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January 31, 2007
Can We Discuss Cowboys And Packers Without Discussing Football?
For next weekend’s Superbowl game you are probably stocking up on chips and dip, you’ve planned for pizza delivery, someone is bringing a kettle of chili, and there will be plenty of your favorite beverages to wash down all of those spicy chicken wings. How many Superbowl gatherings will feature steak, hamburger, beef tips, or barbecued brisket? What’s wrong with this picture? The kickoff is at dinner time. Isn’t beef “What’s for dinner?” To our best knowledge there are no federal, state or local laws against preparing or consuming beef on Superbowl Sunday. There’s a lot of beef in front of the TV cameras, how about beef in front of the TV? Someone needs to work on this issue. In the meantime, we’ll work on the issue of why there is weakness in the cattle and beef market. You have to wonder if they are related!
On Friday the beef industry will be watching for USDA’s cattle report which will indicate how much expansion, if any, is occurring in the current cattle cycle. The past week’s USDA Livestock Outlook hints that increased numbers are not widely expected. “The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions. Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future.”
Beef prices could use some support. With weakening market values, increased feed costs, and a shortage of forage, cowboys are riding into swift currents of red ink. At Kansas State, livestock economist Rodney Jones says fall profits have quickly faded, “The average October steer closeout returned around $65.00 per head, following profits of around $100.00 per head on September closeouts. The impact of higher feed prices, and higher priced summer purchased feeder cattle, really began to be felt on November closeouts, with returns averaging a negative $46.00 per head. Preliminary calculations suggest that returns worsened for cattle finished in December. Average breakevens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head.” And Jones says based on feed conversion and daily gains, January losses could be $123 per head and February losses could be up to $158 per head.
In addition to high feed costs and the drought’s interruption of the normal pasture to feedlot transition, the incessant snow storms across the high plains turned feed conversion from positive to negative, says Jones, “Unfortunately, we have some reason to believe that performance will be below average for early 2007 closeouts. Historical data indicates that overall feed conversions for cattle finished in the first few months following major storm events can be impacted by as much as 15 to 20%. A 15% increase (worsening) of feed conversions with today’s feed prices results in $4 to $5 per cwt increases in the breakevens, translating to around $50.00 per head decline in profit prospects per head holding all other assumptions constant.”
With production costs increased by weather-related events and the corn market, the revenue end of the equation is not much better says Glenn Grimes and Ron Plain at the University of Missouri, “The number of cattle on feed January 1 was up 0.6% from a year earlier based on trade estimates. If true, this will be the fourth consecutive month for the number on feed number to decline relative to a month earlier. On September 1, the number of cattle on feed was up nearly 10% from a year earlier. The placements of cattle on feed during December are expected to show a decline of over 11% from 2005 and fed marketings during December are expected to show a decline of 4.4% from a year earlier.” That may be the best news if it is confirmed. While the market will already have that contraction built in, and discount it after the numbers are released, it will show the trend in the current cattle cycle as not expanding uncontrollably.
While cattlemen may be figuring out ways to stop the bleeding, don’t look to the processing industry for any help in solving the problem. Meat packer profits had been cut to the bone for the past couple years, and have trended up only recently say Grimes and Plain, “Retail beef prices in December were 1.1% below November and 3.8% below December of 2005. For the year of 2006, retail beef prices were 3.8% below 12 months earlier. Based on the data, retail beef prices would have been lower than they were if the total marketing margin had not declined by 3.5% in 2006 from a year earlier. The wholesale to retail marketing margin in 2006 was down 7.7% from 12 months earlier, but the packer's margin was up 18.3% from a year earlier. The packer's margin needed to increase for the last two years and has not been kind to beef packers.”
If the supply begins to tighten up, demand will still have to pick up to justify higher prices. But the fundamentals in the beef market have not been friendly recently. “Pork and poultry seem to be competing for consumer red-meat dollars for beef at the retail level. Overall demand for beef is not seen as particularly strong over the past few months. Exports have not improved much either. According to USDA the U.S. is still having problems resuming beef trade with South Korea as they turn more U.S. beef shipments away saying they contain bone chips or other prohibited animal parts. USDA hopes to schedule more talks before mid-February regarding the dispute.” That is the assessment of Mike Roberts of Virginia Tech, who agrees with Grimes and Plain that packers retreated from higher prices. “Packers are expected to keep slaughter rates down while bidding cash cattle lower hoping to keep margins in the black. The average beef plant margin for Monday was estimated at $16.45/head, up $1.20 /head from last Friday but down $2.65/head from a week ago”
If you have marketing chores, here are some ideas:
1) Mike Roberts says: “Cash sellers are encouraged to push marketings if they can get them out of the pens at the right weights. It is still wise to consider protecting a portion of 3rd quarter '07 marketings at this time. Corn users should hold off pricing more near-term corn inputs now. Corn users may want to protect against rising prices over the next few weeks.”
2) Jim Hilker at Michigan State r at Michigan State says for August Live Cattle: “There is a 10% chance that the price will be higher than $99.79 and a 10% chance that the price will be less than or equal to $75.95. This indicates that there is an 80% probability that the price will fall between these two prices. There is a 50% chance the price will be less than or equal to (or greater than) $87.01.”
3) Allen May at South Dakota State says for fed cattle: “The latest WASDE report left projections unchanged for the first three quarters of 2007 for fed cattle. The January report also gave initial projections for the fourth quarter. Live cattle futures are above the projection range for all of 2007, suggesting pricing strategies are favorable to protection strategies at this time.”
4) Allen May says for buying feeder calves: “There is currently substantial upside for the first and second quarters of 2007, suggesting hedgers use protection versus pricing strategies for those periods. A synthetic put strategy, selling futures and buying an out-of-the-money call, may be a way to manage short-term risk in this volatile market. For the third and fourth quarters the futures prices are in the middle of the projection range.”
Summary:
With higher corn prices and weaker market prices, the beef producer is finding new holes in his belt to use in tightening it up. However, increases in cow slaughter indicate the expansion in the industry may be slowing, which is good news for producers whose profits have disappeared. Increased packer margins have consumed some of the profit, along with a weaker seasonal demand and the closed Korean market. Keys to turning around the predicament will be reduced supplies and increased demand.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
January 30, 2007
Crop Insurance Or Disaster Aid: What Should Congress Implement In The Farm Bill
Will Congress assume part of the burden of managing agricultural risk with ad hoc disaster aid, or will producers assume part of the burden of managing agricultural risk with crop insurance? “Over 80% of insurable crop acreage was enrolled in the program in 2005, and more than half of those acres were insured at coverage levels of 70% or higher. Total liability for the 2006 crop year was approximately $50 billion. Despite this success, Congress once again seems poised to pass another disaster assistance program in 2007,” say Iowa State University ag economists Nicholas Paulson and Bruce A. Babcock. How would you respond to the alternatives of managing your risk?
U.S. agriculture, which includes Cornbelt farmers, Brooklyn consumers, retired taxpayers in Florida, and every agribusiness in between, will be creating a new Farm Bill this year. A lot of work has been done so far, but an agreement will be the result of Capitol Hill politics, and everything is on the table. Paulson and Babcock’s research analysis for the Center for Agriculture and Rural Development (CARD) suggests the answer may lie in one of the more recent forms of crop insurance which exploded in popularity in the spring of 2006.
Federal crop insurance has been expensive for the taxpayer, since it cost $15.5 billion from 2001 to 2005, with $8.8 billion indemnifying farm losses, and the remainder plus premiums being used to pay for the delivery system through local crop insurance agents. That is an estimated $26/A cost to get farmers to sign up. A lesser expensive route is an area or group insurance plan, dating back to 1949 at the University of Illinois, which eliminates individual farm records. The CARD study says, “An often over-looked advantage of an area insurance product is that it would automatically provide disaster aid to farmers faced with unexpectedly low prices or who reside in areas with low yields.” Such a plan is being touted as a revenue safety net that doubles as disaster aid.
You know the programs as GRP (Group Risk Protection) and GRIP (Group Risk Income Protection), since both have been working for several years. How do they work?
• GRP is an area plan of insurance that pays all insured farmers in a county an indemnity when the county average yield falls below a trigger yield.
• The trigger yield is chosen by the insured as a percentage (up to 90%) of the expected (trend) county yield.
• GRIP is an area revenue plan that pays an indemnity when county average revenue falls below a trigger revenue level.
• The trigger revenue is chosen by the insured as a percentage of expected county revenue, which is the product of the GRP trend yield and the expected price as measured by futures markets.
• The Harvest Revenue Option is an optional endorsement to GRIP which turns GRIP into a GRP policy when the harvest price is greater than the expected price.
• Any production losses under the resulting GRP policy are valued at the harvest price.
As an indication of its popularity, Illinois farmers first learned about GRIP in 2003, and by 2006, 37% of corn acreage was covered by GRIP, compared to 28% for CRC, and 22% for RA. The primary reason is the bargain basement cost, compared to the expected indemnity payment, but it was also recognized as a mechanism which provided sufficient risk management protection. Since GRIP is a revenue product, low commodity prices that trigger GRIP means GRIP can also replace LDP’s and Counter Cyclical Payments, should those be lost to WTO trade negotiations. That causes Paulson and Babcock to rhetorically ask if such a program is really crop insurance or is it an ad hoc disaster program.
While that may not seem to be important to a Cornbelt farmer, the issue is rooted in whether the program will be administered by FSA as a disaster payment pass through program with little administrative cost or something else. That alternative would be similar to the crop insurance program for which underwriting companies and agents must get their share, which increases the cost of the program or lowers the payments to farmers.
Paulson and Babcock believe:
1. If the premium rates are actuarially fair, the taxpayer cost of the program would exceed $39 per acre.
2. If rates continue to be calculated by USDA under current formulas, the taxpayer cost would be just under $41 per acre.
3. If rates were modeled after the 2005 harvest revenue option, the taxpayer cost would be just under $43 per acre, which would be comparable to the taxpayer cost for a disaster aid program.
4. However, if this is operated as a crop insurance program, producers would have a premium to pay, and the net benefit would be reduced by that premium.
In conclusion, the CARD report says, “The expected cost of running GRIP through the crop insurance program in 2007 is approximately $42.68 per acre for corn and soybeans in Iowa, Illinois, and Indiana. If every acre planted to corn and soybeans in 2006 were insured under GRIP in these three states (55.4 million acres), the expected cost would be $2.36 billion per year, making it by far the most expensive farm program of all current programs. However, farmers would only receive approximately $1.1 billion of this amount with the rest going to the crop insurance industry.”
Summary:
Development of the 2007 Farm Bill will include a Congressional decision whether to implement perennial disaster assistance programs, or incorporate them into a risk management partnership. While the model for such a policy exists in the group or area insurance programs, there are issues of cost and administration that must be decided, and politics will likely be a major player.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
January 29, 2007
What Is Your Marketing Plan For 2007 Corn?
After you sold your 2006 corn for $2.25 to $2.50, then watched the market hit $4, your New Year’s resolution was probably to never again sell corn too early. That’s fine. That might be a good resolution for your 2009 to 2015 corn crops, but what about your 2007 corn. What is your marketing plan? Are you assured of $4 prices through the rest of the calendar year? Could large acreage, good weather, and a slow down in ethanol plant construction weaken prices? Before too long you’ll need to seriously think about managing your price risk if you have not done so already. Now may be that time!
The US and the world are hungry for your corn, and with demand surpassing the supply from the 2006 crop, last year’s big crop wasn’t big enough. University of Illinois ag economist and outlook specialist Darrel Good’s quarterly outlook says you might have planted more corn, if there had been better communication between the market and farmers last spring. “The market failed to recognize the extent of the cost increase to produce corn relative to the cost to produce soybeans. These incorrect market signals in terms of resource allocation may become more frequent as nontraditional traders dominate the corn and soybean futures market.”
Farmers cannot be responsible for the traders’ technical charts, but farmers can look at the market fundamentals to become comfortable with the needs of the market. Let’s look at several of those:
Exports. A little over a year ago, the corn export market heated up. Sales of the 2005 crop were the largest in 10 years. The pace of exports has remained healthy, and USDA predicts 2.2 billion bushels will be exported from the 2006 crop. Watching the weekly sales statistics, Darrel Good says we remain on track for that goal to be reached. “On the surface, it appears that exports should easily reach the USDA projection. Uncertainty centers around how much the higher corn prices may influence new sales. It is possible that importers purchased U.S. corn early in the year in anticipation of higher prices and that new sales will now decline dramatically.”
Feed and residual. At the last USDA stocks report, which was based on the December 1 corn inventory, the supply was 9% less than the same period the prior year. Based on exported and processed supplies, the disappearance can be attributed to what was fed to livestock, but Darrel Good calculates there was 3% less fed that during the same period a year ago. “On the surface, larger livestock inventories might suggest a year-over-year increase in feed and residual use. Use last year totaled 6.141 billion bushels. Higher corn prices, however, are expected to reduce the rate of corn feeding.” Good believes livestock will consume slightly less than 6 billion bushels of the 2006 crop.
Domestic processing. USDA’s estimate is for ethanol to consume 2.15 billion bushels as part of the total 3.5 billion for all seed, food, and industrial purposes. That would be nearly 19% more than last year. Ethanol’s consumption of corn is increasing at a rapid rate due to new production facilities being completed. When that happens, ethanol will need 4.2 billion bushels of corn. Good says there is a question about just when the plants will all be in operation, but they could need more corn than USDA currently anticipates.
Total. Five months into the marketing year for the 2006 crop, corn demand appears to be about 11.795 billion bushels. Since that is more than the 10.535 billion bushels produced, stocks will be drawn down to 717 million bushels which is 6% of the projected use. The projected marketing year average price is $3.00 to $3.40. Good says the first half of the crop was probably sold at an average of $2.70, so the last half will have to average $3.70 for the entire year to average $3.20.
The 2007 corn crop. Current prices are signaling that more acres of corn need to be planted in 2007, which will come from a variety of crops, including wheat and soybeans. Since the price of soybeans is less than twice as much as that of corn, many Cornbelt farmers will be able to justify increasing corn acreage at the expense of soybeans. But how much is needed and what price will support that size of crop without hurting demand? Darrel Good suggests that price would be in the $3.00 to $3.50 range, retaining a 6% stocks to use ratio, and that would allow a trend yield to produce a 12.6 billion bushel crop on 81.3 million harvested acres.
Beyond 2007. Your 2008 corn crop and beyond will be determined in a large part by the expansion of the ethanol industry, and that depends substantially on the price of oil. Darrel Good says, “There is no reliable way to forecast the price of unleaded gasoline. However, there should be some concern about the ability of ethanol prices to maintain the current premium to unleaded gasoline prices once production is sufficient to exceed mandated levels and all MTBEs are replaced. Production beyond that level would theoretically be sold only if the price is competitive with unleaded gasoline.” Currently, ethanol is selling at $2.43, compared to unleaded gas at $1.69. Good says with the BTU adjustment and the blender tax credit, ethanol should be comparatively priced at $1.64, about 70 cents under current prices. Finally, the rated of ethanol expansion will be determined by political goals and the impact on food prices.
Marketing plan. With those market fundamentals in play, how do you create a marketing plan for the 2007 corn crop? Many farmers have already sold 2007 production, and others are awaiting higher prices. If you are in the later group, here are some ideas for managing your price risk, compliments of Darrel Good:
1. Plan on buying a revenue insurance product with a high level of coverage, particularly if December 2007 futures prices remain high through February. Those insurance products will be relatively expensive, but will likely provide a reasonable guarantee of profitable returns for the 2007 crop.
2. Price a portion of the 2007 crop prior to the release of the USDA’s March 30 Prospective Planting report in case it shows extremely large corn planting intentions.
3. Price another portion of the 2007 crop using options strategies. For example, buying December 2007 put options with a strike price of $3.90 for $.40 per bushel, and selling December 2007 call options with a strike price of $5.00 per bushel for $.17, would establish a minimum futures price of $3.67 and a maximum futures price of $4.77.
4. Consider establishing the basis on some of the 2007 crop if bids reflect a strong basis. A large increase in production and a good growing season could result in a shortage of permanent storage capacity in the fall, even with the construction of new capacity over the next 8 months.
Summary:
Miscommunication between farmers and the market may have created a smaller 2006 corn crop than was needed. That crop is being fed to livestock at a healthy rate, shipped abroad at an even healthier rate, and processed into ethanol at an unbelievably still healthier rate. But prices may be slowing down some of the consumption, and the next major determinant of 2007 corn prices will be the USDA’s planting intentions report at the end of March. There are a variety of marketing options for producers to use to protect their potential corn profits, which incorporate timing, the basis, options, and managing revenue risk.
Posted by Stu Ellis at 5:18 AM | Comments (0) | Permalink
January 28, 2007
Can We Discuss Cowboys And Packers Without Discussing Football?
For next weekend’s Superbowl game you are probably stocking up on chips and dip, you’ve planned for pizza delivery, someone is bringing a kettle of chili, and there will be plenty of your favorite beverages to wash down all of those spicy chicken wings. How many Superbowl gatherings will feature steak, hamburger, beef tips, or barbecued brisket? What’s wrong with this picture? The kickoff is at dinner time. Isn’t beef “What’s for dinner?” To our best knowledge there are no federal, state or local laws against preparing or consuming beef on Superbowl Sunday. There’s a lot of beef in front of the TV cameras, how about beef in front of the TV? Someone needs to work on this issue. In the meantime, we’ll work on the issue of why there is weakness in the cattle and beef market. You have to wonder if they are related!
On Friday the beef industry will be watching for USDA’s cattle report which will indicate how much expansion, if any, is occurring in the current cattle cycle. The past week’s USDA Livestock Outlook hints that increased numbers are not widely expected. “The Cattle report to be released on February 2 may point to a national cow herd expansion that has slowed, as the January 1, 2007 beef cow inventory may not show a significant increase over January 1, 2006 inventories. The Cattle report, along with the January 2007 Cattle on Feed report, could give some indication of the extent to which heifer retention for cow inventory expansion has been affected by poor forage conditions. Any significant cow herd expansion will likely come from the 2007 calf crop, implying that actual cow herd expansion could be at a reduced rate until 2009, which could provide support for beef prices for the foreseeable future.”
Beef prices could use some support. With weakening market values, increased feed costs, and a shortage of forage, cowboys are riding into swift currents of red ink. At Kansas State, livestock economist Rodney Jones says fall profits have quickly faded, “The average October steer closeout returned around $65.00 per head, following profits of around $100.00 per head on September closeouts. The impact of higher feed prices, and higher priced summer purchased feeder cattle, really began to be felt on November closeouts, with returns averaging a negative $46.00 per head. Preliminary calculations suggest that returns worsened for cattle finished in December. Average breakevens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head.” And Jones says based on feed conversion and daily gains, January losses could be $123 per head and February losses could be up to $158 per head.
In addition to high feed costs and the drought’s interruption of the normal pasture to feedlot transition, the incessant snow storms across the high plains turned feed conversion from positive to negative, says Jones, “Unfortunately, we have some reason to believe that performance will be below average for early 2007 closeouts. Historical data indicates that overall feed conversions for cattle finished in the first few months following major storm events can be impacted by as much as 15 to 20%. A 15% increase (worsening) of feed conversions with today’s feed prices results in $4 to $5 per cwt increases in the breakevens, translating to around $50.00 per head decline in profit prospects per head holding all other assumptions constant.”
With production costs increased by weather-related events and the corn market, the revenue end of the equation is not much better says Glenn Grimes and Ron Plain at the University of Missouri, “The number of cattle on feed January 1 was up 0.6% from a year earlier based on trade estimates. If true, this will be the fourth consecutive month for the number on feed number to decline relative to a month earlier. On September 1, the number of cattle on feed was up nearly 10% from a year earlier. The placements of cattle on feed during December are expected to show a decline of over 11% from 2005 and fed marketings during December are expected to show a decline of 4.4% from a year earlier.” That may be the best news if it is confirmed. While the market will already have that contraction built in, and discount it after the numbers are released, it will show the trend in the current cattle cycle as not expanding uncontrollably.
While cattlemen may be figuring out ways to stop the bleeding, don’t look to the processing industry for any help in solving the problem. Meat packer profits had been cut to the bone for the past couple years, and have trended up only recently say Grimes and Plain, “Retail beef prices in December were 1.1% below November and 3.8% below December of 2005. For the year of 2006, retail beef prices were 3.8% below 12 months earlier. Based on the data, retail beef prices would have been lower than they were if the total marketing margin had not declined by 3.5% in 2006 from a year earlier. The wholesale to retail marketing margin in 2006 was down 7.7% from 12 months earlier, but the packer's margin was up 18.3% from a year earlier. The packer's margin needed to increase for the last two years and has not been kind to beef packers.”
If the supply begins to tighten up, demand will still have to pick up to justify higher prices. But the fundamentals in the beef market have not been friendly recently. “Pork and poultry seem to be competing for consumer red-meat dollars for beef at the retail level. Overall demand for beef is not seen as particularly strong over the past few months. Exports have not improved much either. According to USDA the U.S. is still having problems resuming beef trade with South Korea as they turn more U.S. beef shipments away saying they contain bone chips or other prohibited animal parts. USDA hopes to schedule more talks before mid-February regarding the dispute.” That is the assessment of Mike Roberts of Virginia Tech, who agrees with Grimes and Plain that packers retreated from higher prices. “Packers are expected to keep slaughter rates down while bidding cash cattle lower hoping to keep margins in the black. The average beef plant margin for Monday was estimated at $16.45/head, up $1.20 /head from last Friday but down $2.65/head from a week ago”
If you have marketing chores, here are some ideas:
1) Mike Roberts says: “Cash sellers are encouraged to push marketings if they can get them out of the pens at the right weights. It is still wise to consider protecting a portion of 3rd quarter '07 marketings at this time. Corn users should hold off pricing more near-term corn inputs now. Corn users may want to protect against rising prices over the next few weeks.”
2) Jim Hilker at Michigan State says for August Live Cattle: “There is a 10% chance that the price will be higher than $99.79 and a 10% chance that the price will be less than or equal to $75.95. This indicates that there is an 80% probability that the price will fall between these two prices. There is a 50% chance the price will be less than or equal to (or greater than) $87.01.”
3) Allen May at South Dakota State says for fed cattle: “The latest WASDE report left projections unchanged for the first three quarters of 2007 for fed cattle. The January report also gave initial projections for the fourth quarter. Live cattle futures are above the projection range for all of 2007, suggesting pricing strategies are favorable to protection strategies at this time.”
4) Allen May says for buying feeder calves: “There is currently substantial upside for the first and second quarters of 2007, suggesting hedgers use protection versus pricing strategies for those periods. A synthetic put strategy, selling futures and buying an out-of-the-money call, may be a way to manage short-term risk in this volatile market. For the third and fourth quarters the futures prices are in the middle of the projection range.”
Summary:
With higher corn prices and weaker market prices, the beef producer is finding new holes in his belt to use in tightening it up. However, increases in cow slaughter indicate the expansion in the industry may be slowing, which is good news for producers whose profits have disappeared. Increased packer margins have consumed some of the profit, along with a weaker seasonal demand and the closed Korean market. Keys to turning around the predicament will be reduced supplies and increased demand.
Posted by Stu Ellis at 5:16 PM | Comments (0) | Permalink
January 26, 2007
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
What price should corn be to achieve all production goals, be profitable for corn growers, but not punitive to livestock feeders and other users? IL Extension Outlook Specialist Darrel Good suggests the price might be in the $3 to $3.50 range, and to achieve that, the stocks-to-use ratio for the 2007-08 marketing year should be 6%. Read more.
To balance supply and demand, and try to achieve a 6% stocks-to-use, Good thinks:
1) Prices over $3 will cut livestock feed demand and residual use back to 5.85 bil. bu.
2) Exports will be helped by less Chinese exports, but could stay at 2.1 bil. bu.
3) Domestic processing use and ethanol could increase up to 4.55 bil. bu.
4) Total use might reach 12.5 bil bu., and a 750 mil. carryout, results in 6% stocks.
5) A 12.5 bil. bu. crop means a 155 bu. ave. yield on 80.7 mil. acres, 9.5 mil over ’06.
6) The futures market is currently offering $3.80 to motivate that acreage increase.
What price should soybeans be, Darrel Good rhetorically asks, to meet demand and have a comfortable carryout of 250 mil. bu.? He says there will be more imports by China, more production in So. America, and with an increased crush, demand will be 3.14 bil. bu. Given the current stocks, 2007 production needs to be 2.8 bil. bu. With a trend yield, acreage should be 65.8 mil., 7.8 mil. under 2006 acreage. Good says the futures market is offering $7.50, less than twice corn prices, which will cut ’07 acres.
If you are warm and wet, its El Nino time! IN climatologist Dev Niyogi says we are in a moderately active El Nino, since a large part of the Pacific is warmer than normal. As a result he is anticipating problems with Asian rust in soybeans this year, since the southern states have not had a killing freeze to keep rust spores further south and east.
The El Nino may result in active spring weather says Purdue’s Niyogi. There is a significant amount of moisture in the ground, rainfall could be sporadic and intense, and such rainy conditions could create problems for early season crops and spring planting.
1) The wet fall prevented fall tillage, and spring tillage may be delayed from wetness.
2) Wet weather has decreased residual nitrogen carryover, which corn can’t count on.
3) Soybeans could have problems with establishing a stand and fighting seedling blight.
It doesn’t happen often, but IL Extension’s Gary Schnitkey says this year, “On many farms, it will be possible to insure revenues at levels assuring profits, a situation that occurs rarely when using crop insurance.” Schnitkey says profitability can be insured. More.
Given the delicate balance and unprecedented dynamics of the marketplace, Kansas State economist Mike Woolverton says no one can predict with certainty what will happen going forward. “But fluctuating prices during this marketing year will result in potential revenue fluctuations for the average producer in the tens of thousands of dollars. Timing of sales will be critical.” He says, “The usual advice to sell grain and oilseeds in increments using forward pricing techniques still applies. At present, it is possible to lock in selling prices on the 2007, 2008, and 2009 crops at well above long term averages. Now is the time for grain and oilseed producers to become proactive sellers.”
Watch the futures, says IL Extension’s Darrel Good, to see if distant futures pay storage costs. “Now the carry or the spreads will never exceed the costs of storage at the delivery market, but those spreads can be smaller than full carry, smaller than the costs of storage, or they actually can be inverted. (Inverted) futures can be lower priced than nearby futures. It is the magnitude of that spread or carry that is really the signal to market participants whether they should be storing the crop or selling it on the spot market.”
Watch the basis, adds Darrel Good, to see, “What the market is offering, then calculate what it would cost you to hold corn from harvest time until May of next year. If that is on farm, the biggest cost is interest on the value of the crop plus some handling in and out of the storage bin. If it is commercially, then you need to add the commercial storage charges to see if the total cost is more or less than the carry that the market is offering.”
The CBOT wheat contract is disconnected from the physical markets, says Ohio State economist Matt Roberts. He says the delivery mechanism broke down over the summer, resulting in $1+ basis levels when CBOT-approved elevators stopped taking deliveries. Roberts says problems continue as indicated by the basis, meaning the relationship between futures prices and cash prices is unpredictable. Roberts says wheat growers should only pay attention to cash forward prices available from their local elevators.” Read more.
Lower fuel prices may be attractive for spring field work, but Iowa State Extension’s Bob Wisner says that is not good for the corn market. Continued weakness in the oil market will slow expansion in the ethanol industry. Wholesale gas prices have declined 32¢ in the past month and ethanol by 48¢. Wisner says, “The lower ethanol prices, if the decline continues, would lower the maximum price new ethanol plants can pay for corn.”
Your soybean canopy is your friend more than you know, says Iowa State agronomist Bob Hartzler. Research on soybean population found “the primary effect of the soybean canopy was on the growth of weeds rather than weed survival. The reduction in weed biomass associated with increases in soybean populations would reduce the potential yield impact of weeds escaping control and reduce the number of weed seeds produced.”
A second weed study at Iowa State involved a pre-emergent used before glyphosate. Weed scientist Bob Hartzler says, all of the weeds were established in a narrow strip (2 - 4" wide) directly between the soybean rows. Thus, the soybean canopy was as effective as the herbicide in the area within 12" of either side of the row, but by mid-June the canopy had not developed sufficiently to shade the areas in the row middles.” Details and pictures.
Two dozen world trade ministers are meeting feverishly to restart WTO talks that have been in hibernation for the winter. This comes as Canada, Australia, Argentina, Brazil, and the EU have all lodged formal complaints about the US farm program which, they allege, pays US farmers to increase production that depress world market prices.
250 million acres of biotech crops grew around the world last year according to a biotech trade group, which said the acreage was planted by 10.3 million farmers. 90% of the farmers were described as small, resource-poor farmers in the developing world. In the EU, which prohibits most US biotech crops, 6 countries have allowed biotech production, including Spain which has 150,000 acres of biotech crops. Biotech beans are the largest crop with 57% of the world biotech acreage, followed by corn, cotton, and canola.
Early January markets continue to show red ink for cattle producers. Kansas State economist Rodney Jones says in December, “Average break-evens were $95.50 per cwt., which combined with average selling prices of just under $86.50 likely resulted in returns around negative $113.00 per head. Based on average performance (feed conversions and daily gains) early 2007 losses would be expected to range from around $123.00 per head for January closeouts, to around $158.00 per head for February closeouts.” He said heavy winter storms reduced feed efficiency 15-20%, costing $50 more loss per head.
Mark your calendar: Dairy operations in need of pasture upgrades can attend a series of 4 Friday teleconferences on your computer beginning Mar. 9. Topics include pasture transition, forage supplements, forage management, and innovation. Participation is limited. Pre-register: (309) 694-7501 or by e-mail at dseibert@uiuc.edu .
Mark your calendar: IL Extension specialists will discuss wheat in crop rotations, nitrogen management, and market outlook at the daylong IL Wheat Forum, Feb. 19 in Mt. Vernon ((I-57 & I-64). Growing season weather, wheat yields, diseases, and a grower panel are also scheduled. Details.
Producers concerned about the quality of water flowing from field tiles into waterways will want to keep tabs on the results of an EPA contest for students to design filter systems. The challenge is to keep nitrogen, ammonia, atrazine and alachlor out of waterways, using filters made of wood chips, gravel, and activated carbon at the end of field tiles.
The circle is now complete. The Associated Press reports that some ethanol plants are being designed to be powered by methane. The methane would come from cattle feedlots adjacent to the ethanol plant, which produces the distillers’ dried grains fed to the cattle. Once the process gets started, it could come close to being perpetual motion.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
January 25, 2007
Soybeans: Yes, There Is Another Crop On The Radar
The soybean market remains in lockstep with the corn market, despite abundant supplies. At some point the market will determine enough acres of corn have been bought, and both corn and soybean prices could find themselves in mid-air, much like cartoon characters that’ve chased each other off a cliff. They’ll grin at each other, and suddenly they drop out of view. Continuing demand for corn to feed an increasing number of ethanol plans will provide a foundation for the corn market. But what about soybeans? That’s a different story.
2006 was a year of significant statistics for the US soybean industry:
• We produced a record 3.188 billion bushels
• Acreage was among the greatest at 75.5 million.
• Soybean yield of 42.7 was the second highest.
• Soybean exports for the year will be at record high levels of 1.120 billion bu.
• Aug. 2007 carryout will be the highest at 575 mil. bu.
Those statistics are from USDA’s latest Oilseeds Outlook, authored by Mark Ash and Erik Dohlman. They said the final USDA crop report two weeks ago on the 2006 soybean crop faded 16 million bushels from the November forecast, with most of the change due to lower yield estimates for Illinois and Missouri.” Nevertheless the crop was large helped by the unusually high 75.5 million acres harvested.
Export estimates were trimmed a bit by USDA to reflect a softer expectation for Chinese purchases of US beans. Current exports are a bit behind the record pace of 2005, but USDA says unshipped sales could catch up.
Soybean stocks at the last benchmark on December 1 were at record levels of nearly 2.7 billion bushels, compared to 2.5 billion in 2005. Stocks are not expected to drop below 575 million bushels by the end of the marketing year in August. Stocks have continued to ease upward with nearly every crop report.
The fall price rally slipped sideways in December as demand slowed and foreign production prospects picked up. At that time the average farm price was $6.14, with cash prices in the mid-$6 range achievable for many producers, however many beans had been sold for lesser amounts, “By the end of 2006, approximately half of the crop was marketed at a price averaging close to $5.70 per bushel.” Currently the forecast range in beans prices is $5.75 to $6.45 per bushel.
Chinese stir fry may be popular with your family, but not as much as in China, which has doubled its purchases of soybean oil. About a quarter of soybean oil exports will be unloaded this year in Chinese ports. Most US oil will be shipped to Latin American buyers. Domestic demand is dominated by biodiesel producers, but as oil prices rise, their interest has waned. SBO prices have risen 3 cents since last summer making biodiesel about 22 cents per gallon more expensive. That cost, combined with lower oil prices for petroleum, has been shrinking profits for biodiesel producers. The balance of the demand for soybean oil has also softened due to food makers substituting for other oils to avoid the trans-fat issue present with hydrogenated soybean oil.
With soybeans being crushed for their oil, soybean meal becomes a co-product, but it has nearby appeal in Canada and Mexico. USDA says exports sales are health, demand is up 24%, and nearly 75% of bean meal is being consumed by Canada, Mexico, and Latin America.
Regarding other oilseeds:
• The 7% reduction from the 2005 cottonseed crop was derived from an 8% decline in 2006 harvested cotton area.
• US sunflower seed production was nearly halved in 2006 from the preceding year’s bumper crop, due to a 28% drop in acres and a 21% drop in yield.
• The US canola crop is down 12%, with the help of an 8% percent cut in acreage.
• Canola exports are rapidly expanding, primarily to Europe where is it used in biodiesel.
• Peanut production was down 29% from 2005.
Globally:
• Rain has helped the Argentine soybean crop.
• India is cutting its oilseed acreage by 7% to produce feed grains.
Summary:
A record US soybean crop in 2006 has been shrinking because of healthy export business and a strong demand for soybean oil from biodiesel refiners. Despite a record carryover, the average price is above $6 per bushel. Competing oilseed crops were hurt by low yields and acreage in 2006. Acreage for soybeans in 2007 is undecided but will be reduced by corn acres.
Posted by Stu Ellis at 12:18 AM | Comments (0) | Permalink
January 24, 2007
Don't Accelerate Your Depreciation Schedule So Fast The Machinery Management Police Write You A Ticket
As we approach tax time, the question begs and pleads to be asked: How rapidly do you depreciate farm equipment? And since you have probably answered, “As rapidly as possible,” the next question becomes, what impact does that have on your machinery management? Oh, you didn’t want that question asked? We’ll take it back, if you continue reading….
There are several methods of depreciation according to agricultural economists Greg Ibendahl at Mississippi State and Jonathan Norvell at the University of Illinois whose analysis of depreciation indicates that producers are probably taking advantage of the tax law, rather than replacing machinery when the economics dictate. In fact the new IRS Section 179 which allows depreciation to be taken all in the first year, may have resulted from heavy lobbying by the farm equipment makers trade groups!
Recent tax law changes have frequently become a route toward economic development, such as speeding up depreciation of equipment in the areas of the south devastated by Hurricane Katrina. In other words, faster depreciation and faster purchase of more new equipment to put more money into the local economy. But politics aside, what does the economics justify for your farming operation, and when is the appropriate time to replace that piece of equipment?
Ibendahl and Norvell say, “Most assets have an optimal lifespan.” And their point is that your profitability may suffer if that optimal lifespan is not reached. “Therefore, depreciation is a procedure to match the decline in asset value to the yearly expense taken.” On the other hand, if you speed up the depreciation, you have more profits early from your tax return, “This has the effect of increasing the net present value of profits. Therefore, accelerated depreciation should reduce the optimal lifespan of an asset. The important question for producers is if this gain is actually enough to change the optimal expected lifespan of farm machinery.”
Typically, a depreciation schedule begins with a purchase at mid-year, with heavier depreciated value early, and lesser depreciated value later on, with expiration in mid-year eight. A new form of depreciation is Section 179, which Ibendahl and Norvel explain, “as long as a farmer does not acquire more than $400,000 in section 179 eligible property, he or she can take up to the $100,000 in 179 deduction expenses.” Additionally, there is also “a special 50 percent depreciation allowance for qualified new property placed in service after May 5, 2003.”
Beyond the desire to manage your taxes with the help of accelerated depreciation, should be the management of your equipment. The economists say, “Assets must be replaced when they wear out but often the optimal replacement occurs earlier because either the productivity drops off or the repairs and maintenance become increasing prohibitive.”
Ibendahl and Norvell evaluated four types of depreciation schedules: 1) the typical 7 year standard, 2) the new 50% option, 3) the Section 179 alternative, and 4) a schedule that matched the tax depreciation with the economic depreciation of a mid-sized tractor. What they found was, “Trading tractors in year 12 is optimal for the all the depreciation methods, even when there are no tax benefits to depreciation. This figure is based on the expected value of the yearly distribution.” They conclude that your profitability will improve if machinery is replaced at an optimal age, rather than when it had been fully depreciated. Additionally, lenders can better help farmers manage their debt and Extension specialists will be able to better provide better recommendations to farmers about machinery management. “Finally, the results should show if accelerated depreciation laws do help farm input suppliers sell more to farmers. The accelerated depreciation is a benefit to farmer as it lowers their yearly cost (mainly due to getting money earlier rather than later). However, the accelerated depreciation methods do not affect the year the asset should be sold.”
Summary:
Tax laws periodically are changed to allow taxpayers, including farmers, to benefit from special political objectives. Accelerated depreciation schedules may help reduce one’s tax liability, or encourage more economic development in a region with more equipment purchases. While these are legal, they may not foster the best machinery management, and even though a piece of equipment may be fully depreciated before its useable life, that does not mean it should automatically be replaced.
Posted by Stu Ellis at 12:45 AM | Comments (1) | Permalink
January 23, 2007
Farm Bill Dynamics As We Enter The Home Stretch For Debate
With the new Congress holding hearings about issues related to the 2007 Farm Bill, farmers rightfully ask for the latest inside information and educated guesses about what will be included in the legislation. There may be some foregone conclusions, but there is also a lot of coffee shop conversation, interspersed with Internet bloggers offering opinions. The opinions provided here today are from inside sources.
With the political change in Washington, one of those in the catbird seat is Stephanie Mercier, who is the staff economist for the Democratic members on the Senate Ag Committee. Another source is Vince Smith, agricultural economist at Montana State University. Their collaborative analysis is published in the latest issue of the agricultural economics e-magazine Choices.
Following structural change in agriculture since the 1930’s, Mercier and Smith say contentious issues this year will include payment limitations, broadening the scope of subsidies to a wide area of commodities, the impact of international trade, the demands of the budget, and the involvement of agriculture in the energy debate.
Budget. In March 2001, just before the 2002 Farm Bill was considered, the Congressional Budget Office forecast a $5.7 trillion budget surplus from 2002 to 2011. However in August 2006, the CBO forecast a budget deficit of $1.8 trillion between now and 2016. However, the costs of continued Mideast conflict, reductions in tax laws, increased deficit interest, are not included in that calculation, and those writing the next Farm Bill will have less funding available. The 2006 budget resolution requires the House and Senate Agriculture committees to cut an additional $3 billion from commodity, conservation and research programs over the next 5 years. The CBO will issue another 10 year budget projection in March, and that will likely guide the total Farm Bill appropriation.
Demographics. Agriculture is losing political clout with reduced population in rural areas. Each member of the U.S. House represents 646,000 people, and of the 435 Congressmen, fewer than half have more than 1,500 farmers in their district. Many non-farmers are concerned about the distribution of farm payments, and prior to the 2002 Farm Bill the Environmental Working Group released an analysis of where payments were distributed resulting in Farm Bill amendments to substantially cut farm program payments. They were dropped from the final legislation. The issue has already resurfaced this year.
Political Interests. 20 years ago the Farm Bill addressed feed grains, wheat, cotton, rice, milk, and conservation interests. Since then, producers of minor oilseeds and other small crops have gained program benefits, and there will be more for 2007. Some of the benefits will be in crop insurance, particularly for livestock. Other interests will include the low income recipients of food programs, environmental groups, lobbyists for renewable energy programs, humanitarian aid programs, and those who want all farm programs eliminated. But many of those programs have contributed to a 20% increase in land values, and elimination of that type of support would have a negative effect across much of the US.
Trade. Since the 2002 Farm Bill, US farm programs have been attacked by other nations as distorting trade and depressing prices for their producers of similar commodities. The US was forced to eliminate several commodity support programs, and others such as the counter cyclical payment program will not find their way into the 2007 Farm Bill. While Congress debates a new Farm Bill, trade negotiators will try to work out a new international trade program, but it may be subject to Congressional modification because the President’s exclusive trade negotiating authority has expired.
Summary:
The development of the 2007 Farm Bill comes in the midst of substantial budget restrictions, increased political debate from special interest groups, and the parallel environment of international trade negotiations. Observers say agricultural supporters in Congress will not allow a dismantling of farm programs, but the debate could be lively due to the potential for tradeoffs between traditional commodity support programs and innovative programs that allow income transfer unhooked from commodity production.
Posted by Stu Ellis at 12:32 AM | Comments (0) | Permalink
January 22, 2007
What Will Higher Crop Prices Mean For Your Crop Insurance Program?
When you buy a bigger pickup truck, your insurance premium is going to be more, since the new truck has a larger pricetag. When you buy a larger combine, your insurance will increase to compensate for the increased value if the insurance company has to cover a loss. Maybe you have not yet factored in grain prices with your crop insurance premium, but when you do, it should come as no surprise that your crop insurance will cost more in 2007, because you are insuring a crop which has a much higher value. How much more will it cost? The farm gate can give you a pretty fair estimate.
When you moved from Multi-Peril Crop Insurance to Crop Revenue Coverage (CRC) or Revenue Assurance (RA) several years ago, your premium went up because you were moving from a bushel replacement policy to a revenue policy and since it was new, you were not surprised the cost was higher. This year there really won’t be any new types of insurance, but your cost is going up, all because the value of the crop is up. University of Illinois ag economist Gary Schnitkey provides a clear view of crop insurance issues in his January 19 Farm Management newsletter. He says the issue is a double edged sword, since your insurance will be coving a higher valued crop, but the premiums will be higher.
The calculation of what your coverage is going to be begins with fall delivery contracts at the Chicago Board of Trade. For 2006 that was $2.59 for corn and $6.18 for beans. The 2007 prices will be determined during the month of February, but may likely be more than $1 higher for each commodity. That February average of closing prices provides the minimum guarantee for CRC or the harvest price option for RA. If the fall price exceeds that, the fall price will determine your indemnity.
Schnitkey says with current CBOT prices, and at a 65% coverage level, your per acre guarantee will be $121 higher this year than last. At an 85% coverage level, current prices are giving you $158 more per acre. But to earn those indemnity amounts, your premium cost will go up, in part because of the higher base prices. The other part is the increased risk for a decline in prices. That is based on the grain options market, and with increased price levels and increased volatility in the market, there is the other reason for higher premium costs.
Schnitkey’s premium calculations for a Central Illinois farm with a 160 bushel APH yield indicates that a 65% CRC coverage in 2006 which cost $3.92 would rise to $5.51. But an 85% coverage level in 2006 with a $18.78 premium would cost $26.37 per acre this year. Those price volatility factors increase insurance premiums between $.50 and $3.00 per acre depending on coverage level.
While you might think the premium costs are high, keep in mind that the calculations are using CBOT futures prices, and they are probably more than what you are getting as a cash price at your local elevator. In essence, you are being guaranteed a higher price than you will be realizing on your settlement sheet. Subtract your local basis from the guaranteed price to get a good indication of the added value the crop insurance policy is giving you. Schnitkey says in recent years, cash guarantees have rarely exceeded $300 at any coverage level, but this year many will exceed $400.
If you typically use RA insurance or have relied on Group Risk Income Protection (GRIP), your premiums may increase more than CRC premiums, and be more than 60% higher than your 2006 premiums. For RA policies with the harvest price option, Schnitkey says premiums will increase 63 to 68% over 2006. GRIP policies with the harvest price option will be 62 to 82% more than 2006.
Summary:
Your crop budget for 2007 should plan for increased premium expense for crop insurance, since there are higher crop prices to insure, as well as increased price volatility that insurance has to protect. In most years, 85% coverage had to be selected to insure a crop somewhere near a break-even level. However with commodity prices well above breakeven levels, most levels of insurance will be able to guarantee profitability.
Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink
January 19, 2007
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
The January corn crop numbers are now history, but what were the changes besides cutting production and carryout? IL Extension’s Darrel Good offers his weekly analysis.
1) The Nov to Jan cut in the US yield estimate was the 2nd largest in the past 32 years.
2) The corn export forecast of 2.250 bil. bu. is a 17 year high, based on good sales so far.
3) The feed use estimate of 5.975 bil. bu. is a 3 year low, caused by higher corn prices.
4) Prices will have to average $3.50 through Aug. to reach USDA’s price projection.
Iowa State’s outlook specialist Bob Wisner says corn demand keeps surpassing supply. “Revised production data still show the second-highest US corn yield on record in 2006, with a US average yield of 149.1 bu. per acre. Even so, the crop was 1.3 to 1.4 bil. bu. below potential market demand. This is the 2nd consecutive season that production has fallen short of market demand. The ‘05 US crop was about 200 mil. bu. below total use.”
Most of the production-use gap this year can be filled by drawing down the large beginning carryover stocks to minimum levels needed for normal operations from August 31 until new-crop supplies are available, says Bob Wisner. “However, the market will also need to ration away about 200 to 300 mil. bu. of demand through higher prices.” Read his newsletter.
The corn demand results from ethanol, and Kansas State’s Mike Woolverton asks how many more acres are needed. “Each new ethanol plant will add about 37 mil. bu. to corn demand per year; and an average of one new plant is coming on line each week. To meet all needs will require production of about 11.9 bil. bu. of corn in 2007. In order to do that, assuming trend line yield, US producers need to plant about 10 mil. additional acres of corn this spring. Read more.
For wheat producers, Woolverton says, “The wheat market faces a dilemma. If wheat price remains high, export demand will be choked off, but if wheat price does not remain high, wheat acreage will shift into corn or soybean production.” He says the USDA did confirm market expectations of a 9% increase in winter wheat acres.
If 10 mil. more acres of corn are needed, where will it come from? Iowa State’s Wisner says other crops will have to make way, such as oats, hay, and pasture, as well as beans and wheat, which saw a sharp rise in fall 2006 planting. Wisner says half of the Cornbelt CRP acres may be converted to corn and bean production in the next few years.
The January bean crop numbers are also history, and Darrel Good offers his analysis:
1) Though lower than the Nov estimate, the 3.188 bil. bu. crop is a record for the US
2) The export forecast was cut from Nov. but the 1.12 bil. bu will set a record.
3) Prices will have to average $6.50 through Aug. to reach USDA’s projection of $6.10.
4) 2007 bean acres could crop by 10 mil. and still maintain carryout stocks over 250 mil.
5) If Mar 2008 bean futures remain near $7.70, Brazil will significantly increase acres.
The strength in the bean market has come from meal in the past week, says Bob Wisner. But he says, “It is questionable how much further strength is likely in soybean meal, with competition from DDGS and tighter profit margins in poultry and hogs.
Soybean rust may be more of a 2007 threat, than in prior years, says USDA plant pathologist Glenn Hartman at the U of IL. “The situation has changed enough that soybean growers will need to be on heightened alert during the early part of the growing season." Hartman says rust has stayed in FL, AL, & GA the last two winters, but it is now spending the winter in LA, where weather will bring it up the Mississippi River.
A hard freeze or a dry spring could keep the rust in check temporarily, but it currently is residing on kudzu in areas of LA more north and west than in prior winters. Glenn Hartman says rust building up early in the spring in LA, AL, & MS will mean that chances will go up considerably that the Midwest may be reached by the disease.
Soybean producers should check websites: www.sbrusa.com and www.soybeanrust.org regularly for information about the spread of Asian Rust. “When the map begins to light up in northern KY and AR and southern MO. When that happens, they can begin to take appropriate action based on their own risk tolerance." He says there will be time to react.
The difference between 80 bu. and 183 bu. was use of a Bt rootworm hybrid at the IL research facility at Monmouth, says Extension’s Emerson Nafziger. He says the soil was dry, the soil insecticides didn’t seem up to the task of protecting yields in dry fields of corn after corn. More normal weather at the Urbana test site allowed only a 15 to 25 bu. difference. Nafziger says in dry soils stress of corn after corn is magnified. Results from the crop yield trials.
Manure management will be easier after attending one of two Midwestern conferences focused on facility construction, manure application, EQIP funding, odor control and system safety. Sessions will be 3/13 in Effingham, IL (I-57 & I70) and 3/15 in Princeton, IL (I-80). Get conference information.
Many producers will be surveyed between late Jan. and early Mar. for USDA’s annual Agriculture Resource Management Survey. Nearly every federal policy is based on the ARMS survey, which asks about operating expenses, production costs, and households.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
January 18, 2007
If You Are Nervous About When To Sell Your Grain, We Have An Idea For A Good Cure
Did your New Year’s Resolutions address anything beyond losing weight, such as developing a marketing plan for either your old or new crop (hint, hint)? Even though 1/24 of the year is gone, it is never too late to build a marketing plan. You may still have some old crop in storage, and you have some great opportunities for the new crop. Since you always have a crop to market, it is never too late to build a marketing plan. And they don’t have to be complicated, such as these.
Folks who regularly open the farm gate may remember a late summer suggestion about development of a marketing plan for the 2006 crop. It provided good start on marketing plans, for those who are new to the concept. If you didn’t get started at that time, wanting a different format, Melvin Brees at the University of Missouri offers his ideas, with the theory they can be simple and still effective. The Brees plans are one page marketing plans for pre-harvest and post harvest.
Brees make the point that detailed marketing plans covering several pages can be valuable, but one-page plans can be quickly reviewed when decisions must be made in short order in a volatile market. Both of the plans address price setting, quantity and timing, as well as market risks and addressing the need for flexibility. The post harvest plan includes a section for break-even prices that will help with making storage decisions.
Price. The price objectives and goals section allows a producer to create a range of upside marketing objectives and downside traps that will call for sales in the event of rapid market price deterioration. Both cash prices and futures prices can be worked into the plan.
Options. Producers using option strategies can record those, as well as producers using minimum price contracts that utilize options to establish that minimum price.
Risk/Opportunities and Strategy. Brees has created a section in the marketing plan to make marketing a disciplined activity, rather than an emotional event.
Flexibility. As you develop a marketing plan and create price objectives, you constant fear is being wrong. This section of the marketing plan creates opportunities, such as spreading sales throughout the year, or taking advantage of options to avoid missing higher marketing prices.
Regardless of the simplicity of a marketing plan, it needs to be periodically reviewed and updated if necessary. It creates your disciplined approach to marketing by setting some reasonable price objectives.
Summary:
Although marketing plans can be complex or simple, they need to contain reasonable price objectives and a disciplined approach to execution. Plans which contain those objectives, also need strategies to ensure commodities are not sold on emotion, but the flexibility to have a pre-determined “plan B” if necessary. A marketing plan needs to reflect the character of the producer, and be a plan the producer is comfortable in executing.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
January 17, 2007
Crop Insurance Or Disaster Aid: What Should Congress Implement In The Farm Bill
Will Congress assume part of the burden of managing agricultural risk with ad hoc disaster aid, or will producers assume part of the burden of managing agricultural risk with crop insurance? “Over 80% of insurable crop acreage was enrolled in the program in 2005, and more than half of those acres were insured at coverage levels of 70% or higher. Total liability for the 2006 crop year was approximately $50 billion. Despite this success, Congress once again seems poised to pass another disaster assistance program in 2007,” say Iowa State University ag economists Nicholas Paulson and Bruce A. Babcock. How would you respond to the alternatives of managing your risk?
U.S. agriculture, which includes Cornbelt farmers, Brooklyn consumers, retired taxpayers in Florida, and every agribusiness in between, will be creating a new Farm Bill this year. A lot of work has been done so far, but an agreement will be the result of Capitol Hill politics, and everything is on the table. Paulson and Babcock’s research analysis for the Center for Agriculture and Rural Development (CARD) suggests the answer may lie in one of the more recent forms of crop insurance which exploded in popularity in the spring of 2006.
Federal crop insurance has been expensive for the taxpayer, since it cost $15.5 billion from 2001 to 2005, with $8.8 billion indemnifying farm losses, and the remainder plus premiums being used to pay for the delivery system through local crop insurance agents. That is an estimated $26/A cost to get farmers to sign up. A lesser expensive route is an area or group insurance plan, dating back to 1949 at the University of Illinois, which eliminates individual farm records. The CARD study says, “An often over-looked advantage of an area insurance product is that it would automatically provide disaster aid to farmers faced with unexpectedly low prices or who reside in areas with low yields.” Such a plan is being touted as a revenue safety net that doubles as disaster aid.
You know the programs as GRP (Group Risk Protection) and GRIP (Group Risk Income Protection), since both have been working for several years. How do they work?
• GRP is an area plan of insurance that pays all insured farmers in a county an indemnity when the county average yield falls below a trigger yield.
• The trigger yield is chosen by the insured as a percentage (up to 90%) of the expected (trend) county yield.
• GRIP is an area revenue plan that pays an indemnity when county average revenue falls below a trigger revenue level.
• The trigger revenue is chosen by the insured as a percentage of expected county revenue, which is the product of the GRP trend yield and the expected price as measured by futures markets.
• The Harvest Revenue Option is an optional endorsement to GRIP which turns GRIP into a GRP policy when the harvest price is greater than the expected price.
• Any production losses under the resulting GRP policy are valued at the harvest price.
As an indication of its popularity, Illinois farmers first learned about GRIP in 2003, and by 2006, 37% of corn acreage was covered by GRIP, compared to 28% for CRC, and 22% for RA. The primary reason is the bargain basement cost, compared to the expected indemnity payment, but it was also recognized as a mechanism which provided sufficient risk management protection. Since GRIP is a revenue product, low commodity prices that trigger GRIP means GRIP can also replace LDP’s and Counter Cyclical Payments, should those be lost to WTO trade negotiations. That causes Paulson and Babcock to rhetorically ask if such a program is really crop insurance or is it an ad hoc disaster program.
While that may not seem to be important to a Cornbelt farmer, the issue is rooted in whether the program will be administered by FSA as a disaster payment pass through program with little administrative cost or something else. That alternative would be similar to the crop insurance program for which underwriting companies and agents must get their share, which increases the cost of the program or lowers the payments to farmers.
Paulson and Babcock believe:
1. If the premium rates are actuarially fair, the taxpayer cost of the program would exceed $39 per acre.
2. If rates continue to be calculated by USDA under current formulas, the taxpayer cost would be just under $41 per acre.
3. If rates were modeled after the 2005 harvest revenue option, the taxpayer cost would be just under $43 per acre, which would be comparable to the taxpayer cost for a disaster aid program.
4. However, if this is operated as a crop insurance program, producers would have a premium to pay, and the net benefit would be reduced by that premium.
In conclusion, the CARD report says, “The expected cost of running GRIP through the crop insurance program in 2007 is approximately $42.68 per acre for corn and soybeans in Iowa, Illinois, and Indiana. If every acre planted to corn and soybeans in 2006 were insured under GRIP in these three states (55.4 million acres), the expected cost would be $2.36 billion per year, making it by far the most expensive farm program of all current programs. However, farmers would only receive approximately $1.1 billion of this amount with the rest going to the crop insurance industry.”
Summary:
Development of the 2007 Farm Bill will include a Congressional decision whether to implement perennial disaster assistance programs, or incorporate them into a risk management partnership. While the model for such a policy exists in the group or area insurance programs, there are issues of cost and administration that must be decided, and politics will likely be a major player.
Posted by Stu Ellis at 10:26 PM | Comments (0) | Permalink
Manage Your Disease Risk If You Want To Take Advantage Of Premium-Priced Corn
Corn futures hit $4 and you decided to plant a few more acres to cash in on the biggest cash grain bonanza you’ve ever seen in a lifetime of farming. You’d been thinking about it for a couple months, worrying about all of the changes in your cropping pattern, and calculating how to manage any additional production risk. One of those you risks you just thought about was the increased potential for fungus and other diseases carried from one corn crop to the next. You have some legitimate concerns.
However, those concerns can be managed according to University of Missouri plant pathologist Laura Sweet. In her December newsletter on Integrated Pest Management, Dr. Sweet says, “Diseases may cause leaf spots or leaf blights, wilts or premature death of plants. Corn diseases also can cause harvest losses, affect the quality of the harvested crop and cause storage losses.” In other words, there are plenty of gremlins that can quickly reduce the number of bushels you have to sell at $4 each.
Laura Sweet says pathogens can survive on 2006 corn residue and infect the 2007 crop with the help of weather, which she says has a significant impact on the severity of any disease. For categorical purposes, principal corn diseases can be divided into seed rots and seedling diseases; foliage disease; stalk and root rots; and ear and kernel rots. She says to minimize the impact of these yield killers, hybrid selection and agronomic practices become as important as weed and insect management.
Seed rot and seedling blight
You are already familiar with many types of fungus that can attack seedlings and cause seeds to rot, such as pythium, fusarium, rhizoctonia, which create perennial havoc in soybeans. They will thrive in cold, wet soil, so the soil environment at planting time needs to be your focus. To manage your risk:
1. Plant good quality seed of hybrids adapted for your area.
2. Plant under good seedbed conditions, especially at soil temperatures above 50 to 55 degrees F.
3. Use fungicide treated seed, which most commercial seed is, but you will want to control both water mold and other fungi, which may mean a multiple fungicide treatment.
Foliage disease
Once your crop is growing, it is susceptible to gray leaf spot, northern corn leaf blight, anthracnose leaf blight, yellow leaf blight, eyespot, and others. Fields infected one year produce spores the following year from launching pads on corn residue and are carried by the wind, either miles or inches. The only aliens are rust fungi, which will not overwinter, and need to be brought into the Cornbelt each year from the Gulf Coast, such as Asian soybean rust. Dr. Sweet says most of the foliar diseases in your corn field like wet, humid conditions, and heavy morning dew. If you’ve had foliage disease:
1. Select corn hybrids that are resistant to the diseases that you’ve had.
2. Rotate crops with at least one year out of corn, if possible, or do everything else possible.
3. Manage corn residues, but in reduced tillage systems, hybrid selection and crop rotation are especially important.
4. Follow appropriate fertility practices.
5. Manage insect and weed problems.
6. Plant at the proper population for the hybrid.
7. Apply foliar fungicides if warranted, particularly if you are producing an added value specialty crop.
Stalk rot
Stalk rots come from fungi and bacteria that live in the soil, in corn residue, or even in seed and survive from one year to the next. The pathogens may be blown onto leaves or stalks and they may enter stalks through corn borer holes or hail bruises. They may also infect the roots and grow upward unseen into the stalk. Stalk rots thrive when the plant is under stress from too much or too little water, temperature, cloudiness, hail, insects, nutrient deficiency and leaf disease. To manage risk of stalk rot:
1. Select hybrids with good stalk strength and lodging characteristics.
2. Plant at recommended populations for that hybrid.
3. Follow proper fertility practices.
4. Maintain good insect and weed control.
5. If irrigating, try to deliver optimum water from silking through late dough stage.
6. Avoid or minimize stress to corn (especially during pollination and grain fill).
Ear and kernel rot
These invade prior to harvest and can cause quality deterioration. These fungi may increase in prevalence with wet conditions after pollination and prior to harvest. They will survive either in the soil or in corn residue from the prior year. To manage your risk:
1. Select locally adapted hybrids with husks that close over ear tips.
2. Plant at recommended plant populations for that hybrid.
3. Maintain good plant vigor over the growing season.
4. Use a balanced fertility program.
5. Select planting dates appropriate for your area.
6. Follow recommended management practices to limit damage by ear-feeding insects.
7. If irrigating, try to deliver optimum water from silking through late dough stage.
8. Harvest in a timely fashion.
Summary:
While increasing corn acreage can potentially increase your revenue, it can also potentially increase your change of diseases left over from 2006. Seedling blights, leaf blights, stalk rots, and ear and kernel rots can seriously hurt yields, but can also be mitigated with a good risk management program. That stretches from selection of hybrids that are resistant to known diseases in your area, through good agronomic practices during the growing season, and ending with a timely harvest.
Posted by Stu Ellis at 12:12 AM | Comments (0) | Permalink
January 16, 2007
And Why Is It Again That You Plant Biotech Seed?
Why do you use Roundup Ready soybeans? Lower production cost? Better yields? Time savings? How about Bt corn, or Roundup Ready corn? Lower production costs? Better yields? Time savings? Are your reasons the same for each crop or different? The farm gate has an idea what the real reason may be. See if you agree on this issue, and you may end up with an entirely different approach to genetically modified crops and the way you incorporate them in your operation.
The background for this comes from ag economists Dr. Carl Nelson and Dr. (to be) Justin Gardner at the University of Illinois. They looked at Genetically Modified Crops and Labor Savings in US Crop Production, in an attempt to find out why 90% of US soybean acreage is glyphosate resistant, yet there is no significant profit advantage to using Roundup Ready soybeans, which of course are glyphosate resistant. Another study theorized the use of genetically modified crops allowed farmers to save on management time. But do all of them allow a time savings? Some of us have spent a lot of time walking beans, but cornfields haven’t been walked since Grandpa was farming.
A 2002 study found:
1) Bt cotton is likely to be profitable in the cotton belt and reduces pesticide use.
2) Adopting Bt corn should provide a small yield increase, and in some cases adopting causes significant increases in profit.
3) For herbicide tolerant soybeans cost savings should offset any revenue loss due to yield drag.
A 2001 study found:
1) Herbicide tolerant technology leads the farmer to substitute relatively less-expensive glyphosate for other herbicides.
2) Farmers realize a change in the shadow price of labor and management.
3) Due to glyphosate’s effectiveness at killing larger weeds, weather induced spraying delays do not significantly affect weed control.
4) When farmers switch to herbicide tolerant technology substitution effects lead to a decrease in the price of alternative herbicides.
In 2005 herbicide tolerant crops made up 87% and 60%, of U.S. soybean and cotton acreage respectively, while 35% of the corn acreage and 60% of cotton acres were insect resistant.
Gardner and Nelson believe that there either has to be a profit motive or a labor savings reasons for the adoption of a biotech crop. If it is not profit related, they say, "Farmers can then reallocate household labor to off-farm work or leisure thus increasing household welfare and maintaining the same on-farm profit.” And they add, “If the household exhibits a preference for on-farm work there will be important implications in how the household allocates labor. If the preference is strong enough then all available labor will be allocated to on-farm work, constrained by the number of hours in the day or off-farm obligations.”
What Gardner and Nelson found in their analysis was:
1) Adopting herbicide tolerant soybeans, under conventional tillage, reduces household labor by 23 percent. Consequently, “It appears that farmers are substituting HT soybeans for household labor, freeing up the resource for off-farm employment and leisure.
2) Neither Bt corn nor HT corn has a statistically significant impact on household labor. This result can easily be explained, in the absence of Bt technology many corn farmers simply do not attempt to control for corn borers.
3) Unlike Bt corn, adopting Bt cotton saves household labor. Bt cotton requires less spraying. This difference amounts to a 29% decrease in household labor.
4) With the exception of corn, we find that GM crops save labor.
Summary:
Farmers have adopted biotechnology for a wide variety of crops, but for different reasons. Weed control in soybeans can be labor intensive, so herbicide tolerant soybeans have become quite popular. Pest control in cotton requires many field operations, so insect resistant cotton has become quite popular. While corn yields can suffer from both insects and weeds, their control has not been labor intensive. However, biotech corn has become popular because of its positive impact on farm financial welfare.
Posted by Stu Ellis at 12:43 AM | Comments (2) | Permalink
January 15, 2007
How Do I Take Advantage Of The Corn And Soybean Market?
First, USDA Chief Economist Keith Collins tells the Senate that ethanol producers will need one billion more bushels of corn in 2007 than in 2006, and corn futures exploded upward Thursday. Then USDA’s final 2006 crop report reduced the production estimate by 210 million bushels putting the stocks to use ratio at the second least ever, and corn futures closed limit up Friday. The farm gate does not make market predictions, but when trading resumes Tuesday, there may still be some pent-up demand to own corn. And you are not the only one wondering where the top of the market may be.
You are joined by many others, including Purdue agricultural economist Chris Hurt, whose monthly corn newsletter headline rhetorically asks, “Where’s the Top?”
Hurt says the 6.4% stocks to use ratio is the tightest ever, surpassed only by the 5% at the end of the 1995/1996 marketing year when corn prices exceeded $5. That was when many farmers were defaulting on their $2.50 forward contracts and rolling hedge-to-arrive contracts into oblivion. Hurt says corn supplies are not only tight in the US, but throughout the world with only a 10.7% stocks to use ratio.
When supplies are tight and prices are high, demand begins to be rationed, but Hurt says that has not yet appeared. Ethanol producers continue to buy corn. Export business is brisk, with the help of the cheap dollar, and domestic livestock herds continue to expand despite the upward corn price movement last fall.
Hurt says the 1996 experience was a $5.55 high for corn futures, but the average farm price was only $3.24 for the year. He says the market is poised to drive well into the $4.00 range on Tuesday, with $4.50 the next marketing objective. So what should you watch to be assured the bull market is not about to stop at a fence? Hurt says there are several factors that will point to the health of the market:
1) Watch the weekly export purchases, which could be fueled by the exchange rate, but if there is a buying spree gauge the volume being sold.
2) Watch the domestic corn use, which will taper off just before the price peaks. The next indicator will be the USDA’s grain stocks report on March 30 that shows the rate of disappearance.
3) Also watch the Prospective Plantings Report on March 30. Hurt says if it does not show an 8-10 million acre increase in corn, there could be another spurt upward in the market.
4) The weather could spark higher prices, if spring or early summer weather is a challenge for planting and pollination. Hurt says, “If weather is at least normal or better than normal this growing year, prices will be lower in mid and late summer than they are in late winter and early spring. And if there are yield threats, the $5.55 mark has much higher odds of being tested or exceeded this year.”
So how do you re-work your corn marketing plan? Chris Hurt says, “For new crop pricing, December 07 futures will have to move higher relative to soybeans to get even more acres. Using a conventional strategy of pricing 25% to 35% of the 2007 crop in the mid-February to mid-May period now seems reasonable.” A major point that Hurt makes is that you do need to sell your crop, and not hang onto it awaiting prices that will never come. As corn prices go higher, they will move above the break-even cost of many end users and those end users will stop buying corn, until prices retreat.
Although the soybean market has many bearish fundamentals, bean prices have chased corn prices higher, says Chris Hurt in his monthly soybean marketing letter, despite the fact corn prices need to move high enough above bean prices to buy a sufficient amount of acreage. Although Friday’s USDA crop report contained no surprises for beans, some futures contracts climbed over 40 cents because of the bullishness in the corn market.
Hurt says old crop beans have been trading at 180% of corn, so a $4.50 corn price indicates a potential $8.00 corn price. Those are high prices, even with a low stocks to use ratio. He says corn and bean prices “are linked at the hip” currently because of the relationship of Midwestern acreage, but bean prices will have to unhook at some point. Soybean exports have not been seriously affected by the higher prices, which could be a function of the exchange rate that is advantageous to foreign customers.
Chris Hurt says Prospective Plantings report will tell much about the 2007 soybean crop which could decline in acreage 7-8 million acres, if there is a 10 million acre boost in corn. Such a decline might produce a 2.7 billion bushel soybean crop with trend yields.
If you have old crop soybeans to sell, Hurt says watch for a peak in the corn market, because there is a large volume of old crop beans that need to be sold and many producers will sell as corn pulls soybeans higher until acreage numbers are known. He says mid-March to mid-May is the best time to sell beans, regardless whether it is an average year or a high price year for beans. But he says late-winter to early spring can also provide healthy prices.
In the event of bad weather, which would inflate corn prices further, soybean prices could also rise through the summer. Hurt says there are numerous ways to protect your revenue, either storing beans for cash sales, buying futures to replace prior cash sales, or using call options to replace prior cash sales.
Summary:
Tight corn supplies have driven the value upward, providing unusually high cash and futures prices. However, as those prices move above breakeven levels for corn users, demand will slow and prices will peak, then retreat to lower levels. Producers should closely watch export sales and domestic use as indicators of a peak in demand. Because of the acreage connection, soybean prices have also climbed even though there is a surplus of soybeans. Producers with stored beans should watch the signals for a peak in the corn market, because many beans need to be sold, and prices could rapidly fall.
Posted by Stu Ellis at 12:23 AM | Comments (1) | Permalink
January 12, 2007
Extension Update **Updated**
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
USDA’s final 2006 Crop Report estimated corn production at 10.534 bil. bu., compared to 11.114 bil. in 2005 and 2% under its November estimate. The national average yield was placed at 149.1 bu./A, up 1.1 bu. from 2005, but a 2.1 bu drop from November. Grain traders were expecting a 10.706 bil. bu. crop estimate. Read more.
On the other hand, USDA’s final 2006 soybean crop estimate was placed at 3.188 bil. bu., above the 3.063 bil. bu. 2005 crop and the largest soybean crop on record. It faded slightly from November. The average yield was estimated at 42.7 bu./A. The USDA estimate was also below the grain trade estimate which averaged 3.235 bil. bu.
In USDA’s Grain Stock Report, December 1 corn stocks were estimated at 8.93 bil. bu., a 9% drop from 2005 stocks, with fall quarterly disappearance at 3.57 bil. bu. which is above the 3.41 bil. disappearance in the same period of 2005. Stocks at the end of the marketing year in August are now projected at 752 mil. bu. well below trade expectations. Read more.
USDA’s soybean stocks estimate was 2.70 bil. bu., 8% more than in December 2005. However, soybeans are being consumed at a 15% faster rate than in the comparable period of last year. Disappearance was estimated at 940 mil. bu. Ending stocks grew 10 mil. bu. to 575 mil. but not as much as trade estimates.
The wheat stocks report estimated December 1 supplies at 1.31 bil. bu. which is an 8% decline from the same period for 2005, with quarterly disappearance at a 12% slower clip than last year.
The Wheat Seedings Report indicated 9% more acreage than 2006, with 31.9 mil. for hard red winter, 8.3 mil. for soft red winter, and 3.9 mil. for white wheat. 53% of the crop was last rated at good to excellent, about the same as in 2006. Total wheat acreage is 44.089 mil. A, slightly below pre-report estimates. Read more.
USDA Chief Economist Keith Collins surprised the grain markets late Wednesday when he said ethanol would consume 1 bil. bu. more corn in 2007 than in 2006. While he said half of that could come from the 900+ mil. bu. carryover, there would be a need for an additional 6.5 mil. acres of corn to supply the additional demand. Collins was testifying at the Senate Agriculture Committee about renewable fuels.
Higher yields and higher prices not surprisingly are leading to higher net farm income, say IL Extension economists. In fact they believe 2006 income will be higher than any of the last five years, and 60% more than 2005 farm income. Read their newsletter.
The IL farm income study was based on average yields, but because of yield variations, the per farm average ranged from under $50,000 to nearly $120,000. Production expenses were based on a 9% increase in crop expense over 2005 and a 15% increase in fuel expenses. LDP and Counter-cyclical payments for 2006 were estimated at zero.
After three years of profitability, pork producers are entering 2007 with the specter of income that is barely breakeven, and possibly in the red, says Purdue economist Chris Hurt. Over all costs are expected to be 18% higher, including a 62% rise in corn costs. Cost of production was estimated at $47/cwt, with markets expected to average $48/cwt. Read more.
Pork producers needing corn, have some opportunities to manage costs says Hurt:
1) Acquire as much cash corn as possible for feeding needs through mid-summer.
2) Buy corn futures on the breaks when market prices soften.
3) Buy corn call options on the breaks, when option premium values drop.
4) Set a purchase price range buying calls and selling out-of-the money puts.
Can livestock producers expect corn prices to fade as they did in 1996? Jim Mintert at Kansas State says no. “Demand driven bull markets have more staying power than supply driven bull markets. Although ethanol demand is heavily dependent on government policy decisions regarding subsidies, tariffs, and mandated usage levels, it looks like demand for corn used to produce ethanol will remain strong in the foreseeable future.” Read more.
If you are considering a foliar soybean fungicide—regardless of soybean rust—Ohio State researchers say that might be money wasted. Their report said: “Across all studies on average, we gained 3 bu/A. For the application to be economically viable, soybean prices must be $8.00 or higher and the gain must be consistently greater than 3 bu/A.” Find their detailed report with fungicide performance data.
Wet fall and winter fields should not be worked, even if a light freeze seems to help. Ohio State agronomists suggest living with compaction for 2007 and work the field next fall. They also suggest light spring tillage to work out any ruts remaining from harvest. They recommend a tillage depth of only 2-3 inches and not kicking up wet soils.
If you are working on taxes, don’t join other farmers confused over whether CSP payments can be excluded from income tax. They can’t, but FSA had distributed some information that suggested CSP payments could be excluded. OH Extension tax specialist Don Breece said stewardship payments are ordinary income, along with incentive payments. However, he said share rent landlords, who report the payments as ordinary income, may not have to pay self-employment tax on CSP payments.
On another tax matter, Purdue tax specialist George Patrick says the domestic production activity part of the tax code can be helpful with a significant deduction. He says a farm family with qualified production activity income of $80,000 could qualify for a $4,800 deduction. More.
With grain exports outpacing USDA projections this week, Agriculture Secretary Mike Johanns said exports will be important for the 2007 ag economy, as he spoke to the AFBF convention, “In 2001, agricultural experts said exports had declined for five straight years and were down to $50 bil. Since then exports have risen every single year to a record of $68.7 bil. in '06. In '07, they are expected to reach a staggering $77 bil.”
In his same remarks to the American Farm Bureau convention Johanns says the farm economy is quite healthy, “Farm cash receipts increased for the fourth consecutive year in '06 to $242 billion. Now, that's a $42 billion increase since 2001. In 2001, the debt-to-asset ratio was at nearly 15%. In 2006 we reached a significant milestone: the lowest debt-to-asset ratio in recorded history. It is estimated to be approximately 11%.”
Posted by Stu Ellis at 1:37 AM | Comments (0) | Permalink
January 11, 2007
The Ethanol Market: Is It Helping Or Hurting Agriculture?
The Nation’s #1 farm economist Wednesday visited with members of the new Senate Ag committee about the intersection between agriculture and energy. Keith Collins, who has been the USDA’s Chief economist for several Agriculture secretaries, gave a status report on biofuels, with some predictions about the increasing pressure on corn and soybeans to serve both food and fuel markets.
Keith Collins’s testimony to the Senate Ag Committee indicated a significant challenge for bio-fuel advocates, if bio-fuels are going to assume a larger share of the US energy demand. With total energy demand expected to grow 30% by the year 2030, Collins believes biofuels will have trouble maintaining their share of the current market, much less being able to assume a larger role.
Focusing on ethanol, Collins provided some current statistics on plants and production, saying “In 2006, an estimated 5 billion gallons of ethanol were produced, and ethanol accounted for 20 percent of the 2006 corn harvest. Renewable Fuels Association data indicate there are now 110 ethanol plants with total capacity of 5.4 billion gallons and another 73 ethanol plants under construction and another 8 facilities expanding. When construction and expansion are completed, ethanol capacity in the United States will be 11.4 billion gallons per year, which is likely to occur during 2008-09.”
He said in the past couple years, the cost of ethanol production has increased significantly because of higher costs of energy, “U.S. Department of Agriculture (USDA) surveys indicate that between 1998 and 2002 the average cost of producing ethanol (excluding capital costs) remained at about 95 cents per gallon. Since 2002, the cost of producing ethanol has increased to the range of $1.45 per gallon due the increased cost of energy (electricity and natural gas) and corn. Each $1 increase in the per bushel price of corn adds about 36 cents per gallon to the production cost of ethanol, assuming no change in the price of co-products and 24 cents per gallon assuming the prices of co-products increase proportionally with the price of corn.”
The $1 per gallon tax credit for biodiesel has helped promote its production, which was only 91 million gallons in 2004, “High diesel prices and new tax incentives continue to spur production. USDA estimates U.S. biodiesel production reached 250 million gallons in 2006, a 173-percent increase from 2005. For the 2005/06 crop year, biodiesel production accounted for 8 percent of soybean oil use; for 2006/07, biodiesel is expected to account for 2.6 billion pounds of soybean oil or 13 percent of total domestic soybean oil use. The 2.6 billion pounds equals the oil extracted from 229 million bushels of soybeans or 7 percent of estimated U.S. soybean production in 2006.” Currently 87 biodiesel plants are operating with 13 expanding capacity and 65 are under construction, putting production at an additional 1.4 billion gallons per year. Collins said production costs are about $2.50 per gallon, so profit margins are thin, even with the tax credit.
Addressing the issue of 2007 acreage, Keith Collins said corn demand will require the equivalent of 85.6 million acres, and would be met, in part, by a further depletion of the carryover. Which Collins said would have an impact on both corn and soybean acreage in the new crop. He said for 2007, November soybean futures are trading at a 2 to 1 ratio with December corn, but that is below the 2.5 to 1 trend in recent years pointing to a expansion of corn acres. But Collins questioned if that will generate enough acres to meet the additional ethanol demand, “Looking ahead to the 2007 crop of corn, it is quite likely, based on current ethanol plant construction, that corn used in ethanol production will rise by more than 1 billion bushels from the 2.15 billion bushels of the 2006 corn crop expected to be used for ethanol. Use of 1 billion bushels, at a trend yield of 152 bushels per acre, would require an additional 6.5 million acres of corn, if corn consumed in other uses remains unchanged from this year’s projected levels.”
Could the challenge be met with increased productivity? Collins said over the past 50 years, the addition of inputs, such as land, has been modest, but the additional yields have resulted from increases in productivity. “Since 1948, corn yields have increased four-fold, from 40 bushels per acre to 160 bushels in 2004 due to fertilizers, better management, technology, and improved crop genetics. It appears corn yields in the past couple of years have moved above the long-term trend and may continue to do so in coming years as well, helping to meet biofuel demand and reduce pressure on corn prices and acreage. Each 5 bushel increase in yield above the current trend level would be the equivalent of adding around 2.5 million acres to corn plantings, enough to produce an additional one billion gallons of ethanol each year.”
The increased pressure ethanol is putting on the corn market will be felt by the pork producer and the pork consumer according to Keith Collins, “A $1 per bushel increase in the price of corn would raise the cost of producing hogs by about $6 per cwt. With hogs selling for a U.S. average of $43 per cwt in December 2006, the cost of production increase would be about 10 percent of the market price. The farm level value of hogs was about 29 percent of retail value of pork in November 2006, so if the higher feed costs were fully passed on to retail over time, a $1 per bushel increase in the price of corn would translate into about a 3 percent increase in the consumer price of pork.”
Collins said poultry producers will be similarly affected, although beef producers will be insulated somewhat by cattle’s ability to consumer higher quantities of distiller’s grains, which hogs and broilers cannot. But with the increased costs for pork and poultry, Collins said production for both would slow during 2007, as a result prices would increase. At the same time, higher prices for corn and soybeans will result in a slowdown of exports, as foreign buyers look to less expensive sources.
USDA Chief Economist Keith Collins also looked at the expansion of ethanol into the motor fuel market, and forecast a slowdown as the 10% ethanol blend reaches its practical limits of market penetration, “In the face of continued production increases, the price of ethanol could even fall below its energy equivalent to gasoline. If corn prices continue to stay strong and ethanol demand growth slows, ethanol profitability would decline and expansion could slow appreciably in several years.” At that point the acreage balance, that had tipped toward corn would tip back, but that would defeat the purpose of ethanol expansion to alleviate the demand on fossil fuels. Collins said the only way around that predicament is to move toward an E-85 blend, with the help of ethanol made from cellulose, not just corn. While that process is a ways off due to the need for improved technologies, he said the US Department of Energy has goal of cellulosic ethanol production costs of $1.07 per gallon by 2012, which would be less than the cost of producing ethanol from corn.
Summary:
The respected USDA Chief Economist Keith Collins, in his Capitol Hill testimony, offered a challenge to Congress and agriculture, saying the growing demand for ethanol, and its impact on prices and production resources will create some economic hardships elsewhere. However, he said improved production technologies, and government assistance to lessen the expense of cellulosic production of ethanol would help soften the economic blow.
Posted by Stu Ellis at 12:53 AM | Comments (4) | Permalink
January 10, 2007
It Has Been A Warm, Wet Winter, But How Warm And How Wet? (And Did Michigan Ever Finish Picking Corn?)
While eastern half of the Cornbelt has recorded unseasonably warm temperatures, and the ground has yet to freeze, it has offered the opportunity for soil moisture to be recharged. Some parts of the Cornbelt are awaiting frozen soil to finish harvest, and some part of the Midwest have been frozen solid for weeks. However, varying snow cover has left the wheat crop in jeopardy. As we begin a new year, let’s begin with a look at weather and soil conditions.
The USDA and several of its partners assemble weekly reports. We’ll take a state by state summary:
ILLINOIS: Topsoil 1% very short, 8% short, 66% adequate, 25% surplus. Winter wheat conditions are 1% very poor, 7% poor, 23% fair, 62% good, 7% excellent. Temperatures were generally mild for the month of December, averaging more than five degrees above normal across the state. Statewide precipitation averaged 3.67 inches during the month, almost a full inch above normal, with the Northwest and West districts (droughty areas of 2005 & 2006) receiving less than half an inch above normal precipitation. With the above normal temperatures, the precipitation was able to soak into the ground and help recharge soil moisture levels.
INDIANA: December weather was very warm and wet. The average state temperature was 37.1° which was 5.9° above normal. Total precipitation averaged 5.12 inches which was 2.06 inches above normal. The winter wheat crop is reported to be in generally good condition. However, there are some spots that have drowned out because of standing water. Some of the winter wheat is very short due to late plantings and is vulnerable to winter kill. A few scattered corn fields remain to be harvested. Very little field work was accomplished during the month due to wet soil conditions.
IOWA: Above normal temperatures, wet conditions have caused feedlots to become very muddy. Soil moisture conditions: very short 2%, short 13%, 77% adequate, 8% surplus. Average depth of snow cover was 0 inches, compared to 2 inches last year. Average depth of frost penetration was 2 inches, below the previous year’s 4 inches.
KANSAS: Topsoil moisture: 3% very short, 18% short, 76% adequate, 3% surplus. Wheat condition 1% very poor, 7% poor, 35% fair, 48% good, 9% excellent. Wheat wind damage 89% none, 9% light, 2% moderate. Wheat freeze damage 88% none, 11% light, 1% moderate. The State experienced normal to above normal temperatures throughout most of December. Much of the state received moisture in the form of snow or rain, with western counties experiencing heavy snow fall, blizzard conditions. Precipitation amounts during the last week of December ranged from over 6 inches to less than a quarter of an inch.
MICHIGAN: Temperatures were generally mild for most areas during the month of December, although there was a short cold stretch at the beginning of the month. For the 4 week period ending January 2, 2007, precipitation ranged from 1.69 inches in the east central Lower Peninsula to 3.20 inches for the southwest Lower Peninsula. Fields have been too muddy for fieldwork, except on drier soils. Winter wheat and alfalfa seedlings have not been affected by the lack of snow cover. Warmer than normal temperatures have helped maintain winter wheat fields. There were sporadic reports of standing water in some fields. Rains during December prevented late corn harvest. Farmers with corn still in the fields were waiting for the ground to freeze.
MINNESOTA: December 2006 precipitation totals were above historic averages in most locations of the state by one half inch to one inch. December snowfall totals throughout Minnesota were well below normal due to unseasonably warm temperatures that brought rain rather than snow. Temperatures during December averaged from 9.2 degrees to 11.1 degrees above normal. Temperatures ranged from a low of -16 degrees to a high of 67 degrees. This was the third warmest December since 1891, in the Twin Cities. Precipitation averaged from 0.33 inches above normal to 1.19 inches above normal. Snow cover was reported shallow to none prior to a slow moving storm system that moved across the state on New Years Eve, increasing the snow cover. Depth of frost was generally less than 12 inches.
MISSOURI: December weather was most notable for a snow storm that hit the northern two-thirds of the state the night of November 30 and into December 1. Snowfall of 12-16 inches was common in many locations. Precipitation for the month averaged 2.53 inches, slightly below the 30-year average. The winter wheat crop is in mostly good condition, as moisture has been adequate statewide to maintain healthy stands, although a few places in the Bootheel have received too much rain that washed out spots in fields.
NEBRASKA: Wheat conditions ranged: 1% very poor, 4%, 34% fair, 55% good, 6% excellent. However, crop producers had been concerned about future drought due to the lack of moisture, until two large snowstorms brought blizzard conditions across most of the state causing power outages and putting stress on livestock. The western half of the state received the brunt of the storm with reports of up to 26 inches of snow. Even though the moisture came rather harshly, it was sure to help crop conditions which had been abnormally dry to this point. The entire state was at the average precipitation levels for December, with a large portion being at least two times the average. The Southwest part of the state was as high as seven times the average. Depth of snow at the end of December averaged two and a half inches across the state.
NORTH DAKOTA: Above average temperatures during December caused it to be one of the warmest Decembers on record. A late snow storm during the end of December brought most of the precipitation received across the state to what was a mostly dry month. Average snow cover was 5.4 inches on December 31.
OHIO: The December 2006 average temperature for Ohio was 38.0 degrees, 6.4 degrees above normal. Precipitation for the state averaged 3.22 inches, 0.31 inches above normal. Winter wheat producing counties report that field conditions are fair to good, with less 10 percent in excellent condition. The winter wheat planting extended late beyond the recommended planting dates, because of wet field conditions. As a result of the wet fall throughout the State, many fields were not planted and fields planted did not survive.
SOUTH DAKOTA: Average snow depth 1.6 inches. Winter wheat conditions: 4% very poor, 7% poor, 41% fair, 39% good, 9% excellent. Winter wheat snow cover 69% poor, 23% adequate, 8% excellent. December started out mild and dry. By the end of the month, much of the state received snow and rain. The western part of the state continues to be short of