take a look at the July rice futures contract. On April 26 through April 28 the market consolidated by closing around $9.440 cwt three times. On May 1, the market closed up and well off the $9.440 cwt level.
If you were to take on a long position, a move below $9.440 cwt would be your risk matrix. A very comfortable risk level. The reward level is applicable as a wide range move preceded the consolidation. A second such set up occurred May 4 thru May 9. The market closed three times around $9.850 cwt then bounced well off that on May 10. Taking a long position there gave a very comfortable risk level as you knew what to risk if market turned against you.
(5) As with 4, this is not a recommendation for “gun slinging” speculation into rice futures. In this scenario, if $9.440 cwt turns out to be the absolute low, any gain in a hedge account profit wise will only be offset by a loss in a future PLC payment. Vice versa, any loss in a hedge account will be offset by a gain in a future PLC payment (provided no payment limitations).
Chase Bell is a marketing consultant and broker with Brock Associates. Email or call him at firstname.lastname@example.org or 414-540-2608.