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February 28, 2007

The 2007 Farm Bill: What Will Really Determine It's Content?

As Congress gets organized for the 2007 Farm Bill, there will be extensive debate on the types and levels of commodity supports, expansion or contraction of conservation programs, how bio-fuels enter into the big picture, and how the Farm Bill will intersect with the US trading partners around the world. That is all well and good. Those issues should get some airing and Congress will eventually arrive at answers to the questions. However, the forces that push and pull and provide the torque to move the Farm Bill are much different. You can probably guess what they are, but instead of guess, read on…

Compliments of Policy Specialist Brad Lubben at the University of Nebraska-Lincoln, and Kansas State ag economists Sam Funk and Troy Dumler, both the casual observer and the intense farmer/lobbyist can get a good handle on what is driving the debate on the 2007 Farm Bill. They contend the policy will have to be written within an environment that will allow some things and prohibit others.

Economic issues will be a significant determinant of how far the Farm Bill goes. Prior to the 2002 Farm Bill, farm income averaged just over $30 billion per year without farm program payments, which added about $20 billion. With calls to increase the safety net, the 2002 Farm Bill created a crop of payment programs that helped farm income average in the $60 billion range. Congress will take into consideration the impact of the bio-fuels demand on commodities, which has pushed prices into rare high levels, and pointing to correspondingly high levels of farm income from the marketplace.

Budgetary issues will also be a factor. The safety net created in the 2002 Farm Bill was aided by a significant budgetary surplus that Congress allocated for farm programs. As the 2007 Farm Bill is being prepared, there is a significant budgetary deficit that Congress will allocate for farm programs, meaning agriculture will likely take some budgetary hits when it is finalized. The $248 billion deficit is the largest ever when a Farm Bill was being written. But thanks to current commodity prices, the USDA is not spending as much on farm programs as planned 5 years ago, “In the new baseline budget estimates released in January by the Congressional Budget Office (CBO), 10-year spending projections for mandatory farm support programs are $35 billion less than the 10-year projections issued in January 2006. This reduced spending does not technically count as savings to be allocated elsewhere, but it does change the political climate in which federal budget decisions will be made”.

Trade issues will be another factor determining the complexion of farm support programs. Much of the decision will be based on whether there is an international trade agreement, but if not, will trading partners continue to snipe at current farm support programs? Brazilian complaints have negated the cotton program, and Canada has filed complaints against the US feed grains program. To avert other nations slowly dismantling the Farm Bill, Congress will either have to make farm programs immune to trade complaints, or a new trade agreement will have to be finalized that allows certain US farm support programs.

The political environment has certainly changed, but not just party affiliation, but philosophies of the Congressional leadership about which programs are most important. Additionally, the Congressional Agriculture Committees have shifted from southern leadership to Midwestern leadership, which also changes priorities that relate to commodities. Past Farm Bills have also been enhanced by an agreement among several dozen farm organizations. However, the current environment includes a myriad of non-farm and food groups that want to weigh in on the legislation for their own purposes. One of the special interest groups has made public complete listings of farmers and the farm program payments they have received, all in an effort to re-direct some of those funds away from commodity programs to conservation programs.

Summary:
The 2007 Farm Bill will include many of the typical elements, including a safety net, conservation and rural development funding, as well as risk management programs and energy programs. However, they will all be pushed and pulled by the current farm economy, US budgetary constraints, international trade, and the changing political structure in Washington. As the Congress prepares to debate the administration proposal for a farm program, as well as receive input from many other groups, the elements in the 2007 legislation will all be functions of those four core issues.

Stu Ellis

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February 27, 2007

The Difference Between Huh and Yeah.

When Secretary of Agriculture Mike Johanns outlined the USDA’s proposal for the 2007 Farm Bill, it contained a significant number of innovative programs that drew verbal applause, and one particular program that drew some contradicting responses: Huh? and Yeah! It might be easy to predict most of the folk who offered those responses, but it is almost impossible to undoubtedly determine who is going to line up on which side of the fence created by the proposal to have a farm’s adjusted gross income determine eligibility for collecting farm program payments.

Most observers of farm policy will correctly predict that farms with more than the $200,000 adjusted gross income, which would lose eligibility under the proposal, would oppose the idea. But when you look at individual farms across the country, it is difficult to say a particular farm will perennially be immune to the rule, or perennially lose eligibility for farm program payments. At least that is the outcome of a study by economists at Texas A & M University. The 2002 Farm Bill contains a similar means test, but the limits are much higher. It extends eligibility for farm programs payments up to a $2.5 million limit based on a three year moving average, and also excludes operations if less than 75% of the adjusted gross income originates from farming, ranching or forestry.

The 64 farms studied by the TAMU economists are a blend of US agriculture, but are all managed by full time operators who have no off-farm income, that might otherwise skew the analysis. The economists used the proposed $200,000 limit with the 75% qualification and the three year moving average. They predicted price and yield variability, based on historical data, and forecast gross income for the operations over the next 10 years, applying the $200,000 limitation in 2008 and beyond to determine which farms would be prohibited from collecting farm program payments. In general, the research indicated that due to the risky nature of net farm income, and subsequently adjusted gross income, some of the operations would be eligible for USDA programs in one year and not the next year.

Feed grain farm results:

• Acreage ranged from 900 to 7,500 in the 19 sample farms.
  
• The average of the 3-year average adjusted gross income was $160,000.
  
• The 3-year average AGI ranged from a $249,000 loss to $735,000.
  
• The 19 feed grain operations averaged 2.84 years of ineligibility, ranging from always eligible for a 900 acre operation to only .33 years of eligibility for a 7,500 acre farm.
  
• Farms with up to 1,400 acres had a zero probability of ineligibility, and the range extended to a 95% chance of ineligibility for the 7,500 acre farm.
  
• There was a 41% average probability of ineligibility for all of the 19 farms.
  
• Of the 19 farms, 16 had were likely to lose eligibility for farm program payments at some point, and the average loss was $78,000 per year, ranging from $0 to $198,000 loss in payments.
  
• As a result of the lost payments, the farm’s net worth declined, and the average loss of net worth was $102,000 per year, representing an average 1.81% decline in net worth.
  

The new parameters for the proposed means test impacted many farms of a lesser size according to the economists. Farms that were ineligible for payments at least one year in the simulation included: a 1350 acre farm in Iowa, 1850 & 2050 acre farms in Missouri, 2180 acre farm in North Dakota, 1960 acre farm in Nebraska, 1200 & 1200 acre farms in Texas, and a 1500 acre farm in South Carolina. Researchers said, “The impacts of farm program ineligibility were translated into lower net cash incomes and lower ending real net worth. Six of the 16 feed grain farms that lost government payments saw more than $150,000 decrease in real net worth and four lost more than 3% of real net worth.”

Feed grain operations were not the only type of farms affected by the rules change:

• Eight of the 10 representative wheat farms would experience losses in government payments due to the lower AGI limits for program eligibility.
  
• Sixteen of the 20 representative cotton farms experienced lower average annual government payments under the AGI scenario.
  

Summary:
Although creators of the proposed USDA budget were attempting to address controversial issues of farm program payments going to large operations, the outcome of the proposal has apparently had a significant impact on average sized operations common throughout the Cornbelt. The restriction of farm program payments to operations with less than a $200,000 adjusted gross income will impact most operations of 2,000 acres and more at least one year in the next seven, and the larger the operation the greater the chance for losing eligibility one or more years.

Stu Ellis

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February 26, 2007

At What Point Do You Stop Planting Corn and Plant Some Soybeans?

You have already made the decision to plant more corn this year than your typical rotation. Did you stop at 10% more? Did you stop at 2/3 corn and 1/3 soybeans? If you are planting any soybeans at all, what spurred you to make that decision, since you have calculated that corn is going to provide more revenue than soybeans? If that is the case, why are you planting any soybeans? If you have not made a hard and fast decision, let’s think this through….

If you have some highly productive farmland, why not just plant 100% corn and lock in your profit with a revenue insurance product? That is the rhetorical question asked by Farm Management Specialist Gary Schnitkey at the University of Illinois in his latest newsletter. If Professor Schnitkey asked you that question in class someday, would you quickly break off eye contact, or would you make your way to the chalkboard and outline your reasoning? Let’s do the latter, with his help.

Calculating your crop income alternatives: Using futures contracts and adjusting for basis, your crop budget might project $3.80 for corn and $8.00 for beans. With second year corn yielding 170 bushels and beans yielding 55 bushels, plus $25 per acre in direct payments from the USDA, your gross revenue would be $671 for corn and $465 for soybeans. With typical crop production costs, plus a crop revenue coverage insurance policy, expenses might total $333 for corn and $216 for soybeans. So the net return to the operator and land is $338 for corn and $249 for soybeans, which is an $89 difference in favor of corn. By boosting corn from a 2/3-1/3 rotation to 100% on a 1,000 acre farm, you have increased your net by nearly $30,000.

Considering the crop insurance option: Crop insurance revenue products, such as CRC, RA, and GRIP can guarantee your revenue, and based on the price structure being built so far in February, it will guarantee profitability even before you get to the field. Schnitkey calculates a 165 APH yield, with a $4.03 base price and an 85% coverage level will guarantee a $565 indemnity. Consider the fact that your crop insurance indemnity is based on the futures price, but when you sell your grain, the basis is deducted, so a cash grain sale is going to net less than an insurance claim for the same amount of bushels.

So, is there any downside risk to 100% corn insured by a crop revenue policy?
There are some risks, depending upon several price and yield factors. Soybeans could be a more valuable crop if the price exceeded $9.61 on a 55 bushel yield, or if yields exceeded 66 bushels on an $8 price. Soybean could also be a more valuable crop if corn yielded less than 146 bushels on a $3.80 price, or if the 165 bushel corn was sold for less than $3.27.

Production risks may also figure into the final outcome: Corn takes longer to plant and has to be in the ground by early May to yield 100%
Corn takes longer to harvest and yield losses can occur if harvest is not timely.
A 100% corn crop increases production risk if pestilence strikes.
Your planning for 2008 becomes more complex since your 2007 acreage was all corn.

Summary: High yielding Cornbelt farmland will probably return more income in 2007 if planted to 100%, based on current crop prices and historical yields. However, higher soybean yields and prices, or lower corn yields and prices will negate that assumption. Many farmers will take the chance by planting 100% corn, but will also have to address the requirements of longer planting and harvesting periods since corn takes more time to plant and harvest than do soybeans.

Stu Ellis

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February 23, 2007

Extension Update

Exports have contributed to strong corn prices says IL Extension’s Darrel Good, in his marketing letter.
1) Mexican purchases so far of 255 mil. bu. are 50% more than this time last year.
2) Chinese corn exports have been relatively small, giving the US a larger market share.
3) The Argentine crop was small in early 2006, giving more export business to the US.
4) The small world wheat crop in 2006 will push more feed demand to US corn.
5) World corn consumption is expected to reach a record level of 28.7 bil. bu.

However, Darrel Good says, “Demand for US corn may weaken. The rebound in Argentine corn production suggests increased competition for US corn. Record production in Brazil this year may also result in another 30-40 mil. bu. of exports from that country. Finally, a significant rebound in world wheat production could soften the demand for US corn. The wild card will be the magnitude of Chinese corn exports.”

With good planting conditions, Kansas State’s Mike Woolverton looks for corn prices to fade because many ethanol plants and overseas buyers have covered needs until fall. “It is rumored that second-crop corn will be planted in Brazil following the soybean harvest just now getting underway. Nevertheless, low world coarse grain stocks may cause corn price to spike upward in the summer months as we near the end of the old crop marketing year.” More.

Soybean rust had been reported in FL, GA, and AL in early Jan., indicating that its kudzu host survived at least one cold front that pushed deep into the South in late Dec. However, the recent cold front made its way to these southern states and has killed back kudzu to near Gainesville, FL, with temperatures into the low 20’s across the South.

Valuable lessons were learned by researchers from the late Aug. surge north by Asian rust spores. Iowa St. says experts collected valuable data for predicting movement, and identifying low levels of rust with early detection to give soybean growers early warning.

Why have rust spores been found in the Midwest without affecting crops? Researchers
have several answers.
1) Spores can survive only 2 days of solar radiation, and need clouds for a longer life.
2) Spore survival is 95% in a shaded environment, but only 25% without shade.
3) Spores are found first on lower soybean leaves, indicating less survival on top leaves.
4) Rainy days are more associated with outbreaks of Asian rust, since it is cloudier.

Friday’s USDA Cattle On Feed Report was bullish for the beef market. The number on feed February 1 was down 3.2% from the same period in 2006. Feedlot placements during January were down 23.1% and fed marketings were up 1.7% from 2006.

Higher feed costs and harsh winter conditions have pushed total cost of gain to around $75 per cwt, says Extension beef specialist Dillon Feuz of Utah State. “Many of the cattle that have been marketed in 2007 were placed on feed before feeder cattle prices declined sharply this past fall. However, as we move forward an increasing number of fed cattle marketed will have been placed on feed at relatively lower feeder cattle prices.”

Feedlot losses should slow in the second quarter of the year, says Utah’s Dillon Feuz who believes breakeven costs should be matched by live cattle futures. He believes returns should be only $5-10 per head, and cattle feeders should be hedging feed costs.

Hog markets are better than expected says NE Extension’s Allen Prosch, because an expected increase in slaughter rates has not occurred. The better prices may be allowing producers to hold their own against high corn prices. He says producers needing to buy corn could anticipate lower prices when the USDA releases its planting intentions report on March 30. Prosch says it is a two edged sword, and if corn prices drop from a large expected acreage report, that means soybean prices will rise from reduced acres.

Hog marketing data collected by MO Extension’s Glenn Grimes indicates corn prices are controlling marketing decisions. He says, “Average live weights for barrows and gilts last week at 267.2 lbs. per head was up 0.4 lb. from a week earlier, but down 3.4 lbs. from a year earlier. This was the 21st consecutive week with weights below a year earlier. The average weight decline for the last 7 weeks is slightly over 3 lbs. per head.”

Lowering the thermostat in your pig nursery not only saves money, but increases rate of growth. Univ. of MO researchers cut night time temps by 10 degrees, and compared to a control group, the cooler pigs had a 5% increase in daily weight gain, while energy costs were reduced by 25%. It was attributed to increased intake, rather than feed efficiency.

Manage your weeds in continuous corn with the help of soil applied herbicides. Iowa State’s Mike Owen says, “Unless you can be assured that the post-emergent herbicide will be applied by the V3 stage of corn development, you will likely lose enough yield to pay for an early pre-plant or pre-emergent herbicide treatment. Thus, there is still an important role for soil-applied herbicides in continuous corn weed management.” Read more.

The “soybean credit” disappears when calculating nitrogen needs for continuous corn. Iowa State agronomist John Sawyer says with current nitrogen and corn prices, the recommended nitrogen application for continuous corn is in a range of 155-195 lb N/acre. Sawyer says that is the maximum economic return to nitrogen rate. Sawyer provides more guidance for N.

The time is now to rejuvenate your pastures with “frost seeding.” Overseed legume or grass now and late winter thaw/freeze cycles will improve seed-soil contact and the seedlings will get a start before the spring green-up in the rest of the pasture. Nitrogen application will spur that green-up, but neutralize your overseeding efforts. Seed red clover at 4-8 lbs/A or ladino clover at 2-3 lbs/A; or use half rates of each for a mixture.

How did your finances come out this year? Ohio Extension farm business staff says a farm with 1.6 operators, and a $419,475 value of farm production, reported $71,283 in net farm income and $25,000 in non-farm income. Since it takes $50,000 in living costs for an average farm family, it would take $300,000 in gross revenue to generate that $50,000. Once that happens, it only leaves $25,000 for debt payments and investment.

You probably already knew that rural communities are better prepared to respond to disasters. They have more than their share and Univ. of IL researchers found “Rural communities have a tradition of being more self-reliant, but they are also closer to the physical environment and more isolated, making them uniquely vulnerable.”

“Farm families have to keep going," says rural sociologist Courtney Flint. "They may have livestock. They can't wait for someone to flip the switch. They are more prepared for disaster. They have generators, kerosene heaters, snow plows and other equipment." Researcher said in urban areas, neighbors just don’t talk to each as much as rural folks.

Farmers in 4 Midwestern states have access to an Internet website to attract consumers to their specialty food products and services, and consumers can use the same website to find whatever they want. Currently the website utilizes databases of farm products in IL, IA, NE, & KY. MI, IN, & NY will soon be on-line.

Results of a National Animal ID survey from 476 IL livestock producers indicated: 336 had adequate information about the program; only 179 had voluntarily registered and 176 said they would register only if it becomes mandatory. 142 thought premises registration should be mandatory; and134 thought animal registration should be mandatory.

Soybean aphids will be the topic for a Cornbelt-wide seminar Mar. 6 which you can either attend at your local Extension office or from your office via the Internet. Specialists will discuss biological controls and management guidelines. Register for the 8:30 a.m. program.

Regardless of the form of nitrogen, delay its application to wheat until after green-up, but before stem elongation. OH Extension says N application too early will result in a loss of the fertilizer and a 19% less yield than if the application were delayed until later.

One new ethanol plant comes on line each week, and Kansas State’s Mike Woolverton says that will continue for the next 18 months, not counting the 300 announced plants that are still on the drawing board. He’s concerned about an ethanol bubble that will burst the corn market, based on the fact there will be more ethanol than the federal mandate, and it will begin replacing gasoline, but will have to compete economically, dropping ethanol to the $1.10 per gal. range, and forcing a collapse of the ethanol industry and corn markets.

Stu Ellis

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February 22, 2007

Taking A Macroeconomic Look At Agriculture, Or, Hey, Everyone, How's It Going?

If US agriculture was one big farm, it would do pretty good in 2007 according the USDA’s Economic Research Service. But of course it is not one big farm, and your operation is one piece of the picture, and your piece may have either red or black color on it. The ERS forecast for the 2007 farm economy was published Wednesday and while it has some interesting statistics, keep in mind it will also be a significant report used in preparation for the 2007 Farm Bill.

The USDA farm economy report projects a $66.6 billion net farm income for the year just beginning; and that is $6 billion above last year, and continues the trend of recent years above the 10 year average. In fact it is $9 billion over the 10 year average. So what is going to make 2007 such a banner year, and are you going to that party?

Crop production:
Corn, beans and wheat prices will be above 2006 prices, along with sorghum and hay which will benefit from the lack of corn to go as far as it needs to go. The ERS prediction certainly expects a significant increase in corn acres, with subsequent declines in soybeans and sorghum. The wheat crop is also expected to be larger, corresponding to recent higher market prices.

In 2007 corn will earn over $30 billion and soybeans will earn $19 billion, both of which are record high amounts. Corn prices are a good $1 more than in 2006, the function of a slightly lower production and a significantly larger demand, both from ethanol refining and from exports. Cash receipts for soybeans are also up because of a $1 higher increase in their value. Helping that is soybean meal’s competition with corn in feed rations. But while corn has risen 38%, bean meal values are up less than 5%.

Livestock production:
The livestock industry will be valued at nearly $126 billion, up slightly from 2006, but below the record high of 2005. This is a steady trend for the past four years, but is $19 billion above the 10 year average. Livestock producers will have a challenge in 2007 because of higher feed costs and reduced profitability. The pork market is already lower than 2006 because of a lot of red meat in the consumer market. However, the same corn that is increasing the value of the crop production sector is reducing the value of livestock production because it creates higher feed costs.

Cash receipts for beef operations should grow about $1 billion this year, and will remain above the magic $50 billion threshold. The beef market is currently responding to dry pastures, expensive corn, large feedlot inventories and heavy cow slaughter. Increased demand will come from Mexico and US consumers. In the pork market, receipts have been more than $14 billion for the past 3 years, but that will be down about 10%, a result of an increased breeding herd, farrowing intentions, higher litter rates, and more hogs coming from Canada.

Production expenses:
Expenses to produce commodities will go up about 6% in 2007, a bit more than in 2006, but less than in 2005. Since 2002, production expenses have risen 30%. The largest increase in production expense will be the $4 billion jump in feed. Miscellaneous expenses will be up $2 billion. Reductions in expense will come in purchase of livestock and in fuel and oil expense.

Crop production expense for seed, fertilizer, and pesticides will be up 5% or $36 billion from last year, with small part of that due to an increase in planted acreage. Seed prices have gone up 74% since 1999 with the help of demand for genetically enhanced seed. Fertilizer costs will be $725 million, which is up 5%, and that is with a 12% reduction in fertilizer costs in the second half of 2006. The 4.5% increase in pesticides will be the largest increase in the past 10 years, and is attributed to the increased cost of petroleum.

Energy costs rose 47% between 2003 and 2006, but should be up only 1% in the coming year. Fuel expenses went up 66% in that same period, but will come down 1% in 2007.

Stakeholder payments:
Payments to landlords, bankers, and laborers will go up $2.7 billion or nearly 6% which continues a trend from 2003. Wage rates are up more than 7%. Cash rent is up 3% and share rent will be up 15% due to higher values for crops. However landlords will sustain a 29% reduction in government payments, following a 38% drop in 2006. Interest costs are $865 million more than last year, reflecting increased debt, but only modest increases in interest rates.

Government payments:
Direct government payments will be slightly over $12 billion, down $4 billion from 2006, and 25% under the five year average. Counter cyclical payments will be only 30% of what they were last year due to higher crop prices. The loan program will be little used due to higher commodity prices.

Income:
For 2007, gross farm income is expected 23% over the 10 year average. Since production expenses are 25% above the 10 year average, that means net farm income will also be above the 10 year average, by an estimated 16%.

Summary:
Commodity prices will be stronger in 2007, but production expenses will be higher as well. However, the total amount of farm income will be up about 10% over 2006 levels according to USDA.

Stu Ellis

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February 21, 2007

Alex, I'll Take Grain Marketing For $200, Please.

Alex says: The grain market goes up and you don’t want to sell yet. The grain market goes down and you don’t want to sell, because it might go back up. You say, “What is the definition of ‘Quandary.’” And Alex says: “You’ve just won Double Jeopardy!" If you are in a quandary over your marketing plan, your potential profits are in jeopardy. So instead of playing games with you revenue stream, let’s figure out how to win.

You have been watching the corn and soybean market as spring approaches. The demand for corn has been pushing prices higher. But the soybean industry, fearful of having a shortage of beans, has been keeping pace, with soybean prices moving higher. Your high school physics teacher taught you that everything that goes up must come down, and the markets are no different. Today we’ll visit with authorities who can help you solve your quandary.

In his monthly Decisive Marketing letter, Melvin Brees of the Food and Agricultural Policy Research Institute (FAPRI) of the University of Missouri, “feels your pain” about when to pull the trigger on 2007 crops, “There appears to be upside price potential, maybe a lot of upside potential! No one wants to sell at $4.00 if prices may go to $5.00 or more. But there is also downside price risk with a great deal of uncertainty about increases in corn demand and production potential in 2007.” And Melvin probably shares your goal as well, when he says, “The goal should be to capture higher prices if offered and at the same time not let current profitable prices slip away without making sales.”

If we are still on the same page, Brees suggests you think in terms of “price traps,” which he says are downside price targets with the objective of capturing profitable prices before they collapse. “December futures prices have been supported near the bottom of the price range near $3.87. Penetration of this price support, would suggest prices will move lower.” He says placing a price trap or a downside price target just below that level would offer the opportunity to capture profitable prices before a market downtrend accelerated. You can accomplish that with a broker if you are using futures or at the elevator if you are working with cash contracts.

At the University of Minnesota, grain marketing specialist Ed Usset says in his Ed's World newsletter there have been no other years similar to this one in the market, and “We are sailing in uncharted waters.” You, like Ed Usset may have already sold some of your 2007 crop somewhere under the lofty levels of today (or maybe tomorrow.) But he says what’s past is past, look ahead toward the balance of your 2007 pre-harvest sales, and consider timing in the April through June period (known as the tractor seat bounce.) Usset says, “Clearly I am taking a risk – the $3.90 Dec’07 price that we look at today could easily be 50 cents lower in 3-4 months. The same is true of November soybeans at the current $7.65 per bushel price. I do my best to manage risk, but some risk cannot be avoided.”

Your objective should not be to sell at the highest price, since you’ve sworn off caffeine and have no further reason to visit the local coffee shop but to brag. But your objective should be having a good average selling price. And don’t feel bad if you miss the highs, the professional advisory services miss the highs all of the time. Usset says, “ In the most recent AGMAS report I learned that for the 2004 crop year, the average cash corn price received by 27 professional advisory services was $2.40 per bushel. The highest cash price available to anyone that year was about $3.20 per bushel (that’s based upon a Dec’04 high closing price of $3.37 per bushel in April of 2004, and assuming a 17 under basis for Southern Illinois). Think about it: the “pros” (and many more of us) missed the high by 80 cents a bushel – 25%!!”

So if the professional marketers can make a 25% error, don’t feel bad if your error is only 10% or 15%. Marketing is always a challenge. But it is harder when prices are at a minimum and there is only 10 cents of volatility. When prices are higher with volatility more than $1, there is much more room to make a profit, and marketing is less of a challenge.

Summary:
The quandary presented by the current grain market can be addressed with two solutions. Realize that you won’t hit the top of the market, and strive for a high average selling price which might be achieved during the spring months. Secondly, talk to a commodity broker or elevator manager about establishing price traps or sell stops under current market levels, then adjusting them upward as the market moves higher. Those will allow you to achieve high prices, should a downtrend gain momemtum.

Stu Ellis

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February 20, 2007

Are You Singing The Corn Price Blues?

If you are feeding livestock, you probably have the corn price blues. Maybe you are submitting song lyrics to country music producers about the high price of corn and the low price of meat. It might get good play on every radio station with feedlots and pork operations in the broadcast signal. But instead of country wails and barnyard blues, take a look at your feed ration and see where changes can be made to ensure survival, and return to profitability.

Extension livestock specialists at South Dakota State University have offered their thoughts to producers whose feed bill is 50 to 70% of their cost of production and the bulk of that is in the form of $4 corn. Many producers have opted to alternative sources of energy for their livestock, and while that is expected, management of the new ration is necessary.

Beef cattle
Brood cows are not going to consume a lot of corn, but corn prices have impacted the feeder calf market. The cow-calf operator is advised to keep costs in check and use good management practices. If that choice switches to barley, sorghum, or distillers’ grain, each feed has to be judged on its cost per unit, whether that is crude protein or total digestible nutrients. The origin of the feed will also determine its cost because of transportation expense. A potential risk management tool is to forward contract your feed so cost increases will be covered. Also consider costs for creep feeding, extending the grazing season, changing the dates of calving and weaning, and look at your marketing options. Compare your expense and revenue for each variable to determine your most profitable course of action

Cattle feeders need a strategy that allows them to replace a portion of corn in the ration and maintain a competitive feed cost of gain. Alternatives might be silage, distillers’ grains, oilseeds, or other cereal grains. But those alternatives will provide less energy and that reduces feed conversion. If silage replaces corn at more than 30% of the dry matter, feed conversion drops about 10%. The ratio needs to drop $10 per ton in cost to have the same feed cost of gain.

In addition to the cost of the feed, look at management issues, such as reducing spoilage or shrink by improving storage facilities, or processing the grain so there is better nutrient utilization that improves profitability. Look at other inefficiencies in your feedlot to minimize loss, such as bunk management, labor, energy used for feed mixing and delivery, and ensure your scales are accurate.

Lactating dairy cows
For dairies, corn will be 30-35% of the total dry matter in the ration, corn from silage is 10-15% and distillers’ grains are 5-15% on a dry matter basis. Silage provides nutrients, but balances the ruminants’ needs as well. Silage will probably always be in the dairy ration despite corn prices. Displacement of corn with distillers’ grains means higher dietary nitrogen content in the ration. If corn grain and corn silage were to be replaced by alfalfa hay and (or) silage and distillers grains, there would be a need to dilute the crude protein with low-nitrogen feeds that otherwise might not be included due to either dietary or economic constraints. With high corn prices, the use of highly digestible forages to replace part of the grain becomes attractive. Whatever the decision, it should be based on feed efficiency measured by pounds of milk producer per pound of dry matter consumed.

Sheep
Corn would commonly be 80% of the ration in a ewe flock and 75% of the corn consumed would be for finishing lambs. Distillers’ grains and soy hulls can be substituted for forage or energy feeds. Your decision to modify the ration, based on economics, should also consider management of health issues, as well as feed storage and handling. Any change in feed ration needs to accommodate production stages of the lambs, ewe productivity, and how much feed is being wasted. Since lambs have the greatest feed efficiency at lower body weights, so match the cost of the last pound gained with the value of the last pound gained when considering feed efficiency of an alternative feed. When feed costs rise, your profit margin is impacted for every pound gained, thus your marketing weight should be calculated by feed efficiency in times of high feed costs. Refine the crude protein in the diet, which allows you to reduce the cost per ton by $10 for each 1% change in dietary crude protein.

Swine
Pork producers spend 70% of their operational costs on feed, but there are ways to manage that in time of high corn prices by using alternative grains, but only if you match the cost with the energy value. Since barley has 95% of the relative feed value of corn, barley will be a lower cost alternative if it is less than 95% of the market value of corn on a pound for pound relationship. The same is true for sorghum at 96% and oats at 90%.

While soybean prices have increased, meal values have not risen as much and since it is your primary source for amino acid evaluate alterative source if meal prices increase further. Those might include distillers’ grains and synthetic lysine. Good management of your swine ration, and the decision to incorporate alternative ingredients, may warrant consultation with a veterinarian or swine nutritionist as well as negotiation with a feed supplier for the best deal.

Consider also feed efficiencies resulting in phase feeding and split sex feeding programs which save feed and money. The optimal feed grind will reduce waste and lighter weight marketing means avoiding costly feed inefficiency at heavier weights. Other management issues to target greater profitability may include feeder adjustment, environmental controls and other feeder related mechanical issues.

Summary:
High corn prices have impacted hundreds of thousands of livestock feeders, challenging their profitability as they compete for a product that is in wide demand. However, you can meet some of the challenge by exploring alternative feeds, carefully calculating energy and protein values for efficient gain, and looking for ways to reduce other operational costs.

Stu Ellis

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February 19, 2007

What Does Your Crystal Ball Say About The Next 5 to 10 Years?

Some of us want to know what the future holds and are quite satisfied with tomorrow’s weather forecast. Others want to know what the future holds so they can calculate what the farm economy will be like in 10 years. That is not just guessing grain and livestock prices, but factoring in world population growth, energy demand, and the ebb and flow of world trade. Each year the USDA’s Economics Research Service issues its 10 year forecast and this past week made its predictions for the 2016-17 fiscal year. What did they see in their crystal ball?

USDA’s 10 year baseline is fascinating reading if you have the time. For farmers beginning their career, it provides an opportunity to merge your business plan with the USDA’s projections. For farmers at the mid-point in their career, the projection offers some good targets for you and your business partners to consider. We’ll get to the farm level view in a moment, but first we’ll look at the high altitude view from USDA

Economic overview:
• World economic growth will be 3.4%, and US GDP will be sustained at 3% growth.
• Population growth will slow to 1.1% with developing countries having 82% of the world’s population
• The US dollar will remain strong and attract foreign investment.
• Oil prices will drop slightly during the first half of the period, then increase but less than the inflation rate. Prices will be driven by Asian demand.

Farm policy:
(USDA applies the 2002 Farm Bill into the projection period because of the uncertainty of what will be included in the 2007 Farm bill.

Bio-fuel production:
• Ethanol production will reach 12 billion gallons by 2017
• Bio-diesel production will increase to 700 mil. gal. by 2012, then level off.

Beef trade:
• Japanese and South Korean markets will gradually reopen to US beef
• Canadian cattle imports will remain restricted to control BSE

Farm economic factors:
• Net farm income will average $67 bil. over the projection period supported by ethanol.
• Export values will grow, helped by world demand for bio-fuels.
• Food prices will grow less than the inflation rate, and consumers will continue to eat more away from home.
• The rapid expansion of bio-fuel production will change the traditional price relationships of grain. That means soy oil will be at a premium value to soy meal, and cattle feed will cost less than swine and poultry feed because of ruminant use of distiller’s grains.
• US commodities will remain strong in world trade, but will have competition from South America, Canada, Russia, and Ukraine. A strong dollar will restrict US farm trade, but trade will be strong enough to help farm income.

Now, what does all of that mean to you, your farm family, and your farm business? We’ll ask Iowa State Outlook Specialist Bob Wisner. His bi-weekly newsletter, Iowa Farm Outlook should be part of your reading assignment for the week. He makes a number of observations focused on the next five years, rather than the entire 10 year spectrum covered by USDA:

1. Corn acreage will jump to 86 mil. for 2007, and then slowly increase to 90 mil. by 2011. However, demand will leave only a 2 week supply annually at the end of the marketing year through 2011.
2. Wisner is concerned that USDA’s projections for corn acres are insufficient, and based on them, he says exports or livestock production will have to be scaled back as a result of ethanol demand.
3. Corn prices will average well into the $3 range, and even with increasing costs of production, revenue per acre will be above $300 after operating costs are paid.
4. Wisner expresses concerns also about the profitability of ethanol plants which have to buy higher priced corn, and sell ethanol into the volatility of the oil market. He says some plants on the drawing board may be unable to be built or begin operation under the current economic parameters.
5. Soybean acreage will decline from 75 to 71 mil. acres in 2007, then slowly erode to 69 mil. through 2011. The 10 week carryover next August will decline to 4 weeks annually at the end of that 5 year period. Soybean prices will remain in the low $7 range and provide about $200 per acre revenue after operating costs are covered.
6. Comparing corn income with soybean income, USDA’s projections show $90 to $160 more revenue per acre after variable costs are paid. An 1,800 acre farm with a 50-50 corn and soybean rotation could increase income $81,000 to $144,000 after variable expenses are paid by planting 100% corn.
7. Wisner says corn yields are expected to increase 14% through 2017, but soybean yields increasing only 6.8%. That parallels the expectation that the better producing land will be the primary corn production areas and the lesser producing land be dedicated to soybean production.
8. Wisner also expresses concern about the close relationship between supply and demand with corn and soybeans vis-à-vis the variability in Cornbelt production. He says drought years and flood years can reduce production to the point of great price volatility and insufficient demand for export and livestock needs.

Summary:
USDA’s 10 year projection for the agricultural economy shows steady growth in crop and livestock production, trade, bio-fuels and farm income. Iowa State’s Bob Wisner says the projections offer choices for many Cornbelt farmers with regard to acreage. While prices for both corn and soybeans are expected to remain at relatively current levels for at least the next five years, farmers will have to judge how many soybean acres will be dedicated to corn production, given the additional income opportunities.

Stu Ellis

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February 16, 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.

Is the soybean market buying too many acres? IL Extension’s Darrel Good wonders if that might not be the case with the current combination of high soybean prices and bearish fundamentals. He says with the current 595 mil. bu. carryover from the old crop, it would take a 12 mil. acre reduction with trend yields to create a shortage of soybeans. Read his newsletter.

Darrel Good says in his newsletter, there are many bearish factors in the bean market:
1) USDA has twice lowered export projections, expecting 4 bil. bu. from So. America.
2) High costs for soybean meal and soy oil for biodiesel will restrict the domestic crush.
3) Current El Nino concerns are too premature to anticipate drought parallels with 1988.
4) While prices could move higher on such news, current prices could also evaporate.

Price premiums for corn are strong for delivery later into the early summer, according to Purdue’s Chris Hurt, who says bids at some locations are 30 to 35 cents more for June delivery vs. today. “With a 30 cent price premium for June delivery vs. nearby delivery, corn stored on-farm could pay an added 10 cents in interest costs to gain the 30 cent June delivery premium for a net gain of 20 cents per bushel,” says Hurt. Read his newsletter.

As spring draws near, refine your crop production budgets. Iowa State economists suggest: 1) raise expected corn and bean yields by 5 bu. per acre, 2) drop fuel price to $2.05/gal. 3) raise seed cost to $1.82/1,000 kernels with seeding rate up by 5,000/Acre, 4) Cut N costs to $.31/lb. 5) lower herbicide by $8 and insecticide by $1 per acre. 6) for herbicide tolerant soybeans, herbicide costs dropped $3.00. 7) raise crop and hail insurance by $2 per acre. 8) raise the interest rate to 8%, labor rate to $11 per hour, and raise cash rent $5, $10, $ 15 depending on low, medium, or high quality land. Read more.

With higher corn prices and lower nitrogen costs than in 2006, Nebraska agronomists are recommending higher N application rates, but within reason. Using the guideline of 8:1 (corn price to N price) the economic adjustment was to reduce application rates which also cut yield. Today’s ratio is 13:1 to 15:1 which means more N can economically be applied, but the incremental yield increase has to be noted and excess runoff restricted. Read more.

Look hard at crop insurance as a way to assure the high revenue potential this season for corn and beans. Crop insurance decisions have a March 15 deadline. IL Extension’s Gary Schnitkey has a helpful web site for Cornbelt farmers to evaluate all crop insurance decisions. Do it now.

If you are planting more corn, Iowa State agronomists have given the go-ahead to start early. Typically, April 20 to May 20 is the window to plant for 100% yield. IA agronomists say based on recent research, a 100% yield may be achievable with planting corn prior to April 20. Read more.

If you are planting more corn, you may also want to slightly increase your population, say the Iowa State agronomists. “Greater variability in final population exists with planting dates prior to May 1. If planting early, especially before mid-April, the seeding rate should be taken into consideration and potentially increased by up to 5 percent.”

If you are planting more corn, remember the yield drag on second year corn says Iowa State’s Michael Duffy, “There is some discussion that the new hybrids have removed the yield differences. The greatest yield reductions are primarily between first- and second-year corn. The yield response continues to trend downward after the second year and eventually stabilizes after the third or fourth year. Yields of corn following corn for several years never achieve those of corn following soybean. Soybeans will yield 5 to 8 percent higher when they follow two or more years of corn as opposed to just one year.” Read more.

Weather markets usually raise grain prices, but Purdue’s Chris Hurt says watch the weather for the cattle market as well. “Weather in 2007 will also be a major factor in the direction of the beef industry. Weather will affect not only pasture and forage output, but also prices for corn and soybean meal. Harmful weather would seem to have only one direction on calf and feeder prices and that is downward.” Read his cattle market letter.

Bad weather usually means reduced cattle marketings and stronger prices; but not this year, frustrating many producers. Kansas State’s Jim Mintert says, “Severe winter storms normally slow down fed cattle marketings, reduce weights, and lower beef production which leads to markedly higher prices. The reason appears to be that cattle slaughter and beef production, at least so far, have not slowed down in response to the storms.”

Cattlemen can look forward to some stronger spring markets, says Mintert, “Weights are expected to continue to fall more sharply than normal as poor feeding conditions are more widely reflected in market ready cattle. And fed cattle slaughter volume is likely to tighten as winter turns to spring. This combination should lead to reduced boxed beef production, which will be supportive of fed cattle prices in late winter and spring.”

If you have hogs, they probably have porcine circovirus type 2, whether they show it or not. Symptoms include anorexia, rapid weight loss, generally unhealthy pigs, skin discoloration or lesions, respiratory problems and diarrhea. But Kansas State researchers believe they have a vaccine to control PCV2, which cut the mortality rate by 50% and increased growth rate by 10%. They are unsure when the vaccine will be available.

If you own CRP land, do you pay self employment tax? A recent ruling by the IRS says “Participation in a CRP contract is a trade or business” and that the 10-year term during which a CRP participant has duties to perform in “tilling, seeding, fertilizing, and weed control” assures the “continuity and regularity” necessary to be a trade or business.” And that means landowners with CRP need to pay the 15.3% tax. Tax advisers may be helped by knowing more.

Spring tillage raises 2 concerns to Purdue’s tillage specialist Tony Vyn. "One is moisture management. It is very important to manage for achieving uniform moisture conditions in the seed row area. Secondly, it is all about compaction avoidance, because if we smear the soil or compact the soil excessively, we will be much more vulnerable to root restrictions – especially if the later spring weather turns hot and dry." For eastern Cornbelt producers with light soil, planning 2nd year corn, Vyn is urging no-till.

Atratzine degradation occurs more rapidly where the soil microbes are used to it says Bob Hartzler of Iowa State. The assay found that atrazine's half-life ranged from 8 to 11.5 days in soils with no history of triazine use, whereas in soils from fields with a long history of triazine use the half-life was less than one day.” He says rapid degradation of atrazine would greatly reduce its performance as a pre-emergence herbicide, but atrazine would still function effectively as a post emergent product.

Diesel engines across the Cornbelt have not wanted to start on recent cold mornings, but Missouri ag engineer Leon Schumacher says biodiesel may even be more balky than No. 2 diesel. He suggests reducing the biodiesel content to reduce the potential for the fuel to gel and avoid flow problems as the fuel is being pumped through the fuel filter.

Many farmers pitch questionnaires, but 3,000 randomly selected IL farmers may want to take a second look at a four page survey being mailed by IL Extension on behalf of lawyers who want to know what legal issues are perplexing to farmers. With agriculture in transition, such issues could be: contract issues, leases, liability related to new land uses like agritourism, or legal issues related to other niche marketing strategies. Answers will help Extension and attorneys better prepare educational materials for agriculture.

Replace your oral lease with a written document says IL Extension’s Don Uchtmann.
1) It brings discipline to the negotiations and focuses on key leasing issues.
2) It identifies agreements and preserves it when memories may have faded.
3) It clearly describes the property, time period, amount of rent and when paid.
Read more.

Is someone in your operation retiring in the near future? Generational transfers usually are not well planned because issues are tough. Nebraska Extension’s Dave Goeller asks some simple questions:
1) What do you own? How much is it worth? And how much do you owe?
2) Are your assets titled in joint tenancy or by tenants in common?
3) To whom do you want to transfer or give your assets?
4) What is the time frame for making that transfer of assets?
5) How long do you want to exert control over your assets?
6) For long term care, is there income, insurance or Medicaid available?

Stu Ellis

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February 15, 2007

To Improve Rural Health Care, Begin With The 2007 Farm Bill

Six weeks ago visitors to the farm gate were urged to take care of their health. Diet and exercise and other common sense suggestions were made. But all of that was predicated on the assumption that you have a doctor nearby to help you monitor your health. While there are many who are going to ignore the New Year’s offering, there are probably just as many or more who have no opportunity to check up on their health because of the shortage of medical care in rural America. While this issue is not going to increase your revenue or reduce your production cost, it is an issue that affects you, impacts tens of thousands of your brethren, and is part of the Farm Bill. If the health of your farming community is a concern because the closest medical clinic is too far away, it should be a concern to all in farming. You might be next.

Rural health has a voice in the Farm Bill, and in the 2002 edition it was addressed in Rural Development, Food and Nutrition, and Food Safety. However, the infrastructure issues are in the Rural Development Title, which was $2.6 billion. The political winds favor an increase in that area for 2007. Rural Development can provide money for hospital construction and connections for telemedicine, which links doctors with patients at a distance. (So you don’t have to turn your head and cough really loud!)

Rural health and other rural issues are monitored by the Rural Policy Research Institute at the University of Missouri in cooperation with the USDA and other Land Grant institutions, which say rural Americans are not getting their share of federally-funded programs because of structural issues. In cooperation with the National Rural Health Association, RUPRI Director Chuck Fluharty says, “Federal payments into rural areas tend to be to individuals (Social Security, welfare payments, etc.) whereas a greater proportion of funds for urban areas support infrastructure development (federal revenue sharing, mass transit, etc.). Federal payments per capita into rural counties average $200 less than to urban counties. Individual transfer payments are of value to the individual but don’t help meet community needs.” Farm commodity payments can pump a lot of cash to farmers and landowners, but that has increased land values without increasing economic development in rural areas according to the Kansas City Federal Reserve Bank.

While commodity program funds may not be helping build the rural health infrastructure, the USDA Rural Development programs can provide funding for a variety of resources. “Rural Development Programs are highly utilized in many states. They provide a small amount of grant funding for hospital and clinic construction, and leverage much more through loan guarantees and interest rate subsidies. They help fund construction of a range of related health facilities including wellness centers, emergency medical services (EMS), and long-term care centers. Development funds support telemedicine development and a range of forms of rural economic development. Rural Development programs also have been used to support broadband construction for rural communities.”

RUPRI and the National Rural Health Association call for supporters to assist with a variety of strategies to increase Congressional attention to medical shortages in rural areas and fund solutions in the 2007 Farm Bill. They include:
1) Funds for rural development should be immune from WTO criticism
2) Programs should be funded that will support capital building projects for rural hospitals.
3) Broadband Internet access should not take as long to connect rural communities as the REA did for electricity.
4) Strategies should be created to bolster rural economic development.
5) The Farm Bill should be recognized as “America’s rural policy” and should include a number of programs of benefit to rural America.

Summary:
Diminishing populations in rural areas raise the likelihood of shortages of primary health care, which includes doctors, hospitals, and pharmacies, but the rural health infrastructure is one of the elements of the Farm Bill. Income transfer programs, compliant with the World Trade Organization rules, could be implemented to provide improved rural infrastructure. The Farm Bill may provide public feeding programs in urban areas, but it is also America’s rural policy.

Stu Ellis

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February 14, 2007

How Will The Ethanol Demand Affect Your Price Of Corn? (It Depends On Where You Live!)

As ethanol plants increase their capacity or begin initial operation, a bit more surplus corn disappears. The increasing consumption of corn has pushed stocks down to an estimated 800 million bushels at the end of the current marketing year. The projections being made about 2007 acreage and our potential production point to a continued decline in surplus stocks in 2008. There are always pockets of corn of varying size around the Cornbelt, but with the ramped up demand, will there be pockets where all of the corn has disappeared?

Your high school science teacher taught you that water seeks its own level, and without waves, it will have a smooth surface. To a similar extent corn will seek its own level based on prices offered by purchasers, but from time to time the surface of the Great Corn Lake will have some turbulent waves tossed up by the winds of ethanol. The 2007 marketing year could mark the beginning of rough sailing say Iowa State ag economists Bruce Babcock and Chad Hart. Their analysis in the latest edition of the Iowa Ag Review points to diminished corn surpluses in states that are typically awash in corn.

Babcock and Hart use an estimate of 12 billion gallons of ethanol being produced in the 2008-09 crop year, based on current refinery use as well as those that will be coming on line. That amount of ethanol, based on 2.75 gallons per bushel of corn, would require 4.4 billion bushels. Combined with the needs of the livestock industry the ag economists calculated surpluses and shortages of corn around the Midwest. In the 2004 crop year, when 11.8 billion bushels of corn were produced, Babcock and Hart report, “Sixteen states produced more corn than they used. Illinois had the most surplus corn, at 1.4 billion bushels, but Iowa, Minnesota, Indiana, and Nebraska all had over 500 million bushels of surplus corn each.”

Fast forward to 2008 when Babcock and Hart project 89 million acres of corn planted with a trend yield that would produce 12.8 billion bushels. Keeping the refining rate constant along with livestock feed demand, supplies of corn begin to diminish. “Because the plants under construction are concentrated in a few regions of the country, ethanol’s expansion will shift the location of domestic surplus and how much is available. Given our assumptions, nationwide there would be a total of just over 800 million bushels of domestic surplus corn available for export to other countries or to place in stocks.” (That would be at the end of the 2008-2009 marketing year.)

Where will the surpluses and shortages be?
• Wisconsin changes from a net exporter of corn to a net importer.
• Illinois holds firm at 1.4 billion bushels of surplus corn.
• Iowa falls from second to third in surplus corn, as the state will have only 400 million bushels left after accounting for in-state uses.
• Nebraska’s domestic surplus corn falls 400 million bushels from 2004 levels.
• Indiana’s drops 200 million from 2004.
• Corn importing states, such as Kansas and Texas, increase their use of corn to fuel their new ethanol plants as well.

The economists project those significant reductions of surplus will create tight supplies of corn in specific areas, translating into higher localized corn prices. The stability of supply in Illinois and Minnesota, relative to the ethanol demand increasing at the rate of production, suggests those states as being sources of cheaper corn.

Summary:
The growing demand for ethanol will create more corn production, but localized increases in demand will result in pockets of tight supply around the Cornbelt. Depending on locations of ethanol plant construction, tighter supplies will create scenarios of price variation, and corn will be imported from one state to another. The localized prices will reflect how supply and demand is balanced within a given area.

Stu Ellis

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February 13, 2007

You Probably Already Know How Conservation Programs Will Be Written In The 2007 Farm Bill

If you can read the writing on the political wall, it will probably spell out increased emphasis on conservation programs in the 2007 Farm Bill. That should probably come as no surprise to anyone, given 1) the political flavor in Congress, 2) public scrutiny of current farm subsidy policies, and 3) the force of the World Trade Organization to change US farm supports away from production incentives. So what can be expected in the 2007 Farm Bill regarding conservation programs?

First, let’s review the administration’s proposal for conservation spending, which is probably more of a starting point than anything that is over budgeted, given the expressed desires of the House and Senate chairs of the respective Agriculture Committees:
• The 2008 budget includes nearly $4 billion to provide conservation financial and technical assistance on a cumulative total of 215 million acres.
• The largest of these programs is the Conservation Reserve Program, estimated at just over $2 billion in 2008.
• Funding for the Environmental Quality Incentives Program (EQIP) will be maintained at $1 billion in 2008.
• The budget proposes over $455 million for the Wetlands Reserve Program (WRP), an increase of $191 million, or nearly 72 percent over 2007. The projected WRP enrollment for 2008 would be the largest ever, involving up to 250,000 acres, and will bring the total acreage enrolled in the program to 2,275,000 acres, the maximum level authorized by the 2002 Farm Bill.
• Funding for the Conservation Security Program in 2008 is estimated to be $316 million, an increase of $57 million, to continue support to the more than 19,000 contracts signed in prior years.
• The 2008 budget also proposes $825 million in discretionary funding for on-going conservation work. This supports programs providing high quality technical assistance to farmers and ranchers to address their most serious natural resource concerns.

In his announcement of the administration’s Farm Bill proposal Agriculture Secretary Mike Johanns said conservation programs are an element of the Commodity Credit Corporation, “USDA fosters environmental stewardship through conservation programs supported with CCC funding.” In the February edition of USDA’s Amber Waves e-magazine USDA economist Roger Claassen used 2004 statistics and found 6% of all farms received both commodity payments and conservation program payments. In total, commodity payments were $8 billion and conservation payments were $2 billion. Conservation payments were increasing, and Claassen reports many farmers are benefiting from those programs, “Nonetheless, about half of conservation payments made in 2004 went to farmers who also received income support, suggesting that a significant share of additional conservation payments will also flow to producers who do not receive income support.”

However, when Claassen further analyzed the statistics, 17% of farms which received commodity payments also received conservation payments. When you think about the relatively small overlap, there are two basic reasons:
1) Farms receiving commodity payments are primarily larger farms, operated by full time farmers, who have all possible land in row crop production.
2) Farms receiving conservation payments are more likely to have land in the Conservation Reserve, and may be operated by part time or semi-retired farmers. They could also be primarily livestock operators receiving EQIP funding, whose acreage may be pasture or forage crops ineligible for commodity programs.

USDA conservation funding has increased tenfold in the past 20 years, from $500 million to more than $5 billion. During that period an increased amount of spending has been targeted to address specific problems, according to USDA economists LeRoy Hansen and Daniel Hellerstein. In another article in the February issue of Amber Waves, they say, “Targeting is an efficient means of achieving this goal because it directs funds to conservation program participants based on the expected environmental benefits.” They say targeting can be made toward: 1) broad areas such as a large watershed which might be environmentally sensitive, 2) acreage with fragile features such as highly erodible soil, or 3) specific fields and farms that will give the greatest return on money spent to provide environmental benefits.

Over time, USDA conservation officials have created objectives for those goals with the help of the Environmental Benefits Index (EBI), which has become most familiar to landowners with CRP acreage. The higher the EBI ranking, the greater the chance the land will be accepted into the CRP. USDA says the value of the conservation benefits has nearly doubled since the EBI was employed, but with the same amount of money being spent for CRP rental payments. Economists Hansen and Hellerstein say targeting will increase to achieve more conservation goals, but it will have to utilize more satellite imagery and geospatial equipment.

Another effort toward cost effectiveness in federal spending on conservation is the practice of accepting bids from landowners according to USDA economists Robert Johanssen and Marcia Weinberg, writing another article in the February edition of Amber Waves. As you may know, “Farmers would “bid down” the payment rate according to their own costs for installing and maintaining that practice, but only if it was in their best interest to do so. The program manager can then rank the bids in terms of costs, benefits, or both,” say Johanssen and Weinberg.

The economists calculate the public can get more benefit from the bidding practice, making it more attractive to the taxpayer for continued funding, “Simulation results suggest that if farmer contracts were selected on the basis of environmental benefits, environmental performance on cropland could be improved by about 8.5 percent relative to the baseline at a cost of $500 million. If bidding down costs were allowed, the same $500 million program could improve environmental performance by about 12 percent, relative to the baseline.” They say the bidding process works best in programs that have limited funding.

Summary:
USDA spending on conservation programs has grown rapidly in the past several Farm Bills, and that trend is expected to continue for the 2007 legislation. But funding will still probably be less than what some advocates want, resulting in more reliance on the processes of targeting of benefits, and allowing landowners to bid on program participation. Congress will likely look at these practices as part of the next generation of conservation programs.

Stu Ellis

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February 12, 2007

What Is The Next Cash Crop You Will Produce?

If your corn is being processed into ethanol and your soybeans into bio-diesel, your acreage unsuited for row crop production may soon be converted to production of miscanthus, a biomass crop that some researchers believe will help fill the shortfall in US energy production. Miscanthus is a large perennial grass used for energy production, but is more economically viable than the frequently mentioned switchgrass. It is currently used commercially in the UK to provide clean and affordable energy, and it is an environmentally friendly crop, which provides wildlife cover, sequesters carbon, and builds the soil. It may also help build your bottom line. Don’t buy a new pickup truck yet just because you learned about miscanthus, because there is still research underway, and you’ll need to have a market for this product. But if you do your research, while markets are being developed, your train will arrive at the station about the time the station is built and ready to open for business. All aboard!

The research funding got a major boost recently with a $500 million grant from BP, an energy company formerly known as British Petroleum. The money will be used by the University of Illinois and the University of California at Berkeley to refine bio-energy into a mature industry, and miscanthus will be part of that equation. Some of your questions can be answered by the Illinois miscanthus researchers who recently invited experts to share their findings about miscanthus and bio-energy research.

What is the stuff? Miscanthus is sometimes called elephant grass, indicating how big it gets. It is an infertile hybrid, which produces no pollen, so there are no GMO and invasive specie issues. It will grow over 12 feet tall and produce 10 tons of dry matter per acre.

What is the energy value? Miscanthus is being used to fire a furnace in a house on the University of Illinois campus. In this case pelletized miscanthus is being burned, as opposed to being converted to cellulosic ethanol, which is an alternative form of energy. Researchers calculated the cost of the energy at $5-6 per thousand BTU’s.

What research is underway? One of the reasons BP selected Illinois for its grant was that researchers already have a 6-year miscanthus project on-going. Included are:
• agronomic trials to identify the best production areas
• genetic improvement to breed and select new hybrids to insure genetic diversity
• genetic engineering to improve crop quality and disease resistance
• evaluation of carbon sequestration abilities and lowering greenhouse gases
• determination of its ability to reduce nitrate flow into groundwater and its ability to utilize livestock waste
• identification of how the crop will be planted (potatoes & horseradish)
• identification of how the crop will be harvested (baling & silage chopping)
• conversion to a biofuel
• determination of profitability, based on locale of production
• identification of how farms and communities will change with miscanthus production

What are the economics? Economic efficiencies have yet to be fully identified; however, economists believe there are significant chances for profitability. Profitability would be achieved through production efficiencies on a farm, which would be in close proximity to a delivery point, and with the help of financial credits from carbon sequestration. Profitability would also be based on yield allowed by the climate zone of the southern half of Illinois and Indiana as well as Missouri.

Summary:
With the economic, social, and political movement toward more US energy self-sufficiency, bio-fuels will become more important as a Cornbelt crop. Among those could be a biomass grass such as miscanthus, which has twice the economic advantage over the more common switchgrass. Farmers producing miscanthus will need to be in the proper climate zones, have a transportation advantage to a delivery point, and implement production efficiencies on their farm. While it may not be a crop appropriate for 2007 production, it may be a crop that producers will want to research in preparation for planting in future years.

Stu Ellis

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February 9, 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.

2007 acreage estimates are being made, but Iowa State’s Bob Wisner says USDA’s March 30 report is the one that counts. “One private survey showed a prospective 7.6 mil. acre increase from last year corn plantings. The other showed a potential 10.1 mil. acre increase in corn and a 6 mil. acre decrease in beans. With less corn harvested for silage, this latter acreage and good weather could increase corn harvested acreage 15%.”

The ethanol economy has seen prices drop 64¢ per gal. since December. Iowa State economist Bob Wisner says each 10¢ change in the price of ethanol drops the maximum price a new plant can pay for corn by about 28¢ per bushel if everything else remains unchanged. He says a continual decline in ethanol prices for several months, would likely discourage some potential plants from breaking ground at current corn prices.

With corn plantings up 10.2 mil acres from 2006 Wisner expects soybean acres to drop 6.5-7.5 mil. acres. He says higher soybean prices would encourage more double-cropping of soybeans after the wheat harvest if soil moisture is adequate. Read his newsletter.

Corn price volatility is here to stay, says Michigan State outlook specialist Jim Hilker. “The futures market and the basis continue to indicate on-farm storage will pay, and that commercial storage will not. If you think that futures will decrease and/or you don't want to take a chance, then sell cash now if you are in commercial storage, and hedge/HTA if you have your corn in on-farm storage. If you think that futures will increase, then move your commercially stored corn to a basis contract and wait to price your on-farm stored corn. Remember, today's prices are good, no matter which direction they go from here.

Cornbelt farmers have another month to decide before the crop insurance deadline on March 15. IL Extension’s Gary Schnitkey helps make that decision with a calculator to help you see how much premium you would pay, what insurance payouts would be for prices and yields, and how various insurance products have performed over time. Find the insurance calculator.

Do “traited” hybrids increase yield? No, say MN agronomists who tested 170 hybrids, saying, “There is little to no yield increase due to the addition of insect or herbicide traits in corn hybrids. We feel that corn producers can still select hybrids based on genetic yield potential and then consider insect or weed management tactics based on integrated pest management strategies to protect the genetic yield potential.” Read the details.

Beef production was up 5.6% in 2006 and will be up 2% this year, but Purdue’s Chris Hurt says “Highs in late March and early April may extend into the low $90s. These price projections are several dollars under what futures market prices were suggesting as of February 2. Futures may be providing favorable hedging opportunities.” Read his weekly newsletter.

Chris Hurt says ethanol will impact the beef herd in a couple ways. “Some contraction in the breeding herd may also continue in 2007 as calf prices remain under pressure and forage prices rise along with corn and soybean meal prices. Forage prices will rise because more land is being diverted toward crops that produce liquid fuels, thus reducing hay and forage acreage.” And that is in addition to corn prices driven up by ethanol.

Iowa State weather guru Elwynn Taylor says he’s concerned about global weather:
1) “Holes” in the ozone occur naturally, but people caused consistent ozone decrease.
2) There is natural global warming and cooling, but decreasing arctic ice is significant.
3) The composition of the atmosphere is a factor in planetary temperature.
4) People are factor in composition of the atmosphere. The only responsible computation (to date to my knowledge) of the contribution people have made to climate change is 5% of the observed change. Bankers care about 5%, we should too.

Cut soybean costs say Ohio State agronomists, and cut the seeding rate for 7 inch rows. 1) Light colored soils, plants reach knee high to 20” – 225,000 seeds per acre. 2) Medium soils expected plant height of approximately 30” – 175,000 seeds per acre. 3) Dark soils with 40” or higher plant height - 150 – 125,000 seeds per acre. They say similar seed savings of 10% per acre can be achieved in 10”, 15” and 30” row Roundup systems.

Western bean cutworms will be the topic for a Cornbelt-wide seminar Feb. 28 which you can either attend at your local Extension office or from your office via the Internet. Specialists will discuss identification, management, and control options. Register for the 9 a.m. program.

Winter weather has caused alfalfa concerns. Ice halts the exchange of carbon dioxide and oxygen. Healthy and well-fertilized crowns can survive better, especially if cut properly in the fall to allow accumulation of carbohydrates in the roots of the plant.

Ice encrusted alfalfa will decline in health. Disking and other mechanical efforts to break the ice will really not help. Spreading fertilizer to let the salts melt the ice will probably not help, but will increase the amount of nutrient runoff when the ice melts.

Wheat and alfalfa subjected to ice coatings or freezing winds without the benefit of snow cover are more likely to stress and be susceptible to disease. When the snow melts, look for a slimy fungal growth on leaf tissue. Infection in the crown is terminal.

Stu Ellis

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February 8, 2007

Cost Savings 101: Reduce Your Fuel Usage

While fuel (ethanol) costs have helped your revenue increase, fuel (petroleum) costs will help your production costs increase. Those witty folks would say something like a sword has two edges, or something like that. Nevertheless, your 2007 crop budgets will probably need some sharp pencil work to accurately estimate fuel costs. If your calculator doesn’t have that many decimal places, maybe there are some ways to cut back on fuel costs, other than canceling your harvest plans. Possibly, just possibly, some adjustment in your typical year round operations will allow you to save money on fuel, other than the obvious: Slow down.

A crew of ag engineers from Auburn University and USDA offer a number of fuel conservation strategies.

All equipment and farm vehicles will be able to save you money with a combination of maintenance and common sense:
1) By minimizing your idling time you will save fuel. 10 minutes should be sufficient for a diesel engine with electronic controls.
2) If you carry less weight around, you will use less fuel. A truck full of every tool you might need this year and spare parts from last year will use a lot of fuel.
3) Proper tire inflation will result in more traction efficiency.
4) Routine replacement of filters, use of the proper oil, and scheduled maintenance will keep your engines running at high performance.
5) Instead of driving from farm to farm or across the section, call your employee on a cell phone or walkie talkie.

Saving fuel costs in the operation of tractors and other heavy machinery will return the most dividends:
1) Consider multiple operations in the same pass through the field.
2) Allowing the soil to dry sufficiently will reduce compaction and prevent the need for deep tillage that consumes extra power.
3) Since tillage uses more fuel per acre than most operations, consider a switch to conservation tillage on your entire operation, or maybe site specific tillage in those areas that require it because of compaction. Variable depth controls will also help save fuel.
4) Match your horsepower with the needs of the operation or the load. Your front end loader probably does not require a 200 horsepower tractor.
5) If you have a high horsepower tractor and a light load, gear up and throttle back.
6) Use front end weights for proper distribution of the load to all tires and use wheel weights to keep tractive efficiency at a maximum, which is achieved with an 8-15% slippage. Excessive slip wears tires, wastes fuel, and makes you late for dinner. Low slippage means you have too much weight on the wheels or front end and you’ll waste fuel there also.
7) Lay out your fields to minimize turning time. That means maximize row length and spend your time driving instead of turning.
8) Keep your tractors in the field and off the road. Haul your grain with more efficient power than a tractor.
9) The use of GPS, either an autoguidance or a light bar system, will minimize your overlap, reduce fuel consumption, and help you work at night if necessary.
10) The use of variable rate application technology will allow you to make those applications only where needed, and prevent you from having to cover the entire field. You not only save on input cost, but on fuel as well.

And there are those other farm vehicles that seem to want to stop at the fuel pump with frequency: 1) If you are checking fence, wet spots, or performing some other light duty, an ATV or a motorcycle will use much less gas than your pick-up truck, regardless whether it is light or heavy duty. 2) Moving equipment from field to field or headed to town, use your lightest duty equipment to save on fuel consumption. 3) Truck researchers say diesel trucks are at their maximum fuel economy at 40% RPM below peak torque. 4) If you are planning to buy a heavy duty truck, diesel is the choice because it produces more torque at the same RPM as gas engines, allowing you to haul heavier loads. But before you sign the check determine the major use for the vehicle and what it will be doing most of the time. 5) Make your list and go to town once, not several times a day, week, or whatever. And time that trip for the least congested traffic periods. 6) Accelerate gradually, drive smoothly, and brake slowly, just like you did when Dad was teaching you how to drive. He was interested in safety. You should be interested in safety and a 20% fuel savings.

Summary:
If you are not on a budget, you may have fuel to burn, but chances are your bottom line will appreciate a significant savings on your fuel bill. Savings can be achieved with many of the typical adages about proper tire inflation, slow starts and stops, and engine maintenance. However, there are many more ways to save on fuel, which not only involve reduced tillage, but site-specific agriculture, proper ballast and wheel weights on tractors, and selecting the more economical equipment or vehicle to get the job done. And don’t forget to unload the unneeded weight from your cars and trucks.

Stu Ellis

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February 7, 2007

Ethanol, Perpetual Motion, And Religious Parables

The future profitability of ethanol plants, in fact the successful integration of multiple agricultural systems, could be compared to an ancient religious teaching about whether the mountain should go to Mohammed or whether Mohammed should go to the mountain. While you probably know the result of the parable, you may not know whether the economic advantage is to build ethanol plants in cattle country or raise cattle near ethanol plants. You’ll want to know the outcome, because it could impact your own profitability.

The issue arises with the recent announcement of two new ethanol plants which are integrating livestock operations. It is easy to see the usefulness of feeding wet or dry distiller’s grains in a nearby feedlot. However, the livestock return the favor by contributing methane-producing manure which provides energy for the ethanol refinery. As you look to achieve greater efficiency in your farming operation, such integration reduces costs of livestock feed and ethanol refining. Competitors would have difficulty matching the lower operating costs.

As academics and researchers tend to do, Chad Hart and Miguel Carriquiry at Iowa State University rhetorically ask whether ethanol plants should be built near the source of the corn input or the use of the DDGS output. It seems there are many economic equations and variables in solving that issue. To do that, a 50 million gallon ethanol plant was constructed on paper, using current prices of corn, DDGS, ethanol, etc. The plant was located near the source of Iowa corn, and the cost of shipping the DDGS to feedlots was factored into the economics. An identical plant was located in Iowa, but produced wet distillers’ grains, which allowed some economic comparisons. The same plant was located near a Texas feedlot and the cost of bringing in the corn was factored into the economics.

Each plant had advantages and disadvantages at some point in the profitability comparison:
1) The Texas plant would have a $0.20 operating cost advantage over the Iowa plant that ships wet DG and a $0.39 operating cost advantage over the Iowa plant that ships dry DG. These operating cost advantages reflect the drying costs at each plant.
2) The Iowa plants make up some of the cost difference through transportation, as the cost per bushel of moving the corn is higher than that of moving the ethanol and the distillers grains. The Iowa plants have a $0.22 to $0.25 transportation cost advantage.
3) Because the price of the dry DG is well above that of the wet, the Iowa plants derive more revenue from distillers grains than does the Texas plant.
4) When the costs and revenues are combined, the Iowa plant selling wet DG has the highest margin, earning $0.35 per bushel of corn, followed by the Texas plant and then the Iowa plant selling dry DG. However, these results are dependent on the transportation cost assumptions and the percentage of distillers grains fed wet versus dry for the Iowa plants.

Summary:
The profitability and competitive advantage of an ethanol plant is enhanced with a direct link to a livestock operation. With transportation costs being a significant variable, the greatest opportunity would be for an ethanol plant in the middle of corn fields and feedlots. The ability to feed DDGS without the cost of drying also is an advantage. Astute investors are looking for these efficiencies and those efficiencies are only gained with a close linkage to the livestock industry. An investor would be happy with ethanol and livestock in perpetual motion, and this comes close.

Stu Ellis

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February 6, 2007

Waltzes, Tangos, Cha-Chas and other Farm Leases

If you are either an operator or a landowner still doing the annual farmland rental dance to finalize your lease, the farm gate may be able to change the tempo of the music enough to get you dancing to the same beat with your leasing partner. It is understandable for some leasing arrangements to be unresolved at this point because of the uncertain and volatile price of commodities and the decisions on cropping patterns. Maybe there are some ideas here that can help out.

First let’s assume that operators are willing to share some of the higher crop values with landowners, but they still have to make budgets work to maintain profitability. Let’s also assume that landowners want to get a fair share of the increased commodity values, but do not want to financially burden a tenant to the point losing a good tenant at the end of the lease. Remember, a fair lease is equally written by both parties, or in other words, the farm gate swings both ways.

Ag economist Bill Edwards at Iowa State University writes in the February edition of the Ag Decision Maker that higher grain prices--due to market demand—will be felt in land values and land rental markets. He says rent determination can be accomplished in several different ways, the simplest of which is setting a rate equal to what neighboring land is drawing. (That could also be like the two school boys who copied each others homework and both got it wrong!)

Edwards says rents should be in line with the expected value of the crops being produced. Using an Iowa example, he writes, “In the past decade, average cash rents in Iowa compared to gross revenue per acre have been in the 35 to 40 percent range for corn and the 45 to 50 percent range for soybeans. Gross revenue was estimated as the state average yield multiplied by the average cash marketing price for that year’s crop. USDA loan deficiency payments were included in gross revenue.” It would not take much time to run a quick calculation for your state, crop values, LDP rates and compare that to the rent on your farm, just for curiosity. Make an estimate for 2007 to see where it would turn out.

With the price volatility and market uncertainty, there is an increasing amount of anecdotal reports that operators and landowners are returning to the tried and true 50-50 crop share lease. Even with the guideline of equal shares on expenses and income, there are certain factors that can be traded to achieve the balance you desire. Edwards says that plan will make corn and soybean acreage unequal, “Traditionally the same cash rental rate has been paid for acres planted to corn or to soybeans. Under current market price relationships, the approaches just outlined will result in significantly higher rates for corn than for soybeans. The overall rental rate should still be an average for both crops, though, based on the actual acres planted.”

And Edwards says beware of a couple issues:
• 2006 rents were determined in a financial environment unlike that which exists today
• 2007 prices can be booked at profitable levels, but 100% of the crop will not be sold
• 2007 fall cash prices will likely decline as supplies become available
• Costs of production will continue to rise
• If grain prices remain high, cash rents will rise to meet them if not already there

So how do you manage risk in those scenarios? Edwards says there are several ways you can protect your interest:
1) Flexible cash rents may be determined in large part after harvest when yields are know and prices can be better estimated. In this case the rent could be a percentage of the gross value of the crop, or a base value with a premium paid that is based on the value of production.
2) The 50-50 crop share lease provides an equal share of either high profits or crop losses.
3) Crop revenue insurance, while higher in premium cost this year, offers opportunities to lock in profits that have been unseen in prior years.

Edwards says the concept of flexible cash rents offers a number of advantages both to the operator and to the landowner. Since it is paid in cash the landowner does not have to be involved with input or marketing decisions. The rental rate can change as financial conditions warrant without undue financial burden to either party.

However, the flexible cash lease will have certain implications with regard to the distribution of farm program payments and the local Farm Service Agency office should be alerted about the leasing arrangement. Don Uchtmann at the University of Illinois says, “If the farm lease is technically a “cash lease” under federal regulations, the farm operator must receive 100% of the program payments. If the lease is technically a “share lease” under the regulations, payments must be shared between landlord and tenant. Failure to properly allocate payments between the operator and landowner, in light of the lease terms and federal regulations, can make a person ineligible for future farm program payments and trigger a demand that improperly allocated past payments be paid back.”

Summary:
Just because crop prices are volatile and difficult to predict is no reason to delay negotiations for lease on your farmland. Many options exist that will allow both the landowner and the operator to mutually benefit from higher crop values as well as manage financial risk in doing so. There is resurgence in popularity of the 50-50 crop share lease this year because of that desire. However, many flexible cash leases can achieve acceptable results, as long as the Farm Service Agency knows how to legally treat farm program payments.

Stu Ellis

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February 5, 2007

Does The Debate Over Distributing Federal Research Funding Affect You? Is That Your Final Answer?

Who are the researchers in your state to whom you listen? Is it a beef production specialist who knows the market as well as he can spot a management issue on your farm? Is it a soybean disease researcher whose least utterance can spread fear about Asian rust, or calm those fears with prevention techniques? Is it an outlook specialist who understands global grain fundamentals, yet can work you through the intricacies of claiming LDPs and building an options fence? Or maybe it is a researcher who is helping you and dozens of your neighbors resolve some serious drainage and water quality issues. When the 2007 Farm Bill is passed and funds are appropriated, that researcher may find himself or herself without a job depending upon the reallocation of federal research funds.

It is a hot topic in the research labs and deans’ offices in Land Grant universities across the Cornbelt. It is a hotter topic in the US House and Senate office buildings where university lobbyists plead for the hundreds of millions of dollars at stake. But no one wants a meltdown during Farm Bill debate when over $1 billion in agriculture research money could be shifted instead to other federal priorities outside of USDA. Some national farm organizations and even state groups are taking notice of the debate between competitive and formula funding. The latest issue of the agricultural economics e-magazine Choices explores the politics of the issue, which began in 1977. At that time the first competitive grants were issued, after nearly a century of funding being distributed on a formula basis.

Beginning in 1980 formula funding declined 57% or $124 million, and research at the Land Grant Ag Experiment Stations began to contract. Competitive funding increased $120 million, but less than 40% of the competitive funds go to the Ag Experiment Stations. Instead the funding goes to non-Land Grant colleges. At the same time there has been an 88% increase in grants from other federal agencies, and a 100% increase in special research grants from Members of Congress. The Bush administration had wanted to completely phase out all formula funding this year and next, and move to a complete competitive grant system. Some universities would be big winners. Some universities would be big losers. The deciding factors would be who sets the research agenda, the capacity of the institution to conduct research, its efficiency, and its capability of sustaining the revenue stream. Where would your local university fit into the equation?

With formula funding the research agenda is set within the state to address the local needs, whether that is water quality, soybean research, or livestock management. With competitive funding, research priorities are set in Washington and universities bid to conduct the research. As in any grant-funded environment, researchers have to spend a significant amount of time seeking money, and the greater the competition the greater the amount of time spend applying for funds. Some Ag Experiment Stations would wither, if they could not get federal funds and lost their state matching funds. Federal interests would surpass local interests in the research community, as some campuses would close along with research farms.

Without a guaranteed revenue stream from formula funding, some researchers would not undertake long term research such as development of hybrid corn or conservation tillage. As formula funds come to states, directors of Ag Experiment Stations build advisory groups within the agricultural community to develop a state-based set of research priorities.

Political winds have been blowing toward the competitive grant system and some universities have prepared for a day of change.
1) In 1990 there were 11 states that were prepared for change by relying on competitive grants, not mostly on federal funds. They included: Massachusetts, New York, Florida, Michigan, Wisconsin, Arizona, California, and Oregon.
2) In 2004, those states were joined by Maryland, Rhode Island, Kansas, Iowa, Illinois, Indiana, and Texas.
3) Other states remain heavily dependent upon federal formula funds and could suffer with a sudden switch. They include: New Hampshire, New Jersey, W. Virginia, Georgia, Louisiana, Minnesota, Mississippi, Tennessee, South Dakota, Alaska, and Hawaii.
4) Other states are still dependent on formula funds, but have some competitive grants and would be small losers in a switch.

While there will be some states that will be winners and losers, what about society? The taxpayer just wants some good rate of return for a dollar invested, and could care less where the research was conducted. Recent studies have indicated that research designed to address local needs has a 50% rate of return, much higher than competitive funding. One prospect is that Congressional funding of the formula program will decline in favor of the competitive grants, then those funds would decline as well. Another possibility is for an increase in “earmarked” funds from Congress being allocated as Members saw fit to ensure money going to those universities left out of the mix.

Summary:
The authors of the article, who are university researchers from five Land Grant universities, advocate a continuation of both formula and competitive funding for university ag experiment stations. There has been a shift from formula to competitive grants in recent years, which the authors contend will be less responsive to local needs and will not return as much public payback. As the funding drama plays out in Washington, some states will be in good shape to continue their research programs, and others will not.

Stu Ellis

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February 2, 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.

Corn consumption is brisk says IL Extension’s Darrel Good, just 20 weeks into the marketing year. Read more.
1) We’ve sold 856 mil. bu. of corn, 17% more than last year at this same time.
2) Ethanol could use 4.25 bil. bu. in 2008-09, twice the expected 2007 usage.
3) Livestock production is slowing, with 3% less egg set, and 9% fewer cattle on feed.

Soybean consumption is also surpassing the 2006 rate says outlook specialist Good:
1) Domestic crush is 4.2% higher than last year and meal consumption is up 4.1%.
2) Soybean exports are up 21%, with exports plus unshipped beans 30% over 2006.

The market is still looking for the March 30 acreage intentions report, which will indicate corn acreage expansion and how much will come from soybean acres versus other crops. Darrel Good says the price ratio between corn and beans currently favors corn, but he says downside risk for both crops is limited until 2007 acreage is known.

Having too much corn this year is not likely says Kansas State’s Mike Woolverton. “If corn producers plant 12-14 mil. more acres and if growing conditions give record breaking yields across the country, corn price would drop from the current level. One or the other might happen, but the likelihood of both happening this year seems small.” Read more.

With feed cost up 24%, pork producers are expected to lose $1-2/cwt at a minimum says Purdue’s Chris Hurt, who says he has grave concerns about higher 2007 production costs. This will be the 6th consecutive year of higher pork production with the export market consuming the growth. He says prices will range from low $40’s to near $50/live cwt.

Control pork production costs says Chris Hurt with corn buying strategies. Details.
1) Owning corn now may help avoid a higher basis this spring and summer.
2) Buy CBOT corn futures on the breaks to hedge your feed requirements.
3) Buy CBOT corn call options on the breaks, to establish a maximum futures price.
4) Set a price range by buying calls and selling an equal number of out-of-the money puts.

11,974,000 head of cattle were on feed Jan 1, the largest Jan 1 inventory since this data series has been kept and 1% higher than 2006. Utah State’s Dillon Feuz says, “Steer calves on feed were unchanged from 2006, while heifer calves were up 4% and cows and bulls were up 11%. Those are not the numbers one would expect when the nation’s cow herd is expanding, so I suspect that the drought has derailed many expansion plans.”

USDA’s Farm Bill proposal received a warmer than expected Congressional reception:
1) The safety net would be based on revenue, not just price, supporting poor yields.
2) To collect any farm program payments, adjusted gross income can’t exceed $200,000.
3) The three entity rule is eliminated, and the maximum payment is $360,000.
4) Conservation funding goes up $7.8 bil. and expand wetlands reserve to 3.5 mil. A.
5) Re-targeted the CRP to more needy areas and increase CSP program funding.
6) Renewable energy funding is increased $1.6 bil., targeted at cellulosic ethanol.
7) Beginning farmers would benefit from $250 mil. in direct payments.
8) Users of 1031 tax exchanges would be prohibited from collecting program payments.
9) Fruits and vegetables could be grown on base acres to increase fresh food for schools.
10) Farm programs were rewritten to make them more immune to trade complaints.
11) Allow users of crop insurance to cover up to 100% of crop loss.

Ethanol margins have eroded since their peak last summer, says Purdue’s Chris Hurt. He says newly constructed plants will be able to pay up to $4.25 per bushel for corn, which will drop to $3.75 later in the summer if ethanol prices drop in line with ethanol futures. This means that ethanol plants will be part of the corn rationing process as well. While they could pay $7.00 for corn last summer, that is no longer the case, says Hurt.

Ethanol processing margins might go far enough into the red to cause some of the plants to shut down, says Mike Woolverton at Kansas State. “The subsequent decrease in demand for corn would cause price to fall. In order for that to occur, oil price would have to fall more than it has in recent weeks; even then, Congress would likely raise the ethanol-in-gasoline mandate levels to prevent injury to grain producers, farmer/investors, and rural communities that would result from a demise of the ethanol industry.”

Cornbelt agriculture will benefit from a $500 million grant from energy company BP allowing the Univ. of IL and Univ. of Cal. at Berkeley to create an Energy Biosciences Institute designed to develop energy production from biomass, such as miscanthus grass. The research will culminate in greater opportunities for agriculture to produce energy.

Soybean rust is the subject of a new electronic book published by Extension specialists. However, it comes with a stern warning about the potential for immunity. “Since we have so few compounds and fungicides offer the only means of managing soybean rust for the foreseeable future—it is critical that we follow the guidelines put in place to delay or minimize this happening.”

Kansas wheat, covered with ice from the last winter storm, could be threatened says agronomist Jim Shroyer, who said ice eliminates needed air. He says it will survive up to 20 days longer in the ice if it was dormant. He says extended coatings could thin wheat stands, kill the tillers, kill the entire stand, or it may not do anything.

Stu Ellis

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February 1, 2007

You Want A Farm Bill? USDA Has A Plan For You

USDA took another step toward the 2007 Farm Bill on Wednesday, revealing its comprehensive proposal for Congressional consideration. USDA’s unprecedented effort to reach out to grassroots farmers and agribusiness over the past two years gained substantial respect from the usual critics. Shortly after the Secretary’s presentation Wednesday, news releases began churning out of Washington which were reasonably complimentary to the proposal. While some groups will never be satisfied, we’ll see what you think. This is your forum, so let’s explore some of the elements and invite your response.

During his presentation Agriculture Secretary Mike Johanns quoted many of the farmers who spoke at the 52 listening sessions, whose input helped create the proposal:

“Well, a gentleman showed up at our farm bill forum, a forum I did in Lubbock, Texas. And he said, ‘The current farm program has really served its purpose.’ Then he went on to say, ‘It's time to move on, it's time to craft new farm policy.’” There have been many calls for an extension of the 2002 Farm Bill, a horse that was ridden by the American Farm Bureau all of last year, and by some of the Democratic members of Congress. Recent winds in Washington have been blowing in the direction of entirely new legislation, and that is what USDA has offered.

“We also had a woman by the name of Kristina in Virginia, and she said, ‘Farm bill policies are supposed to preserve family farms.’ How often have you heard that? She went o