Does the Natural Hedge Work?

by Brent Gloy and David Widmar


In last week’s post we used USDA yield estimates to look at how revenue expectations have changed as commodity prices deteriorated. This led us to wonder about the ‘natural hedge’ and its effectiveness; how strong the natural hedge is and how much variability is there across the country.

Economists often talk of a natural hedge occurring when low yields are offset by higher commodity prices, and high yields are offset by lower commodity prices. In theory, this condition naturally adjusts revenue as yields and prices move in opposite directions, serving as an automatic risk management tool. In this week’s post, we examine historical county-level yield and state-level market year average (MYA) prices to better understand the natural hedge.

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Budgets Vs. Reality: A Look at Crop Revenues

By Brent Gloy

With the new crop planting beginning, or right around the corner for the Corn Belt, much has been made of 2015 crop budgets which show significant loss potential for row crop farm operators. As we pointed out in an earlier post, the budgeted losses are bigger than any in the last 20+ years. We are frequently asked how budgeted values have corresponded to actual outcomes. While budgets are great tools and very useful in planning and understanding how producers will make planting decisions, it is quite likely that the actual outcomes achieved will be substantially different than those forecast at planting. Price and yield deviations from budget are one of the biggest drivers of these differences.

We thought it would be interesting to look at the relationship between budgeted and actual revenues over time. Specifically, we compared actual market year average (MYA) prices and county level yields to those found in the Purdue crop budgets. This should provide some indication of how prices and yields vary relative to budgeted values. The results carry the caveats that farm level yields can be more or less variable than the county average and that there is no guarantee that a farmer will receive a price that matches the state-level marketing year average (MYA) price. These caveats aside, the results of the analysis provide some insight into how actual outcomes correspond to pre-plant crop budgets.

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Grain Pains on the Plains; A Look at Production



David Widmar

Rail shipping issues on the High Plains have been the focus of several media stories. The challenges have even created political interest (here and here). While the situation is very complicated, the slow rail shipment of grain has created local pricing issues.

Several factors have contributed to the situation (including shipping demands associated with crude oil), but the purpose of this post isn’t to pull all those apart. Instead, we wanted to focus on how grain production has changed in this region.  Previous posts have considered broader, nationwide, aspects of this trend, including large increases in the number of corn acres planted and decreases in CRP acres. These two trends, collectively, led us to wonder what has happened to grain production on the High Plains.

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