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November 30, 2007
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
The dollar is still working to benefit agricultural exports, says Iowa St. Outlook Specialist Bob Wisner. The decline in soybean sales to some nations indicates some rationing of demand may be starting to occur at current prices, but because the Chinese currency is linked in a narrow band with the US dollar, weakness in our currency has not been reflected back to consumers in that country. However, in Europe and other overseas markets, the weak dollar has offset part of the strength in bean prices.
Lock in your return to storage, says Michigan State’s Jim Hilker, not a guarantee of what the unpriced corn will bring. He says the futures markets will pay 16¢ to store corn from Dec. to Mar. and the nearby basis will give you some more. March to May will pay 10¢. May to July will pay 4¢ per month. On-farm storage costs are mostly lost interest, and off-farm storage costs are both lost interest and monthly elevator storage charges.
It is hard to tell what the market really wants to pay for storing soybeans using just the futures market, due to the basis not behaving, says Hilker at Michigan St.. The spreads between futures suggests it will pay 6¢ per month through March, not even enough to offset lost interest. However, if the basis returns to normal by March, returns could be good. To find out what you may be able to get, ask elevators to bid on Feb/Mar delivery.
Wheat futures are willing to pay about 6¢ per month to store your wheat until March, says Hilker, and then it is downhill from there. If you have not priced all your 2007 wheat to this point, consider pricing the remainder on rallies before March. Take a look at the July and/or September wheat charts; since they have not fallen like the old crop futures have. However, they may fall off when the markets think there are enough wheat acres.
Farm budgets are growing say MO ag economists at FAPRI. Their report is available.
1) In 5 years seed corn has gone from $75 to $120 per bag up to a $115 to $260 range.
2) N is $0.335/lb for anhydrous ammonia, but urea & ammonium nitrate are up 30%.
3) Phosphorous is up 40% to $0.38/lb and potash is up 25% to $0.28/lb.
4) Competition has limited price increases in crop chemicals.
5) Fuel prices should be budgeted at $2.70 for farm use and $2.90 for highway.
6) New machinery is 4-6% higher, but used machinery prices have climbed faster.
Based on these relative production costs and the projected corn-soybean price ratio of roughly 2.5, the Food and Agricultural Policy Research Institute says there is a strong signal favoring beans over corn. Corn has the edge over wheat and double-crop soybean. Seed, fertilizer and fuel/energy remain primary operating costs in the crop budgets.
Pork producers are bleeding like a stuck hog, and Purdue’s Chris Hurt says the trend will continue. Increased slaughter rates from underestimated hog and pig numbers are pushing prices down, and higher projected corn prices will push budgets further into the red. Read more.
The time is finally ripe for breeding herd cutbacks to occur in the first-half of 2008, says Chris Hurt. A 4% decline in 2008 may be required to bring the industry back to profitability into 2009. Reductions in the breeding herd may not begin to show up in the USDA inventory reports until June of 2008. This means that reductions in pork supplies will not occur until early in 2009. That requires some industry liquidation this winter.
2007 net farm income is forecast by USDA to be $87.5 bil., up $28 bil. from 2006 and $30 bil. over the 10 year average. It also tops the 2004 record of $85.9 bil. and is due to high commodity prices. USDA also says the $148.5 bil. crop value and the $140 bil. livestock value will be record highs. The demand for biofuels was the major contributor, and secondarily was the export demand, which was prompted by the value of the dollar.
Farm household income is forecast by USDA to be up 7.7% in 2007, to $83.622, but only 13% of the average farm operator household income was from farm sources. The household income recorded a 30% increase in farm income and a 5% increase in off-farm income between 2006 and 2007. USDA says only the largest 8% of farms, on average, with sales exceeding $250,000, will have farm income that exceeds off-farm income.
Profit margins at ethanol plants are skimpy says Iowa St. economist Bob Wisner, thanks to infrastructure problems which will “temper ethanol processing margins for at least the next 10 to 15 months.” He says the infrastructure for distribution has not kept up with the processing expansion. That and the fact that Midwestern demand for ethanol has been filled have combined to cause the downward trend in ethanol prices since last winter.
How is your crop of winter annuals? Soybean cyst nematode specialists at Purdue say, “We have evidence that the life cycles of winter weeds and SCN do overlap and the potential exists for SCN population increases on winter annual weed hosts, especially in fields with high densities of these weeds.” Researchers say with the warm fall and early harvest, your henbit and deadnettle crops emerged nicely, and are nurturing your SCN.
The overwinter growth of SCN depends substantially on the number of degree days while it has a host crop, such as henbit and purple deadnettle. They are not physically active when the soil temperature is below 50 degrees, and complete a life cycle within 750 degree days or one month at 75 degrees. Purdue researchers say SCN will survive on deadnettle roots even when its lifecycle is interrupted for 20 days at 32 degree soils.
100,000 soybean plants at harvest requires how many to be planted in the spring? IA State agronomists found plant mortality was 9.1% greater in 30 in. rows than in 15 in. rows over 4 seeding rates. Planting 125,000 seeds per acre give 108,000 plants in 15 in. rows and 96,000 plants in 30 in. rows. Planting more seed increased plants but not yield.
In order to reduce seeding rates and still achieve 100,000 plants per acre at harvest, equipment setting, residue management, planting depth, and planting speed are more important than anything else, says IA State’s Palle Pedersen. Seedbed conditions are a critical component as well. Plant early, but only when seedbed conditions are adequate.
Carbon sequestration may be a 10 to 20 year process, but Ohio St. agronomists say amounts add up much quicker by separating carbon into individual components: microbial carbon, active carbon, particulate organic matter, and extractable carbon. They measured each and found significant results with carbon storage in no-till fields.
The carbon sequestration process is hampered by soil compaction say the Ohio St. agronomists. Compaction reduces yields because of less root growth, and much of the carbon deep in the soil comes from decaying roots. They suggested soil compaction management by practicing controlled traffic, so carbon is sequestered more quickly.
When was your last soil pH test? The recommendation is every 4 years to determine your limestone needs. IL Extension’s Jim Morrison says a grain rotation needs a pH of 6.0 to 6.5, but 6.5 to 7.0 is needed if alfalfa and clover are in the rotation. Lime lowers the concentration of aluminum and manganese which are toxic to plants. As the acidity is reduced, Morrison says microbial activity rises, soil tilth and N-fixation are improved.
Corn borer Bt pollen apparently is toxic to some aquatic caterpillars, such as caddisflies say Purdue researchers. They are part of the food chain, but the entomologists are not concerned about the Bt product being withdrawn. They say large amounts of the pollen have to enter a stream at the same time, it has to remain intact, and has to become the preferred food of the water bugs which don’t currently care for it. The study continues.
Winter wheat emergence was at 89% this week, which is 4% behind normal says USDA. All of the expected acreage was emerged or nearly emerged in most states, except in AR, CA, MO, NC, and in the southern Great Plains, where emergence was at or below 92% complete. Progress was within 5 points of normal in all states, except OK and TX, where winter wheat emergence lagged 12 and 15 points, respectively.
Keith Collins will be missed as USDA’s Chief Economist. For the past 15 years in that position, Collins was a “tell it like it is” agricultural economist who avoided any political rhetoric within USDA. Yet, he had the respect of every Secretary he served and was a master at converting complex economics into everyday language. He retires in January, and will be replaced by Joe Glauber, formerly his primary deputy, who has been recently advising the US Trade Representative of the WTO impact on the US farm economy.
Another retirement will significantly impact Cornbelt agriculture beginning next week, and that is the departure of Dr. Bob Wisner from the staff at Iowa State University. Wisner has been an Extension marketing outlook specialist for the past 40 years. His specialties have been on risk management, ethanol economics, GMO economics, international grain markets, and is frequently quoted in this newsletter. Thanks Bob.
Posted by Stu Ellis at 12:15 AM | Comments (0) | Permalink
November 29, 2007
Beware Of A New "Gotcha" From The IRS!
There are more than 30 million acres in the Conservation Reserve Program and the tens of thousands of CRP landowners are going to be gnashing their teeth while the Internal Revenue Service collects more taxes on the rental payments from USDA. Buckle your seatbelt, get a grip, and …..
How much money did you receive in CRP rental payments during 2007? If you received compensation from the USDA for your land in the Conservation Reserve, Extension tax specialist Gary Hoff at the University of Illinois says prepare to pay self employment tax on those payments. His Agricultural Law and Tax Briefs newsletter says this is a reversal of IRS policy and will impact all CRP landowners.
Hoff says cash rent income has been immune from the self-employment tax, and for years, the rent received from USDA for CRP acreage was considered immune as well. Unless the landowner was materially participating in the farming operation, there was no reason to pay the self-employment tax. But the IRS believes ownership of CRP land is the same as ownership of a business, since it requires seeding and maintenance of a cover crop and weed control. Hoff says it make no difference if the landowner is an elderly person in a nursing home and does not even understand the concept of the CRP. Self employment tax is still due.
The latest action extends back to 2003, when the IRS ruled that all USDA land diversion and conservation program payments are subject to the self-employment tax, regardless of whether the owner is farming or non farming non-CRP land. That was a change of policy, but the IRS modeled it after tax rulings on acreage idled during the 1983 Payment In Kind program. But in 1988, the IRS had ruled that a retired farmer did not have to pay self employment tax on his income from CRP land. Subsequent court ruling have held that an active farmer did owe self employment tax on CRP land, but someone not farming did not owe the tax.
With the change, Hoff says the IRS draws a line in the sand for taxpayers and tax preparers, warning them that interest and penalties may accrue, if the self employment tax is not paid on CRP rental receipts. That is the law, until either the IRS reverses its position, or Congress exempts CRP rent from the self employment tax if the landowner is not actively farming. That legislation has not yet passed.
Your tax preparer may not want to take any chances, since the IRS has indicated that any preparer not following the rule will be subject to a penalty. The penalty is no less than $250, and could be as high as $1,000 or 50% of the fee for preparing the tax return, whichever is greater. The tax preparer does have the opportunity of submitting a statement indicating he or she is taking an alternative viewpoint.
Summary:
The Internal Revenue Service has reversed its policy which affects owners of land in the Conservation Reserve Program. For those landowners who are not actively farming, the IRS has ruled they must pay self-employment tax on the rental proceeds from USDA. The change is effective for the 2007 tax year, and tax preparers can be financially penalized for not adhering to the new policy.
Posted by Stu Ellis at 12:36 AM | Comments (0) | Permalink
November 28, 2007
Delays, Debates, Debacles. What Happens Without A Farm Bill?
The 2007 Federal Fiscal Year expired at the end of September, without a new Farm Bill being enacted, and most observers say it will be early 2008 before any action will be taken. Your farm has not been confiscated. The sun will rise tomorrow. You won’t be getting checks for parity payments. But what will or won’t happen while we are all in agricultural purgatory?
To help Congress understand the ramifications of a delay in the enactment of replacement legislation, Jasper Womach of the Congressional Research Service analyzed the Possible Expiration of the 2002 Farm Bill. Womach says the all-encompassing Farm Bill contains a wide range of programs, some of which are mandatory and require annual appropriations, and some of which are discretionary and change from year to year depending on the level of Congressional appropriation.
A mandatory commodity program was enacted in 1949, but the periodic Farm Bills supersede that federal statute by overriding its provisions for 4 to 6 year periods. The 2002 Farm Bill covered the crops planted in 2007, regarding price supports, crop insurance, and other annual programs. Your 1996 crop was planted about the time the 1995 Farm Bill was finally enacted. You are probably planning your 2008 crops without knowing what, if any, payments will be made. And there are certainly not any acreage setaside programs that require fields to be marked off and oats planted as a cover crop. Womach says, “(The) lack of new commodity support legislation before harvest in 2008 does little harm other than leaving producers of “covered commodities” uncertain about the size of payments they might receive. He says if Congress takes no action before the beginning of the 2008 harvest, then the provisions of the 1938 and 1949 farm laws that never expire will go into effect. But those would be so costly to the government that Congress is unlikely to allow that to happen.
The 1938 and 1949 permanent law provides mandatory support for basic crops with a non-recourse loan that would provide cash flow and forfeiture of the crop. However, there are no Posted County Prices and no Loan Deficiency Payments. Nor are there Counter Cyclical Payments or Direct Payments. However, those would be negligible to the loan rates which are linked to parity prices. The loan rate for corn would be between $4.05 and $7.28. The loan rate for wheat would be between $8.18 and $9.81. Additionally, the Secretary of Agriculture would announce acreage allotments and marketing quotas and then hold referenda to let producers decide whether to implement them. Soybeans would not be included, since they were not part of the permanent farm program. While the USDA has computed the soybean parity price at $17.90, there would be no loan program that would guarantee a support price. Womach says there would be insufficient time before planting season to address the allotment issue. Since the loan rates are all higher than current market prices, most producers would put their crop under loan and forfeit it when the 9 month loan matures. The market would have to bid above those levels to get the grain out of federal warehouses and into the marketing channel, in the unlikely event that would happen.
However, the milk marketing year begins January 1, so parity prices would go into effect in 5 weeks. Milk would be supported between 75% and 90% of the parity price of $30.38, but through the USDA purchase of nonfat dry milk, cheddar cheese, and butter. Womach says, “Under permanent law those purchase prices (based on July 2007 data) would be about three times as high a currently mandated and nearly 50% higher than market prices. Such high USDA purchase prices could result in the government outbidding commercial markets for a sizeable share of processor output.”
Conservation programs are part of discretionary spending with no guaranteed year to year program, and depending upon annual Congressional appropriations. While most conservation programs remain on the books their level of implementation depends upon appropriations. However, the more well known programs such as the Conservation Reserve, the Wetlands Reserve, EQIP, and CSP, do have expiration dates, most of which were September 30th. Many of those programs were all part of the 1985 Farm Bill which created a somewhat permanent structure for conservation, that is extended from one Farm Bill to the next. Since funding expired for the CRP at the end of September, don’t expect new enrollment announcements before a new Farm Bill is announced, but all existing contracts remain in effect.
Nutrition programs, which include food stamp distribution, are authorized in permanent law, but are depending upon annual appropriations. The programs would not change, but Congressional “Continuing Resolutions” are needed to keep the funding for the programs in place, and so far that is until December 14th. The WIC program, the school breakfast program, and other public feeding programs are authorized separately from the Farm Bill and do not depend upon its enactment.
Rural Development programs are part of permanent law, and financed with annual appropriations. A handful of programs new to the 2002 Farm Bill have expired, and may not be re-authorized.
Agricultural research, foreign food aid, and some farm loan programs are all discretionary, and are not only funded from year to year, but may not be renewed in the next Farm Bill.
Summary:
The Farm Bill contains many programs that are temporary and require annual funding to be continued, but also contains mandatory programs that require funding, such as food stamps and commodity programs. Commodity programs were made permanent in 1949 but the provisions change from one Farm Bill to the next, and a new commodity program will have to be in place before next harvest to displace a loan program based on parity prices. Such a supply management program would put grain in federal storage that would be unavailable to the market at current prices, a scenario unlikely for Congress to allow.
Posted by Stu Ellis at 12:28 AM | Comments (2) | Permalink
November 26, 2007
Ethanol: Taking A Look At The Big Picture (Part 3)
Will an ethanol plant raise the price of corn in your area? Will an ethanol plant generate numerous new jobs? Will an ethanol plant result in the establishment of a feedlot nearby to use the DDGS co-product? Will an ethanol plant energize your local community’s economy? Maybe yes. Maybe no. The farm gate has the answers.
Throughout the Cornbelt, ethanol plants are popping up as fast as a new McDonald’s, but their impact on the local economy is a bit more substantial, say Sarah Low and Andrew Isserman, agricultural economists in the University of Illinois Department of Agricultural, Consumer, and Environmental Economics, which has recently published a comprehensive report on ethanol. They studied the impact of ethanol plants on local communities, since 124 communities have them in operation and 76 more are in the planning or construction phases.
Early ethanol plants were added to corn wet milling plants and added value to the stream of products coming from the complex plants. But once oil prices climbed and corn prices remained low, it became economical to build dry mill corn plants just for production of ethanol. Of course the distillers’ dried grains were a co-product that has made it way to livestock feeding operations. Low and Isserman observe that some plants were farmer cooperatives designed to increase the value of their corn, but more recently the plants have been corporately owned. The local dry mill ethanol plant requires water, natural gas, yeasts, chemicals, enzymes, and corn which it usually pays a 5 to 10 cent premium over local elevators, just to ensure a year round supply without the necessity of storage expense. The premium prices paid for corn become capitalized into local land values, making both the price of the land and cash rent slightly more within the corn draw area around a plant. Low and Isserman say the opportunity to sell corn to an ethanol plant for that amount of premium will result in a 3.5% increase in cash rent, and a 1.4% increase in land values.
Farmers who sell corn to an ethanol plant use the premium to offset the cost of trucking, and 35 to 50 miles is generally the maximum anyone can afford to haul corn to an ethanol plant. Although most plants are built near the corn supply, some California plants pay for corn to be railed in, but have minimal expense in shipping the ethanol since it will be used nearby.
The ethanol industry’s total employment increased 50% between 2000 and 2005 as the number of plants increased from 54 to 124. While specific plant employment is not available, the Department of Labor statistics indicate over half of the ethanol plants will have employment between 20 and 49 workers. A dozen plants employ less than 20 workers, but there are a half dozen plants that employ 50 to 100 workers. Therefore, Low and Isserman say plants are not large community employers.
86% of the plants are located in rural areas, some in mixed counties, because of the need to be near the supply of corn. However, rail service is important, and a good highway is necessary because of the truck traffic. There is also a need for abundant water and power. Low and Isserman say any plans for development of an ethanol plant should address those issues. Another concern is the market for DDGS, and Low and Isserman say in 2005 80% of the DDGS produced was sold out of the region of the plant. A nearby feedlot will not only reduce transportation cost, but can use a wet form of the DDGS to save on the cost of drying it. It has a 5 to 7 day life without spoilage in the wet form. An increase in feeding operations have been locating near ethanol plants, say Low and Isserman, “Nationally, 54% of counties with an ethanol plant have an above average density of cattle on feed, and 87% of plants are within 50 miles of a county with an above average density, even when using data from the 2002 Census of Agriculture with current plant locations.”
Water requirements are substantial, with 300 million gallons of water needed by a plant that produces 100 million gallons of ethanol per year. Waste water treatment is also a major cost, as is a $30 million fee for natural gas for that same sized plant.
While the additional income from corn sales to an ethanol plant will result in more income for farm operators and higher rents for land owners, only a portion will be retained in the local community. Cash rent paid to absentee landowners will leave.
Summary:
A local ethanol plant may provide 30 to 50 additional jobs in the community, and raise the price of corn in addition to cash rents and land values. But an ethanol plant will stay in the community where there is transportation and water infrastructure near the source of corn. But the demand for water and the pressure on the local roadways will create a burden on the community. Political and economic issues challenge the future of the industry, but until the dynamics change that spurred the growth of the industry, local ethanol plants should be considered a contributor to the community economy.
Posted by Stu Ellis at 12:46 AM | Comments (2) | Permalink
To Sell, Or Not To Sell. A Marketing Plan For Today's Commodity Prices.
Emotional marketing urges you to wait for $4.50 corn and $13 beans. Intelligent marketing says you have made a handsome profit already and urges you to pull the trigger on any unsold grain. So, how do you create a marketing plan that reconciles those two?
You are in a quandary. You know prices will go up. Your spouse knows prices will go down, and you are both right, but it is just the timing issue that no one has mastered.
Intelligent marketing does not deny those lofty prices might occur, but urges you to reward the market while enroute. Visiting with Extension Outlook Specialists from Purdue and Missouri may help you reconcile your conflicts to the satisfaction of yourself and those around you who depend upon your good judgment.
Chris Hurt’s latest Purdue newsletter on corn marketing reminds us with a nearly 2 billion bushel surplus there is no shortage of corn, and the only reason corn is so high is due to the concerns that 2008 acreage will be too small. Additionally, he says the bullish soybean market, if it moves from the current $11 up to a possible $13, would stimulate 2008 corn prices to move up 50 cents, putting both the new crop and cold crop at $4.50 for March futures.
Hog producers are facing substantial amounts of red ink because of high feed costs, but Hurt says they already have hogs in place that have to be fed. And cattle feedlots will be full in the first quarter of 2008 also consuming a lot of corn. Export buyers represent aggressive world demand, fueled by a weak Dollar that gives them strong buying power. And he says the ethanol industry will begin to slow down, when corn prices rise to the point that high oil prices can no longer make ethanol profitable. Hurt says that corn prices might reach $4.50, but a ceiling may also be hit at lower levels. He is predicting mid to late winter for the corn market to experience a top.
Melvin Brees’ latest Missouri marketing newsletter says the corn basis has recovered remarkably in recent weeks, indicating a strong demand combined with producer reluctance to sell. And he rhetorically asks, “What are you waiting for?” He says corn prices are 60 cents under June, and have only reached this level 5 times previously; prices are in the upper half of USDA’s projected range; the large carryover means upside potential is limited and downside risk is large; seasonal prices indicate a decline is imminent; and current prices have provided strong profits. Brees says if March futures decline below $3.83 the market would see that as a negative signal and a bearish market would develop; but if the March contract penetrates $4.08, the rally would continue. He says while signals are mixed, a majority suggests that producers should add to their corn sales.
Looking at the history of the soybean market, Chris Hurt says in his latest Purdue soybean newsletter that just before the all time record of $12.90 was set in June 1973, the average farm price of soybeans in the previous five crop years from 1967 to 1971 was only $2.63 per bushel, so a nearly $13 price was five fold of what the norm had been. With $6.11 the recent five year average, a parallel five fold increase would put bean prices at $30. However, he is not predicting that will happen. Hurt says a calculation of inflation, yields, and other factors might suggest something over $12, but farmers need to keep in mind that the 1973 mark was achieved without market competition from South America. He says today’s prices are lofty, but there is no certainty that prices are high enough yet to achieve sufficient 2008 acreage and ration the demand. Hurt says soybean prices may need to be above $11, but with more US and South American acreage prices may tilt downward, meaning 2008 could see both $13 beans and $9 beans with high volatility and high risk for producers.
At Missouri, Melvin Brees in his latest newsletter says it is hard to sell soybeans when they are in a strong uptrend as they are now, even if you have always been told that it is hard to be wrong selling soybeans above $9. Brees says soybean cash bids are in the upper half of USDA’s projected range; at current levels prices could fall rapidly and unexpectedly; the seasonal trend is downward; even with a tight carryover next August the basis is quite weak; world supplies are sufficient; and sales would capture profitable prices.
Brees acknowledges that the basis will tighten over time and the market carry will provide a return to storage, but he says risk increases as historical highs are reached and pricing opportunities usually don’t last long, “Waiting for higher prices is one thing, letting current price opportunities slip away as the market declines is something to avoid. Remember, that whatever happens to prices, it is hard to “be wrong” when selling soybeans above $9 and corn in the upper $3 range.”
And Brees offers this strategy:
1) Determine what market signals will trigger sales at higher prices. At the same time, determine what will trigger sales if the uptrend stalls or prices start to decline. In this way you can define what you are waiting for with upside targets or goals if prices continue higher and downside price traps if you are wrong and the market reverses. Once you have determined what you are waiting for, follow through with your decisions.
2) You need to be prepared to act quickly, especially if the market reverses sharply and begins a rapid decline. While this strategy could capture higher prices, it is important to be prepared to accept somewhat lower than currently offered prices if downside traps trigger sales.
Summary:
Although corn and soybean prices are at near record levels, it demonstrates that having a solid marketing strategy is all important. Corn prices could reach well into the $4 range by following beans higher as they buy acres, but with a large surplus those levels cannot be sustained and profits should be captured at every opportunity. Soybean prices could well reach into the mid-teens, but whenever the market is satisfied it has purchased sufficient acres for 2008, the market could rapidly turn on volatility and fall. Producers should establish trigger points for making sales as the market moves higher and then falls.
Posted by Stu Ellis at 12:28 AM | Comments (0) | Permalink
November 23, 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.
Production factors are driving the market says Extension Specialist Darrel Good:
1) Only 45% of US winter wheat is reported by USDA in good to excellent condition.
2) Dry soil in India and frost problems in Argentina are threatening wheat crops.
3) Increases in Brazil’s soybean crop will be insufficient to cover the US shortfall.
4) Sufficient 2008 US soybean production may be threatened by high corn prices.
Consumption factors are driving the market says IL Extension’s Darrel Good:
1) Corn and bean demand is up from increased cattle, hog, and broiler production.
2) Continued high oil prices will positively impact ethanol and soy diesel demand.
3) China’s potential demand for US beans, soybean oil, and possibly corn is growing.
But volatility will continue in the market says Good. “Sustained weakness in corn, soybean, and wheat prices is not expected in the near term as supplies remain tight and demand is firm. Tight world stocks will continue to magnify the impact of production uncertainty into the foreseeable future. Volatility in energy and currency markets will also add to the volatility of crop prices. Risk has increased significantly.” Read more.
Outlook Specialist Bob Wisner agrees with Good about the volatility. He also suggests it may take an $11 soybean price to achieve a 5.5% to 6.5% increase in US soybean acreage next year, and a 6% to 8% increase in South American soybean acres. The price volatility will occur until the size of the South American crop is known, says Wisner.
Soybean prices for the 2008 crop may mirror corn prices for the 2007 crop, according to Wisner. “If so, farmers and soybean users should expect the soybean market to follow a pattern similar to that of corn last winter and spring. Prices rose sharply into January and then drifted lower as private surveys showed sharply higher plantings were likely.”
Corn exports are an enigma to Wisner. He says cumulative shipments and unshipped sales are up 35% from 2006. But he says Cumulative export inspections through Nov 8 were up only 5.7% from 2006 and have lagged behind sales. He believes the 71% jump in wheat exports over last year may have held down corn shipments by congesting ports. Read his newsletter.
How do you manage volatility? Alan May at South Dakota State says, “Establishing a marketing plan for old and new crop corn that incorporates breakeven in production costs and profit is critical. The corn market will likely be highly volatile, but it is a market that is still providing very sound opportunities for pricing 2007 and 2008 corn.”
Hog prices have been falling as slaughter rates climb says Extension’s Shane Ellis at Iowa State. Slaughter has been up 5% and will soon climb to 10% over last year, but hog prices are down nearly 15% as a result. While the fourth quarter usually sees a 12% drop in hog prices, the average hog prices this year are 20% lower since early September.
Hog slaughter rates will return to normal, says Ellis, but have been unexpectedly high:
1) The Sept. Hog & Pig Report indicated inventories were up 3% from 2006.
2) There were greater numbers of heavier weight market hogs within weight classes.
3) Canadian hogs coming into the US have increased 7% since the first of Sept.
More cattle, and heavier cattle, are entering feedlots according to USDA’s estimates. Placements were 13.6% higher than Oct. 2006, and placements of cattle weighing over 800 lbs were up 23.1% from 2006. Nebraska’s Darrell Mark says the trend toward more cattle in IA, NE, and SD continues, but the October Cattle on Feed report indicated that more cattle were placed in feedlots in TX, OK, and KS, but were still steady with 2006.
Don’t spend too much on nitrogen if you are budgeting, and are concerned about corn production expense. The key to nitrogen application is no longer based on yield, but “a maximum return to nitrogen” and is calculated from nitrogen costs at corn prices. Find the calculator.
The increasing concern by Extension specialists about the failure of SCN resistant varieties of soybeans is resulting in more recommendations for soil testing. Since most resistant varieties get their genetics from PI88788, but 10% of SCN have been able to reproduce on it, they suggest collecting soil samples before the soil freezes and testing them for SCN.
Why does your Bt hybrid yield better? KY agronomists Ric Bessin and Chad Lee say the breeding methods used to add a gene into a hybrid involves backcrossing an experimental line with the gene of interest into one or both of the inbred parents used to make a hybrid. The number of times it is backcrossed determines the degree which it is genetically similar. The differences in yield are not due to the Bt trait, but instead due to the agronomic characteristics of the inbred parents and the whole genetic package it has.
Round bales stored outside can lose up to 30% of their nutrient value if unprotected. At Iowa State Stephen Barnhart says most of the loss of dry matter and nutrient quality comes at the bottom of the bale where it is constantly in contact with the moist ground. He says storing bales on pallets, tires, or crushed rock can reduce nutrient loss.
Hay value can also be lost with improper feeding. Barnhart estimates 50% of the hay value is lost from either storage or feeding. He suggests feeding small amounts at a time to reduce what is trampled, plus the use of a rack or hay ring. Unrolling a bale wastes 40% or more from trampling. Feed hay stored outside before feeding protected hay.
US hay acreage may increase in 2008 says the Livestock Marketing Information Center; but competition from other crops, especially in irrigated areas, will remain intense. National average hay prices are expected to remain well above 2006 for the balance of the 2007-08 crop-marketing year. Hay prices will remain very high next crop year (2008-09) and may average over $100.00 per ton in 2008-09 for the third consecutive year.
To till or not to till. That is the question which frequently results in the wrong answer, says Iowa State agronomists, who are concerned about the impact on wet soils, as well as the added cost of tillage because the soil was wet. They say moisture below the surface will not be tapped off by plant roots, and soil will not fracture the way you believe it will.
Wind and water erosion can be increased when corn stover is removed according to a NE Extension team. They say on soils of low erodibility, 2 to 3 tons of stover per acre should maintain soil organic matter and protect against erosion; but little if any should be harvested if the soil is highly erodible. A ground cover of 30% to 60% is estimated to reduce wind erosion by 70% and 90% respectively, when compared to bare soil. Those facts are included in a Nov. 16 report on corn stover harvest.
Ohio and Michigan are the only major soybean producing states east of the Mississippi River to remain free of Asian rust. Even rust was recently found on soybeans in the Canadian province of Ontario, approximately equal to Chicago in latitude. USDA’s rust website: www.sbrusa.net reports it was found in 285 counties in 19 states since January.
Farm techies may benefit from a variety of websites and electronic services which can improve management abilities, says Ohio State Extension’s Andy Kleinschmidt, who’s newsletter is here.
1) Call the phone number at Jott.com and it sends an e-mail message.
2) Manage all of your passwords with the free service of passlett.com.
3) Extensive yield records and GPS maps can be backed up on line at box.net.
4) A free tool to keep your computer virus free is available at: free.grisoft.com.
Let’s explore the concept of paying farmers for protecting the environment, says a new United Nations Food and Agriculture Organization report, written by IL ag economist Gerald Nelson. He says farmer incentives could assist in addressing issues such as climate change or water purification:
1) A payment could be made to get farmers to change their current production practice.
2) They can change the way they use the land to provide more environmental services.
3) They can choose not to make a change that is motivated by market forces.
Hair sheep and meat goats may be your next profit center, suggests IL sheep specialist Richard Cobb. He says the demand for hair sheep comes from the growing ethnic demand for lighter weight lambs, plus the lack of shearing, they are easy keepers, and prolific breeders. He says meat goat production has expanded from ethnic demand also. Read his analysis.
Posted by Stu Ellis at 1:39 AM | Comments (1) | Permalink
November 22, 2007
Ethanol: Taking A Look At The Big Picture (Part 2)
The financial future of the Cornbelt farmer is rooted in the price of corn, which is rooted in the price of ethanol, which is rooted in the price of oil. But your profitability depends on the implications of the implications of the implications of economic variables for which you can only hope and pray. On this Thanksgiving, we’ll connect the dots, and try to draw a conclusion, instead of a turkey.
This is Part 2 of the farm gate’s great ethanol adventure, exploring a new academic work by the University of Illinois Department of Agricultural, Consumer, and Environmental Economics. Agricultural economists Darrel Good, Bob Hauser, and Gary Schnitkey delved into the economics of the ethanol sector to help you connect the dots of price relationships.
More corn is being used for ethanol production than for exports, and the industry will nearly double its capacity when planned refineries come on line. While that will produce 14 billion gallons of ethanol, it will also require nearly 5 billion bushels of corn, nearly what is currently being allocated for livestock feed. But there are politically-charged incentive subsidies necessary for that to occur, along with a favorable sale price for the DDGS co-products, and affordable construction costs, an affordable price for corn, and an affordable cost of energy. (In other words, the dots need to form a line.)
Dot 1: Ethanol prices. With 2.8 gallons of ethanol produced from a bushel of corn, a 10% change in the $2.25 price of ethanol implies a 63¢ change in the price of corn. But if corn is $3.75 per bushel coming in, a 10% change is 37.5¢; and DDGS is $130 per ton going out, a 10% change would be 11.5¢ per bushel of corn. With natural gas costing $7 per 10,000 BTU’s, a 10% change alters the operating margin by 7¢ per bushel of corn. But instead of pricing ethanol with a formula of corn, DDGS, and energy, ethanol is priced by the going price of unleaded gasoline. In 2006, if unleaded gas averaged $1.94 per gallon, ethanol would have to be priced at $1.30 per gallon because it has only 66% of the BTU value. But adding the blender credit of 51¢ makes the price $1.81 per gallon for ethanol. Its average price was really $2.58 because of its environmental benefits that could become moot when alternatives disappear. Currently, ethanol is priced at a 45¢ discount to unleaded gas, and since that reduces the operating margin of an ethanol plant the expansion of refineries would decline sharply.
Dot 2: Ethanol and corn prices. The Illinois economists say if ethanol can be sold by the manufacturer at $1.50 per gallon, then it can pay up to $3.65 per bushel of corn and still break even. But they add, “The break-even corn price is particularly meaningful in the case of ethanol because (1) it is considerably higher than traditional corn prices, (2) a relatively large amount of corn production is used for ethanol, and (3) the amount of ethanol produced has very little effect on gasoline price.” The economists believe that if corn prices continue under $3.50, then ethanol production capacity will increase, but it will fall if corn prices remain above $3.50. The price of corn not only determines the growth of refining capacity, but also determines how much corn will be grown. But with the expected price of soybeans at 2.5 times the price of corn, the price of soybeans determines how many acres of corn will be planted.
Dot 3: Production and Consumption shifts. The economists hypothesize there will be significant impacts on consumption if the breakeven price is at $3.75 because of oil prices and federal policies, and if corn users did not have alternative feedstocks. Since the livestock industry is the largest corn user, “In our opinion, a large, long-term increase in ethanol demand would ultimately cause higher retail prices at the meat and dairy counter and higher livestock prices, but a relatively small reduction in livestock production.” Further, they say that most of the exported corn is also for livestock feed, the foreign demand for meat will determine the quantity demanded for export. In total they believe 13% of a fixed amount of corn would be all that is diverted to ethanol from other uses of corn. However, corn production can expand as the price demands, particularly from soybean acreage and what the producer loses is the profit from corn production, vis-à-vis corn yields.
Dot 4: Ethanol Yield per acre of corn. The ethanol yield per acre is a combination of corn yield, and how much ethanol can be produced from a bushel of corn, which is currently about 2.8 gallons, and has increased over time. But seed genetic improvements can raise that number with more starch and starch that is easily obtained. An increase in the ethanol yield will reduce the corn acres needed for ethanol. In recent years, the trend yield of corn has also increased, and at an accelerated rate. While technology has resulted in some of the increase, a more benign weather pattern in the past decade has also helped stabilize and increase corn yields.
Dot 5: World response to increasing crop prices. The higher US price for corn resulted in increased acreage in 2007, and the economists believe that as long as ethanol production expands, prices will remain strong and corn acreage will remain high. But they say the bidding war depends on the price of ethanol and how the world responds to higher crop prices in both consumption and production. Higher corn prices would result in higher prices for corn and alternative crops, particularly for Brazilian soybeans, and that would result in lower prices for US beans and less acreage. Continued high prices would lead to productivity gains in many countries.
Dot 6: Corn price risk. The corn prices important to both the producer and the ethanol refiner are a function of weather driven yields. In the past decade they have been more stable than in the prior 20 years. Shortfalls have existed, but the 1 shortfall in 5 years that occurred from 1970 to 1990 has diminished to 1 in 10 in the past 12 years. However, the potential for a major shortfall has kept corn prices volatile, particularly with the low level of stocks on hand.
Summary:
The ethanol economy has become a dominant factor for Cornbelt agriculture, but its stability relies upon corn yields and prices, oil prices, government policies, alternative crops, and how the world responds to production and consumption changes because of the demand for corn. That combination of factors determines whether corn prices will be above or below a breakeven point for ethanol refineries, and that in turn determines the long range support for corn prices.
Posted by Stu Ellis at 12:46 AM | Comments (0) | Permalink
November 21, 2007
A Final Status Report On Harvest And Soil Moisture.
USDA’s last weekly crop report for the season indicated that in many Cornbelt states there were still combines in the field, and drought was a concern for many producers. With little time before the ground freezes, some farmers will enter the spring with dry soil in many areas.
Farmers in the Upper Midwest can see the light at the end of the tunnel, if they are not already in the office working on records, marketing, and taxes. The final weekly crop condition report has been compiled by USDA with the help of hundreds of volunteer crop reporters.
ILLINOIS: Topsoil moisture was 52% in the short category and only 46% adequate. Fall harvest and seeding of winter wheat is virtually complete statewide. Field work is generally focused on nutrient application and fall tillage. The Illinois Ag Statistics Service also reported, “Rising input costs top the concerns of many farmers as winter approaches as well as the depleted soil moisture levels in many areas of the state.”
INDIANA: Topsoil moisture is over 60% adequate to surplus but the subsoil moisture is drier, and 56% is in the short categories. Corn is 96% harvested, soybeans are 99% harvested and 100% of the winter wheat is planted Farmers were busy during the week applying anhydrous ammonia, spreading fertilizer and lime, moving grain to market, and doing fall tillage.
IOWA: Topsoil moisture is 88% adequate to surplus and the subsoil moisture is 95% adequate to surplus following excessive rains that delayed harvest. Corn is 93% harvested and soybeans are 99% harvested. The northern half of the state is wrapping up harvest, in full swing with fall tillage and fertilizer application. The southern half is focused on harvest and is taking advantage of the dry days to finish.
KANSAS: Topsoil moisture is 47% short and 53% adequate. Subsoil moisture is 41% short and 59% adequate. Winter wheat is 4% pastured. Hay and forage supplies are 87% adequate and stock water supplies for Kansas are 81% adequate.
MICHIGAN: Topsoil moisture is 78% adequate and subsoil moisture is 65% adequate. The unharvested corn is rated 16% very poor, 18% poor, 32% fair, 28% good, and 6% excellent. Corn harvest has progressed and is completed some areas; with soybean harvest completed in many areas. Winter wheat emergence continued to be good and at a pace ahead of normal.
MISSOURI: Topsoil moisture is 50% short and 49% adequate. Fall tillage is 64% complete. Pasture conditions range from 45% poor and very poor to 20% good to excellent. Row crop harvest, wheat seeding, fall tillage are all running at or ahead of average progress. Some problems with wheat emergence were reported in the northeast due to dryness. Concern about low ponds and streams spread into central areas. Some
producers in the south-central region have sold cattle in response to very poor pastures, with others contemplating the same course of action.
NEBRASKA: Topsoil moisture is 34% short to very short and 65% adequate. Subsoil moisture is 38% short to very short and 61% adequate. Corn is 92% harvested and soybeans are 98% harvested. Winter wheat conditions are 63% good to excellent.
NORTH DAKOTA: Topsoil moisture is 41% short to very short and 49% adequate, with subsoil moisture 54% short to very short and 45% adequate. Stockwater supplies are 75% adequate. Dry conditions allowed producers to make good harvest progress on corn and sunflowers during this past week. Reporters noted that producers were concerned about rainfall to replenish soil moisture supplies for winter wheat and next year’s crops.
OHIO: Topsoil moisture is 67% adequate to surplus, and late season rains have interrupted harvest. Corn is 89% harvested for grain. Winter wheat conditions are 87% good to excellent. Other field activities included fall tillage on corn and soybean fields, and fertilizer application. Throughout most of the state producers report local elevators are filled to capacity with grain, which has delayed corn unloading.
SOUTH DAKOTA: Topsoil moisture is 84% adequate to surplus. Subsoil moisture is 80% adequate to surplus. Feed supplies are 86% adequate; stock water supplies are 70% adequate; and cattle conditions are 88% good to excellent.
WISCONSIN: Topsoil moisture is 83% adequate to surplus. Corn is 83% harvested, and soybeans are 96% harvested. Fall tillage is 53% complete. Harvest activities were in full swing again last week with soybean harvest beginning to wrap up, and corn harvest was still running ahead of normal.
Summary:
Cornbelt agriculture is nearing the expected end of the season, with only a small percent of the corn and soybean crop still in the field, and most of the fall tillage and fertilizer application nearing completion. Except for the soggy conditions that besieged Iowa and Ohio farmers, much of the Cornbelt has varying topsoil and subsoil moisture conditions which raise concerns about starting the 2008 growing season with adequate moisture.
Posted by Stu Ellis at 12:04 AM | Comments (0) | Permalink
November 20, 2007
Average Crop Revenue: Will It Benefit Your Farm In The New Farm Bill?
While Senatorial procedural issues have halted debate on the 2007 Farm Bill, it gives Cornbelt farmers the chance to examine one of the key commodity program proposals to determine how hard they want to lobby their Senators to vote it up or down. That is the Average Crop Revenue (ACR) program. Farmers would have a different mechanism for computing the USDA safety net. Critics say it offers no change from the status quo, but most farmers would disagree.
The ACR program provides crop subsidy payments based on state-level revenue per acre falls below a trigger price for a given crop. The revenue trigger is a computation of price and yield. The proposal being debated by the Senate would give farmers a choice of the ACR or a continuation of direct and countercyclical payments and non-recourse loans, but once a farm shifted to the ACR it would not be able to go back to the traditional program.
University of Missouri’s Food and Agricultural Policy Research Institute (FAPRI) computed agricultural economic variables over the 5 year life of the Farm Bill, and compared the programs with and without the ACR component. The outcome not only gives the Congress an idea on how much money the program would cost, but also gives farmers an idea of how they would fare under the ACR program. FAPRI estimated that 70% of farmers with wheat, barley, oats and sunflowers would participate, 60% of farmers with soybeans would participate, and 50% of farmers with corn and sorghum would participate.
Under the legislation being debated the ACR program would not be available until the 2010/11 crop year, no payments would be made until after Oct 1. 2011. For the benefit of Congressional spending limits, the cost of the program in the final year of the Farm Bill would not be charged until a new Farm Bill is written.
ACR Program details:
• There are no direct or countercyclical payments, and if a marketing loan is taken on a crop, the loan must be repaid in cash. Crop forfeiture is not an option.
• ACR program participants are paid $15 per base acre on all program crops.
• An additional payment is made if actual statewide revenue (price X yield) is less than a program guarantee. The price factor would be used to determine crop insurance indemnities under a harvest price revenue program.
• The guarantee is computed from trend yields and a 3-year moving average of prices, but may not change more than 15% per year, and equals 90% of that revenue calculation.
• The payment rate on a given farm is further adjusted by the crop insurance APH yield and how it compares to the state trend yield, and the revenue component is paid on 85% of base acres.
• Payments would be made in October, after the marketing year ends, which is 12 months after the harvest of the crop.
In addition to saving money because of the delayed start of the program and shifting the expense for the final year of the Farm Bill into the next Farm Bill, FAPRI says there is very little difference between the ACR and traditional program for the producer. The impact on the commodity market is also minimal, since the program is voluntary. FAPRI says a mandatory program would change acreage balances, since benefits are less for cotton and rice producers, who would opt for more lucrative crops.
• FAPRI estimates the ACR program would mean a $5.07 per acre net loss on corn, an $11.75 net gain per acre on soybeans, and a $2.73 net gain on wheat per acre compared to the traditional program.
• Under the current parameters for the ACR proposal, producers would receive anywhere from $18 (peanuts) per base acre to $26 (soybeans) per base acre. That would be the case as long as per acre revenues held above trigger levels, as they would be in today’s market scenario. However, when the revenue portion of the program is triggered, payments would be much larger because of the fall in either yields or prices or both.
Summary:
The Average Crop Revenue program being considered in Congress for the 2007 Farm Bill would eliminate direct and countercyclical payments, and make changes in the loan program, in return for a per acre payment and a complex mechanism that triggers a payment when commodity revenue falls. The program would be voluntary for farmers who would have the choice of saying with the traditional farm safety net program. While the program is designed to save money, it does not begin until halfway through the tenure of the new Farm Bill, and the final year payments are made after the 2007 Farm Bill expires.
Posted by Stu Ellis at 12:37 AM | Comments (0) | Permalink
November 19, 2007
Schedule Your Appointment With Your Tax Advisor
With 6 weeks to go before the end of the calendar year, time is fleeting for taking action on farm business issues that may have tax consequences. Year end tax planning is always important, but higher commodity prices and added income, your appointment with a tax advisor may be all that more important this year. Let’s take a look at some of the agenda items in that discussion.
Agricultural tax specialist Gary Hoff at the University of Illinois suggests numerous tax saving tools should be considered by you and your tax advisor. Many of the primary tools are included in his Year End Farm Tax Planning Considerations.
Income Averaging. Hoff says three years of income can be averaged. Crop share land owners can use the tool, which is also applicable to partnerships and s-corporations. With increased income your tax bracket may also change, but remember the upper and lower limits change yearly due to inflation adjustments.
Hoff says if your income from the past two years was under the upper limit of the tax bracket, some of your income from this year can be applied at those lower taxable brackets. Another tool is to file amended returns for the prior years, reduce the level of income in some of those years, and make more room in the bracket to accept money from 2007 taxed at the lesser rate. If you go the route of the amended return, it must be filed by April 15 or 2 years from the date the tax was paid. But Hoff says income averaging will not reduce the self-employment tax.
Self Employment Tax. To reduce self-employment tax liability in prior years, you may have deferred income to the next year; but Hoff says the higher incomes in 2007 may cause your Net Earnings from Self Employment to exceed the maximum amount subject to the 12.4% “retirement portion” of the Self Employment tax. He says it is capped at $97,500 in 2007 and $102,000 in 2008. Earnings above that are taxed at the lower Medicare rate. But Hoff says shifting grain sales into 2008 and pre-paying 2008 expenses could end up increasing your 2008 tax liability since it has been added to the 2008 Self Employment tax earnings.
Section 179 Expense Deductions. Machinery purchases, which fall under the Section 179 Expense Deduction, may provide a deduction up to $125,000. Hoff says the new or used equipment must be delivered and ready to use by the end of the year, and the full deduction can be taken if your farm income plus wages total $125,000 or more. If purchases exceed $500,000 then the deduction is reduced dollar for dollar above that threshold. The Section 179 tool also applies to farm buildings, grain storage, and breeding livestock, as long as it was not purchased from a relative. Keep in mind it can only be applied to the cash payment above the trade-in value.
Section 199 Deductions. You have come to know and love the Section 199 Domestic Production Activity Deduction, and for 2007 the deduction is now 6% of the qualified income, which Hoff says will be even more valuable. (For a thorough discussion of Section 199, either consult a tax advisor or see Hoff’s newsletter.)
Retirement planning. We are beyond the Oct. 1 deadline for establishing an IRA for 2007, however a Simplified Employee Pension account can be established by the tax filing deadline for yourself or employees. The maximum is 25% of the compensation, but no more than $45,000, but is keyed to the self employment tax for employers. For a self-employed farmer, a Keogh plan can be established by the end of the calendar year with a contribution that is calculated. A ROTH IRA is an individual plan with a $4,000 maximum annual contribution, or a $5,000 maximum for those over 50 years of age. Those contributions are not tax deductible, but earnings are tax free.
At Ohio State, Farm Management Specialist Don Breece provides several tax planning tips in his monthly newsletter.
1) Livestock sales forced by drought can receive favorable tax treatment. Breece says any gain on the sale does not have to be recognized if replacement livestock are purchased within 2 years. And a federal disaster declaration can extend that to 4 years.
2) Regarding disaster payments and crop insurance indemnity checks for yield loss, typically they are reported in the year they are received for the cash basis operation. Breece says an exception to the rule allows a 1 year postponement in reporting a crop loss payment.
3) Wages paid to children are a farm expense, but not subject to social security if the child is under 18. Since the standard $5350 deduction is not taxable, wages exceeding that amount will be taxed, but at a lower rate.
4) Deductions for prepaid supplies cannot exceed 50% of deductible farm expenses. Livestock producers cannot prepay this year for the feed that livestock will consume next year, unless the business purpose is not tax related and the deduction does not materially distort your income. Cash rents can only be deducted in the year they apply.
Since numerous Cornbelt farmers will receive indemnity payments for either drought, flood, or aflatoxin problems, the entire issue of tax treatment of crop insurance might be ripe for discussion. Minnesota Extension specialists Robert Holcomb and Gary Hachfeld advise in their newsletter that deferral of crop insurance payments are usually easily deferred for cash basis farmers. However, there will be several pitfalls to avoid.
1) The payment must be for the destruction or damage to a crop and the farmer must suffer an actual physical loss. That means that indemnity payments for GRP or GRIP insurance are not deferrable, since they are based on a county average, and must be declared in the year they are received.
2) The same applies to indemnity payments for crop insurance that is revenue-based, such as CRC or RA with the harvest price option. Payments for a price or revenue issue must be declared in the year they are received. Holcomb and Hachfeld advise against being creative and trying to break out the yield portion of the payment for deferral to next year.
Summary:
There is still time left to consult with a tax advisor and work on year end tax planning. While some prepayments might be made along with deferred grain sales, the higher levels of revenue that some farmers are reaching may need some different tax treatments such as income averaging. There are many other tools available to reduce tax liabilities, such as Section 179 expense deductions and Section 199 production deductions, as well as creating retirement accounts that may have tax benefits. Declarations of disaster and crop insurance indemnities can also be delayed if weather and physical loss related.
Posted by Stu Ellis at 12:29 AM | Comments (0) | Permalink
November 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.
Farm Bill Update. The Senate’s consideration of the 2007 Farm Bill has become mired in political debate over which of 240 amendments can be considered, many of which have little to do with agriculture. In the House, a contingent of 22 Republican Members has co-sponsored a 1-year extension of the 2002 Farm Bill to continue current policy until the Senate can winch its way out of being stuck. Don’t expect a quick resolution.
The up and down USDA estimates of the corn crop are parallel to certain prior years says IL Extension’s Darrel Good. And using those trends, he says the 13.168 bil. bu. estimate in November could fade to 13.083 bil. in Jan. He bases that on the 153 bu. average yield fading to 152 bu./A which parallels the 1990 and 2006 crop forecasts. Both of those trended higher in the September report, then dropped in October and November.
Darrel Good expressed surprise at USDA’s lowering of its estimated feed use of corn in the November Crop Report, given the current record level of hog production. With year ending stocks forecast at 1.897 bil. bu., Good says if the crop is smaller than currently estimated and feed use larger than estimated, ending stocks may decline more. Read more.
World wheat buyers have switched from US to cheaper Black Sea markets says Kansas St. Outlook Specialist Mike Woolverton. But he says the US supply will be rationed over the next 7 months. He says USDA lowered Australian wheat estimates again because of quality, however he says the global wheat supply shortage eased a little with improved prospects for Argentine yields, however, the world supply is still at a thirty year low.
Woolverton urges farmers to watch the energy and financial markets which are linked to commodity markets. “The value of the dollar has dropped relative to other major world currencies recently. When the Fed lowered the interest rate, the dollar fell to an all-time low against the Euro. That caused global oil prices, which are quoted in US dollars, to jump to the mid-$90 range. Commodity prices rose, but the lower valued dollar made them seem less expensive to foreign buyers. US exports, including agricultural commodities, have been strong all year improving our trade deficit. That meant higher than long-term average prices for commodities sold by US agricultural producers.”
Woolverton says that may sound good, but he says if the dollar continues to weaken overseas banks and investors will shift holdings out of dollars to Euros, setting off an inflationary cycle that would hurt agriculture. He says, “It means that agricultural producers have another set of factors to watch as they make commodity marketing decisions.” Read his newsletter.
Don’t be fooled by TV commercials say Purdue entomologists who studied corn roots. “Side-by-side root rating comparisons of Bt-corn rootworm hybrids with different events (i.e., Agrisure, Herculex, YieldGard) are not possible. Plant genetics that determine a hybrid’s root mass, architecture, and rooting depth make direct root rating comparisons between the Bt events virtually impossible, since the plants are different in many ways, not just the presence or absence of Bt. Read their analysis of rootworm product performance.
The effectiveness is faltering for the gene that makes soybean varieties resistant to soybean cyst nematode. The gene is PI88788 and has been a 30 year veteran in 97% of the SCN resistant soybean varieties. But Purdue nematologist Jamal Faghihi says it is not working as well as expected since failure was first noted in 2005. He says Tennessee beans are no longer resistant; but Canadian beans are still resistant; and Illinois and Indiana beans are in between. He said beans with Peking and CystX genes resist SCN.
Test plot averages of 246 bu./A for corn and 70 bu./A for beans are enticing, but what varieties were planted? That is revealed in the latest IL variety trials website. Yield results are available on 311 corn hybrids, 544 soybean varieties that are glyphosate resistant, and 57 conventional soybean varieties.
When looking for seed corn, Ohio State, agronomist Peter Thomison says, “It may become increasingly difficult for growers to get good information on the performance of non-transgenic hybrids simply because there won't be as much information out there. From a cost standpoint, growers don't want to pay for features they may not need, but from a production standpoint, fewer transgenics will be available in the future."
It may not only be the two-legged critters who steal your nitrogen, but it may be stolen by a healthy crop of giant ragweed. Weed specialists at Wisconsin applied 180 lb of N to a field prior to planting corn. The giant ragweed emerged with the corn, and by the 16 in. level ragweed had removed 10 lbs of N. By the end of the season, giant ragweed had removed 58 lbs of N while the corn had accumulated 97 lbs. It has expensive tastes.
Your combine is beginning a long winter, spring, and summer nap, and probably well deserved. But it also deserves some TLC suggested by MO Extension’s Bill Casady:
1) Dust and chaff make good rodent bedding, so make sure it is eliminated.
2) A “clean” combine may still hold a bushel of grain, which is great rodent food.
3) Mice in the combine gnaw on wires, and you’ll wonder why that gauge won’t work.
4) Birds that like your combine for its grain will make a nest that is a fire hazard.
5) Before maintenance, remove the key and teach everyone around about the hazards.
6) Compressed air is a better choice than water to clean debris and dust and prevent rust.
7) Avoid allowing a high pressure washer to hit any seals and bearings on the combine.
8) Remove the battery, lightly oil the terminals, and store it with periodic charging.
9) Clean the air and fuel systems, drain the water, and use a stabilizer in the fuel tank.
Food prices are 4.4% higher this year than one year ago, thanks to a 15% rise in dairy prices and a 45% hike in egg prices. Purdue economist Corinne Alexander said energy costs are higher and food retailers are passing that onto the customer in the food bill. She also said prices of foods made with wheat are up 10%; and while the Thanksgiving turkey will cost about 94 cents more than last year, prices of the trimmings are lower.
Weekly hog slaughter remains above 2.3 mil. head for the fifth consecutive week says MO Extension’s Glenn Grimes, but he says prices are holding well despite cold storage and the pipeline being full. He believes prices may be pushed lower indicated by the futures market, but he says packers have handled record numbers quite well so far.
Overall meat demand is up says Grimes and colleague Ron Plain who compared Jan. through Sept. to 2006. Beef was up 0.2%, pork up 1.4%, and turkey up 2.3%. Broiler demand was down 2.3%. They report live fed cattle demand was up 3.3% and live hog demand up 3%. They attributed the demand for fed cattle to the increase in beef exports.
Cattle economist Dillon Feuz has urged cattle feeders to consider ethanol co-products, specifically WDGS at 30-40% of the ration and DDGS at 20-30% of the ration, “At these rates, it appears that average daily gain is increased and feed efficiency is also improved for cattle on finishing programs. There does not appear to be much if any impact on marbling and yield grades from feeding these levels of distillers grains in the diet.”
“The concern among cowboys,” says Feuz are the politicians who try to beat each other at raising the renewable fuels mandate, which he thinks will be 15 billion gallons from grain, which means 5 bil. bu. of corn, equal to what is being fed to livestock, “Corn prices will be higher than present levels. All other grain, oilseeds, and hay prices will likely be higher. The feedlot industry will adjust to higher grain prices, and feeding of DDGS will help. But, calf prices will likely be lower.” Read his newsletter.
If you are buying hay, weigh some bales to make sure you are getting what you pay for says Purdue beef specialist Ron Lemenager. And he says that is particularly true for those who buy baled corn stalks. A 1,000 lb.-sized bale might only weigh 800 lbs. and the cattle will only eat 60% of it, so the bale has only 480 lbs of usable feed value. But he said using a grinder will improve consumption and digestibility of the corn stalks.
Coincidental to the override of the veto of the Water Resources Development Act, which will finance renovation of locks and dams on the Mississippi and Illinois Rivers, MO economist Seth Meyer says lock failure on either would cost a half billion dollars to corn and soybean producers from diminished prices. Meyer says, "When you shut off the river, you push down prices in Iowa for corn and push prices up at the Gulf."
Meyer’s study examined Lock 25 north of St. Louis and the LaGrange Lock on the Illinois River. He says over 60 million tons of goods, valued at more than $29 bil. went through the locks in 2005 and a failure of either increases the cost of products all the way from Iowa to the Gulf. But he says lower grain prices at upper Midwestern locations means farmers may store grain to increase demand, anticipating the river will reopen.
Posted by Stu Ellis at 3:11 AM | Comments (0) | Permalink
November 15, 2007
Crystal Ball Gazing For 2008
It is crystal ball time. You have had a relatively good year with yields and prices, and while not everyone was able to come to the party, the overall ag economy benefited from 2007. 2008 will bring a new Farm Bill, higher cash rents, and lower profit margins. But from there, what will the farm economy resemble?
Managing risk, developing a marketing plan, and estimating a budget are all challenges for even a strong farm operator. However, some keys to success come from the agricultural economists who study those factors more thoroughly than farm operators have the time to read and research. The Purdue Agricultural Economics Department just released its forecast for 2008, and you will be among the first to see it.
US economy. Larry DeBoer says the economy will continue to expand but has slowed. The weak dollar has spurred exports but economists are debating whether the housing and mortgage problems will spread to the rest of the economy. GDP will be above inflation, unemployment will rise slightly, interest will remain steady along with inflation. He predicts a 20% chance of a recession.
Agricultural trade. Philip Abbott expects another record year with farm exports reaching $79 billion, but with imports climbing above $70 billion. Poor weather abroad has helped US wheat export values, but overall exports have been helped by a strong global economy and a weak US dollar. The latter is expected to continue, due to the high trade deficit. More than two-thirds of the trade expansion has resulted from higher commodity prices.
Farm Bill. Allan Gray reminds us the House passed its version in July, which changes very little from the current US ag policy of direct and counter cyclical payments and a loan program. Both the House plan and the Senate offer an alternative that provide a safety net based on average crop revenue. Payment limits are reduced significantly in both versions, and conservation programs are increased more in the Senate than in the House. Both versions provide funding that will benefit specialty crop production.
Food prices. Corinne Alexander believes consumers will pay an additional 3.5 to 4.5% for food, for both 2007 and 2008, and reports that food prices rose over the past year more than the annual average for the past 10 years. Higher prices are due to livestock operations paying more for feed, strong domestic and foreign demand for food products, higher energy costs, and adverse weather.
Milk prices. Mike Schultz reports the all time record for the all milk price was set at $21.70 this summer, resulting in increased dairy profits. But he says the strong demand will keep the price higher in 2008. Higher feed costs have pinched profits, but the global demand for dairy resulted in more revenue. The higher price of milk should result in 2.6% more milk in 2008.
Beef cattle. Chris Hurt says reduced supplies mean higher prices for the balance of 2007 and through 2008. The breeding herd dropped slightly and fewer heifers were retained. With stable supplies and a growing population, per capita consumption will be down. With high prices for finished cattle and a large corn crop, feeder cattle markets will also be strong. Profits look bright for cow-calf producers with little interest in expansion and growth of exports.
Hogs. Chris Hurt said the 3% increase in pork production in 2007 will be followed by 2% in 2008 along with a slight pullback in prices. The stability in pork prices extends back to 2005. Production costs are becoming more volatile with higher feed prices which have eliminated profit margins. Breakeven prices are anticipated next summer.
Corn. Chris Hurt says total usage will grow to 12.6 billion bushels, out of the 13.3 billion produced. Ethanol will use 25% of the crop and exports will reach 2.35 billion bushels due to tight world stocks. US stocks will be nearly 2 billion with an average price of $3.20 per bushel. High costs will narrow margins for ethanol producers and refineries will slow down.
Soybeans. Chris Hurt expects the 2007 carryover to diminish with the smaller crop. The crush will remain high as large numbers of livestock demand soybean meal and bio-diesel producers demand soybean oil. The result is fewer beans being exported. Soybean acreage will grow 8 to 10% in 2008, but tight supplies will keep prices around $10.
Wheat. Chris Hurt says below normal yields in most wheat production areas will keep inventories at 30 year lows and prices at record highs, reflecting its transition from a feed to food grain. The weak dollar keeps the demand high for US wheat. The US average price for new crop wheat will be $6 to $6.50 per bushel. Producers with the capacity to double-crop their soybeans behind wheat are urged to consider that practice.
Crop input costs. Alan Miller forecasts higher production costs, but also expects supplies to be strained in some areas with unusual cropping patterns. Fertilizer will be up 4 to 20% in 2008 resulting from higher natural gas prices. Chemical costs will be up 2% to 6%. Seed with biotech traits will be up 15% to 25% in price. Diesel fuel will be up 5% in cost. Crop insurance premiums will be comparable to 2007 for corn, but higher for soybeans. Machinery prices will be up 5 to 6% and wages up 4 to 5%.
Land leases. Luc Valentin believes the ability to pay rent must be taken into account when signing a lease because higher crop prices and higher production costs will create thin margins. Leases will be renegotiated to provide higher payments to land owners even with financial uncertainty. Land owners have the least risk with a cash rent lease should not expect more than a crop share land owner with higher risk.
Land prices. Craig Dobbins says land values have moved sharply higher with a 16.6% jump in the average price of land over the past year. For a tenant to have the same chance of return, his risk premium needs to be twice as large as it was in the period of 2001 to 2005. Land prices will continue to rise another 5% to 15% in 2008, unless higher interest rates cause more owners to sell than there are currently.
Finance and agribusiness. Mike Boehlje and Chris Hurt say the financial performance of agribusiness firms has been strong in the past year and should not fade in 2008. Farm equity improved in 2007 with the help of higher land prices, but the greatest risk for farmers in 2008 is the reduction of margin due to higher rents and crop production costs. Survival will be dependent on managing downside risks and leaving an opportunity for favorable outcomes.
Posted by Stu Ellis at 1:22 AM | Comments (0) | Permalink
November 14, 2007
Ethanol: Taking A Look At The Big Picture (Part 1)
For more than 20 years, the members of the National Corn Growers Association, its state affiliates, and non-affiliated corn farmers across the Midwest have made impassioned pleas to Congress, their state lawmakers, and anyone else they could find who might become an ethanol advocate. They won. But the emotions that have run as deep as a subsoil tillage tool are being challenged by a variety of hard economic realities. Will corn-based ethanol survive?
Ethanol has become one of the first successful alternative fuels available for nationwide use, not only displacing 10% of gasoline, but providing EPA mandated oxygenates in the fuel. “But without the large increase in oil and gasoline prices that has taken place since 2002, we would not be experiencing today’s ethanol boom.” That’s the analysis of Bob Hauser, agricultural economist at the University of Illinois, who heads the Agricultural Consumer, and Environmental Economics Department which has just released an extensive economic evaluation of ethanol and its impact on the US. Pointing to the rise in petroleum prices in the past 5 years and the corresponding ethanol production that began about the same time, Hauser says the price of corn, subsidies, trade barriers, and renewable fuel policy have also helped the surge in ethanol use.
Currently 131 ethanol plants are producing 7 billion gallons, and 82 more are in construction that will produce an additional 6.45 billion gallons; all of which would consume 4.8 billion bushels of corn. Hauser’s colleagues “ran the numbers” on ethanol and using $4 corn with a 12% rate of return, they calculated the break even cost for a new plan would be $2.34 per gallon of ethanol, and at $2 corn the break even price declines to $1.62. But the economists say those prices are also dependent upon the values of co-products, governmental subsidies, and the technical abilities of ethanol as a motor fuel.
The economists contend the 51 cent per gallon federal blending subsidy has been a significant driver of ethanol demand, and if it were eliminated, then the break even level for ethanol production would be the same for both $2 and $4 corn. But Hauser says, “The effect of the subsidy is to create a breakeven ethanol price for $4.00 corn that could only be achieved with $2.00 corn without the subsidy.” Hauser says if the long term expectation for the price of oil is to be $60, then the implied break even price for ethanol refiners to pay for corn is $3.50, and with the significant demand for ethanol, then the equilibrium price for corn will be $3.50 per bushel.
Such a price level for corn would be a 50% increase from the long term equilibrium price that has been $2.40 since the mid-1970’s. And Hauser’s colleagues say that will have an impact on livestock production and the export industry, as well as production of competing crops that do not have the same return per acre, and will go as far as contributing to changes in land values.
The Illinois economists say there are numerous other ethanol factors impacting crop prices in addition to the price of oil, including ethanol blending subsidies, the tariff on imported ethanol, the 10% limitation in blending, foreign demand for US corn, and the production of ethanol from feedstocks other than corn. While those will impact the equilibrium price of corn and the break even price of ethanol, the economists believe the long run price of oil will have the greatest impact on ethanol.
Along with ethanol, a refinery also produces distillers’ dried grains with solubles, commonly known as DDGS. The Illinois economists estimate that 82% of DDGS will be used in cattle feed, 7% by hogs, and 11% by poultry. The current magnitude of production indicates livestock production is being drawn closer to ethanol plants so far in the western Cornbelt, but not yet in the eastern Cornbelt.
The Hauser report also examined other feedstocks for ethanol, such as switchgrass, corn stover, and miscanthus. None of those feed the “food versus fuel” debate, less land is consumed, marginal lands can be used, and there are specific environmental benefits not existent with corn-based ethanol.
The University of Illinois report is extensive and too large to address in a single farm gate posting. Salient portions of the report will be explored over the next several weeks.
Summary:
No one questions the value of ethanol in raising commodity prices following more than two decades of ardent support by corn farmers. However, the relatively sudden demand has been aided by the price of oil, and a prior foundation that included governmental policies. Ethanol has helped corn to a new equilibrium price of $3.50, which will have impact on livestock production, competing crops, land values, and numerous other factors. Ethanol production has also sparked changes in the Cornbelt, including drawing livestock production closer to ethanol plants which produce DDGS. The next generation of ethanol may be oriented away from corn and more toward grasses and corn stalks.
Posted by Stu Ellis at 12:20 AM | Comments (0) | Permalink
November 13, 2007
With a $1 Billion Freeze And A Devastating Drought In 2007, What Will 2008 Weather Bring?
Everyday you listen to the weather forecast. Your family wants to know how to dress appropriately. You want to know how your revenue stream will be impacted. Knowing what the weather will be can make a considerable difference in your management of risk and the way you operate your farm. Most of the Cornbelt had a challenging year, so let’s take a look at what to expect turning into 2008.
Late last month Brad Rippey briefed the US House Agriculture Committee. Rippey is a meteorologist for USDA’s World Agricultural Outlook Board which estimates world supply and demand statistics as outlined in Monday’s posting on the farm gate. Noting that it had been 20 years since the 1988 drought that stretched coast to coast, Rippey said there had been many regional droughts that have impacted crop production.
At the outset of 2007, the drought in the Central US was suddenly washed away with flooding, which hurt the winter wheat. And in the Southeast the record warmth in March helped plant the crop early, only to be hit by record cold in April that hurt wheat, corn, fruit, specialty, and nursery crops. Freeze damage extended throughout the Ohio Valley westward into the Great Plains. Rippey said the April freeze will be the first such freeze outside of the nation’s citrus belt to reach the billion dollar damage benchmark. Coming out of the freeze, the drought in the Southeast intensified.
Rippey said, “The US corn crop for the most part experienced good weather during the 2007 growing season.” Adding that yields will be a record high for corn, he noted soybean yields will be lower than 2006, but said the smaller crop is not totally blamed on the weather. “While the eradication of drought in the Central and Southern Plains resulted in generally improved wheat yields, rains were excessive in some areas.”
For the winter and spring, Rippey told Congress that drought conditions have lingered across the Southeast and much of the west, causing concerns about water supplies approaching the 2008 cropping season. As an example, Rippey said the reservoirs in California are only at two-thirds of typical storage capacity.
The recent development of a La Nina has a significant implication for US weather according to Rippey. A La Nina is a cooling of the Equatorial surface waters in the Pacific, which disrupts the Jet Stream across the southern states, resulting in drier than normal weather from autumn into spring. He says with the existing drought, the lack of moisture could be serious for winter wheat in the Southeast. But he said extending the drought, which began in 2006 in the Southeast all the way into 2008, would lead to summer crops being planted in dust. While the Southeast’s contribution to wheat is minimal, is produces 25% of the cotton and 66% of the peanuts.
Rippey said soil moisture is favorable in the Southern Plains and the winter wheat should be well established. But the National Weather Service has issued a drought warning for western Oklahoma through January. Another La Nina impact will be warmer and wetter weather in the Ohio Valley and the Northwest. He’s expecting a lack of persistent frigid weather which will ease the stress on livestock and result in some disease and pest issues in 2008. But the accompanying moisture in the Ohio value would help small grains and ease drought conditions. Rippey said the impact of La Nina will diminish in the spring months, and the latest March to May outlook calls for the wet conditions to subside in the Ohio valley.
Summary:
The April freeze earlier this year may have caused as much as $1 billion damage; but it came in the middle of a drought in the Southeastern US which continues to persist, and without some winter moisture relief, the Southeastern wheat, cotton, and peanut crops could be in jeopardy. A La Nina will keep the Ohio Valley warmer and wetter than usual this winter, but it should diminish during the spring months.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
November 12, 2007
It's A New Day, Do You Know Where Your Markets Are?
South American soybeans. Chinese corn imports and exports. Australian wheat production. Korean beef demand. All are headline issues that move the US commodity market and directly affect the prices that farmers receive. Remember the public service announcement that asked “It’s ten o’clock; do you know where your children are?” If you are marketing commodities, you should know the international dynamics involved.
Along with the November Crop Report from USDA, the World Agricultural Outlook Board released its World Agricultural Supply and Demand Estimates for the month. Included in the lengthy report were global assessments on grains, oilseeds, and livestock, as they would impact the US market.
Wheat: Domestically, USDA kept most supply and demand numbers static, but did forecast 5 million more bushels imported from Canada. The season average price was refined a bit and forecast at $5.90 to $6.30 per bushel for the marketing year. Globally, production is expected to increase with the help of better crops in Argentina and China, but Australian production was cut slightly because of continuing drought. World consumption is expected to increase as the result of higher production, despite low supplies and high prices in other parts of the world. The world stocks are being rebuilt and USDA says they are 2.8 million tons larger than in October. However they are still the lowest in 30 years.
Coarse grains: Domestically, corn feed use during the year and carryout next August were lowered, with a resulting rise in the season average price to $3.20 to $3.80 per bushel. Sorghum production was raised, but higher export levels more than offset it, with a resulting decline in ending stocks. The season average price will be $3.00 to $3.60. Barley exports were raised in conjunction with higher global demand, while domestic feed use of barley was reduced. The average barley price will be $3.55 to $4.15. Globally, coarse grain supplies were estimated slightly higher, as lower corn production and higher production of other grains balance out. Chinese production was estimated 2.0 million tons more on more acreage. More corn was also found in Europe and the Ukraine. Subsequently, there will be increased international trade in coarse grains with the biggest increases going to Europe, Canada, and Japan. World ending stocks should remain unchanged for coarse grains.
Oilseeds: Domestically, soybean ending stocks are estimated at only 210 million bushels next August. Current year production estimates have declined because of lower yields. However, total oilseed production is up because of larger crops of peanuts and cottonseeds. The season average price for soybeans is $8.50 to $9.50, with soybean meal prices estimated $15 per ton more than the October estimate. Soybean oil prices have recently exceeded 41.5 cents per pound, a 15% climb in the past month. Globally, oilseed production is down because of foreign production declines for rapeseed and cottonseed, despite more sunflower seed production. In the palm world, global production is up as a result of more crops in Indonesia. Global ending stocks are estimated to be lower than October, resulting from lower soybean stocks in Brazil and China. Global vegetable oil stocks are up from increased palm oil in Indonesia.
Livestock, poultry, and dairy: Domestically, mean production will be up in 2007 from higher slaughter rates in cattle and hogs. Broiler production is also up and hatchery numbers are also increasing. Poultry is up so much, it offset lower beef production. Pork production will be off slightly because of higher feed costs. 2008 exports will be lower resulting from a suspension of trade with Korea until new protocols can be agreed upon. The weaker dollar and lower prices will help pork exports increase. Prices for cattle are weakening due to a larger supply, which parallels the pork market. Milk production is expected to be down in 2008, despite slowly growing production. Imports of milk products will be down due to the weak dollar and tight supplies elsewhere. The all milk price that will average out between $18.95 and $19.05 in 2007 should be in the $17.70 to $18.60 range for 2008.
Summary:
While US commodity production and supplies are generally known around the Cornbelt, frequently international supply and demand is not know, but can have a significant impact on the market value of US commodities. Wheat is still at a 30 year low in global supplies, but stocks are building slowly. Coarse grains, such as corn and other feed grains, are seeing increased demand internationally because of the shortage of feedwheat. While ending stocks will remain unchanged, average prices are climbing. Oilseed production will be down in the US, with tight ending stocks, but internationally total oilseed production will be up with the help of Indonesian palm oil. In livestock trade, meat supplies are increasing and prices are decreasing domestically.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
November 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.
USDA’s November Crop Report forecast US corn production at 13.167 bil. bu. which is 1% under the October estimate and slightly under the market expectation of 13.261 bil. bu. Carryover next August was estimated at 1.897 bil. under market expectations of 1.932 bil. Feed use was lowered 50 mil. bu. and other uses were retained from October. USDA raised the season average price by 30¢, increasing the range from $3.20 to $3.80.
USDA’s November Crop Report nudged downward its soybean production estimate from 2.598 to 2.594 bil. bu., compared to market expectations of 2.606 bil. bu. Usage estimates were retained and the carryout next August was lowered from 215 to 210 mil. bu. The season average price estimate was raised 65¢ to a range of $8.50 to $9.50.
The short crop from the 1988 drought pushed NOV beans to $10.46, the only time that contract has traded above $10 until this week, says Extension Marketing Specialist Darrel Good. While soybean futures have risen, so has the river basis (43¢) and interior IL basis (20¢) in the past 2 weeks. And Good expects the basis to continue to strengthen.
Driving the bean market is soybean oil which has reacted to strong exports and high crude oil prices. Darrel Good says USDA had expected a 24% decline in soybean oil exports for the current marketing year, but so far they are 22% larger than last year. He says high soy oil prices have kept biodiesel margins thin, even with high fuel prices.
With low soybean stocks, Good says more acreage will be needed in 2008, but forecasts will be inaccurate until South American production is known. With new crop futures high, some producers will be committing acres, but he says new crop corn is still more profitable than beans. The new highs in beans offer marketing opportunities says Good, who expects more volatility in the months to come. Read more in his current newsletter.
Non-land costs for 2008 corn could be as high as $380 per acre on good soils say Extension economists Gary Schnitkey and Dale Lattz, which is up $42 from 2007. The increase is a result of higher input costs, rent, and crop insurance. The result is the expectation that break-even prices for corn could be as high as $3.00 per bushel.
Non-land costs for 2008 soybeans could be as high as $228 per acre on good soils say Illinois economists Schnitkey and Lattz. Higher input costs are the cause and may push the break-even cost for soybeans over the $8 mark. Visit their farm economics newsletter.
Diesel fuel prices, as indicated by futures contracts, are 38% higher than they were a year ago, and that difference will increase through next year. Prices throughout 2008 are expected to be higher than comparable months in 2007, says Kansas State economist Kevin Dhuyvetter.
Cattle feeders have been seeing some red ink this fall, says Extension’s Shane Ellis at Iowa State, he expects that to continue until the second quarter of 2008. “Producers using a position on the futures market would have their best chance of locking in a profit from April to June. We also see from this comparison the steady to slightly bullish year over year trends in the Iowa fed cattle market.” He says uncertainty in the 2008 corn crop have kept the expected breakeven price for fed cattle well above expected sale values.”
Pork producers are also seeing red ink, says Shane Ellis as the hog market softens. “Losses are expected to continue until March and even May, but the futures market is forecasting added strength next summer. Corn prices in the next year will continue to be a question mark, but corn futures next fall do not bode well for production costs. That said, any moderation in feed costs will add to the hope of net profitability again in 2008.”
Economics are going against Canadian pork producers, says MO economist Glenn Grimes, “The Canadian dollar earlier this week was worth about 5% more than the US$. This means the price received for hogs in Canada has declined about 35% relative to what price the US producer has received in last few years. We expect the Canadian dollar to continue strong relative to the US$ and Canadian hog producers are expected to continue to reduce the size of their hog herd.”
Livestock producers in areas with aflatoxin problems should have all droughty corn tested before feeding. The maximum levels established by the government are 300 ppb for finishing beef cattle, 200 ppb for finishing swine over 100 lbs, 100 ppb for beef breeding cattle, breeding swine, and mature poultry, and 20 ppb for other animal feeds. Dairy cattle rations should not contain more than 20 ppb to avoid milk contamination.
With nearly half of 2008 corn containing Bt toxins to control corn borers, entomologists are wondering if they are becoming an endangered specie and whether to budget for continued surveys. Apparently the finding is widespread. The 2007 IL survey indicated 10.7% of corn plants were infested and there were only 13.4 larvae per 100 corn plants.
But the habitat for European corn borers will increase as more acres of corn are planted. Extension entomologists Mike Gray and Kevin Steffey say with more Bt corn, the ECB mortality should increase, with refuge plantings. Without the required refuges, the potential will increase for corn borer populations to develop resistance to Bt corn.
Soybean aphids have been a rare visitor to traps this fall, which may be an indication that populations are low and 2008 will be a year in which soybean aphids are not a serious problem. But Extension’s Kevin Steffey says the Asian lady beetle, which is an aphid predator, has not been that common, which may also predict low aphid numbers.
Did you have greenstem in your soybeans, and if so, how was the yield? Ohio State’s Jim Beuerlein says the drought caused soybean plants to digest their leaves to fill pods and consequently the stems remained green while there was still water movement. While greenstem was a curse during harvest, it indicated that yields were better than expected.
Harvesting throughout the day puts grain in the bin at a wide temperature variation, which MO Extension engineer Bill Casady says is both good and bad. Dry, warm grain dries out the wetter grain, and the wetter, cooler grain cools the hotter grain. But he says the warm, moist grain is a haven for fungi, so the cooler the grain, the better for storage.
In managing the temperature of stored grain, Casady recommends measuring air at the top of the grain before starting a fan. Run the fan continuously until the temperature drops 10-15 degrees. Repeat several weeks later as needed until the grain temperature is 35-40 degrees. He says that will extend the shelf life of the grain for longer storage.
If you have harvested some drier than market moisture content grain, Casady says you may wish to run fans selectively from about dusk until dawn to cool the grain. Very little or no increase in moisture content will occur, but the grain will cool to more acceptable levels quickly. Read his recommendations.
Temperatures during corn maturity, then harvest, then storage created the potential for blue-eye mold says Purdue’s Dirk Maier, which he says is an indicator of something that went wrong during the storage process. It grows at lower moisture and survives cooler temperatures than other molds and he says look for steam or odor coming from the bin.
Your field loss germinated quite well in corn stubble and could be good temporary forage, if your cattle are eating hay, other grasses or corn stalks. But pure volunteer corn will have too much nitrate if it is growing in droughty areas. IL Extension Livestock Specialist Dean Oswald says get the corn tested for nitrate content if in doubt.
The lush crop of volunteer corn could be a detriment to any crop of wheat that might follow it or be planted nearby. IL Extension pathologist Loretta Ortiz-ribbing says it is a food source for the wheat curl mite that carries wheat streak mosaic virus. Weather has been good for mite survival along with corn leaf aphids which carry yellow dwarf virus.
If you remember low prices after the export-oriented 1996 Farm Bill, Extension’s Daryll Ray at the Univ. of TN says you won’t like the proposed Average Crop Revenue plan in the 2007 Farm Bill. The policy specialist says it is based on ethanol and exports, just like the 1996 legislation, which preceded a commodity price decline. Ray says ACR is good with high prices, but not with low prices. Read his newsletter.
The Average Crop Revenue provision in the Senate’s Farm Bill is designed to level out per acre revenue says Daryll Ray. “The ACR provides a relatively high income safety net if prices or yields drop from current levels for one year or so. If prices fall and remain low for a string of years, the ACR safety net is quickly lowered to ground level.”
Posted by Stu Ellis at 12:02 AM | Comments (0) | Permalink
November 8, 2007
Will Your 2008 Income Cover Your 2008 Outgo?
Can high prices and high incomes in 2006 and 2007 give way to lower prices and lower incomes in the near future? With the prospect for higher production costs, in 2008, there is an even greater chance for profit margins to be squeezed, and profits become a small percentage of total farm budgets which have grown significantly.
In the euphoria of $4 corn and $9 soybeans, there may also be the depression of profit margins that have nearly evaporated. Even without the flooded fields of the western Cornbelt and the droughty fields in the eastern Cornbelt, farmers who enjoyed near perfect production this year will be financially challenged say University of Illinois ag economists Gary Schnitkey and Dale Lattz. Their recent publications on financial prospects and on 2008 crop budget prospects will lead many farmers to wonder why their bank accounts do not reflect the results of record high prices.
Crop prices that began to climb late in 2006 provided farmers with the stairway to net incomes in excess of $100,000 for farms enrolled in Illinois Farm Business Farm Management (FBFM) which assists farmers with records and taxes. And 2007 is expected to be similar, thanks to high prices and above average yields. These levels have never before been seen, but Schnitkey and Lattz are concerned that such income levels are vulnerable to declines in commodity prices as supply and demand conditions change.
Additionally, production costs have increased. The Illinois economists are projecting $380 per acre cost for corn and $228 for soybeans. On top of production costs, they believe cash rents will average $40 more per acre for 2008 than they were in 2006. That magnitude of production costs will require corn prices above $3 and soybean prices above $8 to break even, even with exceptional yields. Their fear of commodity prices near those benchmark levels, resulting from routine price variations, point to net farm incomes well under the past two years, and even below the $50,000 levels seen just 5 to 10 years ago.
While market prices are beyond the controls of farm operators, production costs can be controlled to some degree, and economists Schnitkey and Lattz have calculated the non-land costs of corn and soybean production in the northern part of Illinois, which has relatively good soils. The $380 per acre cost they project for corn is a $42 increase over 2007. $38 of that comes from the direct costs of seed, fertilizer, pesticides, drying, storage, and crop insurance. Their $228 projected cost of soybean production in 2008 is up $18 from the current year, as the result of the direct costs previously noted.
In addition to the direct costs for corn, there has been a $2 increase in machinery and power costs up to $75 and a $2 increase up to $57 per acre for other expenses, including labor, building rend, depreciation, insurance, and non-land interest. Increases are similar for soybeans.
To cover those costs and break even in the farming operation, Schnitkey and Lattz say farmers will need to obtain higher market prices. Break even levels for corn have risen $ .60 per bushel in just the past 5 years. However the break even price for soybeans has not increased quite as much because of the soybean production costs. At a $225 cash rent, the break even price is $3.40 per bushel for corn, and $8.88 for soybeans. While current commodity markets are offering high prices for 2008 production, any decline to typical levels of $2.40 for corn and $6 for soybeans will create low and negative income for many farms.
Summary:
Despite high commodity prices, farm incomes face financial challenges because of higher production costs and higher cash rents that are being paid. Net incomes that have been over $100,000 for the past two years may well decline to $50,000 or less if commodity prices return to more normal levels. The higher production costs are being seen for both corn and soybeans, and will require commodity prices above $3 for corn and $8 for soybeans to break even for many farms, even with good soils and exceptional yields.
Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink
November 7, 2007
Corn Production Needs Extra Evaluation Because Of Nitrogen Costs
Beans or corn? Corn or beans? Which will dominate your 2008 cropping plan? If revenue per acre is relatively equal, will Asian rust tip the scales toward corn? Or will rising nitrogen prices tip the scales toward soybeans? The spread of rust may be harder to predict than nitrogen prices, since you know they are going up.
During the past 7 cropping seasons the composite price of fertilizer climbed 113%, and during that time, the price of ammonia rose 130% from $227 to $523 per ton says USDA economist Wen-Yuan Huang in the November issue of Amber Waves. Higher prices are due to increasing demand, and USDA says with global demand up 14% since 2000, US imports of nitrogen will be more costly. It has to be imported because the US supply is declining due to higher costs for the natural gas used to make ammonia. Ammonia production has declined 44% since 2000, while imports have increased 115%. That balance, says USDA, will make corn growers more vulnerable to changes in global supplies of nitrogen and the natural gas market.
This is happening at the same time corn production increased to keep up with the demand for ethanol, and with the demand for additional nitrogen, it will greatly impact the cost of corn production says Iowa State ag economist Don Hofstrand in the November issue of Ag Decision Maker.
Hofstrand says natural gas contributes 80% of the cost of producing ammonia, and ammonia prices have closely paralleled natural gas prices since 2000. Since then the number of ammonia plants declined from 40 to 25 and production capacity declined from 20 to 13 million tons per year. To make up for the shortfall imports increased and in 2005 represented 80% of the ammonia used in the US.
Prices of natural gas and crude oil usually parallel each other and petroleum costs are well known to everyone. Additionally, supplies of natural gas are located in the same nations with large oil reserves. Hofstrand says our attempt to become more energy independent with ethanol may link us tighter to the Mideast if natural gas demand increases for nitrogen fertilizer production. Alternatives include the Caribbean island of Trinidad and Tobago, as well as Venezuela, but production capacity is not well developed there.
Until then, Iowa State’s Hofstrand says the cost of ammonia will be an element of uncertainty to corn production. USDA says the current US ammonia industry is to make and deliver the product as needed to minimize the cost of holding inventory, and any unexpected problem will result in a shortage of supply and higher prices. USDA says the US has 3 million tons of unused ammonia production capacity, but it is uneconomical produce even at current prices, and it would take higher ammonia prices to bring it into production.
Summary:
Farmers making cropping plans for 2008 should balance revenues with production costs, but the cost of nitrogen for corn prod