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The Economic Drama of Soybean Rust in 2005 Corinne Alexander, Chris Hurt, Craig Dobbins, George Patrick Agricultural Economists, Purdue University PURDUE.

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Presentation on theme: "The Economic Drama of Soybean Rust in 2005 Corinne Alexander, Chris Hurt, Craig Dobbins, George Patrick Agricultural Economists, Purdue University PURDUE."— Presentation transcript:

1 The Economic Drama of Soybean Rust in 2005 Corinne Alexander, Chris Hurt, Craig Dobbins, George Patrick Agricultural Economists, Purdue University PURDUE COOPERATIVE EXTENSION SERVICE Sponsored by:

2 Can rust be Managed?????? Will national yields be sharply reduced?????? Will the threat of rust cause U.S. farmers to abandon soybeans in 2005??????

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4 National Economic Impacts Soybean producers Livestock producers Other crop producersConsumers Total impact First year, worst case: Yield loss of 9.5% Expected impact ($million) -1,004-52-14-271-1,341 Percent change -19.9%-0.1% -0.3% After 3 years: Medium spread Expected impact ($million) -828-575-287-1,168 Percent change -14.3%-0.2%0.03%-0.1%-0.3% Source: Economic Research Service, USDA, OCS-04D-02

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6 Regional Acreage Responses (After 3 Years, Medium Spread) Regions Lake States Corn Belt N. PlainsApp.SEDelta South PlainsUS Suitability index 0.590.700.540.780.830.660.38 2001 soybean acres (million) 8.637.68.55.53.39.40.374.2 Percent change in acreage, 2008 2.3-1.92.1-11.3-13.3-101.2-3.2 Source: Economic Research Service, USDA, OCS-04D-02

7 Planning yields & prices Cont. Corn Rot. Corn Rot. BeansWheat Yield (bu/a) 13314346.269.1 Futures: Jan. 4 $2.33 $5.48$3.10 Basis -.22 -.25 -.30 2005 harvest ($/bu) $2.11 $5.23$2.88

8 Expected 2005/acre return: January 4, 2005

9 Estimated production costs

10 Assumptions on Fungicide and Application Costs for One Application? Material……………$13 to $16 per acre Application …..……… $5 to $6 per acre Total………$18 to $22 per acre

11 If you have been near a 50/50 rotation (corn/soybeans), Then What are the Alternatives to Soybeans for 2005? Winter wheat???? Buckwheat????? Idle the land???? Corn back to corn!!!!!! Have to Play the Cards you have been dealt for 2005!

12 Adding fungicide & ONEONE TWOTWO NoRUSTNoRUST

13 June Number of years in ten suitable for an epidemic, hatched areas indicate soybean production (courtesy of R. Magarey)

14 ONEONE TWOTWO

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16 Market Logic for 2005 Soybeans Say all U.S. farmers decided beans were to risky in 2005 and cut all U.S. bean acres and switched to corn!!!!

17 IF expected returns to soybeans are much lower than to corn prior to planting, THEN producers would reduce bean acreage and increase corn.

18 With a NEW Expected Costs for Fungicide application on Beans. New Crop bean Prices should adjust upward relative to corn to provide incentives to plant sufficient bean acres.

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20 So in the Pre-Plant period Expect the new-crop futures market to provide a price premium to plant beans on average quality Midwest soils that is roughly equal to the Expected Costs of Rust Treatment Our Guess is: $10 to $20 per acre of soybean premium without rust treatment costs Note: Price relationships for corn and soybeans can also depend on other world and other U.S. factors

21 Pricing Implications: SOYBEANS Greater yield, production, and price uncertainty in 2005 Fewer bean acres: Our thought 3% to 5% Volatility in price could be high Diversified pricing---spreads risks Tendency to use options to price 05 Beans Bushels not committed Price not committed if rust is a major problem Continue to do some pricing in the March-April-May spring “premium” window.

22 Pricing Implications: CORN More acres in 2005: Our guess up 3 to 4% Weaker price increases into this spring Price danger of storing too far into the summer Expect strong carry to continue in to 05 crop. Favorable returns for storage. Stay with pricing some new-crop in the March-April-May spring “premium” window

23 64.2% of IN crop acres insured in ’04 Soybeans = 62.3% of acres Corn = 66.8% of acres Two types of insurance products County-based (group) products GRP and GRIP (18.7% in ’04) Individual producer-based products APH, CRC, RA & IP (81.3% in ’04)

24 Individual Crop Insurance Plant diseases, including soybean rust, due to natural causes are a covered peril Expected to use “good farming practices” Crop Insurance would also pay if: No effective control is available, or A lack of supplies of fungicide for effective control What about Inability to get a custom applicator???--- (We don’t know if this will be covered by insurance ) Losses NOT covered by insurance if: There is insufficient or improper application of plant disease control measures Damage due to producer’s decision not to buy and apply available control measures

25 Individual Crop Insurance Remember insurance only covers losses from yield/revenue below the coverage level of insurance Coverage level can vary between 50% and 85% of producer’s historical yields times “price” for revenue products 15% to 50% insurance “deductible” Point: For insurance to cover losses from rust, you will likely have to apply fungicide, and if you properly apply fungicide treatments the proper number of times, you likely won’t have a yield loss from rust that is in excess of 15%.

26 Critical Questions Asked if You Claim Rust Loss: Could producer have applied recommended fungicides in a timely manner?????? Were fungicides applied in a timely manner for optimum control (rate) regardless of cost? How will Crop Insurance Adjuster Decide???? Probably case-by-case decisions, especially in 2005 until better guidelines can be developed

27 Crop Insurance Decisions Crop insurance premiums are based on historical results Soybean rust is a new risk of possible losses and is not reflected in current premiums Crop insurance, combined with forward pricing, can increase average returns and reduce downside risk for producers

28 Insurance Bottom Line: Start with insurance you have used in the past, Then. Consider that Rust is a new risk of loss and you will not have to pay more for insurance The new rust threat tends to cause one to: --Stay with insurance you have had, or --Increase soybean coverage levels in 2005

29 Conclusions: National Perspective Rust can be managed! Primary impact is on production costs not yields Soybean producers bear most of the negative impacts Consumers also bear some Livestock producers to a small extent Impacts will vary by region of the county Bigger bean acreage reduction in the Eastern Corn Belt (ECB) and Southeast compared to WCB Somewhat more corn and lower prices in ECB compared to WCB Somewhat more growth of animal industries in ECB compared to WCB

30 Conclusions: Indiana Producers For 2005 alternative to soybeans is corn-on-corn With 7% yield drag, corn-on-corn tends not to be a good “economic” alternative Susceptibility % may vary around the state and remains uncertain for 2005 November 2005 bean futures are expected to “bid for bean acres” maybe $10 to $20 per acre over corn Most will tend to stay with corn/soybean rotations Insurance is a better deal in 2005 New risks of loss from rust is included, but Premiums will not be higher in 2005, but Will have to spray if you have rust, and if you spray yield losses from rust may not exceed 15%.

31 Government costs-share for fungicides Provide Disaster Assistance legislation Establish a rust detection system Crop insurance programs: Soybean premium rates could be adjusted downward or be subsidized more Farm programs: Increase soybean Target Price as an example. Policy Implications Should the broader society help farmers bear some of the negative implications?


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