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January 30, 2009
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.
Soybean exports continue to climb, says IL Extension’s Darrel Good, and USDA is forecasting nearly as many shipments as last year, which would put sales at 1.1 bil bu. Good says the rapid pace of Chinese purchases has pushed totals 39% above 2008. He says to reach USDA estimates, shipments will not have to match last year’s pace. Dry weather in Argentina has reduced its crop potential, reducing US export competition.
Corn exports, says Darrel Good are at 617 mil. bu., which is 412 mil. behind 2008 at this date. That results from declining demand from major buyers, which may be buying corn in other global markets, and feeding low quality wheat from other nations. USDA’s corn export forecast is for 1.75 bil. bu., but Good doubts the goal will be reached. Read his newsletter.
Same stocks, but a new price level, says Extension Specialist Jim Hilker at Michigan State. “The bottom line is that expected 2008-09 ending stocks were put at 1.790 bil. bu., up 316 mil. from the Dec estimate. The 1.790 bil. is 15% of use, in the old days an ending stocks-to-use ratio of 15% would have meant a $2.25 price. But the increase in inelastic ethanol demand, and a floor caused by the ethanol mandates, has changed the corn pricing model.” Read more.
Wheat stocks are plentiful, says Jim Hilker at Michigan St. “With the projected ending stocks-to-use ratios for both 2008-09 and 2009-10, supplies are projected to be more than sufficient the next two years. However, while the projected US 2008-09 ending stocks of 655 mil. bu. are ample, and the 2008-09 projected world ending stocks are much improved from last year, projected 2008-09 world ending stocks are still relatively tight.
Mike Roberts’ market observations from VA Tech contain grain selling strategies:
1) Lack of technical strength is a contributing factor keeping corn under $4.00/bu. Wait and see where these prices are headed before pricing any more of the 2009 corn crop.
2) Forecasts for better weather in Argentina and producers did not seem to be turning loose of many beans. It might be a good idea to price binned soybeans on upticks.
3) Argentinean government was reportedly blocking exports to protect food supplies amidst an ongoing drought. It would be good to hold off pricing any more wheat.
Planting decisions should be based on market signals, says MO Extension specialist Melvin Brees. He recalls the 2007 January corn/soybean futures price ratio near 1.9/1, which favored corn. But the 2008 signal had a January soybean corn futures price ratio of 2.5/1 that favored soybean production. Corn acres grew in ‘07 and soybeans in ’08. Read more.
Brees says, On Jan 15 “March corn of $3.65 and beans $9.95 (put) the bean/corn price ratio near 2.7/1. When compared with the last two years, this appears to heavily favor soybeans. However, nearby (March ‘09) corn futures are discounted when compared with new crop (December ‘09) futures prices. This “carry in the market” suggests weak nearby demand and a market that is willing to pay more for corn next year.”
Brees says, “In contrast, the soybean market is inverted with nearby futures prices about 35 cents higher than new crop (November ’09) futures prices. This signals stronger nearby demand for soybeans with less concern about next year’s crop supplies. Comparing new crop corn futures price ($4.11) and soybean prices ($9.61) (Jan 15), the soybean/corn price ratio is about 2.3/1. For much of the Cornbelt, this price ratio is probably a neutral signal, unless corn production costs are especially high.”
Brees leaves some final words of wisdom. “(For either corn or soybeans), profits are likely to be harder to come by in 2009 than they were in 2008 and wishful thinking should be avoided in setting price goals. During an uncertain economic climate, capturing potential profits when they are offered may be important.
Fertilizer prices are stabilizing, but vary widely at dealers and farm supply companies according to Purdue economist Bruce Erickson, who says the US demand is at the mercy of whatever happens in other parts of the world. He says 47 % of the N and 45% of the K needed for use in the spring of 2009 came into the US during the period of lower prices.
Fertilizer delivery could be a problem, since less than the usual amount was applied in the fall, and more will have to be transferred into retail dealerships, which may have problems getting timely deliveries this spring. That is the thought of Purdue’s Erickson, who says the delivery network will be strained with a high demand for spring fertilizer.
Fertilizer pricing depends on the dynamics in the price of corn between now and planting time says Purdue economist Alan Miller, who adds that nitrogen prices have returned to levels that would bring natural gas prices into play again. He says natural gas prices have been relatively low, but if they increase, so does the cost of nitrogen. Read more.
Urea and UAN prices have declined slightly to become more competitive with anhydrous ammonia, causing some farmers to question the value of one over the other. Purdue agronomist Jim Camberato says urea can be applied faster than ammonia, but is typically not as good a source of N. He says Urea is often inferior to UAN when surface-applied, but equivalent or slightly better than UAN when incorporated into the soil. Read his fact sheet.
Cut your production costs with help from audio, video, and fact sheet resources provided by NE Extension. The frequently updated website offers efficiency improvements on cropping systems, machinery management, production management, irrigation, pest control, fertility, and harvest and storage issues. The site also features production budgets for 11 crops.
Mark your calendar. USDA’s deadline is February 27 to sign up for any financial assistance from various crop disasters between 2005 and 2007. Producers with crop or pasture damage must complete an FSA-840 application at local FSA offices.
With a 35% drop in dairy prices, dairymen are urged by OSU dairy economist Cameron Thraen to sign up for the Milk Income Loss Contract (MILC) program begun in the 2002 Farm Bill. He says the record high returns for the past two years are history, and the MILC program can provide a counter-cyclical type of payment during the grim 2009 milk economy, if you sign-up one month before you plan to enter the program. Read more.
If you need DDGS, go to Indiana, says Purdue economist Frank Dooley. He says the Indiana ethanol industry will reach a 1 bil. gal. capacity and those ethanol plants will produce enough distillers’ dried grains to feed IN livestock three times over. Dooley says that means an annual production of 900,000 tons of DDGS, when 300,000 are needed. He says the relative high price of $100 per ton has not given indications of softening.
Ethanol proponents have some new ammunition to use from research at Nebraska:
1) Corn ethanol directly emits an average of 51% less greenhouse gas than gasoline.
2) Ethanol produces 1.5 to 1.8 units of energy for every unit it takes to make ethanol.
3) 10-19 gal. of ethanol are produced for every gal. of petroleum used to grow corn.
Many Cornbelt farmers may be surprised to find 80% of their soybean fields infested with soybean cyst nematodes as are fields in IL. Nematologist Terry Niblack says if a field has been SCN free, it will not be for long, and said IL was completely infested by 2005, after SCN was found in only 1 county in 1962. Niblack says soil sampling is the only way to know if SCN is present, since it can cause an undetected 30% yield drop.
SCN is easier to keep suppressed than it is to reduce the impact says Extension specialist Niblack. She adds, “If the field is planted to a confirmed SCN-resistant variety and SCN populations are increasing, that's proof that adaptation or a "race shift" has occurred. SCN-resistant varieties do not have the same levels of resistance and there are no immune soybean varieties.” She says rotate crops, varieties and sources of SCN resistance.
Given the moisture saturation of soil, MO Extension’s Laura Sweets is concerned about the potential for seed decay, seedling blights, and root rot problems for both corn and beans this spring. She says that favors pythium, rhizoctonia, and fusarium fungi problems for both corn and beans, and phytophthora problems for beans. She recommends using seed with high germination rates and fungicides, if not pre-applied.
All of that information you provided to the USDA in 2007 for the Ag Census, will be published on Feb. 4 when the results of the Ag Census are released. County-level data is the smallest unit that will be detailed, and will show the changes in agriculture from 2002 when the last Ag Census was taken until the latest one nearly two years ago.
Posted by Stu Ellis at 12:45 AM | Comments (0) | Permalink
January 29, 2009
ACRE: Are You Still Uncertain About Signing Up?
The crop insurance deadline and planting time will have come and gone by June 1, when Cornbelt farmers will have to decide whether to enroll in the ACRE program for 2009. It is a one-way decision, since you cannot reverse the decision, but it is one that can be deferred until 2010. ACRE is the Average Crop Revenue Election element in the new Farm Bill, which is designed as a risk management program, rather than a price support like counter cyclical payments. If you are unsure whether to sign up, read on…
You have probably heard that the offset to the ACRE program is a loss of 20% of your direct payments, as well as for counter-cyclical payments if prices go low enough to trigger them. The loan rate is also cut 30% for ACRE participants, if the marketing loan figures into your marketing plan.
But most farmers will try to determine if the ACRE formula will give them more revenue protection in this unusual market price year. Unfortunately, many of the variables in the formula will not be known when the June 1 sign up deadline arrives, says economist Bruce Babcock at Iowa State University in the Winter edition of the Iowa Ag Review. But his educated guess is for ACRE to pay off, unless there is a sudden bull market for Cornbelt grains.
ACRE contains a trigger price, but it varies for each state because the state average yield varies. Other elements include the average state yield for the past 5 years and a national average price. But Babcock says one of the keys to your decision whether to sign up is the relationship between current commodity prices with the prices guaranteed by the ACRE program. If you expect 2009 prices to be low, sign up for ACRE. If you expect 2009 prices to rise, then ACRE will not be your choice.
Babcock says ACRE payments could be eliminated if yields are good and prices rise, and that is the hedge you have to make. He says if the yield and price in a given state does not trigger an ACRE payment, then the conventional direct and counter cyclical program will provide more revenue support.
An ACRE payment depends on both yield and price, so if your state has widely varying yields, your chance of an ACRE payment may be greater. The strength of prices in 2009 should also be noted says Babcock. They could weaken further with the economy, or they could strengthen if the economy turns around and oil prices push corn and ethanol to higher price levels. Supply and demand also determines revenue, and a large US crop will enlarge the supply further and that weakens price strength.
Using recent futures prices and the USDA’s expected season average prices, Babcock tested an ACRE decision on $3.88 corn, $9.20 beans, and $5.98 wheat. Prices that end up 35% lower than those have a more than 90% chance of getting an ACRE payment. Prices that are 35% higher than those have a less than 10% chance of getting an acre payment. Those specific prices have a 35% to 70% chance of getting a beneficial ACRE payment, depending upon the state and the crop.
Babcock says he believes, “Most midwestern farmers will sign up for ACRE unless prices unexpectedly strengthen in the next few months.” He says constant prices will mean ACRE payments that will compensate farmers for the lost payments from direct and counter cyclical payments. “If prices stay up and growing conditions are good, then the loss in direct payments will not be compensated, but market returns for most farmers will be high. If market conditions deteriorate in the next few months, then all farmers will have quite a large incentive to move into ACRE immediately, as there is a very small probability that payments from LDPs and CCPs will approach the level of ACRE payments.”
Summary:
ACRE is the new Farm Bill program that is designed to provide risk management support to farmers, based on state yields and state average revenue. However, signing up for the program requires a sacrifice of 20% of direct and counter cyclical payments. But if current prices hold, ACRE payments will make up the loss and provide more revenue-based risk subsidies, as would a large crop with low revenue. Stronger prices because of a stronger economy would reduce any ACRE payment and give the preference to the direct payment program.
Posted by Stu Ellis at 12:03 AM | Comments (0) | Permalink
January 28, 2009
Where Does Agriculture Stand In The Economic Stimulus Package?
Investment banks on Wall Street have been bailed out with billions of federal dollars. Funds have also been requested and discussed with various other segments of corporate America, as well as state governments, schools, as well as to indemnify mortgage bankers against falling real estate values. But have any funds been earmarked for agriculture?
Farmers should not expect a check in the mailbox. However, more than $27 billion will be allocated for food and agriculture, out of the $825 billion economic stabilization plan being developed by the government to restart the US economy. The use of the funds are detailed in a new Congressional Research Service report distributed to Members of Congress in preparation for a vote in coming days. As of January 27, the report had not yet appeared on the CRS website.
$27 billion represents 3.3% of the total economic stabilization plan, slightly more than the USDA portion of the federal budget, but more than $21 billion will be used for nutrition assistance and about 92% of those nutrition funds will be for the Supplemental Nutrition Assistance Program, which was formerly the food stamp program. Other nutrition funds will be allocated to after school feeding programs, senior citizens, emergency food assistance and the WIC program for women, infants and children.
While many of those nutrition funds will be distributed in urban areas, more rural areas of the US will see the bulk of the other funds from the $21 billion; specifically, rural development and conservation.
The CRS report indicates the administration is proposing $5.125 billion for rural development and infrastructure improvements over a two year period to fund grants and loans. That is double the annual USDA appropriation, and with local matching funds, raises the local impact to nearly $35 billion.
1. The rural facilities program would receive $200 million for public safety, libraries, education, community centers, day care, and rural medical clinics that will begin $1.2 billion in loan and grant applications already pending.
2. Another $500 million will be distributed to guarantee loans for rural housing, which will benefit low income individuals to purchase modest homes in rural areas or to upgrade similar homes with water and septic systems.
3. Rural water and waste water programs will receive $1.5 billion to provide community drinking water systems and waste water treatment plants, which is double the annual USDA appropriation.
4. $100 million will be appropriated to spur $2 billion in loans and grants to rural businesses which have been hampered with tight credit.
5. The stimulus bill will provide $2.8 billion for loans and grants to expand broadband Internet service to rural areas. This is more than 20 times the annual appropriation. CRS says funding will be limited to areas without existing broadband service and where more than 75% of residents are in rural areas.
6. Funds will also be allocated to upgrade computers and IT equipment in local FSA offices, upgrade scientific equipment at Agriculture Research Service facilities, and make repairs at USDA buildings in Washington, D.C.
Conservation programs would receive $400 million from the economic stimulus bill. CRS says $350 million would fund watershed projects, flood prevention projects, floodplain easement purchases, and for dam rehabilitation.
1. Watershed and flood prevention projects would receive $175 million. Projects must be planned and contracted by September of 2010, but USDA has over 300 unfunded, but approved, projects ready to start.
2. Floodplain easements would also receive $175 million in funding to allow NRCS to obtain full authority to restore and enhance floodplain functions. There is currently an estimated $250 million list of projects in 17 states that already meet the criteria, but the priority will be on those projects that can begin immediately.
3. Watershed rehabilitation would get $50 million to provide technical and financial assistance to rehabilitation aging dams. 775 dams are on the list, which will grow to more than 4,300 by 2015.
Summary:
The economic stimulus bill pending in Congress does not overlook agriculture, but allocates 78% of the funding to nutrition programs, including food stamps. The balance is designated for rural development, such as Internet broadband service, rural water and water treatment systems, and other infrastructure improvements. Funds are also included in the $850 billion package for conservation that includes watershed, dam, and floodplain projects.
Posted by Stu Ellis at 12:22 AM | Comments (2) | Permalink
January 27, 2009
Will You Plant More Or Less Corn This Year? And Will Your Answer Depend On Soybean Prices?
Somewhere a farmer, or maybe several, has taken a big washer and written “corn” on one side and “beans” on the other. He has flipped it a time or two to help decide whether to plant corn or soybeans this year. While that would be a low cost decision aid, it may not give the best answer. There are other ways to think through the process, and we’ll do that today.
Every farmer this spring has been trying to work out the best revenue per acre, and because of fertilizer costs, unknown crop insurance costs and guarantees, and the uncertainty in the commodity market, the exercise has been a real challenge. Some farmers who regularly rotate corn and soybeans, or those who applied nitrogen in the fall, may already have had their decision made for them. But for those with a decision to make, ag economists Bruce Babcock and Lihong Lu McPhail at Iowa State University say a simple calculation can be used to aid your decision.
Writing in the Winter edition of the Iowa Ag Review they say the jump to 93.5 million acres of corn in 2007 came at the expense of soybeans, with all Cornbelt states except South Dakota planting more corn than beans. But the tide turned in 2008 with a near reversal of the trend and an increase of 11 million acres of beans and 7.5 million fewer acres of corn.
The economists say farmers must be induced to plant adequate corn acreage in 2009 to meet ethanol demand; and corn prices must rise relative to the price of beans. If it does not, then less 2009 corn will be planted following 2008 corn. Babcock says your decision is, “simply the difference in expected return this year from planting corn after corn versus corn after soybeans minus the forgone benefits of planting corn after soybeans the following year. Because these forgone benefits exist in the future, they need to be discounted to today’s dollars.” His calculation is graphed in the article, but he says most farmers don’t worry about the following year crop until harvest, and stop their analysis about May 20 when it becomes too late to plant corn.
The Iowa State economists say from 2001 to 2006 there was no incentive to plant corn after corn because the revenue from a corn-soybean rotation would always exceed that of a corn-corn rotation. However, they acknowledged that access to abundant hog manure might be an incentive. In January of 2007, the market switched to give a preference to a corn-corn rotation, but disappeared three months later. In early 2008, the incentives favored a corn-soybean rotation until early March, but the market feared an inadequate supply of corn and created the incentive to plant corn after corn.
For 2009, the economists say the incentives for a corn-soybean rotation began stronger than either 2007 or 2008, but following the January 12 USDA report the incentives for a corn-soybean rotation have strengthened, compared to a corn-corn rotation. They currently calculate a $100 per acre advantage for a corn-soybean rotation.
Based on those economics, Babcock and McPhail question whether corn acreage will exceed 80 million acres in 2009, which is what the current demand estimates require. They believe the corn market will begin strengthening relative to soybean prices before planting. They do not estimate whether corn prices will rise or soybean prices will weaken.
Summary:
Your 2009 cropping decision should be made on whether there are more revenue opportunities from a corn-soybean rotation or a corn-corn rotation. Based on daily market changes, those values can and have changed about this time of year, when the market senses that farmers will not plant enough of one crop to supply the demand. Currently, the preference is for a corn-soybean rotation to provide more revenue, but that may not provide enough corn to meet expected demand. While a shift could be spurred by rising corn prices, it could also be spurred by falling soybean prices.
Posted by Stu Ellis at 12:54 AM | Comments (1) | Permalink
January 26, 2009
Agriculture's Annual Report To Congress For 2008.
The new Congress is getting an in-depth look at your finances, that is, the finances of agriculture as a whole, not your personal bank account. The Congressional Research Service has just delivered a report to Members that says you had a pretty good year in 2008, but gives just a whiff of things to come in 2009.
Some of the numbers in the report are not new. The news that 2008 net farm income would be a record of $86.9 billion was forecast late last year, and the 14% growth in cash receipts to $323.4 billion was also predicted, based on commodity prices in December. However, CRS economist Randy Schnepf says, “Less than ideal market conditions heading into 2009 suggest dim prospects for the longer-term farm income outlook, albeit surrounded by considerable uncertainty.” He says the global recession, tight credit, rising unemployment, and declining asset values have combined to soften demand for farm products. He tells Congress that USDA will have its first forecast of 2009 farm income on February 12.
Before the gloom and doom, let’s relive the glow that marked the past year. And Schnepf says the six years ending last month represent the six highest years for US farm income on record. Good harvests, strong prices, and robust demand all combined to push farm gross receipts to record levels that were $38.6 billion higher than the prior record of $284.9 billion. Schnepf’s analysis for Congress is that domestic demand was supported by the rapid emergence of the ethanol industry, along with strong export demand that rode on the weak back of the dollar. And he added, “While crop farmers rejoiced, livestock feeders expressed concern about the escalating costs of feed—the largest single cost component for cattle, dairy, hog, and poultry production.”
Schnepf says corn and other feed crop sales were up 42% and soybeans and other oil crop sales were up 27%. He says with the strong federal policy support for ethanol, the corn refining industry has grown rapidly from 3 billion gallons of ethanol in 2004 to over 10.8 billion gallons at the end of last year. He tells Members of Congress that the additional demand for ethanol “has helped to push corn and other crop prices steadily higher since 2005 as they compete for a fixed amount of cropland.”
The CRS economist says 2008 livestock sales were up 4% to $143.5 billion, helped by strong market prices for beef, poultry, and hogs, but price prospects were weakening at the end of 2008.
Schnepf says government payment were forecast at $12.5 billion last year, up 5% from 2007, primarily because of lower prices of cotton that triggered counter-cyclical payments, as well as more conservation payments and disaster payments. He says payments had been $24.4 billion in 2005, comparatively.
The economist says production expenses last year were forecast at $262.8 billion up 16% from 2007, pushed upward by higher feed costs for livestock producers. Energy costs pushed fuel expenses up 26% and fertilizer expenses up 64%, but both were declining sharply toward the end of the year.
Average farm household income was projected to be $86,798, up 0.7% from 2007. However, Schnepf was quick to note that off-farm income has pushed that number higher progressively, and in 2008, off-farm income sources accounted for over 93% of the national average farm household income, and only 7% from farming activity.
Farm asset values were projected to be a record of $2.359 trillion, up 7% from 2007, helped by rising farm real estate values. Debt was projected to be $211.7 billion, essentially equal to 2007, and that would put farm equity at a record $2.147 trillion. The farm debt-to-asset ratio was expected to decline to a 49 year low of 9%, after a peak at 23% in 1985.
Schnepf says little about the 2009 farm income prospects, other than to say, “Prospects for 2009 are less sanguine, as commodity prices continue to weaken for most major field crops and livestock products heading into 2009. Only rice and broilers appear to have reversed, at least temporarily, the downward trend.” His graphs all reflect the late 2008 fall in many commodity prices. He cites milk prices as being 34% lower in 2009 and eggs down about 4%. A table in the presentation created by USDA indicates the current marketing year prices for commodities, compared to the 2007 crop’s marketing year:
Wheat up 3.4%
Corn down 4.8%
Sorghum down 19.1%
Barley up 46.8%
Soybeans down 10.9%
Steers up 0.8%
Hogs up 1.3%
Summary:
For the Cornbelt grain farmer, 2008 was a banner year, helped by strong demand for grains. Although there was strong demand for livestock products, feed costs were responsible for holding down income growth similar to crop operations. Overall, farm income reached record levels in 2008, as did asset values and equity. Farm debt did not increase measurably.
(The CRS Report has not yet been posted on its website.)
Posted by Stu Ellis at 12:46 AM | Comments (0) | Permalink
January 23, 2009
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.
Will your cropping pattern change in 2009? IL Extension’s Darrel Good says many farmers are still waiting for fertilizer prices to come down, commodity prices to give stronger signals, and cost estimates and price guarantees from crop insurance. His newsletter is here.
Will more corn or beans be needed? Good says the answer depends on: the level of consumption next year, the magnitude of stocks at the end of the current marketing year, and US average yields in 2009, but the question won’t be answered before planting time.
For corn: Good says repeating 2008 acreage of 85.982 mil. and a trend yield of 153 bu. would produce 12.04 bil. bu. Combined with the 1.79 bil. ending stocks from 2008, such a crop would still provide a 490 mil. bu. surplus with a 12.53 bil. bu. consumption. He contends that corn acreage needs to be maintained at least at 2008 levels of 86 mil.
For beans: Good says repeating 2008 acreage of 75.718 mil. and the trend yield of 42.3 bu. is reached, then a crop of 3.164 bil. bu. would be produced. He says with the 225 mil. bu. carryout, soybean use during the 2009-2010 marketing year would have to exceed 3.204 bil. bu., which he doubts, to warrant increased soybean acreage in 2009.
Set sales targets, advises marketing specialist Jim Hilker at Mich. St. because there is plenty of corn, “$4.00 being a good starting target to consider for both this year and next. Of course you can average into $4.00 by staring a bit below and hoping to price some of it above. The other target you need to set is how much you want to price at each price target and time period, don't get carried away, but consider making significant sales.”
Soybean pricing depends on the Argentine drought in Hilker’s mind. “The drought in Argentina both makes that a hard decision, but also may be an opportunity. Futures were only willing to pay four cents a month storage, which would only cover those with on farm storage and no production loans due. And the $9.60-70 price being offered for old crop is above what fundamentals would project at this time on known information.”
Potentially the most damaging aspect of (the Jan. 12 USDA) reports for the corn market is that the weaker demand doesn’t look like it will be a one year phenomenon, says Matt Roberts at Ohio State. “Combined with higher initial inventories for next year, these reports remove much of the worry about the 2009 crop year—not only will there be a large carry-in to buffer any production shortfalls, but demand will be weak.”
Unlike corn, says Roberts, “There is no evidence of a broad-based, dramatic slowdown in soybean demand.” There is softness in domestic crush, but exports are stronger. He says, “These reports provided a tremendous amount of support to soybean demand.”
Matt Roberts says, there does not appear to be much hope for higher prices in the short or intermediate term. He says corn acreage could drop 2 mil. from 2008 and corn prices would still move lower. He agrees with Darrel Good, “There is no compelling scenario in which the soybean market ‘needs’ additional acreage.” And he says compared to the battle “for” acres of the past 3 years, weak demand will cause a battle “from” acres.
Roberts believes undesignated acres may be destined more for wheat than for corn or soybeans. “This leads me to believe that we may have already seen the strongest of the winter rally, and prices will decline from this point to $3.80-$4.00 for the Dec ’09 CBOT contract, where they will wait to gain a better handle on farmers’ planting intentions.”
Strong grain prices may create problems for some farmers with the new Adjusted Gross Income rules that determine farm program payment eligibility says Steven Johnson at Iowa St., and he says there are some new financial reporting forms required by FSA.
1) CCC-902I, which is a “Farm Operating Plan for Individuals.”
2) CCC-902E, which is a “Farm Operating Plan for Entities.”
3) CCC-926, which computes Average Adjusted Gross Income.
As a refresher, Johnson says, “For commodity and disaster programs, the AGI limitation was reduced from the 2002 law’s $2.5 mil. from all sources to a 3-year average non-farm AGI of $500,000. For 2009, those 3 years will consist of taxable years 2005, 2006 and 2007. An individual or entity that exceeds this $500,000 non-farm AGI average shall not be eligible for such programs. Also, under the new regulations, an individual or entity must have a 3-year average AGI under $750,000 per year from farm income in order to qualify for direct payments issued under the Direct and Counter-cyclical Program.”
Cattle feeders are being hurt by ethanol plants that are shutting down and diminishing the volume of wet and dry distillers’ grains that are available. Nebraska livestock economist Darrell Mark says, “Feeders can’t simply remove it from rations once cattle have been fed this highly palatable feed. Given strong local demand and reduced supply, the cost of distillers’ grains has increased dramatically relative to corn (despite absolute prices dropping).” Read more.
Pork producers are intrigued with the 2008 broiler production, which was down 0.7% for the year and 5.8% for the 4th quarter. MO livestock economists Grimes and Plain say the cutback is big in absolute terms and historically. They say the pork-poultry cross demand relationship is high and “Therefore, this reduction in poultry supplies and higher prices should be positive to pork demand.” Read more.
Returns to cattle feeders in 2008 were a minus $130 per head according to the Livestock Marketing Information Center, and the worst going back into the 1970’s. That is based on feeding out a 750 lb. steer in a commercial feedlot. Grimes and Plain say, “Due to the weakening feeder-calf prices and high costs, some cow-calf producers did not cover cash costs of production in late 2008.” Returns are in the 20th month of red ink.
Livestock production will be down in 2009. The Grimes and Plain Outlook says:
1) Beef producers will continue to reduce the cattle herd in 2009 and into 2010.
2) Pork production will decline 2-3% in the first quarter of 2009, and 3% for the year.
3) Chicken and turkey production will decline 3%, an unusual two year decline.
Should corn silage get extra N? That was the question to be answered in a 4 year IL study involving continuous corn, corn-soybean rotations, and varying rates of N.
1) Silage yield and crude protein were higher in Sb-C than in C-C rotations.
2) Silage yield and crude protein rose in both rotations up to 180 lbs. of N.
3) Neutral detergent fiber decreased in both rotations with increasing N rates.
4) Results were minimal or inconsistent for other silage quality parameters.
Delayed weed control means lost corn yield to weed specialist Bob Hartzler at Iowa St. Early season weed competition reduced the biomass of the ear shoot up to 85%. He says allowing weeds to compete for an additional week when corn was growing from V4 to V5 resulted in a 63% increase in lost yield because ear shoots begin at the V5 stage. Read his analysis.
If non-GMO soybean premiums have caught your attention, please, please remember that Roundup is not an option for weed control. Some farmers will need a refresher on weed control for non-GMO beans. You can do it from home with the help of Ohio State’s weed management fact sheets. Find them here.
For maximizing grain yield and profitability, soybean variety selection is the single most important factor. In a free webcast presentation titled Soybean Variety Selection, WI Soybean Extension Specialist Shawn Conley discusses variety selection criteria and other related yield-maximizing factors. This recording, which can be viewed through mid-February, is provided by the non-profit Plant Management Network.
Your grain bins may be out of sight, but should not be out of mind. MO Extension’s Charles Ellis says cooler air along the sides settles, and is warmed at the bottom, where it carries moisture to the top and releases it for the benefit of insects and mold. The top surface moisture condensation will lead to rapid spoilage as the outside air warms. He suggests aeration.
The Clean Water Act has broadened, thanks to a federal court ruling on FIFRA-regulated pesticides that might find their way into water. Although EPA may have found the chemicals were not environmentally harmful, the court ruled that pesticides are not exempt when they leak into water. Iowa St. specialist Roger McEowen says the court may have been confused. Read more.
Mark your calendar if you are buying, selling, or renting Cornbelt farmland. The Chicago Farmers Farmland Investment Fair is set for Feb. 7 at Joliet (IL) Junior College. Speakers will focus on farm management, ownership issues, production alternatives, and the Farm Bill. Registration and trade show information is here.
Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink
January 22, 2009
Price, Supply, Basis, Transportation, And Other Corn Fundamentals Changed By Ethanol.
If you think ethanol had a significant impact on corn supply and demand, and influenced the strength in the 2006, 2007, and 2008 corn market, then consider the overnight shift in how corn moves around the Cornbelt that resulted from the biofuel industry. The Iowa corn market is no longer doing business the way it used to do business, and it will not be going back to those “good old days.”
The redistribution of corn to a major new consumer and the distribution of distillers’ dried grains have created a new paradigm, say economists Edward Yu of the University of Tennessee and Chad Hart of Iowa State. Their analysis says the change in distribution of grains and feeds and the utilization of shipping affected grain prices, the basis, and other feedstocks. Yu and Hart looked primarily at the impact on the Iowa interior markets, but some of their findings can be expanded to a wider portion of the Cornbelt.
Prior to 2003, they reported that more than 40% of annual production was shipped out of state, but the ethanol industry increased its corn use at the expense of other consumers of corn. Ethanol use rose from 6% of the 1999 crop to 21% of the 2005 crop. Corn that was shipped out of state dropped from 44% to 35%, and the livestock use also lost market share.
The researchers utilized a 2001 survey for comparison in which 80% went to elevators and 13% went to processors, but for the 2006 corn crop only 62% went to elevators and 16% went to ethanol plants and 10% went to other processors. The greatest reductions in volume of corn were at river terminals and on-farm feeding operations. The latest survey indicated that ethanol plants absorbed at least 10% of the corn in 8 of the 9 Crop Reporting Districts in Iowa.
Of the 1.1 billion bushels of corn produced from the 2006 Iowa crop, 26% went to ethanol plants, 23% to cattle feeders, 18% to processors, 11% to out of state cattle feeders, and 5% to river-based grain terminals. That compares to the 2001 crop, of which 44% was processed in Iowa and 27% was fed to livestock. The researchers report, “Although the share of corn utilization in some markets may decline, the corn volume to those markets is expected to increase, as total corn marketed posted significant growth between the two survey periods.”
From the 2006 corn crop, the Iowa ethanol refiners produced about 2 billion gallons of ethanol, 5.1 million tons of distillers’ dried grains and 2.6 million tons of wet distillers’ grains; but the ethanol made up 85% of the total sales. The majority of the ethanol was used in Iowa and surrounding states. Interestingly, 25% of the DDG was shipped to California and 13% to Texas.
The researchers conclude that country elevators are still the primary market for Iowa grain producers, receiving 62% of the corn, but the share going to processors and particularly ethanol refiners increased sharply in the first half of the decade. While Iowa cattle feeders received less corn direct from farms between 2001 and 2006, the total amount of corn and other feeds delivered to feedlots indicated they remain the single largest end user of corn from the 2006 crop.
While country elevators are suffering from a smaller share of the corn handling market, the researchers found they are benefiting from the emerging sales of wet and dry distillers’ grains.
While very few of the ethanol plant remove the corn oil during the refining process, the increased value of that commodity indicates more will convert their refining process to capture the additional revenue and that will become an additional feedstock for the biodiesel refiners.
Summary:
The first half of the decade brought a substantial shift in where corn was delivered and how it was used in the Cornbelt with the rapid development of ethanol plants. Elevators lost a substantial market share of corn handling to the ethanol plants, but the growing volume of corn offset the loss. Elevators also benefited from the merchandising of wet and dry distillers’ grains to livestock operations, which remain the largest end user of corn and ethanol co-products. The dynamics in the market will continue to shift, impacting the basis, transportation, and product availability.
Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink
January 21, 2009
Million Dollar Farms Are More Common Than You May Think
Where does your farm rank in gross sales? If you are under $250,000, you are part of the 92% of farms classified as “small.” But those with sales of $1,000,000 and over are the 2%, which make up USDA’s “large” farms and produce half of US farm commodities. There are over 35,000 “million dollar” farms, and more are entering that category every year.
USDA’s Million Dollar Farms research indicates they have a competitive advantage and the larger the farm the greater the chance of growth, but to a point. And surprisingly, there are too many of them to dominate the market for specific commodities.
With recent commodity prices, some farm may surpass the $1,000,000 sales category, and not be all that big, based on 2005 prices:
1) 1,120 acres of corn, 800 acres of beans, 400 head of fed cattle.
2) 2,080 acres of cotton, 1,265 tons of cotton seed, 960 acres of soybeans
3) 475,000 broilers
4) 8,000 finishing hogs
5) 400 dairy cows
6) 170 acres of lettuce, 125 acres of tomatoes, 120 acres of celery, 35 acres of strawberries
Of the million dollar farms, 24% are less than 5 years old, and only 16% are more than 24 years old. They accounted for 48% of the value of US farm production, and contrary to widespread public opinion, only 16% of government payments went to million dollar farms, primarily because of payment limits.
The USDA economists found that million dollar farms specialize less in cash grains, but more in high value crops and hogs. Because of that, an acreage definition for million dollar farms is not a good indicator, primarily because of some extensive cattle ranches skews the numbers.
Regarding ownership and rental, 20-30% of farms over $250,000 in sales are wholly owned, including million dollar farms, but when the sales exceed $5 million, 42% are full owners. While 92% of all US farms are sole proprietorships, that organization category decreases as sales volume increases. And only 45% of million dollar farms are sole proprietorships, while most are either partnerships or family corporations. Family farms make up 97% of all farms, and while the million dollar farms include more ownership organizations, 84% are still family operated.
The principal operators are about 52 years of age and report their primary occupation as farming. About 30% are college graduates. 66% of million dollar farms have more than one operator, with the average at 2.1 operators per farm. On 30% of the farms, the spouse is that second operator.
Operating profits switch from negative to positive about the point of $175,000 in gross sales rising beyond that point. For million dollar farms, operating profit averages 20% and household income averages about $152,000.
31% of million dollar farms rent farm machinery, and the rental rate goes up with the volume of sales. On average, million dollar farms use 36,500 hours of labor, equivalent to 18.2 full time workers, with 72% hired and 13% contracted.
USDA economists say the shift to million dollar farms will continue, but that shift will slow down once their share of the commodities most amenable to large scale production reaches the upper limits. There are too many million dollar farms currently to dominate production of an individual commodity. Most operations are family farms, organized either as partnerships or family corporations.
Summary:
There is a growing number of farms with gross sales exceeding $1,000,000, with the number growing more rapidly with higher commodity values. Most are family partnerships and corporations which produce typical commodities and carry a 20% operating profit margin. Million dollar farms collect a relatively small amount of government farm payments and there are too many to dominate a market for an individual commodity.
Posted by Stu Ellis at 12:13 AM | Comments (0) | Permalink
January 20, 2009
Have You Decided Yet If ACRE Is For You?
Cornbelt farmers will soon have a decision to make, and it will be more difficult than what to buy for Valentine’s Day. The decision that beckons is whether or not to sign up for the ACRE program. That is the new farm program option offered at the Farm Service Agency office that was developed for the 2008 Farm Bill. ACRE is an acronym for Average Crop Revenue Election, and will require some head scratching, some finger crossing, and a bit of body English….that is, unless you become familiar with the program. ACRE familiarity is straight ahead.
ACRE has been well digested in the farm media, and its concepts should come as no surprise to you. The issue is whether you think it will help with your management of revenue risk compared to the Direct payments and Counter-cyclical payments in the 2002 Farm Bill that remain as options to you. Beginning with the 2009 crop you will have a choice of signing up for ACRE or remaining with the conventional programs.
To help with the decision, Ohio State University agricultural economist Carl Zulauf provides a decision aid fact sheet which attempts to help you answer the question: “Does ACRE’s state revenue program improve management of revenue risk enough, compared to the price counter-cyclical program, to compensate for the 20% reduction in direct payments and 30% reduction in marketing loan rates?” The trade-off for signing up for ACRE is loss of a portion of the old payments.
Zulauf says ACRE helps you address risks that you have no control over, and those are a decline in state average crop revenue and a decline in the US cash price for grain. Both of those variables are included in the ACRE formula to determine the amount of a farm program payment. For corn, beans and wheat, Zulauf says the ACRE revenue coverage is estimated to be at least 80% more than what would be received in the Counter-cyclical program. He made that calculation for the State of Ohio, which could be close to the balance of the Cornbelt, but not exactly. Zulauf says the benefits include:
· ACRE updates yield annually and 2009 will be above the historical Counter-cyclical yield.
· ACRE updates price annually and 2009 exceeds the fixed Counter-cyclical price.
· ACRE’s update of revenue coverage is important when costs are increasing faster than productivity, which has happened since 2005.
· Since ACRE payments cannot decline more than 10% a year, they will be more than Counter-cyclical payments through 2012.
· ACRE payments are tied to planted acres, not base acres, but cannot exceed base acres.
That is the good news, and there must be some trade-offs, which Zulauf calls the “risk management costs:”
· Direct payments per bushel of grain will be reduced by 20%, $3-4 per planted acre.
· ACRE comes with a 30% cut in the loan rate, but he says variable production costs currently exceed the loan rate, and if prices drop that low, planting will decrease and prices will rise.
· ACRE’s revenue is not fixed, and if market revenue declines, so will ACRE payments, and Zulauf says if that is the case, the likelihood of direct and counter-cyclical payments will increase. This decision has to include the next four years, since an ACRE sign-up this year locks in the farm through 2012.
In addition to the Zulauf analysis and suggestions, University of Illinois offers an ACRE decision aid.
Summary:
The new ACRE option in the 2008 Farm Bill attempts to provide revenue risk management assistance with current changes in state revenue, US cash prices, and other elements that improve over the direct and counter-cyclical payment programs. ACRE provisions are set to benefit farmers whose costs are increasing faster than productivity. Farmers will have to make a decision soon on whether to opt for the ACRE program through 2012 or stay with the conventional program and maybe select ACRE in a future year.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
January 19, 2009
Watch For Opportunities In The Energy Portion Of The New Farm Bill
When early promoters of gasohol were educating the other farmers and the public about the potential of a corn-based motor fuel, one of the early slogans was “an oil well in every cornfield.” Since that time corn has been the primary feedstock for ethanol production, and will continue to be until biomass is converted into cellulosic ethanol. The transition that agriculture is making to add fuel to its traditional food and fiber products received a substantial boost with the Energy title in the 2008 Farm Bill. In fact, some farmers may consider themselves “corn sheiks” and “ethanol barons” because of the Farm Bill’s opportunities for agriculture to claim a significant share of the US energy market.
Agricultural Policy Specialist Tom Capehart of the Congressional Research Service says the energy policy in the new Farm Bill builds on the foundation laid in the 2002 legislation. The latter provided grants, loans, and loan guarantees to foster research on renewable energy from the farm. His report to Congress says, “Many policymakers view agriculture-based bio-fuels as both a catalyst for rural economic development and a response to growing energy import dependence.” The new Farm Bill closely followed the 2007 initiative to write new federal energy policy, which established higher targets for ethanol and bio-diesel and raises the 2022 goal to 36 billion gallons, which would all primarily come from agricultural sources.
Capehart says the high commodity prices in the past year came at a time when an agricultural commodity was directly competing with petroleum in the marketplace. As the price of oil rose, so did the price of corn and corn-based ethanol. He says that was marked by complaints of high food prices and high priced livestock feed, along with calls to water down the ethanol production goals in 2009. Capehart says that was beyond the ability of the USDA, because the goals were implemented by the Energy Department.
However, the 2008 Farm Bill contains many energy-related provisions, controlled by USDA, that will have an economic impact for production agriculture. Those include:
· emphasis on cellulosic ethanol production through new blender’s tax credits, promotion of cellulosic feedstocks production, feedstocks infrastructure and refinery development;
· grants and loan guarantees for biofuels (especially cellulosic) research, development, deployment, and production;
· studies of the market and environmental impacts of increased biofuel use;
· expansion of biofuel feedstock availability;
· support for rural energy efficiency and self-sufficiency;
· an education program to promote the use and understanding of biodiesel;
Capehart says farmers and ranchers may have opportunities of which they are not aware. He says there is $1 billion in incentives to support production of cellulosic biofuels, such as funding which supports the production of dedicated crops for biofuels, including post harvest storage and transportation. Currently, cellulosic ethanol is in a transition phase from research to commercial production, with 39 plants in the construction or planning stage, with production scheduled this year or next.
Federal funding for all of the bio fuel research and programs is considerably more than what was contained in the 2002 Farm Bill. Capehart says the energy title in the 2007 legislation authorizes $1.1 billion in mandatory funding, compared to $800 million in the old bill. There is an additional $1.8 billion in discretionary spending, which is more open-ended.
Summary:
While some farmers have benefited from higher corn prices due to ethanol demand, more farmers may be able to benefit from a wide variety of new federal programs designed to encourage ethanol production from biomass and other cellulosic feedstocks. The new Farm Bill authorizes nearly $3 billion in funding for a variety of energy related programs, much of which will be available to help cellulosic ethanol plants become operational and assistance to farmers in the delivery of the biomass to the plants.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
January 16, 2009
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 crop production, stocks, and supply-demand reports were especially negative for corn prices and will likely end the month old rally in prices even with some worries about the Argentine crop, says IL Extension’s Darrel Good, who says corn prices could decline to the level of early December. “The larger projection of year ending stocks and the slower consumption suggest that corn acres may not have to increase much in 2009.”
Darrel Good says the reports were less negative for soybean price prospects, but the larger inventory of US soybeans will offset some of the concerns about the Argentine crop. Darrel says, “An increase in US acreage is not needed in 2009.” Read his latest newsletter. A recap is here.
The bearish USDA report was a surprise to many, says Mike Woolverton at Kansas State, It“caught most people in the grain trade leaning the wrong way. Because of the late soybean harvest and thousands of acres of unharvested corn caught by early winter snow storms, most grain traders expected the USDA to lower its final estimates of corn and soybean production.” But he says in commodity markets heavily influenced by outside factors and populated by pessimistic traders, the report was enough to take both markets limit down the next trading day. And the wheat market fell down the daily limit also.
USDA’s wheat seedings report last Monday also surprised the market with a 9% drop in acreage, but Woolverton says, “An even bigger surprise was the 26% drop in soft red winter wheat.” He blamed “The terrible basis farmers faced in summer and fall, up to $2 per bushel or more in some local markets; the convergence problems with the CBOT wheat contract; and the late, wet corn harvest. Farmers simply could not get into their fields in time to plant wheat, although it is likely some producers intentionally held back from planting soft red to give them more flexibility for spring-planted row crops.”
Woolverton says corn exports will eventually increase. “US wheat price is still being suppressed by low quality, low priced Black Sea wheat. As much as 80% of the Ukrainian wheat crop graded no higher than feed wheat and has been selling for as little as $2.50 per bu., hurting both global wheat and corn prices. US exports of wheat and corn have been disappointing the past several months.” He says feed wheat will soon be gone.
The recent low corn price, pushed down by competition from feed wheat, slack export demand, and lower than expected ethanol corn grind, may be giving corn growers a misleading market signal to cut back on acres planted this spring, believes Woolverton. A soybean to corn price ratio that discouraged corn planting and still sky-high fertilizer prices had early surveys showing farmers intending to shift more acres into soybeans.
Woolverton’s preliminary calculations show a need for more corn production next year rather than less, assuming a reduction in feed wheat availability, corn export demand recovery, and increased ethanol production to meet the upwardly revised mandate for 2009. He says the market will have to bid more acres into corn with a higher corn price relative to soybeans. Better profit margins for ethanol producers would help and lower fertilizer prices would pull some of those unplanted soft red wheat acres into corn.
Learn about ACRE before sign-up arrives this spring, say IL Extension economists. Payments are crop specific and the whole farm must be enrolled in ACRE, not just your corn base without enrolling your soybean base. It is expected that the ACRE election will be made by Farm Services Agency (FSA) farm number, so an operator could have some farms enrolled in ACRE and some under the traditional counter-cyclical program.
Ohio had the worst soybean crop last year since 2002 when the average yield was 32 bu. per acre. The 2008 yield was 36 bu., some 7 bushels below the 2007 crop. OSU soybean specialist Jim Beuerlein blamed the weather, which destroyed more seed test plots than in his 40 years of research, "Of the six locations that were evaluated, yields were down anywhere from 20 to 40 bushels an acre due to the flooding and the drought. I had one field that had about 1,000 plots in it and we probably threw away 600 of them.”
Fungicides have the best chance to increase yield when fungal diseases are, or have a high risk of, infecting a crop, says Purdue specialist Kiersten Wise, and that requires scouting. She says as the price of corn goes down, it will take more bushels to pay off, “If the application cost $28 per acre, an extra 7 bu. of $4 corn would be needed.”
Pork weights are falling say Glenn Grimes and Ron Plain at MO Extension. Iowa-Minnesota live weights were 269.4 lbs. last week, which they said was 2.2 pounds less that year ago levels. “Weights will likely start declining in the next few weeks and hit a low in late summer, probably in August,” say Grimes and Plain. “The low week in 2008 ended August 9 at 257.4 lbs per head for barrows and gilts in Iowa-Minnesota.”
Productivity is up in the US cattle industry. In fact Grimes and Plain at MO Extension say it is up 51% over the past 42 years. “This productivity growth resulted from growth in cattle feeding, feeding more of the cattle, feeding to heavier weights, the decline in the dairy herd relative to the beef cow herd and imports of more live feeder cattle.”
Grimes and Plain say the dynamics include increased beef and veal production by pulling marketings forward. “In other words we are increasing slaughter some each year by moving cattle through the growth and feeding cycle faster and slaughtering cattle at a younger age. How much more growth we have is not very predictable. There are limits to how heavy we can feed cattle and percentage of calf crop fed to heavy slaughter weights.” They believe there will be some productivity growth for several more years.
Posted by Stu Ellis at 12:32 AM | Comments (1) | Permalink
January 15, 2009
Fertilizer Prices: Will They Dictate Your 2009 Cropping Plan?
The greatest enigma in agriculture today is not the volatility in grain prices. Most farmers can understand that and have weathered prior storms. But the issue that has everyone scratching their collective head is fertilizer pricing. Wholesale and retail prices went into orbit, and now wholesale prices have returned to Earth, but retail prices are still sky high. Grain can be hedged, but fertilizer can’t. What is a fella to do?
The first thing to do is read the farm management newsletter written by farm management specialist Gary Schnitkey at the University of Illinois, because it may have an impact on what you will be planting this spring.
Fertilizer prices, along with seemingly everything else, are rooted in the turmoil that has captured the global economy. Schnitkey says conventional wisdom is the financial meltdown will lead to a world wide recession, which will diminish the demand for fertilizer, which will lower the price of fertilizer, and that will impact your decision about whether to plant more corn or more soybeans. But how did we get there?
About two months after grain prices peaked in early July, fertilizer prices peaked and then plummeted along a parallel path with grain prices. Wholesale anhydrous ammonia that was once $800+ is now below $200 per ton. Wholesale DAP, that was $1,000+ in September, is now $350 per ton.
Suppliers indicate that a “perfect storm” occurred with the economic collapse, large pipeline stocks of high priced product, and a late fall that prevented typical rates and volumes of application. The credit crunch diminished South American demand, and when US grain prices fell, so did the demand for fertilizer at any price. So fertilizer storehouses are full of unsold products, some of which has a very high price attached to it. Unfortunately for farmers, the closer they are to the fertilizer the higher the price of the product. If retailers are forced to cut prices, they will lose substantial amounts of money on their inventory, but Schnitkey says there are incentives for farmers to delay purchases in the hope prices decline.
But delays could also create unexpected financial risks for farmers, if the recent natural gas price dispute between Russia and the Ukraine boils over to impact the price and availability of anhydrous ammonia. Whatever happens there, as well as the dynamics of pricing for stored fertilizer can potentially impact the acreage relationship between corn and soybeans. Schnitkey says fall fertilizer prices would have been $210 per acre for corn and $92 per acre for soybeans. But potential spring prices could be $143 for corn and $64 for beans. With the lower cost of production for corn, would that change your mind to plant more corn than beans? And if nitrogen prices have one of the biggest cost decreases, that may further encourage increased corn acres.
Summary:
After grain prices collapsed in late summer, production costs continued to rise, particularly with fertilizer. While retail fertilizer is still quite high priced, wholesale prices have dropped substantially because of reduced demand. Local dealers have large stocks of high priced products, and would suffer financially if forced to sell below the cost of their inventory. However, if farmers can gain access to lower priced fertilizers, which would reduce the cost of crop production, substantial changes could occur in whether more corn or more beans would be planted this spring. September fertilizer prices pointed to larger soybean acres, but potential spring fertilizer prices point to larger corn acres.
Posted by Stu Ellis at 12:58 AM | Comments (1) | Permalink
January 14, 2009
Are You On The Right Side Of The New Agricultural Laws In 2008?
Your attorney may be a member of the board of directors of your farming enterprise, and if so, he or she has probably already counseled you on the major developments in agricultural law in 2008. Some of the issues will be quite familiar, since they were headline issues in the farm media. But other issues may sneak up on you when least expected. If your attorney has not alerted you about the legal issues arising in 2008, here are some of the issues you might discuss.
Although every attorney may have a different perspective or interpretation of the law, and that is how they earn a living, we’ll follow the advice of Iowa State University’s Roger McEowen, of the Center for Agricultural Law and Taxation. He offers his Top Ten list:
1) The 2008 Farm Bill brought numerous changes in commodity programs, offering the ACRE program as an alternative to the direct and counter cyclical payment programs. While many farmers need to evaluate the ACRE program, others will be concerned about the reduced levels in payment limitations, which are defined in part by the adjusted gross income for the operator and the owner. The Farm Bill also intersected with the tax code in the area of eliminating self employment tax on CRP payments for retired farmers, as well as many others.
2) No longer will farmers selling livestock have the burden of proof that conduct by a meat packer adversely impacted competition. An appeals court ruled in a case against Pilgrim’s pride that the Packers and Stockyards Act did not require a producer to prove lack of competition on a price manipulation claim.
3) In a case primarily of interest to landowners in the western US, the court decided it will not be as inclined as in recent years to accept complaints from environmental groups that challenge activities on public lands. The judges decided they did not want to be scientists in a logging dispute.
4) The IRS found itself on the losing end of several cases involving Chapter 12 bankruptcies and reorganization of farming operations. The court said the IRS was not following the intent of Congress regarding the liquidation of assets and how they are to be taxed after the bankruptcy filing.
5) The Swampbuster provision of USDA’s conservation program has existed since 1985, and prevents farm program payment eligibility for cropping a wetland. But the court ruled against USDA in a case that only had a water-loving plant as the evidence of a wetland. The court says there has to be wetland soils and wetland hydrology as well.
6) While “mad cow” disease has faded from the headlines, a major case remains in the courts, and the latest ruling held in favor of USDA when it would not allow a private livestock operation to conduct its own testing program and privately sell beef to foreign buyers. The courts have ruled to date that USDA can halt the private testing in lieu of spot testing throughout the entire packing industry. But “stay tuned” on this one, because it remains in litigation.
7) Several lawsuits filed by farmers against USDA because of administrative decisions have taken the point of view that when USDA regulations were applied in error, then the farmers are entitled to attorney fees in order to resolve the issue. The courts have agreed, ruling that USDA should pay legal fees and court costs.
8) Cash basis farmers who typically defer crop sales to the year following production, have frequently deferred crop insurance indemnity checks and disaster payments in the same manner. However, if crop sales are split between two years, farmers and their tax advisors must depend on the ambiguity in the law to justify the deferral of any portion of the payments. A court ruling supported the IRS policy that over half of the funds must be deferred, if any is deferred.
9) Cattlemen won a court battle with the USDA that was initially focused on the rule that allowed cattle over 30 months old to be imported from Canada as part of the effort to prevent more cases of “mad cow” disease. However, the court ruled that USDA’s public notice requirements were not fully implemented and the court granted an injunction that allowed cattle of any age to be imported.
10) USDA’s controversial Premises Registration requirement for livestock producers to identify their facilities for purposes of tracing movement of diseased livestock had been a lightning rod issue for several years. USDA in September mandated the program for producers engaged in interstate movement of livestock, but in December rescinded the requirement when opponents challenged it, also under USDA’s public notice requirements.
Summary:
A wide range of legal decisions, administrative actions, and legislative initiatives during 2008 have provided both relief and additional regulations for crop and livestock producers. Without expert advice, some farmers may find themselves in conflict with the laws and regulations, even though they were engaging in long held practices.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
January 13, 2009
Monday's Basketful Of USDA Production And Stocks Reports Caused It To Overflow.
Without the typical fanfare reserved for the August 1 Crop Report, USDA put the wraps on the 2008 crop with some numbers that surprised most of those who weigh in with their own predictions. A handful of reports were released Monday, including the Quarterly Grain Stocks Report, and the Final Production Estimates for the old crop. So how did the numbers change?
USDA’s final report on the 2008 crop placed corn production at 12.101 billion bushels, up 1% from the November crop report by raising the average yield to 153.9 bushels per acre. The estimate was 119 million bushels higher than what the market expected. Soybean production was estimated at 2.959 billion bushels, up 1% from November also because of a higher yield estimate of 39.6 bushels per acre.
The World Agricultural Supply and Demand Estimate (WASDE) for January raised US corn carryout for the 2008-09 marketing year by 316 million bushels because of higher production estimates and lower estimated consumption. Total production went up 81 million bushels. Feed used was dropped 50 million bushels reflecting fewer livestock numbers and ethanol use was dropped 100 million bushels due to lack of profitability at ethanol refiners. Industrial use was chopped an additional 35 million bushels because of reduced demand for corn sweeteners. Exports were also cut by 50 million bushels. USDA reduced the estimated price range by 10 cents to $3.55 to $4.25 per bushel. By raising production 81 million bushels and lowering demand by 235 million bushels, the 1.790 billion bushel carryout forced the market down limit on Monday, since the market was anticipating the carryout to hold about steady.
Global coarse grain production was raised 5.5 million tons because of better yields, however consumption was lowered because of less livestock feeding, and so ending stocks were raised 12.2 million tons.
The WASDE report raised US soybean production estimates by 39 million bushels to 2.959 billion bushels, but also raised exports by 50 million bushels due to strong export demand. But domestic crush estimates were reduced 30 million because of a lower demand for soybean meal for livestock feed. Ending stocks were raised 20 million to 225 million bushels. The season average price was reset to $8.50 to $9.50, compared to the December estimate of $8.25 to $9.75. The larger surplus of soybeans, when the market was anticipating a decline in stocks, contributed to the weakness in the market, which also saw soybeans close limit down Monday.
Global soybean production was estimated at 416 million tons, down 2 million from December, primarily from dryness that reduced planted areas.
The WASDE report forecast lower domestic wheat consumption by 30 million bushels and less seed used for planting, which raised ending stocks by 32 million bushels. USDA clipped a dime from each end of the estimated price range, and reset it to $6.50 to $6.90 per bushel. The market was anticipating a decline in surplus stocks, not an increase, and the surprise caused weakness in the wheat market which closed limit lower.
Global wheat production estimates declined 1.1 million tons from December, and with global consumption declining, world stocks estimates were raised by 1 million tons.
The Quarterly Grain Stocks report was also released, reflecting grain stocks on December 1. Corn stocks were dropped by USDA to 10.084 billion bushels, down 2% compared to year ago levels. The September to November disappearance was 3.64 billion bushels, compared to 4.06 billion in 2007. The market expected more consumption and for stocks to recede, instead of the 239 million additional bushels.
Dec 1 soybean stocks totaled 2.275 billion bushels, down 4% compared to year ago levels. Disappearance was measured at 889 million bushels, down slightly from 2007 disappearance. The market also anticipated more soybean use and was surprised at the 95 million bushels of additional stocks.
Dec 1 wheat stocks totaled 1.422 billion bushels, up 26% from the same period in 2007. The quarterly disappearance was estimated at 436 million bushels, 25% less than the same period in 2007. Traders expected wheat stocks at 1.365 billion bushels, and were surprised with the 57 million additional bushels.
Winter wheat seedings were estimated by USDA at 9% less acreage than the 2008 crop. Total acreage was forecast at 42.098 million acres, compared to 46.281 million a year ago. USDA says wet weather delayed the start of planting and the pace remained behind prior years. Hard red winter acreage is estimated at 4% less than 2008, soft red winter acreage is estimated at 26% less than 2008. White wheat acreage is up 1% and durum wheat acreage is down 16%.
Summary:
While the grain market was surprised at many of the statistics released Monday by USDA, the report reflected increased production, reduced consumption, and more surplus stocks. With those statistics in hand, farmers and the grain market must determine the amount of corn and soybean acreage that should be planted this spring. The limit down closes in the corn, soybean, and wheat markets make those decisions difficult today, but supply and demand issues will soon become less emotional.
Posted by Stu Ellis at 12:31 AM | Comments (1) | Permalink
January 12, 2009
Will The Brazilian Ethanol Machine Challenge US Renewable Fuels Policies?
The corn market, and to an arguable extent, the soybean and wheat markets, have been a function of the demand for ethanol and the US renewable fuels policy. That policy sets annual targets for ethanol production and keeps in place a subsidy for fuel blenders and a tariff that make foreign produced ethanol more expensive when it enters the US market. Next to the US, the world’s biggest ethanol producer is Brazil, which converts sugarcane to fuel, and runs a substantial amount of its motor vehicle traffic on ethanol. But is Brazilian ethanol a real competitive threat to the Midwestern corn grower?
Brazil has nearly doubled its ethanol production since 2003, and will produce over 7 billion gallons in its current marketing year, compared to the 9 billion in the US, according to Don Hofstrand, in the January Iowa State Ag Decision Maker. Hofstrand says Brazil initiated a renewable fuels program in the 1970’s during the high oil price era, and kept building it into today’s robust ethanol program.
Brazil’s sugarcane industry is the primary supplier of the feedstock for ethanol. The canes are chopped and crushed to produce sucrose which is converted into ethanol. The remaining fiber is burned to produce the electrical energy needed to refine the sugar into ethanol. Hofstrand says new laws are designed to reduce the smoke that pollutes the air. Also, the sugarcane has traditionally been cut by hand, but manual labor is being replaced by machinery in the harvesting process. He says excess energy from the co-generating plants is used to feed the Brazilian electrical grid.
In comparison to corn, sugarcane is planted only once in six years, with five annual crops before it requires replanting. Sugarcane produces 35 tons of cane per acre, compared to 8.4 tons of 150 bu. corn. An acre of sugarcane produces 560 gallons of ethanol, compared to 420 gallons of ethanol from an acre of 150 bu. corn. The sugar ethanol is cheaper to produce than corn ethanol, both in the cost of crop production and in the cost of refining it into ethanol. Brazil has 9 million acres of sugarcane converted annually into ethanol, which is only 1% of its arable land base, while the US has 28 million acres of corn converted annually into ethanol, equal to nearly 4% of the land base. Current Brazilian governmental policies do not include either subsidies or tariffs comparable to the US renewable fuels policy, however the policy does call for planted acreage to reach 25 million acres by 2012.
Regarding future expansion, Hofstrand says Brazil can greatly expand sugarcane production without an impact on any other crop, while any US expansion of corn production for ethanol will come at the expense of either soybeans or wheat production. He says Brazil has made substantial governmental investments into research that will improve sugarcane production, focused on drought and pest resistance, as well as yield and overall sugar content. He says yields have tripled in the past 30 years.
Research has also been focused on using the entire sugarcane plant for ethanol production, not just the sugar content, which Hofstrand says will allow ethanol production per acre to double. Ethanol production in Brazil is expected to grow from the current 7 billion gallons per year to 10 billion gallons by 2012.
Summary:
While Brazil is currently second behind the US in world ethanol production, its plans for expansion are in nearly lockstep with the US renewable fuels policies. Brazilian ethanol comes from sugar, which produces more ethanol per acre than corn, and is produced at a lower price per gallon. While the US maintains a tariff on imported ethanol, some Brazilian ethanol does enter the US market at competitive prices. Over time, Brazil will have the opportunity to produce even more ethanol at a lower price than the US, which will challenge current US renewable fuels policies.
Posted by Stu Ellis at 12:05 AM | Comments (2) | Permalink
January 9, 2009
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 link to crude oil has broken says economist Chad Hart at Iowa State and grain prices are stronger. Hart says the strength in corn and bean prices has come from weather concerns in South America, weakness in the dollar, and bidding for 2009 acreage. Read more.
Corn exports are significantly behind the pace of last year, despite weather problems in Brazil and Argentina that threaten the size of their corn crops. But soybean exports are stronger, running well ahead of early 2008 levels. Chinese purchases have been the key. With the stronger dollar hurting exports, Brazil’s trade could certainly benefit, says Hart.
The 2009 calendar year may be the first that ethanol production could be less than the federal mandates for production. Chad Hart at Iowa State says the ethanol industry has suffered financial stress as seen by the Verasun bankruptcy. He says that means there will be less DDGS produced and a greater demand for corn by the livestock industry.
Chad Hart is not expecting 2009 total acreage to expand has it has been for several years because of the higher production costs and lower profitability. He says some forecasts have been for record acreage of soybeans as farmers shift away from high priced fertilizers for corn. Hart says prices in the early part of 2009 and weather going into the planting season will ultimately decide the allocation of corn and bean acres.
The federal ethanol production mandates makes marketing specialist Jim Hilker at Michigan State think corn acreage will expand by 2.3 mil. over last year. He said 2 mil. more acres will be needed and the ethanol industry will bid up prices to buy some insurance acres. He says, “If you look at corn prices relative to soybean prices, corn yield relative to soybean yields, and you look at the huge drop in wholesale fertilizer prices, corn will deliver a higher return per acre. Thus more corn acres to be planted.”
Hilker says soybean acreage will drop by 1 mil. acres from last year because of better returns for corn. He says if they drop very little, soybean prices may struggle next year and he’s suggesting prices be locked in for fall delivery. His reasoning includes:
1) Ending stocks for the 2009/2010 crop will be 250 mil. bu. with trend yields.
2) Export growth & increased domestic demand will support prices for the new crop.
3) Increased acreage will result in 2010, and ending stocks will continue to build.
Mark your calendar for Jan. 12, when USDA will close out the 2008 production year estimates. The final projection will be made in crop size, along with a new supply-demand estimate, and the Quarterly Stocks Report. Winter wheat seedings will also be reported. Watch the farm gate website for a summary of the USDA crop reports.
Production cost: Fuel. Diesel fuel prices are down 28% from the highs and 25% in the last month, but only down 1% from year ago levels. Mike Duffy at Iowa State says tune engines, keep tires properly inflated, and consider energy efficient replacements.
Production cost: Seed. Duffy says 30% price variations on comparable products are not uncommon, as seed industry competition is reduced and prices rise. He says make sure you can benefit from a special genetic trait before buying seed with that trait.
Production cost: Fertilizer. Fertilizer and lime costs are up 64% from 5 years ago, and estimating costs is difficult with different payment regimes. Duffy predicts steady prices for N & P, but uncertainty for K, as higher priced products are sold before lower priced.
Production cost: Pesticides. Pest management costs have increased considerably says Duffy, who says one popular herbicide will likely double in price for 2009. Pesticide costs per acre were flat the last several years, but he says that trend will end in 2009.
Production cost: Rent. Average increases will be up by 8% says Duffy, which will follow land values. He says lower grain prices and higher input costs will lead to lower returns and that should lead to lower rent, which is up 30% over the past 3 years.
Continuous corn will cost $4.88 for 165 bu. and $5.10 for 145 bu. for non-land cost of production. Corn after beans will cost $4.21 for 180 bu. and $4.32 for 160 bu. for non-land costs. Soybeans will cost $9.64 for 55 bu. and $9.81 for 50 bu. for non-land costs.
Mike Duffy at Iowa State says prepare for volatile grain and input prices, and risk management is going to take on a new meaning and urgency in the years ahead. He thinks wild gyrations will settle down, but prices and costs will be at a higher level. He says the energy-related boom for agriculture has faded and the 2009 outlook is not bright.
One final note, says Duffy, “Remember that over the past 40 years there has only been one year when the top third farms in the Iowa Farm Business Association didn’t make money. Somebody is always making money in Iowa agriculture.”
To follow up on diesel prices, Kansas State economist Kevin Dhuyvetter tracks the NYMEX crude oil market which determines diesel prices. He says March prices should be 48% less than last year, and April through July, diesel prices should be more than 50% less than what you paid in 2008. Harvest prices should be 30-45% less than last fall.
No lower fertilizer prices yet, says Jim Hilker at Michigan St., but stocks of high priced fertilizer must be sold first. “Consider waiting to price fertilizer until you can price it at the lower prices. Urea in the mid $300's, wholesale NH3 in the $500 range, may find retail NH3 for $600, wholesale DAP around $600, and wholesale potash around $900, which is the smallest drop.” Read more.
Crop insurance indemnity payments will likely be taxable as 2008 income, since most of the revenue policies paid price declines, not yield losses. A yield loss payment can be deferred if it follows your normal marketing pattern, but any portion of the indemnity related to revenue cannot. An indemnity from a GRIP payment will not be paid until later this spring and will be considered 2009 income, says Iowa State farm management specialist Steve Johnson. He says any payment deferred must be all or none and cannot be split. Iowa State’s Johnson urges farmers to seek advice from a certified tax preparer.
Modest profits are in the future for the hog industry says Purdue economist Chris Hurt in his latest newsletter. However, that is dependent upon moderating feed prices and somewhat higher hog prices as production is anticipated to decline 1-2% during 2009. But Hurt says the 21% of production that was exported in 2008 to help out, may not be as robust this year.
With a 60¢ reduction in corn and a $25 drop per ton in bean meal, Hurt says cost of production should drop $3-4/cwt for live hogs. He says that may turn the $15 loss per head in 2008 to a gain of $3 per head in 2009, reversing 6 straight quarters of losses.
The 2009 beef market will be marked with the start of a consumer trend of less beef being purchased and purchasing less expensive cuts of meat, says Nevil Speer at Western Kentucky. He says the corn market will also interfere with profitability and the end result is continued turbulence, requiring careful decision making and risk management.
The sufficiency approach for P, K and S management allows for significant savings in short-term fertilizer costs, says NE fertility specialist Richard Ferguson. “With this approach, nutrient application is not recommended when the soil test level exceeds the critical level as the probability of yield response is low. With the crop nutrient removal approach, an additional $118.56 of nutrients per acre would be applied for situations of adequate nutrient availability and 200 bu/acre corn yield.” Read more.
Clay soils that are poorly drained have a long compaction memory say Ohio State soil scientists. On a no-till field, the compaction caused by one trip of a grain cart resulted in a 40% yield loss, with effects of the compaction continuing for 8 years. They determined that it is better to prevent the compaction initially, than struggle to eliminate it.
Preventing compaction can be accomplished, say Ohio State researchers:
1) Practicing minimal tillage techniques, such as chisel plowing or subsoiling.
2) Rely on earthworms for help, but compaction reduces their population by 70%.
3) Utilize alfalfa or other cover crops that have deep taproots to open compacted soil.
4) Crop residue left in the field acts as a buffer to dissipate any wheeled traffic.
5) Use dual axle equipment with wider tires to distribute weight over a wider area.
6) Practice controlled traffic to confine equipment traffic to specific paths each year.
The difficulty of defining sustainable agriculture has appeared again in a national effort to create standards for sustainable agricultural production, processing, and product handling, says IL ag law specialist Bryan Endres. In an effort to select an organization without preconceived ideas to write the plan, the input of a large segment of agriculture was ignored. Work is resuming on the standards with wider farmer representation. Read more.
Posted by Stu Ellis at 12:55 AM | Comments (0) | Permalink
January 8, 2009
Whatever Happened To The Move Toward Cellulosic Ethanol?
There is no secret that when corn becomes too high priced or there is an insufficient supply, ethanol will be refined from cornstalks, switchgrass, miscanthus, wood chips, potato peels or some other form of low value biomass. The bugs are being worked out of the processes, but since it is all in the experimental stage, what will be the financial support for the biomass ethanol industry to start up and go on line toward full scale production? Has the economy threatened such a start up industry? You and a lot of other farmers want to know when to deliver a truckload of corn stalks.
USDA grants in the past year provided over $10 million to speed up the cellulosic ethanol research, and some pilot plants are operating. But economist Cole Gustafson at North Dakota State University says financial constraints will interfere with the transition from experimental to commercial operation. His analysis casts doubt on the availability of industry capital and the uncertainty in the US financial markets. And he thinks Brazil and Mexico will be in a position to capture a share of the cellulosic ethanol market.
Gustafson says the US ethanol industry expanded rapidly with the help of federal mandated production goals and low cost corn, generating financial benefits for local and state economies. But he says research has shown that as local ownership declines by one percent, one less job is created in a local community.
When corn-based ethanol plants were at their peak of profitability in 2006, $2.25 per gallon was returned to investors, who had invested about $1 per gallon of capacity to build the plant. But he says those margins have steadily declined since mid-2006 as more ethanol reached the market and more ethanol plants competed for local corn. Gustafson says when plant margins diminish, external capital sources are no longer interested in the investment. He points to the decline and bankruptcy of Verasun Energy, and says some firms will struggle in the best of times and with capacity at 62%, new firms will have limited incentives to begin producing ethanol.
Additionally, Gustafson says construction costs have risen to $2 per gallon of capacity, tax credits and subsidies for ethanol are increasingly uncertain, public concerns over water consumption by ethanol plants, credit limitations placed on ethanol plants, and the emphasis being placed on development of technology for cellulosic ethanol have all converged as threats to the expansion of the corn-based ethanol industry. Despite the challenges, the financial stability of the ethanol industry remains solid, and one lender which has financed 44 ethanol plants says only 3 of them were in poor financial health.
Parallel to the industry’s challenges, the collapse of the international credit markets has resulted in some uncertainty, but the ethanol industry had halted expansion in summer due to high corn prices, so the failure of international financial markets had little impact. The economist says most plants had alternative lines of credit to use when commercial paper markets dried up.
Gustafson says the cellulosic ethanol plants will be eligible for a 50% tax credit, and they will become commercially viable in the next couple years. While rising construction costs are a problem, they are doubly difficult for cellulosic plants that cost twice as much to build as corn ethanol plants. However, the value of the ethanol will increase along with the nation’s path to reduce its carbon footprint, and cellulosic ethanol may command a premium price, if the carbon value can be calculated.
Summary:
The ethanol industry is in a transition phase from corn to cellulosic feedstocks, but at the same time there is a lack of capital available from investors to help it advance, and funding arrangements over the past several years have not allowed the industry to build any equity in its plants. Uncertainties in the ethanol industry include continuation of the tax credits and other subsidies, as well as the difficulty in establishing values for carbon trading that could potentially benefit cellulosic ethanol. The Wall Street turmoil is an additional challenge that could subdue the economic performance of the country for the next decade. Part of the solution will be the rising value of the dollar, which will increase importation of foreign refined ethanol. Mexico and Brazil have announced substantial expansion plans for sugar-based ethanol that will help the US meet its mandate for 36 billion gallons of renewable fuel production per year.
Posted by Stu Ellis at 12:47 AM | Comments (1) | Permalink
January 7, 2009
What Is Your Comfort Level With Regulation Of Agricultural Markets?
For months the evening news broadcasts and morning headlines have been detailing the bailout du jour and we have been equating that action with the voters’ demand for change. So far, the bailouts and regulatory controversies have occurred in the financial markets along the East Coast. But would you see positives or negatives in governmental intervention in the grain market, for example, if for some reason their was a failure of the Chicago Board of Trade, the Mercantile Exchange, or the grain trading floors in Kansas City or Minneapolis?
Markets allocate resources, but when there is a failure to do that, to what degree is the government warranted in any intervention? Without a deep exploration of the mind of Eighteenth Century economist Adam Smith, it may be worthwhile to consider government involvement in agricultural markets. According to USDA economists Marc Ribaudo, Fred Kuchler and Lisa Mancino, in the November issue of Amber Waves ag markets are competitive, composed of numerous diverse buyers and sellers, transparent, and should be efficient without direct government intervention. However, the economists contend that on-going government intervention includes: conservation payments, price supports, pesticide exposure limitations, food labeling requirements, and public-funded research.
Justification for government intervention is identified in various ways:
1) When our decisions impact others and no compensation is involved, such as water pollution.
2) Public goods that do not lend themselves to market allocation, such as national defense.
3) Marketable goods with insufficient information about them, such as organic foods.
4) Near-monopoly situations that exclude some market participants.
The issue of water pollution is one example of government intervention where conservation payments have been developed to assist farmers in solving problems that would eventually impact others downstream. The economists call that a substitute for consumer demand. Another intervention, such as the Clean Water Act, uses regulations and imposes requirements and penalties.
Another example of intervention follows the outbreak of foodborne illness, resulting from consumers unwilling to pay higher prices for safer foods, or the lack of information about a food, where a consumer may not believe a seller’s claim. Without some certification of purity, safety may be sacrificed in the absence of government oversight, say the economists.
A third example is market concentration, such as the meat packing industry, where the top four beef packers account for 81% of fed cattle slaughter. The economists contend, “The market system works best when there are many buyers and sellers acting independently and where no single actor or set of actors can influence prices. With only a few buyers, processors may have sufficient market power, individually or cooperatively, to exert downward pressure on the price they pay producers. If that were to happen, the quantity supplied and prices paid to farmers would ultimately be lower than under more competitive conditions.”
Market failure occurs when decisions made in self interest conflict with society’s desire for an efficient allocation of resources. The USDA economists say when that happens, there is a wide variety of remedies such as more stringent regulation, tax incentives, subsidies, and government-set standards.
Summary:
Although most people would identify the US as a free market economy, the agricultural markets alone have a diverse number of government interventions to ensure the market allocates resources. Recent examples in the news have dealt with various bailouts and failures of regulatory oversight in the financial markets. So far, the commodity market has not made the daily headlines, but that may be a result of all of the USDA program involvement before and after a commodity value is established.
Posted by Stu Ellis at 12:23 AM | Comments (0) | Permalink
January 6, 2009
Have You Adopted The Skills Of Successful Farm Operators?
Faced with lower crop prices than a year ago and higher input costs than a year ago—with the potential for profitability in doubt for many farmers, what expertise do you have that will contribute the most to your success? Is it machinery management? Is it the ability to select the right corn hybrid and get it in the ground on the perfect date? A recent survey identified those skills, so let’s see if you agree with some of more successful farmers in the Cornbelt.
Chief Executive Officer. That is the name plate on your desk and your office door. And Purdue’s Mike Boehlje says farmers need to become more like corporate CEO’s to successfully compete in today’s environment. He says that includes leadership, relationship management, and strategic thinking. Boehlje assembled the survey taken by the organizers of Purdue’s Top Farmer program, and in their December newsletter Jason Oliver and Bruce Erickson said farmers rated financial management skills and risk management skills as most important to their success, but when those were analyzed, success in financial management was dependent upon production management and personnel management.
As a result, Boehlje says, “While those CEO-type skills are likely important going into the future, the survey indicated that for farmers in business today, their success appears to be more built on the basics of producing their crops, tending to their livestock, and managing their work force.” What are those skills? They include:
• Production management
• Procurement and selling
• Financial management
• Personnel management
• Strategic positioning
• Relationship management
• Risk management
Those seven characteristics or skills were offered to several hundred farmers in survey to find out what they believed were the most important to have to be successful, and if they had actually adopted those skills. The scores indicated the respondents in the survey were short of adopting the important skills by 8%-15% for six of the seven. Personnel management was only rated 51% as an important skill, compared to the 81% given to financial management. At the same time, only 31% of the farmers indicated they put personnel management skills into practice on their farm.
The farmers who completed the survey were also asked a number of other questions that revealed information about their financial success, and when that characteristic was crossed with the importance placed on the skills, it was obvious that the more successful a farmer was, the more emphasis was placed on implementation of that given skill. For each of the seven, the greater the profit, the higher the adoption of each of the seven characteristics. While there was only a 9 point spread in the adoption of risk management skills from the under $50,000 profit to the more than $200,000 profit farms, there was a 21 point spread on personnel management and an 18 point spread on production management.
The Purdue researchers say prior studies have shown that farm profitability increased until the operator reached the age of 50; and that younger farmers who take on more debt are willing to adapt more skills to grow their business.
Summary:
Management capabilities are critical for success, and farm operators should look at their skills to determine which they have adopted and where improvements could be made. Financial and risk management often seem to receive the most attention, a subset of production management issues can easily bolster the potential for financial management success.
Posted by Stu Ellis at 12:40 AM | Comments (1) | Permalink
January 5, 2009
Can Livestock Consume Enough DDGS To Prevent An Adverse Impact On Ethanol?
Cornbelt agriculture has benefited from the ethanol market that will consume an estimated 3.7 billion bushels of corn this marketing year, and has created a premium pricing environment for the corn grower. 2009 will produce an estimated 11 billion gallons of ethanol, enroute to the 2015 mandate of 15 billion gallons. But along with the explosive growth in ethanol has been a similar growth in production of distiller’s dried grains, expected to reach 40 million tons this year. But what is the market for this commodity?
At the typical dry grind corn mill that produces ethanol, the fuel flows into tank trucks and tank cars and the distillers dried grains (DDGS) is shipped out at the other end of the plant to trucks and railcars headed to feed lots. For the ethanol refining industry to be profitable, there must be a market for both ethanol and DDGS. But the question of the potential market size for DDGS is addressed by Purdue economist Frank Dooley.
Dooley and other economists have offered potential market estimates based on maximum amounts of DDGS that can be included in livestock rations, multiplied by the estimated number of head that would potentially be fed DDGS instead of the prime alternative, corn. The consensus of use has focused on dairy cattle consuming 12.7%, all cattle consuming 66.4%, swine consuming 7.3%, and poultry consuming 13.6% of the DDGS that are produced domestically. The various economic studies find that 100% of the DDGS will never find a livestock feeding operation and be consumed, and that the current volume of DDGS being produced should not become burdensome in the near future. Researchers found that not all farms would feed DDGS, and larger operations would be more likely to use it.
The rate of DDGS inclusion in the ration depends largely upon price relationships with other feed, as well as nutrient composition and availability. Interestingly, inclusion rates vary from one economic study to another. University economists and livestock specialists usually have smaller amounts of DDGS included in livestock rations than does the National Corn Growers Association, particularly for dairy cows, swine, and poultry.
Livestock feeding practices have been tracked by USDA’s National Ag Statistics Service, which indicates livestock producers are feeding less than could be fed. Of the 1,276 livestock feeding operations using ethanol co-products:
• Dairy cattle were consuming 61% of the potential.
• Cattle on feed were consuming only 36% of the potential.
• Beef cattle are being fed 55% of the potential
• Hogs were being fed 28% of the potential.
Ten different classes and species of livestock may be markets for DDGS are counted by NASS, but Dooley says, “The growth of the ethanol industry and the resulting availability of DDGS in the Cornbelt may influence state level populations for cattle on feed, dairy cattle, and hogs.”
Dooley says the lack of consumption of DDGS stems from class of livestock and availability, although the expansion of the ethanol industry will resolve the latter issue. However smaller farms may not have the equipment to handle it, shelf life may be limited, and transportation may be an issue. He says 25% to 40% of farms may find it difficult to feed DDGS.
Using the average number of head of livestock per specie, Dooley says a 24 ton truck of DDGS would last 64 days at an average sized dairy and 10 days at an average sized hog operation, all based on differing inclusion rates in the ration. For some operations, spoilage of the DDGS would become an issue. Given a 60 day shelf life, it would take require a dairy operation to have 178 cows and a poultry operation would have to have more than 80,000 pullets to consume the single truckload of DDGS in two months.
Based on the potential consumption, Dooley says 24 million tons of DDGS would have been consumed in 2008, with an upper limit to 55 million tons for the long term expansion potential. At this point, he says dairy farms have nearly reached their peak rate of consumption with 96% market penetration. Swine operations have reached 35% of their potential use, but only 15% of cattle operations are using DDGS to the maximum and less than 10% of poultry operations are at potential consumption.
But ethanol expansion and more DDGS production are occurring daily, and Dooley says, “The amount of DDGS available for consumption will rise sharply from 13.49 million tons in 2007 to 20.62 and 30.03 million tons in 2008 and 2009, respectively. Compared to 2007, this represents around a 50 percent growth rate in both 2008 and 2009.” He says unless DDGS exports expand rapidly, DDGS consumption can only increase if more livestock producers feed it, and they feed it at higher rates in their ration.
Summary:
The expansion of the ethanol industry has increased the amount of DDGS available for livestock feeding operations, and if the feed is not consumed, the ethanol economy will be adversely impacted. The current rate of DDGS production will saturate the dairy and hogs markets by the end of the 2009 and the beef and poultry markets must triple their use of DDGS.
Posted by Stu Ellis at 12:21 AM | Comments (1) | Permalink
January 2, 2009
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 December USDA crop report made headlines for cutting projections for corn used for ethanol from 4 bil. to 3.7 bil. bu. But Extension’s Jim Hilker at Mich. State says 2009 will still require 700 mil. more bu. of corn used for ethanol than the 2007-2008 marketing year. He says subsidies and mandates remain, but just the rate of growth is slowing.
Hilker says E-85 prices used to be less than the price of gasoline, but that is no longer true. “This is due to wholesale gas prices dropping to around $1.10, while ethanol has dropped to about $1.50 per gallon. At the peak of the oil and corn prices ethanol reached $2.90, about 80% of gas prices at the time. The relatively higher ethanol content in E-85 is one reason the USDA has lowered their forecasted use of corn for ethanol.”
With trend yields in corn and the nearly 1.5 bil. bu. carryover next August, Hilker says 2.25 mil. fewer corn acres will be needed in 2009, but he expects a 3 mil. acre expansion. Hilker’s latest newsletter can be found here.
If you have corn to sell, Hilker says, “The futures market spreads continue to say it will pay five cents a month to store corn, under a hedge if prices drop, and under both a hedge and storing cash if prices rise. However, the nearby basis has tightened to the point where it may no longer help with paying for storage. This tells me that on-farm storage is still a reasonable alternative, and paying commercial storage plus lost interest is not.”
If you have beans to sell, Hilker says, “The futures are telling everybody it will not pay to store soybeans. Of course, with 35 cents-plus nearby basis it is hard to know what that means. My best shot is if you want to stay in the soybean market, use a basis contract, sell cash/forward contract and buy futures, or sell cash/forward contract and buy calls.”
When your bookwork is finished, 2008 will show substantial red ink for hog producers says IL ag economist Dale Lattz. Reviewing records from 5,500 farms, Lattz says hog prices are expected to average about $49.50/cwt in 2008. The sharp increase in corn and soybean prices early in 2008 will resulted in significantly higher feed costs. Feed costs are expected to average about $38.75/cwt and non-feed costs at $19.70. Total production costs would be $58.45/cwt, or significantly above the average price received.
2008 will prove to be less profitable for beef producers than 2007, says Dale Lattz at IL Farm Business Farm Management. Returns to cattle producers were supported by slightly higher finished cattle prices and lower prices paid for replacement cattle. Offsetting the higher finished cattle prices will be significantly higher feed costs. Feed costs rose in 2008 due to higher corn and forage prices. Even with higher finished cattle prices, those higher feed costs will most likely result in 2008 returns below 2007 returns.
Deductions, exemptions, and depreciation are at the top of your mind, and all farmers should beware of many changes approved by Congress late in the year to boost the economy that have implications for farm taxes. For changes in the law and needed tax tables, MN Extension tax specialists have provided extensive information here.
Full time farm employees who received a year end bonus were rewarded with an average of $1,000, but within a range of $50 to $9,000 according to an Iowa State survey. 55% of employees received the bonus, which were based either on volume of commodity produced, commodity quality and performance, longevity, or farm profitability.
Year end bonuses were tallied by Iowa State ag economist William Edwards who notes a bonus does not have to be paid in cash. Appliances, gift certificates, paid vacation or travel. A commodity can also be used, such as a volume of grain or livestock, or grain from acreage to sell. Edwards says current tax laws do not subject payments to employees in the form of commodities to Social Security tax. For ideas about bonus payments, Edwards has a fact sheet here.
Cash rent increases from 2008 to 2009 may be flat says Purdue economist Craig Dobbins, due to the erosion in grain prices and economic meltdown. "So the decision that might have been made in September to pay cash rents in 2009 of $180 to $200 an acre and still have something left over, well, today there's nothing left over and a farmer is in the hole." He says costs and profits should be carefully calculated when negotiating rent.
Purdue’s Craig Dobbins says when meeting with a land owner to discuss cash rental rates, “It's worthwhile to share some information about your costs, how you see your return situation shaping up and letting the landowner know what the margin is potentially going to be for the next year." He says owners should be aware of market price drops. Get negotiating help here.
Production costs are going to be cut where possible says Dobbins. He says this is not the time for a fertility building program. No-till systems will help cut down trips across fields. Money can be saved by ensuring seeding rates are at the proper level.
Are your yield goals reasonable? Profitability can be increased $7.50 per acre by decreasing a yield goal that was 10 bu./A too high, or increased $42.50 per acre by increasing a yield goal that was 10 bu./A too low. NE agronomist Charles Shapiro says the savings comes from a more correct nitrogen application adjusted for reasonable yield. Read his fact sheet.
Profitability is dependent upon the efficient and wise use of fertilizer says KY soil specialist Lloyd Murdock. He offers a checklist for fertilizer profitability:
1) A soil test will indicate if reserves of P and K in the soil are sufficient for profits.
2) If P exceeds 45 lbs/A and K exceeds 250 lbs/A, why add more and raise your cost?
3) If P & K are insufficient, apply them in the row at a half to a third of broadcast rates.
4) When the pH is between 6.2 and 7.0, crops use fertilizers much more efficiently.
5) Manure is cheaper, but good distribution and nutrient testing are the keys to its value.
6) K should be applied each year if vegetation is harvested such as silage, hay, or straw.
7) Sidedressing N on poorly drained soils will improve efficiency and allow lower rates.
Evaluating hybrids can become easier with two principles offered by Purdue’s Bob Nielsen here.
1) Consistent yields 5% above the average yield of trials in which they are entered.
2) Consistently yield at least 90% of the maximum yielding hybrid in a trial.
Purdue’s Bob Nielsen also says look for trials that evaluate hybrids over multiple locations. Multiple testing locations in a single year represent possible weather patterns your farm may encounter in the future. Weather influences hybrid performance more than any other variable, because weather interacts with most of the other yield limiting factors.
Selecting corn hybrids for silage requires different standards than hybrids for grain. MN agronomist Jeff Coulter says check performance data from university seed trials.
1) Silage hybrids should be 5-10 days longer in maturity than hybrids for grain.
2) Consider hybrids with a range in maturity to avoid crop loss from heat or drought.
3) Avoid hybrids with long stay-green ratings because whole plant moisture is too high.
4) Dairy producers should evaluate hybrids by milk per acre and milk per ton here.
December weather has been LaNina weather says Elwynn Taylor at Iowa State. He says it is extraordinary for it to develop this early, which is 3 months earlier than usual. A LaNina peaked last March, contributed to spring flooding, and diminished by mid-May and began to peak again in November, causing all of the snow and cold temperatures.
Will the LaNina remain with us? Taylor says, “The “early peak” of the current LaNina may indicate that the adverse impacts with the large-scale event will dissipate early in the growing season. If so, the above average moisture in the soils of the Cornbelt would be considered as advantageous to potential crop yields.” In the meantime, Taylor there has been near record flooding of some Midwest rivers, instead of January for LaNina years.
Warmer temperatures are on the way says MO climatologist Pat Quinan, who says precipitation predictions are a toss-up for January according to the National Climate Predication Center. Guinan says 10 of the past 15 winters have been warmer than normal with 3 in the top 5 warmest since 1895. Eleven of the past 15 have been wetter than normal. Guinan says 2008 was one of the wettest years which means livestock ponds are full, ground water is in good shape for spring planting, and soil moisture is sufficient.
Corn milling technology can be improved with a new gene inserted in corn that will cause it to stand out under special lighting. The genes can be inserted into the embryo, the starch, or the pericarp coating on the seed and the selected element can be identified under the testing light after the corn has been milled. Iowa State researchers say the individual kernel parts can be identified and segregated easier with the advancement.
Posted by Stu Ellis at 12:45 AM | Comments (0) | Permalink
January 1, 2009
Your Cost Of Production And Your Efficiency Depends Upon Your Address.
The Cornbelt, which the USDA officially labels “Heartland” is the primary agricultural production area of the US. On all the seed that is planted from Western Iowa to Eastern Ohio, there is a great volume of fertilizer and pesticides that are applied. But for a year like 2009, when the cost of those inputs has increased, will the “Heartland” be able to hold its competitive edge, or will other sections of the US become the low cost producer and enjoy greater profitability?
For years, the US has been the world’s low cost producer for nearly all grains when yield and total production are considered. But within the US, the dynamics may be shifting with higher costs of production in regions where more inputs are used. That is the premise offered by University of Minnesota economists Kent Olson and Lena Zakharova in their research on geographical differences and increasing crop production costs. It is all based on USDA’s resource regions.
The economists say the higher input prices have cast a shadow over the enthusiasm for higher grain prices. Fertilizer and fuel have seen the largest cost increases with seed following in third place. For purposes of the research, input price increases during 2008 were used as the yardstick. Fertilizer prices were up 73%, fuel prices were up 60%, seed prices were up 30%, and machinery prices were up 10%, all compared to 2007. While recent data indicates lower fertilizer and fuel prices, there is still uncertainty about when they will stabilize. In addition to the variable costs, the economists say overhead costs for corn are about 50%, wheat is 60% and soybeans are 65%, but the sharpest increases have come in operating costs.
Price trends were used to forecast 2009 prices, based on the 2008 data, and the economists found that fertilizer prices would double from 2007. That is about the level it reached before the economic melt down over the past several months. The economists also used a conservative method based on a four year average annual growth rate, and fertilizer prices were 76% higher than 2007 using that method. A more pessimistic prediction was also developed, using December 2008 prices, which forecast a seven fold increase in fertilizer cost.
Based on USDA’s national estimates of production costs in 2009, the Minnesota “trend” method raises production costs from $3.01 per bushel in 2007 to $4.09 per bushel in 2009, which is a 36% increase. The Minnesota “conservative” method forecasts a 32% increase in production costs from 2007 to 2009, settling at $3.83 per bushel. The Minnesota “pessimistic” forecast of production costs shows a 216% increase from 2007 to 2009, with a 2009 cost of production of $9.16 per bushel.
The same exercise was done for soybeans, with an expectation of $8.52 per bushel in 2009, based on the trend increase. The conservative estimate was for $8.17, and the pessimistic estimate was $13.90 per bushel. For wheat, the trend estimate was for $6.82 in 2009, the conservative estimate was for $6.47, and the pessimistic method was for $13.19 per bushel.
The economists say once the national production cost estimates are calculated, they compared them to seven US regions, which feature differing production practices in growing corn, beans, and wheat. “For example, it is reasonable to expect that the regions that use more fertilizer will see their total costs rise more in response to an increase in fertilizer prices than would regions that use less fertilizer.”
For corn, the economists say the Heartland (center of the Cornbelt) will maintain its competitive edge, but the Northern Great Plains (Dakotas, and northern Nebraska) and the Prairie Gateway (southern Nebraska through Kansas, Oklahoma, and into central Texas) will increase their competitive advantage due to less fertilizer and chemical use.
For soybeans, the Heartland is expected to maintain its competitive edge, but the Eastern Uplands (Appalachia and the Ozarks) will increase its competitive advantage due to less fertilizer and chemical use.
For wheat, the Prairie Gateway (southern Nebraska south through central Texas) was expected to have the greatest increase in competitive advantage, but all other regions will lose some advantage because of production costs.
Summary:
Increased production costs for grains have caused some efficiency shifts in various parts of the US because of varying production practices. While the heart of the Cornbelt keeps its advantage in corn and soybeans, wheat production is more expensive than for other regions. The states with the greatest borders on the Great Lakes have become less efficient overall. Although individual farms have differing costs of production, their trends will be related to their geography, but their profitability will be more unpredictable.
Posted by Stu Ellis at 12:33 AM | Comments (0) | Permalink
