At Iowa State University, ag economist Bruce Babcock explores the odds of an ACRE payment to corn and soybean farmers, saying futures market prices point to a good chance of that occurring. His analysis is here.

Also at Iowa State, ag economist William Edwards discusses the pros and cons of using default or "plug" yields in place of historic yields in the Ag Decision Maker.

At Kansas State University, risk management specialist Art Barnaby has been filing many updates on ACRE. He is holding 2 webinars (Internet web broadcast seminars) entitled “Will ACRE pay on my farm?” on Aug. 4, with sign-up details here.

Some of Barnaby’s most recent calculations for prices and yields are located here.

Barnaby also provides an exchange of questions and answers that farmers have been asking him about program details, which may very well be some of your questions. Find his answers here.

At Michigan State University, marketing specialist Jim Hilker’s latest market outlook explored the impact of ACRE on Michigan farmers. If you are one of them, you would be well served to review his comments.

Several members of the Michigan State University ag economics department, including Hilker, Roy Black, and Roger Betz issued an alert for farmers to sign up for ACRE. Their explanation and examples are listed here.

University of Nebraska agricultural economist Brad Lubben provides his analysis of the program with an observation that is appears to be an attractive option for Nebraska producers. Find that analysis .

At Ohio State University, ag economist Carl Zulauf has been one of the more prolific authors of material about ACRE, creating brief fact sheets. Six of his factsheets are located here.

Economists at Purdue University used their Top Farmer Newsletter to provide an analysis of ACRE and give an Indiana example of how it works. Find that here.

Purdue marketing specialist Chris Hurt provides ACRE help on corn and on soybeans.

Texas A & M University created a series of links to ACRE websites and presentations. Those are located here.

In Minnesota, the chance for an ACRE payment is better for wheat than row crops says economist Kent Olson in his latest newsletter.

If any of these are helpful, please remember that August 14 is the deadline to enroll your farms in the ACRE program. Only a signature is needed, including signatures of the operators and owners. All production evidence should be submitted by July 2010. However, you will need to have a good handle on the comparison of your farm yield with the state yield to determine whether that farm should be enrolled in the program.

Summary:
Obviously, the time to decide on whether to sign up for ACRE for the 2009 crop is quite soon, and many farmers are undecided. If the reason for the indecision is insufficient information, there are numerous resources, many of them recommending that farmers enroll in ACRE for 2009, because of the greater potential for financial benefit, compared to the conventional program.

Stu Ellis

Posted by Stu Ellis at 12:33 AM | Comments (1) | Permalink

July 21, 2009

Yields, Price, And ACRE: Working Toward A Decision

How do potential yields look compared to normal? Is the crop getting larger? Will crop prices recover after their recent plunge? Where are prices in relation to crop revenue insurance guarantees? Will revenue from low prices trigger an ACRE payment? And when is that ACRE signup deadline, anyway?

My, you have a lot of questions! But since you only have 25 more days until the August 14th ACRE sign-up deadline, you’ll need to do some significant cogitating about yields, prices, and whether ACRE will benefit your individual farm. And remember, since every farm is a bit different, this year ACRE may benefit you but not your neighbor, and vice versa.

At Purdue, marketing specialist Chris Hurt uses the term “flushed” in his newsletter to describe the corn market, which peaked at $4.67 on June 2 for December futures and has traded under $3.30. Hurt says more acres, improved yields, lower usage, and higher ending stocks have all combined to reduce the value of corn. And that value is one of the elements of the ACRE formula. While crop conditions are better than usual, Hurt says weather forecasts point to a deterioration of the crop size in August. He is expecting a 156 bu. national yield, compared to the 153.4 bu. average that USDA predicts, but he also says acreage is not as much as the June 30 Planted Acreage report projected. The Purdue economist believes that demand will also increase because of lower prices, and that will raise corn prices. He says grain producers might avoid price any corn now, arrange for storage, and expect to see December futures in the $3.75 to $4.00 vicinity.

One question to consider is the potential size of the corn crop based on current crop conditions, which Darrel Good at the University of Illinois says would point to a 163 bu. national average yield, if crop conditions remain steady, and there is not an early frost or freeze. His newsletter suggests the current prices have been a factor of the corn acreage fundamental, along with weakness in financial and energy markets. And for the next several weeks, yield and production prospects will likely determine if a low in prices has been established.

Good believes the markets are quite satisfied with the size of 2009 production, "Corn and soybean markets have priced in relatively large crops, but considerable production and price uncertainty remains. The November soybean futures are now about $.50 above the spring price guarantee for crop revenue insurance products offering an opportunity for some additional pricing of the 2009 crop. In contrast, December corn futures remain well below the crop revenue insurance price guarantees." Those revenue insurance guarantees are $4.04 for corn and $8.80 for beans.

Hurt suggests that corn may be too cheap, based on the potential for increased use and fewer corn acres than USDA believes. But the relative low price of corn is pushing many farmers toward the FSA office to get the appropriate ACRE forms to fill out before the sign-up deadline. Hurt says if yields are 1-2% better than normal, then the US average price has to be $3.70 for ACRE to provide more financial benefits than the conventional program. As a point of information, $3.75 is the midpoint of the current USDA forecast price range for new crop corn. At that point, Hurt says the likelihood is slim that ACRE would make any payment. However, the futures market is projecting a $3.30 season average price, and if that is the case, ACRE would pay about $45 more per acre than the conventional program. That also depends on whether your farm trigger is met, according to Hurt, “If your yields look to above normal this year, then this makes it less likely your own farm will trigger. To the extent your yields look normal or below-normal, then that makes it more likely you will meet your own farm trigger.”

Chris Hurt doubts the USDA’s expected average farm price would trigger an ACRE payment on corn, but he says the low futures prices may make that possible, if, your yields are not as good as your farm average.

If you need more assistance in making the ACRE sign-up decision, a good explanation supplemented by audio can be found here.

Summary:
If you are trying to make the decision on whether to sign up for the ACRE farm program, get a good estimate of how your yields will be in relation to your yield record that is part of the sign-up documents. In addition to your farm triggering a payment, there must also be a trigger pulled by the state average yield and the national average price. While USDA’s price forecast may not be low enough, the average price being projected by the futures market may trigger an ACRE payment. Collect as much data as possible before the August 14 sign-up deadline.

Stu Ellis

Posted by Stu Ellis at 12:17 AM | Comments (2) | Permalink

July 16, 2009

Five New Yardsticks Indicate How Your Farm Measures Up Financially

When Dad measured your growth on a door frame, you stood on your tiptoes because you wanted to demonstrate how you had grown. In middle age, we are measured by our belt size, the model of our pick-up truck, or how many acres we farm. But the latter doesn’t really give a good measurement of the financial success of our farm. Lenders have used 16 financial yardsticks for several decades to evaluate our success, but will soon have 21 of them to more accurately assess how we are doing financially.

Lenders and farm financial consultants have a toolbox full of formulas to apply against your financial records to drill down and find out how you are really doing. Even if you don’t have a lender and do not use a financial consultant does not mean you should not conduct your own financial analysis to find out where and how operations could be fine tuned. Economist Tina Barrett of the University of Nebraska outlines the five new yardsticks http://www.agecon.unl.edu/Cornhuskereconomics/2009cornhusker/7-8-09.pdf that have been developed by the Farm Financial Standards Council to determine the financial health of a business.

A measure of liquidity that was adopted is working capital (which is assets minus liabilities) divided by gross farm income. It is called working capital to gross income, and measures operating capital available against the size of the business. You might have a Current Ratio of $1 million; but if working capital was only $25,000, that would not allow financial flexibility. It would show that you could not finance many of your own needs from your own bank account.

If working with a lender, he or she may be interested in your EBITDA score, which is your earnings before interest, taxes, depreciation, and amortization. If the lender wants you to repay a loan quickly, EBITDA will indicate how much money is available for debt repayment.

Since debt repayment capability is the key to success in getting a loan, the Farm Financial Standards Council added three new ways for farms to be graded on their repayment ability.
1) Your capital debt repayment capacity measures all sources of money that would be available to repay a loan. It would include farm and non farm income; after payment of family living expenses and taxes, with depreciation, and interest added back in.
2) The replacement margin measures those operations which have little borrowed capital on their books. It shows the amount of cash available for new principle and interest payments.
3) The replacement margin coverage ratio divides the capital debt repayment capacity by the sum of principle and interest payments plus the cash contribution in the replacement margin. That ratio indicates if there is enough income generated to cover term debt repayments and the cash contribution for new equipment.

Barrett says “The best improvement for these ratios is going to be for operations that don’t borrow much money, but do need to have a measurement for cash available for replacing equipment. In the past, the Repayment Capacity measures have not worked well in these situations.”

Summary:
Farm operations would be difficult to improve if they could not be measured, and the 16 measurements of the Farm Financial Standards Council have been expanded to 21. The new yardsticks provided more analysis capability for farm operations that currently do not have much borrowed money on the books, but need a way to show they have the capacity to repay borrowed money should it be needed.

Stu Ellis

Posted by Stu Ellis at 2:09 AM | Comments (0) | Permalink

July 9, 2009

Are We Entering A 1980's Style Recession?

Are we repeating the farm economy of the 1980’s? With a potentially deadly economic cocktail of surging commodity prices, increasing oil prices, a low and declining value of dollar, high ag exports, inflationary pressures, negative real interest rates, and increasing capital gains, one may sense some déjà vu.

For the most part, most farmers suffered in the 1980’s; tens of thousands lost their farms, some lost their lives, and many lost their families. A large percentage of those who survived are still farming today, with many of them well past their golden years and not looking forward to a re-run of hard times. But what are the implications of the current recession on the farm economy? That was addressed by Michael Swanson, agricultural economist for Wells Fargo, the largest agricultural lender in the US.

Swanson pointed to the relationship between oil, ethanol, and corn as an initial example, saying that energy costs had raised input costs by 30%, but that corn values benefited from the ethanol market being pulled up by oil prices. That had in, icreased farm profits and contributed to higher land values. But at the same time, the recession has reduced vehicle miles driven, pushing down petroleum demand and reducing ethanol output. But Swanson says turning off an ethanol plant is much easier than turning off a feedlot, if the commodity is not needed. Livestock cycles cannot be turned on and off when needed and costs will continue even if the demand is absent. Currently, ethanol prices have floated between the breakeven point for high cost and low cost refining plants. The Wells Fargo economist believes fuel is a wildcard for the row crop industry, since the carbon tax being debated in Congress could inflict collateral damage on crop production. He says if the government hurts the gasoline market, that hurts the ethanol market, and that in turn hurts the corn market.

Swanson says the global economy will help pull up the US agricultural sector because of the strong global per capita real gross domestic product. That points to a “huge future growth” potential for the US livestock industry, according to Swanson. But pork producers should not expect a quick recovery, since futures prices for the next 12 months are within the price range of the last six years for the nearby CME lean hog contract.

Swanson was addressing Illinois farmers on July 8, along with Steve Kruse, Director of Finance and Accounting for John Deere, who said the Wall Street meltdown had a substantial impact on John Deere Credit. He said the credit market dried up overnight, and the subsidiary had trouble borrowing money to be able to loan to its customers. Since then John Deere has “deleveraged” or liquidated its inventory to raise money. But with Deere and Company being a major consumer of steel, it is suffering from OPEC-like consolidations within the global steel industry and its artificial pricing.

Also impacted by the credit market was the Farm Credit system, which sells its bonds to raise money for lending to farmers. Chairman Lee Strom of the Farm Credit Administration that regulates the various Farm Credit banks said the global recession has diminished the interest of foreign investors in Farm Credit debt instruments. While only 6-7% of investors in 2008 were foreign based, foreign banks had been large investors in one of the categories of the Farm Credit short term bonds. (Percentage corrected from earlier post.) And he said the efforts of the US government to resolve the home mortgage crisis is having unintended consequences on the Farm Credit system. He said Congress so far has been willing to allow Farm Credit to regulate it self and remain under control of the House and Senate Agriculture Committees, instead of the Congressional banking and financial regulation committees. Strom said his frequent meetings with Congressional, administration, and Federal Reserve officials result in questions about the health of the farm economy. He says the headlines about the ethanol industry, the dairy and poultry industries, and other challenges of agriculture are getting peoples’ attention who want to know if we are heading into a 1980’s style recession.

Strom says the federal stimulus program has yet to work, since only 10% of the money has been dispensed, at a time when some consideration is being given to a second round of programs. He is anticipating many more home foreclosures when local banks raise interest rates on adjustable rate mortgages, but he does not think the administration will allow major problems to occur as long as unemployment remains at a high level. He said that has impacted much of rural America because many farmers depend on part time jobs that have evaporated, but he hoped the federal stimulus money in USDA’s Rural Development budget would be a positive force.

Summary:
The US economic recovery is a work in progress and agriculture is sharing many of the positive and negative aspects of the recession. The recovery of the global economy will help demand for many US commodity exports, but the administrations climate change legislation may create hardship for the oil industry, and that hurts both ethanol refiners and the price of corn. Agriculture credit is available, but companies that supply credit are having difficulty getting money to loan to farmers.

Stu Ellis

Posted by Stu Ellis at 12:15 AM | Comments (0) | Permalink

July 2, 2009

When The Global Recession Ends, Will You Be Ready To Resume?

Is your farm income dependent on the export market? If you are raising sweet corn, pumpkins, and other domestic vegetables, there is probably not much dependency. But if you are raising corn, soybeans, and hogs, there is a substantial impact. Even though hog profits are elusive, $32 of the value of every market hog comes from the export market, and it was higher last year before the global recession hit. One of six rows of corn and one of three rows of soybeans are exported, and so when the recession spread around the world, US ag trade was interrupted and commodity prices were affected.

US agricultural exports reached a high water mark of $115 billion in Fiscal Year 2008 with the help of high commodity prices and wealthy world consumers willing to buy them. But a $20 billion decline from that is anticipated when Fiscal Year 2009 concludes in September, thanks to the recession. USDA’s Economics Research Service Amber Waves newsletter says the overall decline in trade is due to reduced economic growth abroad, exchange rate movements, and declining US spending. Regarding US exports, many of our trading partners are suffering the same economic blahs seen in the US. Compared to mid 2008, economic growth is down:
• Canada-4.5%
• Mexico-7.5%
• European Union-5.1%
• India-3.4%
• China-3%
• Japan-6.8%
• Russia-8%
The USDA economists say, “All major developed economies still slid into recession. The U.S. and the world economy subsequently entered one of the deepest downturns since World War II, with global growth turning negative.” They point to China and say, “In 2009, China’s economy is expected to grow less than 6 percent, largely because reduced consumer spending in developed countries is causing the first annual decline in Chinese exports in 25 years.”

Until the economic slowdown, US ag exports had paralleled global agricultural trade, which grew over 50% from 2000 to 2006, after growing only 25% in the decade of the 90’s. But since late 2008, the stronger dollar has hurt US exports, particularly bulk commodities since they are more expensive compared to commodity shipments from competing sources. While horticultural and processed food exports will only decline 6% this year, there will be a 26% decline in US bulk commodity exports.

The USDA economists do not believe the current problems will be part of a long term problem, since similar recessions have only impacted US exports for no more than 1-2 years. They say, “The long-term trend in U.S. agricultural export growth prevailed despite large swings in the mid-1980s and late 1990s caused by macroeconomic, weather, and policy events. Now, prospects for U.S. and global agricultural trade will clearly hinge on the resumption of global economic growth.” But they are not ready to predict when that will happen. However, fiscal and monetary actions are expected to help world economic growth recover beginning next year, and USDA’s economists project a 2% growth in world GDP and a 5% growth in world trade continuing into 2011 and 2012.

Such resumption in growth and trade will translate into “increased food demand because consumers are likely to consume more food and diversify their diets to include higher value goods such as red meat, poultry, and other livestock products. Rising incomes along with continued population growth is expected to increase trade in both meats and animal feeds. The USDA projections anticipate rising global trade volumes for all major food and feed grains, soybeans and soybean products, and beef, pork, and poultry. With commodity prices remaining high compared with levels preceding the 2008 price spike, the value of U.S. agricultural exports is projected to rise steadily back toward the peak level recorded in 2008.”

So the market demand will be present, but with US farmers be ready? That is the question USDA is considering because of factors left over from the recession, “U.S. agricultural exports will be influenced by the uncertainties of increasing farm costs and limited resources. A key issue in the future will be the ability of U.S. agricultural production to expand to meet future export demand without escalating costs. In conjunction with sustained foreign demand, long-term productivity gains will be a key component in maintaining U.S. export competitiveness.”

Summary:
Grain and livestock commodity prices have certainly softened because of the global recession, pushing meats down to the level of unprofitability, and challenging the profitability for grain producers. However, the economic atmosphere may be changing with a recovery to positive territory in 2010. USDA says farmers will be able to compete again, as long as costs are kept under control and productivity gains can be sustained.

Stu Ellis

Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink

June 29, 2009

Will You Face Credit Challenges Going Into 2010?

Several times per week federal banking officials close a bank at the end of the day and it reopens as a new branch of a larger bank the next morning. Deposits are still there, so are the employees, but the change indicates the banking industry remains fragile for some banks. Fortunately, banks with largely agricultural clientele remain in good shape, but for how long is uncertain. What the Federal Reserve does report is that agricultural banks are taking measures to strengthen their own financial foundation, and that has an impact on farmers.

The latest issue of The Main Street Economist which is published by the Federal Reserve Bank at Kansas City, reports that agricultural credit standards are tightening, and agricultural borrowers are becoming concerned about their access to credit at the same time agricultural bankers are becoming concerned about the creditworthiness of their borrowers. The reason is the weakening agricultural economy.

In the wake of the global economic meltdown, US agricultural banks remained generally strong, but their profitability has been trimmed while still outperforming banks in the general commercial sector. Comparatively, returns on equity at agricultural banks had declined to 7.6% by September of 2008 while returns for all commercial banks were down to 2.86%. The decline in ag bank returns was due to lower interest rates, since the average rate on operating loans was 9% in 2006 and it was down to 7% in the last quarter of 2008. Correspondingly, the cost of capital for banks to borrow from other banks increased. At the same time, loan delinquencies have increased from 1.08% in the first quarter of 2008 to 1.23% in the third quarter, with delinquencies and write-offs rising faster than at small commercial banks.

In this lending environment, agricultural banks have tightened their lending standards to preserve their capital and manage their risk. However, 84% of the banks in the Kansas City Fed District report having the same amount or more money to lend in the first quarter of 2009 as they did in 2008. But while funds were available to lend, the bankers reported raising collateral requirements on operating loans by as much as 20%. However the change did not restrict loan activity, since farm debt levels rose at the same time, meaning that farmers were able to meet the increased collateral requirements and obtain borrowed capital. But while issuing loans, the average risk rating on farming lending increased and loan quality, particularly those associated with livestock operations, deteriorated. There have been more loan renewals and extensions, indicating that farming operations were unable to completely repay the loan in the prescribed time. One reason may have been the shorter time period banks allowed for loans to be repaid.

The Federal Reserve says banks are at risk themselves by having insufficient funds to loan from their own operations. Specifically, bank deposits are growing slowly because of low interest rates being offered and that reduces the amount of money that can be loaned for farm operating and land loans. With more job losses, many savings accounts are being depleted and that also limits funds. Banks also have the option to issue commercial paper, but with lower equity values at banks, there is a declining interest in loaning money to banks.

During 2009 the creditworthiness of agricultural borrowers is expected to decline with narrower profit margins for crop operations and elusive profit margins for livestock operations. The Kansas City Fed says loan defaults are low at this time, but delinquency rates, loan write-offs, and risk ratings are rising. At the same time, land values are softening because of lower income and that means collateral values will shrink when the lending season begins anew.

Summary:
At the outset of global economic crisis, agriculture seemed to be insulated following two strong years of commodity prices and rising land values. With declining prices, rising costs, and softer land values, the financial stability of the farm economy is weaker, and banks serving agricultural clientele are responding by tightening the availability of credit. Borrowers have to post more collateral, and loans are being written for shorter periods of time. Meanwhile, banks are having more trouble obtaining money to loan.

Stu Ellis

Posted by Stu Ellis at 12:43 AM | Comments (0) | Permalink

June 4, 2009

Replant? Take Prevented Planting Payment? Punt? What Do I Do?

Some Cornbelt farmers have had smooth sailing this planting season. They planted into perfect seedbeds early, germination was perfect, and they have a good crop coming out of the first turn. And then, there is your crop, which just can’t out of the starting blocks. Some is not planted yet, but what is planted has germinated poorly, was drowned out, and is in dire need of replanting. And with questionable profitability from a mediocre crop, can you afford to replant? What are your options? We’re glad you asked!

Some of your initial decisions will be helped if you have crop insurance, and what type of crop insurance. Not all crop insurance policies will cover the costs of replanting and prevented planting, says University of Illinois Farm Management Specialist Gary Schnitkey. His recent newsletter quickly points out that GRP and GRIP insurance policies will not pay for replanting, prevented planting, or indemnify against late planting, but do require a crop to be growing to establish eligibility for an indemnity payment based on a yield under the county average.

However other policies, such as multi-peril, Crop Revenue Coverage, Income Protection, and Revenue Assurance do have those provisions. But even if you have one of those policies, talk to your crop insurance agent before doing anything or you may lose one or more benefits. Don’t just read the policy, call your agent.

The farm level policies will cover one replant and you will need receipts for expenses. However, don’t anticipate unlimited coverage. The revenue-based policies will provide up to $32.32 per acre for corn and $26.40 per acre for beans, and a minimum of 20 acres or 20% of the unit must be replanted.

When the final planting date has been reached (June 5 for much of the Cornbelt), and your field remains unplanted, you can take a prevented planting payment that is 60% of the final guarantee. 25 days beyond the final planting date another crop can be planted but the prevented planting payment will shrink to 35% of the final guarantee of the first crop.

Although planting the second crop, probably soybeans, may seem like a reasonable alternative, there is a downside to planting that second crop. By leaving the field unplanted, it will not be included in any future calculation for your Average Production History (APH) yield. However, if you plant a second crop, your APH for the year will have a 60% crop yield as the data for the year.

After the final planting date, you have the option to plant, but your coverage is reduced by 1% per day up to the 25th day, and at that point the guarantee drops to 60% of the guarantee.

Your choices probably fall into the following categories:

1) If your corn crop has not been planted, you will either plant corn when you can, or take a prevented planting payment of 60% of the guarantee, or plant beans and take 35% of the guarantee. Read more. If you want help with the calculations, use the decision aid in this newsletter.

2) If your stand of corn is poor, you will either let it mature, replant it, or consider it a failed crop and plant soybeans or another crop. Read more.

Summary:
Replant decisions can be quite costly, both in expense of doing so, and revenue lost if not doing so. Prevented planting decisions will be guided by crop insurance regulations, but may not always be easily made because of the potential to lose APH yield average. Many decisions will not come easy because of the potential for lost inputs, such as nitrogen, however, decision aids are available to assist in making a financially sound decision on how to proceed with a challenging spring planting season.

Stu Ellis

Posted by Stu Ellis at 12:56 AM | Comments (0) | Permalink

June 2, 2009

Is The Farm Economy Out Of The Economic Woods, Or Just Now Entering?

Cornbelt farmers have their fingers crossed. Crop inputs have been purchased, some at painful prices. Corn prices are holding their own because of planting delays. Beans are going up because of several market fundamentals. But there are miles of farmland that remain too wet to plant with uncertainties about what, if any, crop will be planted. But since the financial failures in the rest of the US economy have whip-sawed agriculture, many farmers have learned their market and the rest of the economy are too close for comfort.

“The agriculture sector is not an economic island.” That is what Iowa State economist Neil Harl told Congress recently, and is telling farmers in the June issue of the Ag Decision Maker newsletter. But he says the bulk of the world’s economic troubles have sped past agriculture. However, Harl says the longer the recession lasts, the more likely there will be devastating issues for farmers, including diminished credit availability for production, land purchases, and trade.

Harl says the high commodity prices of 2007 and 2008 allowed agriculture to build a financial foundation and gain insulation from the global financial meltdown. But he says falling prices, the lack of profitability in the ethanol industry, and reduced demand for US commodities abroad have been felt in rural America.

The first of Harl’s Danger Signals is found in the commodity market. He said the high grain prices of last year were capitalized into farmland purchases and cash rent leases, only to have prices decline with reduced income per acre. He believes commodity funds played a role in the up and down movement of oil, but their involvement in the up and down move of grain prices “is less well accepted.” Harl notes the initial declining trend in land values, but does not expect a repeat of the 1980’s.

A second Harl danger signal is the economic fortune of the ethanol industry. He says the demand for ethanol pushed corn prices higher, along with beans and wheat which had to compete for acres, but since the fall of oil prices, more than 20 ethanol plants are in bankruptcy court, with 30% of the capacity in park. Harl contends the future of the industry depends on US energy policies, the price of corn, and emerging technology. He says ethanol will be in the spotlight for several years, and then become one of several alternative energy sources, but must remain economically competitive with or without federal subsidies.

While farmers are experts at production, Harl’s third danger signal is the demand side of the equation, which has also experienced a meltdown. Globally, incomes were growing, particularly in developing countries where increased income is used for more and better foods. But the global recession dampened that demand dramatically, and Harl says only China has been a buyer of US commodities, which he predicts will also fade as Chinese unemployment rises.

The fourth danger signal to Harl is tighter credit, not just for the general populace, but for agriculture as balance sheets weaken. He says the number of non-performing loans has dramatically increased in rural areas, making rural banks unprofitable. Although that is not reflective of the current agricultural economy, Neil Harl says lower commodity prices and higher costs of production will cause farmers to become problems for lenders in the future.

Harl believes agricultural profitability and financial strength will be heavily dependent on the direction of the world economy. Deterioration in financial systems will contribute to a decline in the agricultural economy, because of how the economy considers debt. He says the downshifting economy that began late in 2007 resulted from a shift in the way consumers think about debt, corporate strategies to curtail debt, and governments living beyond their means. After the bubble burst, Harl says there has been a more cautious use of debt and that will affect the general economy in the near future.

Summary:
Agriculture has been somewhat insulated from the economic downturn, but it may only be a matter of time before that changes. There is a danger to the farm economy that results from a cost-price squeeze, lack of profitability in the ethanol industry, a global decline in demand for US foods, and growing restrictions on credit. The farm economy will possibly feel more of a pinch from the global recession, unless it quickly turns around, and then there may be some delays before agriculture regains its growth trend.

Stu Ellis

Posted by Stu Ellis at 12:37 AM | Comments (0) | Permalink

May 21, 2009

ACRE: Are You Moving Closer To A Decision To Sign Up?

Most Cornbelt farmers have had a lot of tractor seat time this spring, during which the question of ACRE may have been mentally debated. Sign-up for the Average Crop Revenue Election program will begin June 1, and many farmers are either still trying to decide or have given up and plan to wait until the next rainy day when they can study a bit more about it. If you are among either group, we have some insight from the experts to share with you.

While most farmers are well along with planting, there are tens of thousands in Illinois, Indiana, and other parts of the Eastern Cornbelt who have yet to get into the field, and many others who have not even gotten a good start on planting. That will cause those to wonder if the ACRE program participation will be a plus or a minus if some acres don’t get planted or if their own prevented planting crop insurance claim will have an impact. Good question, says Kansas State ag economist Art Barnaby. His latest advice indicates that acreage which was considered planted but failed, will count against the state ACRE payment, which is the first threshold that must be crossed. Barnaby says the crop may be reduced because of failed acreage, but it would be less than 2% and that would not be sufficient to have much of an impact, unless they were all in one state.

Barnaby says FSA considers prevented planted acreage a farm level statistic, and not a state level statistic. If corn acreages shift to soybeans, bean acres will increase nationally as the result of prevented planting for corn, but he thinks acres that were never planted into anything will have a small impact.

The Kansas State economist says the FSA definition for failed acres will impact ACRE payments and in many cases may be the difference between a large ACRE payment and none in some states. However, failed acreage does not include prevented planting. He says late planting will cut corn yields and that would increase ACRE payments, which will also be determined by the average price for the Marketing Year.

On a related issue, Iowa State University ag economist Bruce Babcock writes in a recent newsletter that ACRE payments will be based on historical prices but crop insurance is based on market conditions at sign up time. He says today’s ACRE safety net uses a moving average of prices over the past two years, but not the current year. He estimates ACRE prices at $4.20 for corn, $9.88 for soybeans, and $6.67 for wheat; and if prices fall 10% below those levels ACRE payments will begin, provided state yields are close to their five year average.

What is that chance? Iowa State’s Babcock says there is a 50% chance that corn payments will exceed $7 per acre, a 50% chance that soybean payments will exceed $9 per acre, and a 50% chance that wheat payments will exceed $12 per acre. Since direct payments, which are reduced 20% upon ACRE sign-up, are much lower than those amounts, Babcock says, “The chance is much better than 50-50 that average ACRE payments will exceed the average loss in direct payments. This suggests that many corn, soybean, and wheat farmers will find it advantageous to enroll in ACRE.”

Babcock says ACRE’s backward look for prices and its 10% limit on year to year change, there is a chance that 2010 ACRE guarantees will be much greater than what producers can get for their crop when sold into the marketplace. If that is the case, the ACRE program will be dictating cropping patterns in 2010 and not the marketplace.

Could that have been avoided? Babcock says it could have, if the writers of the ACRE program would have used futures prices, rather than historic prices.

Summary:
The ACRE program will offer the opportunity for payments higher than what would be lost from the direct payment program, under expected scenarios. The ACRE program, which holds its sign-up from June 1 through August 14, will be impacted by the delays in corn planting this year. That will reduce the yield, which would benefit those who would sign up. Additionally, the potential for acres that are failed, will make ACRE payments more likely, due to the lower yield. Acres that are prevented planting, will count against the farm yield, but only have a small impact.

Stu Ellis

Posted by Stu Ellis at 12:37 AM | Comments (0) | Permalink

May 5, 2009

Olympic Style Training For The ACRE Games

Whether you are figure skating for a gold medal or raising corn, soybeans and wheat under the ACRE farm program, an Olympic average will determine your future. With the high and low discarded, the remaining numbers are averaged to determine the trend in state yields and farm yields for payment eligibility purposes. With the ACRE program, is there really that much at stake in how payments are calculated?

Gary Schnitkey thinks there is a lot at stake. He is a Farm Management Specialist at the University of Illinois, and in his latest newsletter Schnitkey says Olympic averages for yields, primarily go up, but will sometimes take a downturn. “On a state basis, farm Olympic average yields will decline in about one-third of the years, given that history provides a reasonable guide for the future.”

Since signing up for the ACRE program is a calculated risk that it will provide better protection than the conventional direct and counter-cyclical payments, Schnitkey’s reference to a “guide to the future” is a valuable one. He says there are two places in the extensive ACRE calculation that the Olympic average yield for your farm will come into play. The first is determining eligibility, since your farm revenue must be below a farm guarantee and state revenue must be below a state guarantee. Both use the Olympic average, and if both meet the test, an ACRE payment is triggered.

Schnitkey makes some observations that may help you make a decision on sign-up for the ACRE program:
· Farms with higher Olympic average yields will receive higher payments than those with lower Olympic average yields.
· Based on average yields from 2003 to 2008 to determine a 2009 ACRE payment, Schnitkey says some of the difference in Olympic averages is regional, and all farms should make their own evaluation, since there can be wide variations within a region.
· In calculating an Olympic yield, one year falls away from the calendar movement, and if it was a low yielding year, then the next calculation will undoubtedly rise because the lower yield was eliminated from the calculation.
· With poorer corn yields in 2005, it may be one of the two discarded in the Olympic average, suggesting a potential for the 2011 average to increase if shortfalls do not occur this year and next.
· Over time, Olympic averages will vary. In most years, Olympic averages will increase as productivity gains cause higher yields. However, Olympic averages will not always increase and some years will decrease.
· In Illinois, for example, from 1977 to 2008 Olympic averages declined in 11 years for corn, anywhere from 1.1 bu. per acre to 7.4 bu.
· Using the same Illinois example, since 1977, there have been 13 out of 31 years in which farm Olympic average soybean yields have declined.

There is no cut and dried, black and white answer as to whether you should sign up or not for the ACRE program, which requires a sacrifice of 20% of Direct Payments and 30% of market loan benefits. And Schnitkey concludes that while Olympic averages yields vary across farms in any state, there will also be variation within a geographic area. As you well know, you and your neighbor can have widely varying yields in a given year, a result of one or more of many factors.

Schnitkey believes that farms with higher farm Olympic average yields will have higher ACRE payments than farms with lower Olympic averages. And he adds those lower averaging farms will also have lower Direct Payments, meaning there is less to sacrifice by switching to ACRE. But he also says as yield trend lines rise, Olympic averages will also rise.

Summary:
Whether or not the answer to the ACRE sign-up dilemma is how Olympic average yields are calculated for your farm and your state, those calculations will play a significant role in determining your eligibility for an ACRE payment and how much it will total. Olympic averages for a farm have the potential to vary widely within a locale, not just across a state. Over time, Olympic averages have registered declines about one-third of the time, but progressive yield increases should keep them generally increasing.

Stu Ellis

Posted by Stu Ellis at 12:08 AM | Comments (0) | Permalink

April 22, 2009

The Juggler: Balancing Replanting Versus SURE Disaster Benefits

You may not be a Kansas wheat farmer, but you may want to eavesdrop on their coffee shop debate about whether to plant a spring crop on failed wheat acres or hope for the best from the new SURE disaster program. The SURE program will be available for all farmers who signed up for crop insurance, and it may or may not benefit corn and soybean farmers later on this year in the event of a crop disaster. Some wheat farmers may take the program for a test drive, and everyone else will be able to see how it handles.

Currently, it is too early to determine if there is freeze damage to the winter wheat crop, but Kansas State ag economist Art Barnaby says as insurance companies settle claims, “Farmers need to be careful they don’t void their free SURE disaster aid coverage from the Farm Service Agency (FSA).” In his latest newsletter Barnaby suggests that planting a replacement crop of sorghum on failed wheat acres could jeopardize any SURE disaster program benefits.

Since crop insurance was required for SURE benefits, failed acres would have been insured. Insurance adjustors may require farmers to leave a test strip to determine later the extent of any loss, and allow them to plant the balance of the field in another crop, such as sorghum. That changes the level of coverage from a high wheat base price of $8.77 to the lower value of the sorghum crop. The performance of the wheat test strip will determine net revenue, which will be lower if the sorghum crop fails.

Barnaby alerts farmers that insurance companies will not release the wheat acreage until it heads, and at that time the sorghum will be considered by FSA to be a double crop, which will negate the disaster benefits of the SURE program. He says for the sorghum to be discounted by FSA as a double crop a farmer would have had to pay the $250 per crop premium for non-insured acreage or NAP. Few would have done that by the March 15 deadline, consequently, production of sorghum behind a failed wheat crop would eliminate the SURE payment.

There is a significant problem, however, which Barnaby says results from the lack of rules for the SURE program. They are expected sometime later this year, but they will be needed to determine the benefits of the SURE program. The general rules indicate part of the formula depends on the average price of the Marketing Year, similar to the ACRE program, and since marketing years end 12 months after harvest, delays can be expected in benefit payments.

Prior to the wheat forming heads, the Risk Management Agency allows farmers to pay 35% of their premium and receive 35% of their indemnity payment, close out their wheat insurance policy on wheat and then plant another crop, which will also be insured, if it was originally listed as a replacement in the event of a failed wheat crop. While that seems like a solution to the SURE controversy, Barnaby says it becomes a problem if landlords and operators went different directions on their crop insurance program, and one will lose out on the SURE disaster payments. He says another downside to the program is that it will force more crop share arrangements to switch to cash rents.

While the issue at hand has been potentially failed wheat acreage, and whether a follow up crop of sorghum is planted, move eastward into corn and soybean territory. Under Barnaby’s scenario, a farmer who plants corn, which might be flooded out in May or June, could follow it with a replacement soybean crop. His example suggests the planting of the soybeans would negate the opportunity to apply for a SURE disaster payment on the failed corn crop. However, before taking any action, always consult your crop insurance company, and check with FSA for any official information on program details.

Barnaby says since the provisions of the Farm Bill were not finalized in time for the 2008 crop, Congress allowed participation in the disaster program by opening a late sign up period. However, he says don’t count on that for 2009.

Summary:
A spring freeze after wheat emerged from dormancy may be the first test for the new SURE disaster program. Farmers who abandoned their failed wheat and plant a second crop of sorghum, may be jeopardizing their disaster benefits under the new SURE program. Similarly, planting soybeans following a failed corn crop might possibly be a parallel. One of the problems for the uncertainty is the lack of final rules for the SURE program.

Stu Ellis

Posted by Stu Ellis at 12:24 AM | Comments (0) | Permalink

April 9, 2009

Farm Prosperity Depends On The Future Value Of The US Dollar.

In a lengthy report on the world economic crisis and its impact on US agriculture, a cadre of USDA economists suggests that the trade-oriented farmer become more aware of the growth of foreign economies and foreign exchange rates, which would indicate his potential profitability. Cornbelt prosperity turned when the falling dollar became the rising dollar.

For much of the current decade world GDP grew at a 3% rate and in the past two years, US exports climbed to record high levels, contributing to a 43% growth in farm income from 2001 to 2007. Agricultural goods comprised 27% of US exports in 2007, but during that year interest rate hikes and Central Bank action to improve market liquidity was the pre-cursor to the financial crisis say the USDA economists in an Economic Outlook. They say the world economic crisis was caused by a combination of world macroeconomic imbalances and severe weakness in the financial system of western economies. Such imbalances include negative trade balances, supported by foreign governments buying US treasury notes, and that kept their currencies artificially low, along with US interest rates. The economists also lay part of the blame at financial market practices of the past 20 years, which reduced transparency and increased risk.

The economists with USDA’s Economics Research Service say the direct impact on agriculture will be modest. Domestic customers will continue to buy food, although types may change including meat selections. The disruption of financial markets may inhibit lending and those with credit challenges may reduce purchases of inputs.

However the major impact will be indirect effects, stemming from the financial health of overseas markets, including the relationship of foreign currency to the US dollar. But the economists say, “U.S. agricultural exports of high-value agricultural products tend to be more sensitive to changes in foreign income growth and less sensitive to exchange rate changes than those of bulk commodity exports.” The global contraction means cuts in spending for food, primarily in developing nations, and cuts in spending for high value food in developed nations.

The value of the dollar, in relation to other currencies is another factor, which stems from US overspending and undersaving. The USDA economists say, “These imbalances could be corrected by a realignment of exchange rates involving an appreciation of the surplus countries’ currencies against the dollar. This would raise the prices of their exports in the United States and lower the prices of U.S. exports in their countries. U.S. imports and consumption would fall and exports to trade surplus countries rise, while trade surplus country exports would drop and their imports and consumption rise. The U.S. trade deficit would shrink.” Compared to Asian currencies, the dollar depreciated the past 3 years against the Chinese yuan by 18%, the Korean won by 40%, and against all foreign currencies by 17%. But in the last 6 months of 2008 the dollar appreciated by 17%.

The economists say if the dollar continues to be strong, the world could rebound from the economic crisis and agriculture would benefit from resumed world growth. On the other hand, if the dollar depreciates against the currency of countries with a high trade balance, the low dollar would result in a significant reduction of global imbalances and could lead to sustainable world economic growth, which would be a double benefit for agriculture.

Under either scenario, agricultural trade is seen declining in 2009 and recovering by 2011. By 2017 corn exports would grow from $55 bil. to $65 bil., however soybean exports would decline from $25 bil. to $19 bil. Wheat would remain steady, and meats would see very slow growth. Corn and wheat would be hurt by the high dollar scenario, but soybeans would be helped substantially. In the long run, the export value between the high and low dollar scenarios have substantial divergence. The economists say changes in the exchange rate generally help meat exports more than crops, because meats are a high value export and grain is a bulk commodity.

To farmers the bottom line benefit of either scenario is what happens to the bottom line, and farm income expected to fall 20% between last year and this year. The economists say the high dollar scenario means less exports and less farm income because receipts decline faster than expenses. And they add that livestock receipts will suffer the most. In the low dollar scenario farm income declines 26% this year, but will begin to climb above averages in 2010and be nearly twice as much as farm income under the high dollar scenario by 2016. Farmland values are not expected to be impacted as much, and they are expected to increase 5% in nominal terms, and 3% in real terms.

Summary:
As the world recovers from the global financial crisis, agriculture may be impacted, depending actions taken by Central Banks. If the dollar remains weak while global currencies and exchange rates are realigned, then US agricultural export volumes will be strong, along with commodity prices, farm income and farmland values. However, if exchanges rates are realigned with a strong value of the dollar, it will constrain the agriculture economy, along with commodity prices and farm income. However, US farmers will remain a major global source for high quality and large quantities of food.

Stu Ellis

Posted by Stu Ellis at 12:16 AM | Comments (0) | Permalink

March 31, 2009

Are There Risks You Cannot Manage? Are They Becoming More Profound?

Dad was pretty smart. He never got upset about the weather, “because you can’t do anything about it.” Your father was probably the same way, and after years of farming they knew what risks could be managed and what could not. You have learned as well how to manage the risks that you can, and either don’t worry about those that are unmanageable or have your farm organization push the government to do something about it. But how do we really deal with those risks that are seemingly unmanageable by an individual farmer?

What are those risks that just can’t be controlled? How about adverse trade policy, or exchange rate reversals. How about the recession that dried up consumer demand, or energy price shocks that peaked late last summer. Those are all considered to be systematic risks, which individuals cannot manage no matter how good you think you are. At least that is the thought of several Purdue economists writing in the March edition of the Top Farmer newsletter.

You can manage many risks. Production risk can be managed with crop insurance or crop diversification. Price risk can be managed with futures, options, or cash forward contracts. Human risks can be managed with operational policies, business succession plans, training programs, and insurance policies. But systematic risks are common to all farms and cannot be eliminated with typical risk management measures.

Since the current recession is a systematic risk, how are commodity prices responding to it, and how did they respond in prior recessionary years? The Purdue economists gauged the volatility of five major commodities in relation to the overall market to find the answer.

Corn prices increased their volatility from 1956 to the present, with Iowa prices showing the greatest volatility, followed by US average prices, then Indiana prices and finally Illinois with the least volatility of the four.

Soybean prices showed the greatest volatility in Iowa and Indiana, followed by US average prices, and finally Illinois with the least.

Wheat prices were the most volatile for the national average, followed by Iowa, Illinois and Indiana, all of which were nearly the same.

Cattle prices were the most volatile for the national average price, followed by Iowa, Indiana, and then Illinois.

Hog prices were the most volatile for the national average and for Iowa, with Indiana and Illinois being the least volatile.

The Purdue economists say systematic risks have increased since 1973 when international exchange rates were altered. Levels of systematic risk for cattle and hogs have been consistently lower and less volatile than for corn and soybeans. Soybeans had the greatest volatility, followed by corn, wheat, hogs, and cattle over the past 50 years of the study.

Although we are in a recession, recessions do not consistently have an impact on systematic risk. The recession of the early 1970’s saw a decline in systematic risk for all five of the commodities, but the risk levels all increased for them in the recession of the early 1990’s.

While the Farm Bill offers the greatest chance at policy change, systematic risk has not been consistent after new farm policy became effective.

Since 2002, systematic risk has been increasing rapidly for all commodities, reaching record highs for both corn and soybeans. The Purdue economists say, “This indicates that agricultural producers are bearing heightened levels of risk which cannot be controlled through agricultural diversification.”

Summary:
Compared to a common agricultural commodity index, there is a great variation for the volatility of the five commodities. While that measure is growing larger, the systematic risk actually peaked in the 1970’s and then declined, it has only been exceeded in the past two years. While agricultural risks are increasing, producers are having to become creative in the ways they offset those risks.

Stu Ellis

Posted by Stu Ellis at 12:32 AM | Comments (0) | Permalink

March 30, 2009

2009 Corn, Soybeans, And The Question Of Profitability.

Your profitability for the 2009 corn and soybean crop may depend on when you purchased crop inputs, last fall or this spring. As we head toward the March 31 USDA Prospective Plantings report, many farmers, particularly with high cash rent, may find few opportunities to avoid a year filled with red ink on the balance sheet.

Whether you booked seed, fuel, anhydrous ammonia and other fertilizer last fall or this spring, the prospects for profitability are not assured. And even with a bounce in the market after the planting intentions report, there may not be enough pricing opportunity to offset the higher costs of production. That is the bottom line in the new crop budgets calculated by Gary Schnitkey, Farm Management Specialist at the University of Illinois.

His latest newsletter indicates that wholesale prices of fertilizer and energy have declined substantially, but whether they have declined as much at the retail level depends on when the dealer booked his inventory. Compared to fall prices of $1,000 per ton of anhydrous ammonia and DAP and $900 for potash, spring prices have fallen to $700 for anhydrous ammonia and$500 for DAP, with potash remaining at $900 per ton. Your price will depend on whether the dealer still has high priced inventory that is clogging the pipeline. Compared to fall fertilizer prices of $210 per acre for corn and $92 for beans, Schnitkey says spring prices are closer to $151 for corn and $83 for beans.

Prices may or may not have come down for fertilizer at your supplier. In parts of the Cornbelt where a late harvest and early winter prevented typical fall application, prices may remain high. Similarly with seed; where Schnitkey says changes in acreage may soften some seed prices. And costs of fuel are considerably lower. But the key is whether there are funds remaining after input and cash rent costs are paid. Schnitkey says if spring input costs are used, non-land costs are $476 for corn and $293 for soybeans on highly productive land, which will demand a high cash rent. Based on $3.75 for corn the return to operator and land (cash rent has to be paid from this) is $222. Based on $8.30 for soybeans, the return to operator and land (cash rent has to be paid from this) is $153. In other words, if cash rent is $180, 180 bushel corn provides a $42 per acre profit and a 51 bushel bean yield provides a $27 per acre loss. Schnitkey says, “Higher yields or higher prices will increase returns. Conversely lower yield or lower prices will decrease returns.”

Many farmers may be locked into 2009 acreage as a result of fertilizer application, but others may have discretionary acreage and have not yet decided whether to plant corn or soybeans. Comparing per acre revenue, Schnitkey says if your inputs were priced last fall, corn may provide slim revenue or even a loss. Soybeans may provide more revenue, when soybean revenue potential is subtracted from corn revenue potential. “For planting decisions, a key will be whether farmers are facing fall pricing versus spring pricing. In some areas, input prices have not fallen as much as in other areas. In areas where input prices have not fallen, soybeans may be more profitable than corn.”
When comparing returns that are calculated by subtracting soybean revenue from corn revenue, Schnitkey says, “Corn-minus-soybean returns decreased dramatically from September 2008 until February 2009. Since February, futures price changes indicate increasing profits for corn relative to soybeans.”

As you get in the tractor seat this spring, one issue to consider is cash rent for 2010. While you may have recently settled that for the current year, it is never to early to make long term plans, and 2009 profitability will certainly impact cash rent levels for 2010. Schnitkey downward pressure on rents as a result of lower operator and farmland returns this year. And he says if corn and soybean prices remain where they are, rents will have to decline if your profitability is going to return to historical levels.

Summary:
2009 profitability will depend in large part on input costs, and those will depend on whether suppliers are pricing fertilizer based on fall or spring wholesale prices. Spring prices have declined, but that may not benefit farmers in all areas of the Cornbelt. In some cases, high input costs and moderate cash rents will not be covered by current corn and soybean prices. Farmers who have yet to decide on a cropping pattern for 2009 may be able to adjust acreage based on costs of inputs. Future cash rents will have to decline, if commodity prices remain at current levels.

Stu Ellis

Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink

March 26, 2009

ACRE: Answering The Bottom Line Question On Whether To Sign Up.

There are a couple decisions awaiting your consideration. Initially, how much corn and soybean acreage will you be planting? Secondly, will you be signing up for the ACRE program effective for the 2009 crop? Your priority is on the first question, since that will determine your income for the year and decisions must be made on short order. The question about ACRE participation can wait until June 1, which is the deadline for 2009 participation. Undoubtedly, you will be thinking about ACRE while on the tractor seat this spring, so let’s get down to the basic question that you will need to answer.

The Average Crop Revenue Election (ACRE) is part of the 2008 Farm Bill and is designed to help farmers better manager their revenue risk. You have probably heard that signing up for ACRE means sacrificing 20% of your Direct Payments and 30% of your loan rate. (20% of counter-cyclical payment rates are also sacrificed, but few experts believe crop prices will be low enough to result in counter-cyclical payments.) The formula to determine ACRE payment rates is rather complex. If you are beginning the process to study it, a good study guide is provided by the University of Illinois.

With the knowledge that a sacrifice of $3.71 per acre in Direct Payments must be traded for ACRE participation, Ohio State ag economist Carl Zulauf says to make the decision about signing up for ACRE, there is one question that needs your answer:
“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?” Zulauf’s guide on the decision question indicates that a focus must be made on revenue risk management because the state price and yield formula and the potential decline in US cash prices are two issues that farmers cannot control.

Zulauf says for current expected prices, ACRE’s revenue guarantee is estimated to be at least 90% higher than the implied revenue target in the counter-cyclical program. First, ACRE updates yields annually, compared to the historical averages for the counter-cyclical payment. Secondly, ACRE updates price targets with a two year moving average, compared to a set price number in the counter-cyclical program. Thirdly, ACRE’s revenue guarantee is important when costs are increasing faster than productivity. Lastly, ACRE’s revenue guarantee cannot decline more than 10% from year to year, so it will be higher than the counter-cyclical program through the end of the program in 2012. Additionally, ACRE payments are tied to planted acres, not base acres, but the number of planted acres receiving ACRE payments cannot exceed base acres.

To refresh your memory about the counter-cyclical alternative to ACRE, payments will only be made if the US season average price is below $2.35 for corn and $5.36 for soybeans ($5.56 in 2010-2012). The marketing loan program will only provide benefits if the market price drops below the loan rate, which nationally is $1.95 for corn and $5.00 for beans. Before signing up for ACRE, consider whether market prices will drop below those rates.
Zulauf provides some other keys to making your decision:
1) The reduction in direct payment per planted acre usually will be smaller, the greater the share of base acres that are soybeans.
2) Compared to the counter-cyclical program, ACRE better matches current production risk because its payment is based on planted acres (up to the farm’s total base acres).
3) The higher a farm’s 5-year Olympic moving average yield, relative to the state’s 5-year Olympic average yield for a crop, the higher the farm’s ACRE revenue payment.
4) The more yield has increased the higher will be a FSA farm’s Olympic average yield.
5) The closer changes in yield on a FSA farm and state move together, the more similar is changes in farm and state revenue, implying better risk protection from ACRE.

Summary:
The ACRE program provides a revenue risk safety net, which is calculated from several elements, including state revenue and national average prices, neither of which can be controlled by a farmer. So to make the decision on whether to sign up for the ACRE program, one must determine if the ACRE program manages those risks better than what the traditional direct payments, counter-cyclical payments and loan rates would provide, keeping in mind that a small portion of those benefits are sacrificed when signing up for ACRE.

Stu Ellis

Posted by Stu Ellis at 12:45 AM | Comments (1) | Permalink

March 18, 2009

Commodity, Food, Fuel Prices: What Goes Up Must Come Down, But, Really Now, Why Is That?

The rise in commodity price from 2007 into the spring and summer of 2008 sent food prices upward to the point of consumer complaints and finger shaking at farmers, farm policy, bio-fuels and anything they could imagine that might be to blame. Since that time commodity prices have retreated 50% or more, but food prices have fallen very little. We’ll put those commodity and food prices under the microscope to see what dynamics are or are not at work.

Thanks to the Farm Foundation, which sponsors analysis of agricultural issues for the benefit of Congress and the public, Purdue economists Chris Hurt, Wally Tyner, and Phil Abbott recently updated their 2008 study to find out why economic forces at work last year reversed course and what the results were. The March Update followed last year’s findings that said food prices were driven upward by global consumption outpacing production, the low value of the dollar, and the linkage between energy and agricultural markets. All contributed to tighter stocks of grain and oilseeds.

The 180 degree turnaround was the result of many factors, and not the least was supply and utilization. Low prices caused production declines and stocks diminished, resulting in some price rationing going into 2008. The higher prices spurred more production globally, and in the past 8 months production grew, consumption declined and ending stocks doubled for corn and wheat. While early 2008 production challenges did not seem to hamper crop yield, they caused markets to peak early as perceived shortages were resolved. The economists say higher production last year was an important factor in increasing stocks, particularly for wheat and soybeans.

The impact of price was felt after May 2008, say the Purdue researchers. First was the upward surge from perceived crop shortages, then growing conditions improved about the time the dollar was rising in value, and finally prices fell from declining demand for food and fuel. They say, “The financial crisis further reduced demand for grains and oilseeds for both food and energy uses as world income growth eroded.” They say USDA’s Supply/Demand report for May 2008 forecast an average $5.50 corn price based on a 6% stocks to use ratio, but by January 2009, stocks had climbed to 15% and prices had fallen to $3.90 per bushel of corn. The economists say with lower market prices now, and higher production costs, the low margin awaiting producers will result in reduced production.

The rising commodity and food prices in 2008 was also the result of the declining value of the US dollar which made our commodities less expensive to foreign buyers and that cut the inventory available to the US consumer. The lower dollar caused higher oil prices, which are quoted in dollars. The Purdue economists also report that global growth, the recession, and the financial crisis were responsible for not only the rise in commodity prices into last summer, but the dramatic decreases in commodity prices since then. While the dollar was falling, then rising, it was engaging in a volatile dance with other world currencies, even to the point of helping the balance of payments and reducing the trade deficit.
The economists say, “The recession, which is now expected to be longer and more severe than recent recessions, coupled with the financial crisis that has also spread across the globe, led to much weaker demand for energy and strengthening of the dollar.” Consequently, that weakened demand for agricultural commodities beginning at mid-summer 2008.

The bio-fuel demand served to drive corn, and to some extent soybean, prices, which were linked to the market for crude oil. Since ethanol is a substitute for gasoline, the price of gasoline will drive the price of ethanol, and subsequently the price of corn. But when crude oil rose to $140, taking ethanol and corn up with it, then fell to $40, the demand for corn to make a low margin ethanol quickly diminished. Many ethanol plants were either halted or production slowed because, “The price relationship between ethanol and corn became very important as plants opened or closed depending on margins driven mainly by these two prices.”

Significant to the discussion about the impact of ethanol on commodity prices are the federal policy issues of tariffs on imported ethanol, the blenders’ credit, and the 10% blending wall, which puts a 12 billion gallon upper limit on production. All have a potential impact on ethanol supply and demand.

The Purdue economists attribute the commodity price rise and fall to macroeconomic forces and say the depth and length of the recession will play a key role in how long food and crude oil prices stay where they are. They believe the inflation anticipated with a recovery will influence commodity prices, and the price of oil (along with ethanol and corn) will be linked to the exchange rate. They wonder aloud about the movement of crude oil and how that integrates with the renewable fuels mandate, the blending wall, and other policy issues. But they believe the big question is whether and when supply will catch up with increasing demand for food and fuel and where commodity prices will settle.

Summary:
The rapid rise in commodity prices in 2007 and early 2008 is attributed to several macro-economic forces including low stocks, increasing demand because of exchange rates, and the growth in the connection between food and fuel markets. But the collapse of commodity prices resulted from an unwinding of those forces, exacerbated by a global recession that diminished demand for both food and energy commodities. The gradual return to normalcy expected within a year will create a likelihood for some inflation and whether commodity supplies will be sufficient to meet the demand growth.

Stu Ellis

Posted by Stu Ellis at 12:54 AM | Comments (2) | Permalink

March 16, 2009

For Disaster Program Eligibility, Crop Insurance Is Required.

March 16 is the deadline for signing up for 2009 crop insurance for Cornbelt row crops, and farmers not electing crop insurance this year will also be denying themselves access to the SURE program, the USDA’s permanent disaster aid program. SUpplemental REvenue assistance payments are contingent upon the operator carrying crop insurance or FSA’s Non-insurable Crop Disaster Assistance Program (NAP) coverage. That is a change in the 2008 Farm Bill which many farmers may be unaware.

The new federal policy was implemented when advocates called for permanent disaster assistance legislation, instead of annual appropriations, which were not always guaranteed. However, the writers of the legislation determined that farmers eligible for the SURE program must be required to carry crop insurance, and March 16 is the deadline for obtaining that coverage for row crops across the Cornbelt.

The SURE program is detailed in a factsheet from Ohio State University’s Ag Manager. It indicates eligibility is contingent upon a disaster declaration in your county or a contiguous county, crop production under 50% of normal, and coverage by crop insurance or the NAP program for non-covered crops. Additionally, average adjusted gross income cannot exceed $500,000 in non-farm income.

Through a complex set of calculations, the SURE program would determine a disaster payment for eligible farms. In general terms, the payment guarantee is 60% of the difference between total expected revenue and total farm revenue. However, there is a $100,000 upper limit on payments to producers from the SURE program. That will be a significant limiting factor in some cases, but not for some smaller farms.

For some farms, on issue will be how much is included in the “total farm revenue.” It includes more than just a grain settlement check from a droughty crop. Total farm revenue includes estimated crop value, any indemnity payments from crop insurance, and payments from the non-insurable crop disaster assistance coverage, marketing loan proceeds, direct payments, any counter-cyclical payments, and any ACRE payments if the farm is signed up for ACRE.

According to an FSA worksheet that is detailed on the Ag Manager website, total farm revenue is subtracted from the expected revenue that SURE guarantees. The difference is then multiplied by 60% to obtain the final calculation.

The requirement for crop insurance or NAP coverage is known as Risk Management Purchase Requirement, in case you contact an FSA office to ask detailed questions about eligibility. Important among various questions and answers you might have, is the requirement for all crops of economic significance in the counties farmed to be covered by crop insurance. In other words, your corn and soybeans in one or more counties have to be covered to be eligible for any future disaster payment. Additionally, any replanted or subsequent crops have to have crop insurance coverage. If an operator has crop insurance coverage, but not a land owner, the operator is eligible for SURE program disaster payments, but not the land owner.
CAT (catastrophic) coverage is not sufficient to meet the SURE requirements, nor will hail and wind insurance, provided by private insurance carriers. The requirements specify federal crop insurance. If you carry Adjust Gross Revenue insurance, that is an acceptable alternative.

Summary:
The SURE disaster aid program will provide financial assistance to producers beyond normal crop insurance coverage, but federally-subsidized crop insurance policies or NAP policies must be in place to qualify for the SURE program. That requires producers to have signed up for crop insurance by the March 16 deadline.

Stu Ellis

Posted by Stu Ellis at 12:39 AM | Comments (4) | Permalink

March 12, 2009

Are You Making Some Last Minute Risk Management Decisions?

If you remain befuddled about grain prices and crop insurance, beware that March 16 is the deadline for making crop insurance decisions on Cornbelt row crops, such as corn and soybeans. Last year crop insurance protected high grain prices with the spring guarantee. This year the $4.04 corn and $8.80 soybean base prices may again be the highs or could be the lows, but regardless, your investment in crop inputs needs to be protected. Not much time is left if you are unsure which of many choices to make. Here is one suggestion.

Farmers who are concerned about the potential for low market prices in a year that profitability will be challenged may want to review the proposal of University of Illinois Farm Management Specialist Gary Schnitkey, who makes a case for Group Risk Income Plan (GRIP). He says if lower commodity prices are your concern, a GRIP policy at 90% coverage “will provide superior protection compared to Crop Revenue Coverage (CRC) or Revenue Assurance (RA).” Given average yields, Schnitkey says, “GRIP will begin to make payments at higher harvest prices than CRC or RA. Moreover, GRIP will make larger payments than CRC or RA at the same harvest price.”

If that is an attractive proposition and your yields track with county yields, review the graph created by Schnitkey that net insurance payments under different harvest price scenarios at the previous web link.

Schnitkey says the GRIP option with CRC on enterprise units which carries a lower premium rate than on optional or basic units. Since enterprise policy premiums drop with larger acreage, Schnitkey uses an example with 500 acres and an APH of 185. That would require a $20.43 premium for 85% coverage at $5.67 premium for 75% coverage.

One of the keys to the success of GRIP is its dependence on a trend yield, which is current, as opposed to the Actual Production History yield, which is an average of anywhere from the last 4 to the last 10 years, and would arguably be a lower yield than what is currently being produced on the farm.

What is the payout for GRIP over CRC? Schnitkey says, “For GRIP, insurance payments occur for harvest prices below $3.64 and insurance payments exceed premiums at prices below $3.41. For CRC at 85% coverage level, payments occur for prices below $3.32, with payments exceeding premium at $3.30. For CRC at 75% coverage level, insurance payments occur at prices below $3.03 and payments will exceed premiums at $2.99 per bushel.” But when you look at his calculations, Schnitkey’s analysis is that, “GRIP at 90% coverage levels makes larger payments than CRC policies at harvest prices below $3.40. At a 100% protection level, differences between GRIP and CRC payments become larger for lower harvest prices.”

Moreso, Schnitkey says the example favors CRC because of the APH lagging yield issue and an average year will result in a farm yield exceeding the APH yield. He says GRIP’s trend line yields will not have the lagging problem.
The example is only one farm’s scenario, but could be typical for much of the Cornbelt. Other yields will result in other premiums and payments, and higher yields will result in lower indemnity payouts.

Crop insurance agents will be able to provide examples with yields and costs in your part of the country, if you discuss risk management business with them before the close of business on March 16.

Summary:
With the deadline quickly approaching for crop insurance sign-up for 2009, farmers undecided about what flavor of crop insurance to pick may want to explore the GRIP option if their yields closely track the yields in their county. Using a strong corn APH yield of 185 bushels GRIP policies, compared to CRC, will make larger payments if harvest prices drop below $3.40 per bushel, and the lower the market price the larger the GRIP payment will be compared to CRC.

Stu Ellis

Posted by Stu Ellis at 12:21 AM | Comments (2) | Permalink

March 10, 2009

Farm Program Payment Eligibility: How Sure Are You?

Are you a farmer or landowner “living on the edge?” That is, on the edge of being ineligible for any farm program payments in the 2008 Farm Bill? While many farmers have looked at the income thresholds and found themselves to be eligible, there may be other aspects of the eligibility that could put some on the outside looking in.

Iowa State University agricultural law specialists Roger McEowen, Kelvin Leibold, and Erin Herbold reviewed the payment eligibility provisions and summarized them in their latest analysis. They observe that the new rules have important planning implications for individuals and farming entities.

1) Farmland owned by the public which supports public schools is eligible for farm program payment payments unless the state has a population under 1.5 million. For the Cornbelt, that excludes North and South Dakota, as well as 9 other states.
2) USDA will cross check social security numbers twice per year with the Social Security Administration to ensure payments are not made to the deceased.
3) If you have previously failed to comply with the payment limitation rules, you are ineligible for 2 years, but that increases to 5 years if you have engaged in fraud.
4) The most significant change affects cash rent tenants, and the Iowa State specialists say, “The cash rent tenant rule stays essentially the same, with clarification that a tenant under a cash lease who renders personal management, but not personal labor, is eligible for payments if the tenant makes a significant contribution of equipment.”
5) The “active engagement” test is important because it determines payment eligibility. Those who are “actively engaged” include: landowners whose contributed share is at risk; adult family members contributing labor or management; sharecropper with a contribution at risk; hybrid seed growers; recipients of custom farming services; a non-farming spouse with an ownership share at risk.
6) Regardless of acreage or yield variables, the Direct Payment maximum is $40,000, which will be adjusted downward by 20% or to $32,000 in the case of ACRE participation.
7) Regardless of acreage or yield variable, the Counter-cyclical payment maximum is $65,000, which will be adjusted downward by 20% in the case of ACRE participation.
8) There is no limitation on the amount of Loan Deficiency Payments that can be received; however, the loan rate will be lowered by 30% in the case of ACRE participation. Additionally, the marketing loan program is not subject to payment limitation.
9) The ACRE program reduces direct payment rates by 20%; loan rates by 30% and eliminates eligibility for counter-cyclical payments. Producers with multiple farms, and with one farm in ACRE and another out of ACRE, there is a $65,000 limit on ACRE and counter-cyclical payments.
10) The upper limits on income have been reset for farm program payment eligibility. For price support program a producer’s adjusted gross income must be less than $500,000 for direct and counter-cyclical payments, and an adjusted gross farm income under $750,000 for direct payments. For conservation payments, the adjusted gross non-farm income must be under $1 million, unless two-thirds of the adjusted gross income is from farming. The adjusted gross income is a three year average with the FSA requiring annual certifications from each individual or entity requesting farm program payments.
11) With the abolition of the three-entity rule, all farm program payments are now keyed to social security numbers, which eliminates the necessity of determining “a person.”
12) Both individuals in a marriage may also qualify, if they are both contributing to the operation with labor, management, or land ownership that is at risk.

Summary:
USDA’s new eligibility rules for farm program payments have reduced the potential for payments per individual because of using social security numbers, but have also clarified how individuals are actively engaged in farming. While payments can still be received under the conventional farm programs, as well as the new ACRE program, the limits under ACRE will be reduced. Changes have also occurred to ease the conflict with payments to cash rent tenants under the former farm program.

Stu Ellis

Posted by Stu Ellis at 12:04 AM | Comments (0) | Permalink

March 2, 2009

USDA's Chief Economist Provides His Take On The Farm Economy.

“What a difference twelve months make.” That is how USDA’s Chief Economist Joe Glauber began his presentation last Thursday at the USDA’s Annual Outlook Conference. Compared to 2008, when authorities questioned if sufficient supplies of agricultural commodities existed to meet the world demand, Glauber outlined his analysis of the current supply/demand picture for 2009.

The USDA’s conference drew a global audience for discussions about agriculture, which will be reported by the farm gate in coming days. However, Glauber’s viewpoint was stark, “This time last year, the outlook picture was quite different than today: prices for most commodities were near record highs and rising; farm exports and farm income were projected to be at record levels. There were concerns about whether there would be enough crop production to meet global demand. Livestock, dairy and poultry producers were seeing their operating margins squeezed, and food price inflation was being discussed with concern for the first time in almost 20 years.” Since then he said prices for most commodities have fallen 40-50%, with uncertainty about income in conjunction with the global economic slump.

Glauber’s export forecast for FY 2009 (ending in September) is $20 billion under the $95.5 billion record in 2008 due to increased competition from other wheat and corn producing nations. Soybean exports are expected to parallel last year. Exports of high value meats are expected to drop as well.

Glauber is looking for a 5.2 million acre reduction in 2009 cropland to 247.6 million acres. Soybean acreage is being forecast by USDA to increase 1.3 million to 77 million, corn acreage will remain flat at 86 million, and wheat will be down 5.1 million to 58 million acres. Global wheat production last year exceeded consumption by nearly 26 million metric tons so pressure to expand US wheat has diminished.

The reason USDA does not expect more corn acreage results from the dramatic fall in prices and lack of forward contracting opportunities. But Glauber says net returns for corn relative to soybeans remain favorable in most areas and the soybean to corn price ratio favors corn. But he is quick to acknowledge the decline in net returns is expected to limit corn planting, particularly outside the Cornbelt. He thinks the yield trend will increase production by 2%, and while feed demand will decline slightly, overall consumption will increase because of ethanol.

Glauber says the federal ethanol blending mandate requires 10.5 billion gallons during calendar 2009 and 12 billion during 2010, which is 11.5 billion for the crop year and a requirement for 4.1 billion bushels of corn. He notes the ethanol industry remains under financial pressure because of the current economy and volatile prices, causing the idling of more than 2 billion gallons of refining capacity.

Global oilseed production will be up 4%, because of acreage expansion for crops competing with soybeans. But he says lower soybean yields in South America will limit production. China’s soybean imports account for 49% of global trade, while the EU has seen a decline in soybean demand. US production in 2009 is expected to rise with more acres coming from reduced acres for wheat, cotton, peanuts, and rice. USDA is expecting the soybean supply to increase by 9% in the coming year.

Glauber says weakening domestic and global demand challenges the US livestock industry. Uncertain demand and high feed prices have caused producers to cut production about 2%. He says recent reports indicated cattle supplies in 2009 would be tighter and there would be lower beef production. That will come as exports should repeat 2008, but the value of the dollar will make beef, pork and other meats more expensive. Hog producers are and will be farrowing fewer sows, but litter rates have been higher and will offset the decline in farrowing. US pork exports expanded 50% last year because of strong Chinese demand ahead of the Olympics. But that demand is waning.

The USDA economist reiterated his department’s recent forecast of farm income, resulting from both revenue and expenses that are expected to be lower than 2008, but with a more narrow profit margin. Debt equals 9.1% of assets, which Glauber compared to more than 20% in the mid-1980’s. And he says recent Federal Reserve surveys have indicated the land market is softening.

Summary:
On the whole, the farm economy faces uncertainty with declines from the record highs of 2008, and the potential for adverse impacts on farm real estate values. The drivers from 2008 still exist and the farm economy will again benefit from high energy prices, ethanol mandates, and growth in emerging markets. Farm lenders are in good financial shape and so are farmers.

Stu Ellis

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February 24, 2009

Fine Tune Your Risk Management Program For 2009.

With corn and soybean prices insufficient to cover operating and land costs for 2009, the financial risk for many farmers will be a burden. Lenders are/will be pushing for a strong risk management program that may include crop insurance, a marketing plan, and the ACRE farm program and SURE disaster program. Rain or heat in the wrong week will be unwelcome in 2009 with such thin margins, and could result in a financial disaster.

What are your plans to disaster-proof yourself for 2009? There are a variety of tools to use and Kansas State University risk management specialist Art Barnaby has several recommendations to take advantage of changes in crop insurance programs and combining them with other risk management tools.

Barnaby’s first recommendation is for those using crop insurance to switch to enterprise units by crop, which is made possible with a pilot program the next three years. Your coverage is increased, but your premium is reduced. He says it increases the total dollars of revenue coverage and increases the free coverage from the SURE disaster program. But he still recommends hail insurance coverage, if you do not raise your coverage level. Also, the premium subsidy is being reduced on GRIP and he says farmers with GRIP policies should also switch to enterprise units. He believes the savings from the switch will provide more financial cushion than any ACRE or SURE payments. Barnaby says the downside to the fact it is a pilot program is that it could see subsidies reduced in future years, and you would need your records to return to optional units.

A second recommendation is to maintain eligibility for the SURE disaster program, which can be triggered by both price and yield. There is no sign-up but eligibility requires insurance or $250 per crop fees paid for all crops by March 15. Barnaby says the SURE coverage works best on a non-diversified farm, such as Great Plains wheat, or continuous corn, but not a corn and bean rotation. This gives the farm the same crop insurance characteristics as an enterprise unit with the same crop throughout the county.

A third recommendation from Barnaby is wait until May to take any action on switching to the ACRE farm program, which of course, is a permanent decision. Delaying your decision allows more information about the potential yield information. He says the decision to participate depends on if the ACRE “strike” price is higher than the expected 2009/2010 marketing year average price. Barnaby says, “ACRE is simply a “put option” on expected state revenue. A Chicago (CBOT) put is an option on expected price. ACRE works like the put so the odds increase for payment if ACRE is in the money. At signup (before June 1) one would have to assume average 2009 yield (state yields do not vary as much as farm yields) but one will know if there is a current “loss on price” at signup, i.e. if the ACRE is in the money.”

He says one would not want to enroll in ACRE for 2009 if ACRE is “out of the money” and a payment would not be expected. “If ACRE is in the money then odds of an ACRE payment increase but it does not guarantee it. In the money put options expire worthless too. If ACRE is “deep” in the money then one could buy call options and reduce the risk of no payment, i.e. one would either collect from the call or ACRE.”

Barnaby says the ACRE program makes a payment only if there is a state revenue loss, and if so, then the farm must also show a revenue loss below a benchmark to collect. He says there is only a small chance of any counter-cyclical payment or a loan deficiency payment on corn or soybeans, “Therefore the tradeoff is a potentially large ACRE payment in return for a 20% reduction in direct payments and a 30% reduction in the loan rate for the next 4 years.”

While farmers were lobbying hard for USDA to use the 2008/09 marketing year price for corn, which would raise the ACRE payment, Barnaby thinks the recent slide in corn prices may have neutralized the effort. And he says wheat looks like a better bet than corn for ACRE, but he wants to wait until June 1 for a verdict. Anyone signing up for ACRE will be committed to that program through the end of the Farm Bill in 2012, and may not return to the conventional program featuring direct and counter-cyclical payments, as well as a full loan rate.

Summary:
Risk management tactics for 2009 crops will depend on fine tuning of crop insurance and switching to enterprise units to take advantage of higher coverage at lower premium rates. Also, consider the ACRE program, but not sign up until as late as possible to get as much information about crop conditions and potential pricing.

Stu Ellis

Posted by Stu Ellis at 1:30 AM | Comments (1) | Permalink

February 23, 2009

The News On Fertilizer Prices, And Its Not Friendly To Farmers

Some farmers have it, and other farmers don’t. Some have paid high prices for it, and others are hoping they will not have to. Fertilizer is the topic of many coffee shop conversations, as well as hours spent on working on crop budgets, and probably a few sleepless nights. Tough decisions will soon have to be made, but prices will depend on the demand this spring.

The upward move in fertilizer prices can be traced back about 7 years says USDA economist Wen-yuan Huang in the latest Fertilizer Outlook, but they increased sharply the past two years. In 2008, nitrogen climbed about one-third in price, while phosphate and potash doubled, which Huang says resulted more from global economic issues than from domestic supply and demand. US production of fertilizers has declined and farmers have had to depend upon imports of either fertilizer or ingredients to supply the growing demand.

In the 10 years prior to 2008, domestic fertilizer production capacity declined 42% and annual production dropped 37%. The infrastructure had been underutilized and was being idled about the time that natural gas prices began to rise, which pushed up nitrogen production costs. Similarly, US production of phosphate declined along with production capacity because of low profits and declining export demand. The US only produces 16% of the potash it uses and imports the rest, primarily from Canada. Consequently, fertilizer is a global commodity, but the US is one of the largest importers, leading the world in nitrogen consumption, and is in second place for potash imports.

With the nitrogen price linked to the price of natural gas, but its cost to agriculture is also dependent on the cost of electricity and petroleum, both of which have experienced volatile pricing structures. Since 2000, natural gas has risen 550% and oil by 970%. Transportation cost is 22% of the expense in getting ammonia shipped from the Caribbean into US Gulf ports and 50% of the cost of Russian ammonia. In the past 3 years rail rates increased 63% along with a 44% railroad fuel surcharge added last July.

Complicating the matter had been the falling value of the dollar, which made imported ammonia and potash more expensive. Another issue is the fertilizer export associations, and since they are global in nature, are shielded from anti-trust rules according to USDA economist Huang. And yet, another factor is the concentration of fertilizer production in just a small group of countries. Canada, Russia, and Belarus control potash, and the US and China control phosphate.

When the global economy expanded in 2007 and food demand outstripped the immediate food production capacity, the demand for fertilizers increased as well. The current weaker demand is expected to strengthen and fertilizer demand will increase over the long run. US farmers used high commodity prices in 2007 and 2008 to increase their purchases of fertilizer and maximize returns. Those commodity prices insulated farmers from the impact of the higher costs of fertilizer. But now commodity prices have fallen and the insulation is thin against the fertilizer prices, which have not fallen in tandem with grain prices.

Currently, fertilizer inventories are low, in part because of the additional 15 million acres of corn and 3 million acres of wheat planted in 2007, consuming 15% of the normal nitrogen carryover, 27% of the phosphate carryover, and 49% of the potash inventory. Huang says the US fertilizer industry is not equipped to meet a surge in demand, and when foreign demand entered 2008, fertilizer prices rose rapidly.

Huang says September's nitrogen prices were 36% above April 2008, with phosphate and potash about 93% higher, before the price decline began in October. The softer winter market was attributed to lower global demand, reduced US application last fall due to weather, increased supplies created during last summer, a decline in natural gas prices, and farmers postponing purchases hoping for lower prices. But the USDA economist says prices may not remain soft:
(1) Many of the causes of the recent spike in fertilizer prices, such as natural gas price movements and expected growth in global demand, could still place upward pressures on fertilizer prices in spring 2009;
(2) In response to low fertilizer prices, the U.S. fertilizer supply is expected to decline due to production cutbacks by manufacturers and worker strikes in potash plants in Canada;
(3) U.S. fertilizer imports are expected to decline given the current low prices and congested distribution supply chains in the United States
(4) Fertilizer demand will likely stay high. Current low fertilizer prices, projected relative crop prices and the government’s continuing ethanol mandate may favor corn planting in the spring.

For the spring, USDA's price predictions are:

Nitrogen—because of strong Chinese and US demand expected from feed and food grain production, tighter nitrogen supplies are expected in spring 2009, and there could be some additional upward pressure on nitrogen prices.

Phosphate—Tight supplies due to limited U.S. production of DAP and MAP, coupled with high production costs and expected strong global demand, may keep phosphate prices above their historic trend levels this spring.

Potash—Most of the potash consumed in the US is produced in Canada, which may not be able to produce enough to meet short run demand. However, a recent supply contract of $817 per ton is expected to become the benchmark wholesale price for potash marketed in 2009.

In the long term, USDA says demand for fertilizer will continue because of the growing world population and a return to a better economy, but higher energy costs will keep upward pressure on fertilizer prices. The US access to supply is good, and future coal gasification plants will help increase the supply of natural gas to produce ammonia.

Summary:
The global nature of the fertilizer industry, along with current economic forces here and abroad, have combined to make agricultural fertilizers more scarce and higher in price. While winter prices were soft, spring demand is stronger and costs of fertilizer are not expected to decline much, if at all.

Stu Ellis

Posted by Stu Ellis at 12:38 AM | Comments (2) | Permalink

February 18, 2009

Quick Question: Will There Be Financial Stress On Farms In The Near Future, And Will You Be Able To Handle It?

Your grain farm income for the past two years has likely covered production costs, allowed some investments, and to improve the quality of life for your family. However, heading into 2009, your production costs are projected to be higher than potential marketing revenue, and you have a hollow feeling in your stomach about your financial position at this time next year. You are not alone.

Market volatility and high financial risk were prevalent last year and will remain close to you this year as well, say ag economists from Minnesota, Nebraska, Texas, Washington State, and Delaware. They surveyed farm lenders, ag educators, crop insurance agents, crop consultants, elevator managers, commodity market advisors, and others who are close to farmers. The responses paint a fairly clear financial picture of the 2009 farming year.

Of the 2,300 ag professionals who were surveyed, 84% believe farmers will experience financial stress in the next three years; with 45% believing the chance is high, and 39% believing it is very high. The remaining 16% think there is a moderate chance of financial stress on the horizon.

When lenders are broken out of the mix, 54% think the chance of financial stress is high in the next three years, and 26% give odds on it being very high. Only 20% think there is a moderate chance of financial stress, with none in the category of a low chance for stress.

But what about right now? Are producers feeling financial stress at the outset of 2009? Nearly 25% of producers say there may be 5% of farmers who are feeling the pinch, and another 25% say it is more like 10% under stress now. About 12% think more than 30% of farmers are feeling pressure. But when farmers were asked about the future, nearly 30% think farmers will feel financial stress in the next 3 years, and more than 45% say between 10% and 30% of farmers will feel the pressure by 2012.

What is contributing to the financial stress? The cost of inputs and market price volatility are the top two reasons, and both have a high to very high impact on farm stress. In the moderate impact category are such issues as negative cash flows, inadequate business planning, lack of management skills, and a tighter credit market. Factors that cause stress, but in a declining rank, are, machinery decisions, loss of off farm income, failure of input suppliers, failure of commodity buyers, changes in farm policy, rising interest rates and declining land values.

As farmers visit their lender, many of them are finding stricter requirements to obtain credit. While not all producers have found that lenders want more documentation, 56% say the requirements have changed slightly and 17% report substantial increases.

As the changes affect farmers, the question becomes how well equipped they are to weather the financial storm, if there is one. Unfortunately, only 8% of farmers feel they are well equipped with financial management skills to manage their business during a period of financial stress. 74% say they are moderately equipped, and 18% admit being poorly equipped. Combining the first two categories indicates over 80% feel some skill in managing their financial future if there are hard times ahead.

Summary:
No one really knows what will happen to the agricultural economy in the next three years, but most of those close to farmers believe there will be difficult financial times ahead. And they doubt that farmers are really able to weather any financial storm. While farmers also feel there will be difficult times for their farm in the next three years, more than 3 out of 4 think they will be reasonably equipped to handle whatever comes their way.

Stu Ellis

Posted by Stu Ellis at 12:51 AM | Comments (0) | Permalink

February 17, 2009

USDA's Fine-Tuning Of Crop Insurance May Affect Your Choice In 2009

How are you planning to manage production and revenue risk in 2009? Some of your neighbors will be utilizing well-thought crop insurance and marketing plans. Some of your neighbors will be using “seat of the pants” marketing and hoping for the best when that feeling in their gut says they should sell. With markets below the levels of the past year and production costs higher, will you tailor a crop insurance program to fit your farm?

If you are waiting for new crop insurance programs to be announced for 2009, don’t wait any longer. You have the same choices you had last year, but some changes have been made that may make some more attractive and others less attractive. That is the essence of a newsletter prepared by University of Illinois Farm Management Specialist Gary Schnitkey. While he writes it for Illinois farmers, other Cornbelt farmers will be able to apply many of his principles to their farm as well. Schnitkey says CRC, RA, and GRIP were the top choices for farmers last year, and will probably be this year as well. But of course, GRIP is a county level product that pays an indemnity if a yield on a farm falls below the county average. CRC and RA are farm level policies that pay an indemnity if the yield falls below the farm average. Within the three, USDA has made some minor changes that could have major impact for some farmers, depending upon their state and how the various policies were rated for their states.

Changes to Enterprise Units for CRC and RA

Crop insurance veterans know that farms can be insured by basic, optional, or enterprise units, the latter of which combines all farming units in a county, but divided by crops. When the insurance is spread over a larger area, the cost declines. What USDA has done is raise the subsidy levels for enterprise units, meaning USDA will pay more of the cost of insuring a given crop in a single county than it did last year. For coverage of 70% or less, the subsidy will be 80% of the cost, and it declines to only 53% of the cost for an 85% policy. USDA will be paying about 15-20% more of the cost for enterprise unit insurance in 2009. Consequently, farmers using CRC or RA and selecting enterprise unit coverage will be paying a lower premium than last year.

Biotech Yield Endorsement

Monsanto’s BYE product for 2008 corn has been expanded to include Herculex by Pioneer and Dow AgroSciences, and Agrisure by Syngenta. The insurance is available for farmers who plant at least 75% of their corn to one of the eligible hybrids which feature triple stack technology for control of weeds, rootworm, and corn borers. While the BYE insurance was available to a limited number of farmers in 2008, it has been expanded to include the remainder of the Cornbelt for 2009. There is no requirement to stay with one hybrid, since any eligible hybrid among the three brands can comply. However, there is paperwork involved to certify the use of the eligible seed or USDA will not allow the premium discount for the program.

Subsidy decrease for GRIP

Schnitkey says the USDA will be paying less to subsidize GRIP policies compared to 2008. Most of the coverage levels will have USDA paying 4-6% less of the subsidy, however, because of other changes in the policy, the overall premium that farmers will have to pay will decline, anywhere from $3 for 70% level coverage to $20 for 90% level coverage. But again, that depends on your state.

Harvest price change limits

From the beginning of CRC and GRIP, the harvest price of corn could not rise or fall more than $1.50 above the spring guarantee and for beans the limit move was $3. But RA had no limits on moves. In 2008, the harvest price for soybean dropped more than the $3 limit for CRC and GRIP, forcing the USDA to make higher indemnity payments on RA policies than on CRC policies for the same yield and coverage level. The change for 2009 is to eliminate the limits on price declines if the spring guarantee is more than the harvest price, but place an upper limit on price rises of twice the spring guarantee. Schnitkey says this levels the playing field for CRC and RA when it comes to indemnity payment, so the only difference is the premium going into the season.

Summary:
Refinements have been made by USDA on several of the more popular crop insurance programs, which could impact both premium costs and potential indemnity payments for farmers who typically sign up for them. CRC and RA will have similar indemnity payments as a result, GRIP may have a lower premium cost, the Biotech yield program includes more hybrids and more states, and farmers using enterprise units will be paying a lower premium for CRC and RA.

Stu Ellis

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February 16, 2009

USDA's Farm Income Forecast For 2009 Provides A Hint Of What To Expect On Farms.

How will agriculture financially perform in 2009? Will the recession keep a lid on demand and market prices? Will production expenses continue to rise? When the income and outgo are totaled at the end of this year, will farmers have earned any income? Or will farm household vitality be dependent upon off-farm income?

At first glance, USDA expects 2009 net farm income to be $71.2 billion, down 20% from 2008. Net cash income will not be down as much because it reflects farm commodities produced in 2008 and carried over to 2009 for sale. The statistics are reflected in the latest USDA report on Farm Income and Costs. The USDA economists say the 2008 record farm income was driven by the higher value of crop production, aided by a weak dollar that enhanced export demand. But those factors have reversed.

For 2009 USDA expects 12-13 billion bushels of corn and 3 billion bushels of beans, along with strong demand for grains and oilseeds. Compared to 2008, receipts from grain sales will be down 22%. Wheat income will be down 26% because of lower acreage and reduced exports.

Corn revenue will be down more than 15% reflecting the weaker demand by ethanol refiners and for exports. Soybean receipts will be down more than 6%, in part from the lower price of oil and the lesser willingness to pay high prices for soy diesel. But there are abundant global supplies of oilseeds to meet the demand.

A substantial cut in milk prices will lead the $11 billion decline in livestock receipts, which will be down a total of 8% for the year. Feed costs for livestock producers will be high because of the demand for grains and oilseeds. But softening world economies will result in a lower demand for meats. Beef production will maintain 2008 levels and with falling grain prices, feedlot margins will improve. Cattle prices may move slightly higher, along with hog prices; both are the result of lower production.

While production expenses increased over 14% in 2008, they are expected to drop over 4% in 2009. The $290.6 billion for 2008 expenses would diminish to $277.1 billion in 2009. Compared to gross farm income, expenses make up 79% and that is more than in 2008.

USDA says 10 of its 17 expense categories should fall this year, with feed, fertilizer, fuel, and oil dropping more than $3 billion each. There will be a 3% drop in overall inputs, interest, taxes, and wages, the first time that has happened since 2002. Feed expenses that went up 19% last year will be down nearly 10% this year.

Interestingly, USDA has some difficulty in gauging fertilizer prices. The economists say, “Farmers who did not pre-purchase fertilizer in late 2007 could not avoid the runup in fertilizer prices during the first half of 2008. However, as prices continued to rise through September, farmers probably curtailed purchases. This tendency was reinforced by plummeting wholesale fertilizer prices during the last 3 months of the year. Many farmers probably held off purchasing fertilizer as they waited for retail prices to come down.”

Fuel and oil prices will be down 33% this year following six consecutive double-digit percentage increases. USDA says the fall of fuel prices in the latter part of 2008 is significant because more than 50% of farm fuels are purchased in that part of the year.

While crop input outlays will go down, other expenses will rise, such as cash rents that will climb 7%, interest outlays up slightly, and farm wages up slightly as well. Government payments will be down about $1 billion to $11.4 billion and 27% below the five year average. USDA expects part of the drop to be a result of farmers signing up for the ACRE program that clips 20% off direct and counter cyclical payments.

Summary:
There will be less money in the pockets of farmers at the end of 2009 compared to 2008, with a forecast 17% drop in income, but remaining well above the ten year average. Expenses for crop and livestock production are also expected to decline, but would still be higher than in 2007. Part of the drop in income would be a decline in crop receipts, the first since 1999, after rising 20% each of the past two years. Government payments will also be down to the lowest level since 1997.

Stu Ellis

Posted by Stu Ellis at 12:15 AM | Comments (2) | Permalink

February 10, 2009

Uncertain Market Prices. High Production Costs. How Do You Cover Your Risk?

You are operating in a new era of financial risk in agriculture. The bullish market of the past two years is history. But the high cost of production is the present. How do you manage production, marketing, and revenue risk in the current environment? Is the answer a wing and a prayer? Is the answer a seat of the pants marketing plan? To manage today’s risk will take some expense, but it will also take knowing what crop insurance programs to select. And there are many decision aids available.

Farming was simple for Dad. It is complex for you. But managing the financial risk in an era of weak markets and strong production costs is a challenge that can be met with the proper tools. Many of those tools are available from the Farmdoc crop insurance program, created by University of Illinois ag economists, which cover multiple Cornbelt states.

The Premium Calculator will provide your crop insurance premium regardless of the county in which you farm in the 12 North Central states plus Maryland. After entering your state, county, and crop into the calculator, along with your 2009 APH yield, you will be provided with a table that indicates crop insurance premiums for various coverage levels and your yield and revenue guarantees for both farm-level insurance policies and county-level products. The Biotech Yield Endorsement is also detailed. The advantage of the premium calculator will help you create a crop budget before you have to meet with your crop insurance agent early in March. The Premium Calculator can be downloaded into Microsoft Excel software on your computer, or you can use the online calculator.

The Payment Simulator will evaluate a range of insurance products for both corn and soybeans in Minnesota, Iowa, Illinois, Indiana, and Maryland. The Payment Simulator will detail the premiums for various coverage levels, then shows the percent of years that a certain coverage level will make an indemnity payment, along with the average payment. It will also provide data for policies with the Biotech Endorsement. The Payment Simulator is available as an online decision aid.

Farmers wanting to explore a variety of options with crop insurance programs will be able to use the “What If” analyzer. It is a spreadsheet tool that you can download onto your computer, if you have Microsoft Excel software. The “What If” tool will compute your crop insurance premium, calculate your payment from various crop insurance products with prices and yields that you supply. It will also compare your farm yield to a county yield, if you want to consider the use of a county-level crop insurance product, such as GRIP. It will be of particular value to corn and soybean producers across the Cornbelt.

An extensive resource is also available which will provide background on types of insurance, how they are calculated, their benefits, and their limitations. Various examples are also provided, which address CAT, Crop Revenue Coverage, Revenue Assurance, and Group Risk Income Plan. One of the particularly important factsheets combines the use of crop insurance and making marketing decisions. Farm Management Specialist Gary Schnitkey outlines which of the common crop insurance tools are applicable for producers who make limited use of pre-harvest hedging or who aggressively hedge prior to harvest, as well as those who have either strong or vulnerable financial positions.

All of the decision aids can be used reliably between now and the crop insurance sign-up deadline on March 15. Premiums are already set, so costs are known. The only unknowns are the price guarantees for revenue products that depending on futures closes during the month of February.

Summary:
Financial fears can be eased somewhat with the use of crop insurance in a year when production costs are high and prices are not as high as in recent years. To help with a crop insurance program, there are many decision aids that will indicate the level of premium under different crops, coverage levels, and on various farms. The decision aids will also provide the opportunity to explore different levels of risk, and potential payments.

Stu Ellis

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February 4, 2009

You Asked For Change, And Change Came.

USDA listened. Or at least someone on a Capitol Hill staff listened, and when the 2008 Farm Bill was written, rules were changed that will enhance the widespread use of flexible cash rent leases. Just a stroke of the pen, actually some computer keystrokes, was all it took to eliminate one of the major barriers to the use of flexible cash rent leases.

Flexible cash rent leases have provided the opportunity for thousands of farm operators to manage their risk, based on the variable rent paid to land owners which might be determined on commodity prices, crop yields, both, or many other innovative formulas. But under the rules of the last Farm Bill, the innovation was stifled by the requirements that determined flex leases were really crop share leases. No longer, will that cause a problem, according to Farm Management Specialist Stephen Johnson at Iowa State University.

Johnson’s February newsletter indicates the new FSA rules state, “For 2009 through 2012, a lease that provides for the greater of the guaranteed amount or share of the crop or crop proceeds shall be considered a cash lease if the lease provide for guaranteed amount and share of the crop.” Sure, the language could have been written in terms that were more understandable, but Johnson says, “With this change, the burden of many flex leases as crop share leases, and therefore requiring the government farm programs to be shared with the landowner, has been removed.”

That may spur some farm operators and land owners to launch into a rousing chorus of “Ding, dong, the witch is dead,” from the Wizard of Oz movie. No longer will land owners with a flexible lease be required to sign up for the Direct and Counter-Cyclical payments, and instead may have a life without the Farm Service Agency.

Johnson suggests the change will expand the use of flexible cash rents that he says will guarantee a minimal base rent or bushels of grain, and then let farm yields or gross revenue to trigger a flexible rent payment. What could those triggers be?
1) Actual farm yield, verified by bin measurements, scale tickets or grain monitor.
2) FSA’s Posted County Price, which is shifting to a 30-day moving average.
3) Average of harvest delivery bids at local elevators, or quarterly prices with mid –month calculations.
4) And a multitude of other factors.

Establishing the gross revenue for a crop is a basic necessity in the calculation, but Johnson says if production costs are too high or too low, then adjustments need to be made to protect the financial interests of both the land owner and the farm operator. He says for the current year, “consider not triggering the flex payment until gross revenue exceeds the total cost of production, including the base cash rent.”

On the horizon, Johnson says the yield information required by the new ACRE program could serve as the basis for a flexible lease, if the operator signs up for that program. He says the information required by FSA will be transparent, and could serve as the basis for a lease that will extend for the life of the ACRE program. That will allow the operator more flexibility in addressing fertility and other issues that require a longer term horizon.

Summary:
USDA rule changes will allow more farm operators and land owners to use flexible cash leases because the owner no longer has to sign up for and receive Direct and Counter-cyclical payments. The new FSA rules for variable leases will create more opportunity for innovation in determining base rent and trigger points for any premium payments based on yield, revenue, or other factors.

Stu Ellis

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February 3, 2009

Has The Recession Hit Your Farm Yet? If Not, Are You Prepared If It Does?

Some sectors of agriculture have elected to not participate in the recession, but if the economic slowdown captures just about everyone, how should farmers plan to manage their financial affairs? Where will credit come from and what will be the requirements to qualify for it? Many questions could be asked, but let’s start with those and get a look at the big picture.

The collapse of major banks, insurance brokerages, investment houses, and other financial institutions started the dominoes falling last summer. Other than a rise in production expenses, and a drop in commodity values, agriculture has been “like an island of tranquility,” says Extension economist Bob Jolly at Iowa State University. Writing in the February issue of Ag Decision Maker, Jolly says farmers, lenders, and agribusinesses wonder when the recession will be felt and what can be done now to soften the blow. Regardless of the route you eventually take, Jolly says the degree of uncertainty about the future warrants the need for various contingencies.

Jolly notes the significant rise in asset values in agriculture over the past 20 years; and while debt loads have risen modestly, net worth has reach record highs. He says that is a critical asset during hard times, because is provides a credit reserve and less income is needed to service debt.

Jolly looked at the financial records of several thousand Iowa farms to put them in various credit categories, based on their assets, liabilities, equity, income and other factors. 65% had strong financial status and 26% more were financially stable, thanks to strong grain prices the past two years. Inquiring of lenders, Jolly found that less than 5% will require some type of financial restructuring or debt rollover, but a significant number of farms will be reducing input costs, delaying purchases, and re-negotiating rents.

He says the consensus is that farmers and lenders will be able to withstand the stresses of 2009, but if conditions worsen, the capacity of farm businesses will decline without major adjustments. And he says that why contingent plans are so important.

One of Jolly’s colleagues, Iowa State economist William Edwards, writes in the same newsletter that farmers have a variety of financial tools in their tool box that might come in handy this year:
1) An accurate set of financial statements with current inventory values and land prices will be important for a lender to see.
2) A detailed cash flow budget, with high input costs and rents will show where operating credit lines will need to be increased.
3) Input prices may vary, depending on when suppliers booked them, so shopping around may yield some lower prices.
4) While reducing nitrogen will cut costs, it may also cut revenue, so the use of a decision aid on the amount to apply would be wise.
5) Lock in profitable commodity prices, and watch for price breaks on inputs.
6) Falling prices triggered many revenue insurance policies late in 2008, and adverse weather provided opportunities to collect SURE disaster payments, so documented yields could result in additional revenue.
7) With higher costs of production, you have more invested in the crop and that warrants higher levels of crop insurance coverage. Additionally, livestock insurance programs allow price floors to be set.
8) Consider enrollment in the ACRE program for guarantees based on higher price levels and current yields.
9) Try to negotiate leases that allow flexible payment arrangements, based on prices or yields.
10) Until you know revenue opportunities, defer capital purchases, such as machinery replacement, land purchases, or new grain bins.
11) Consult your tax advisor about early depreciation, deferring crop insurance payments, income averaging, and other ways of leveling out your income.
12) Various lenders may have a wide range of interest rates, so survey the opportunities and don’t forget USDA loan programs.
13) Discuss with your lender the possibility of refinancing long term loans, which may be available at lower rates of interest.
14) Keep savings in liquid accounts to pay production expenses or family needs, rather than investments that are hard to convert to cash.
15) If you have equity in land, livestock, and equipment, they may serve as collateral for lenders to increase your credit line.

Summary:
While the US and much of the world are in a recession, agriculture has escaped to some degree, giving farmers a chance to make plans to weather any storm that might result in financial damages. Surveys indicate most farmers are in good financial position, but could be in trouble if a recession is long lasting. Many actions are available for farmers to take that will help insulate them from any economic onslaught, and consultation with lenders and tax advisors are among the priorities.

Stu Ellis

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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.

Stu Ellis

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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.)

Stu Ellis

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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.

Stu Ellis

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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.

Stu Ellis

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.

Stu Ellis

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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.

Stu Ellis

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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.

Stu Ellis

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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.

Stu Ellis

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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.

Stu Ellis

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December 23, 2008

Will Corn Or Soybeans Provide Greater Profitability Opportunity In 2009?

Cold winter days are more bearable if your computer and Internet connection are working, and you can make progress on 2009 crop budgets. Major changes in production costs have occurred since the first pencil calculation in September, and they may push breakeven prices lower than what you last calculated.

Early in the fall, the potential for profitability was bleak in 2009 because of production costs that exploded higher than commodity prices had climbed in early summer. Unfortunately, those production costs and commodity prices were headed in opposite directions faster than red ink could be poured onto the bottom line. Before the global economic melt down, University of Illinois farm management specialist Gary Schnitkey estimated prices at $1,000 per ton for anhydrous ammonia and DAP, $900 for a ton of Potash, $275 per unit on triple stack corn and $200 per unit for refuge corn.

During a recent series of presentations, Schnitkey estimated the non-land cost of production for corn in 2009 at $569 per acre, and for beans at $324 per acre. He says the aggregation of higher costs for fertilizer, seed, power, crop insurance, interest, and other costs hike corn production costs by $181 over 2008 and beans by $85 per acre.

But then the US and global economy began to crumble and oil prices dropped from $140+ per barrel to less than $40 per barrel, changing the costs of many farm inputs. Schnitkey says wholesale prices of anhydrous ammonia have dropped from $800+ to about $350 per ton, and wholesale DAP prices were over $1,000, but now are about $550.

Seed costs projected by Schnitkey in 2009 will be $110 per acre for corn and $53 for soybeans. However, he says it will be difficult to achieve USDA’s forecast of 90 million acres of corn in 2009 without better prospects for profitability in corn. The prospects have improved slightly following the economic collapse which saw a parallel decline in some production costs. Schnitkey recommends penciling in $600 per ton for anhydrous ammonia and potash, $800 per ton for DAP, $210 for triple stack corn, and $180 for refuge corn. That would put non-land corn production costs at $470, down from $569, and $296 for soybeans, down from $324 before the economic melt down.

If your cash rent is $200 and corn yield is 191 bushels, Schnitkey calculates a breakeven price at $3.50, more than 50¢ lower than before the meltdown. For soybeans yielding 54 bushels on land renting for $200 per acre, the breakeven price would be about $9.22, another 50¢ drop.

If your cash rent is in the $100 range on land yielding 151 bushels of corn, the breakeven price is about $3.71 per bushel. On similar land that produces 47 bushels of soybeans, the breakeven price is $8.29 per bushel.

So, will more corn or more beans be more profitable for 2009? Schnitkey says in the past four seasons, corn profitability has been greater than the average over the past eight seasons, except for lower quality soils. To calculate your prospects, and be conservative, Schnitkey says use production costs prior to the economic meltdown, and create a price chart based on Wednesday futures closes for Dec corn and Nov beans. Then deduct a 50¢ basis. Schnitkey says the results will show a declining value since mid-summer when prices reached their peak. For $100 cash rent land yielding 151 bushels of corn and 47 bushels of beans, the corn premium disappeared about Oct. 1. For $200 cash rent land producing 191 bushels of corn and 54 bushels of beans, the corn premium disappeared in late November. That indicates soybeans are a more profitable crop when using the higher production costs. If your production costs are closer to the post-meltdown prices, Schnitkey says there is still a premium for planting corn about $50 per acre on $200 cash rent land, beans have the preference by $29 dollars on $100 cash rent land.

The bottom line on any crop budget indicates a return to the operator and to the land. Using the post meltdown production costs, Schnitkey calculates that at $233 per acre on higher quality land, with $3.50 corn and $9.00 beans. On lower quality land, returns are $137 per acre. Adding $1 to crop prices adds about $100 per acre on the returns to operator and land.

Summary:
The economic meltdown has resulted in lower production costs being estimated for 2009 corn and soybean production, compared to earlier in the fall. Lower prices for fertilizer and seed have contributed to a greater potential for profitability, by reducing breakeven prices. Based on lower production costs, farmers with higher quality land may be able to pencil in a premium for corn, while lower quality land may have more profitability opportunity with soybean production.

Stu Ellis

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December 18, 2008

USDA Is Doing Its Year End Bookwork, But Where Do You Fall Amidst Those Big Numbers? (Part 2)

Record high commodity prices have pumped significant amounts of cash into Cornbelt farming operations, but at the end of the year, have balance sheets improved any compared to last year? USDA’s analysis farm finances reports net farm income at nearly the same level as 2007. In this conclusion of a two-part series we’ll look at whether a good crop year really helped farmers’ financial position.

USDA’s mile high view of agriculture’s balance sheet says farm household income is forecast at $86,798, which is less than 1% more than 2007. That is the result of an increase in off-farm income which offset the decline in farm income. Untold in that number is breakdown of each. USDA says, “Average farm household income from farm sources is forecast to be $5,900 in 2008 (down more than 30% from the 2007 estimate); average off-farm income is forecast to be $80,897 (up 4.2%). About 70% of farms have at least one family member working at an off-farm job.

Among the key figures that a lender would scrutinize are:
• In 2007, the average net worth of farm operator households was $898,179, and the median net worth was $533,975. (USDA does not forecast farm operator household net worth for 2008.
• The debt-to-asset ratio of farm operator households in 2007 was 10 percent, with average assets of $1,001,298 and average debt of $103,118.
Large or commercial-farm households (8% of family farms) had a 2007 average household income of $179,225. More so than other households, they rely on farm income, which made up 75% of their total 2007 household income.

Net worth of farm households is significantly higher than that of non-farm households, according to USDA economists. The median value of net worth for all U.S. households as $93,100 in 2004, compared with $456,914 for farm households. This puts the median net worth of farm operator households at about five times the median net worth of U.S. families. Farm households have greater net worth in part because capital assets, such as farmland and equipment, are generally necessary to operate a successful farm business.

Farm sector debt is anticipated to stand at $215.1 billion by the end of 2008, up to a new record level for the fifth consecutive year. Real estate debt is expected to rise to $111.1 billion, up 3.1%, while non-real estate debt is expected to be $104.0 billion, a 0.3% increase. However, almost 70% of farm operations carry no debt, and 97% of those operations said they had sufficient funds to avoid debt. For those operations with debt, 66% are for real estate loans, 19% are intermediate term debt for farm machinery and buildings, and 15% is for annual operating lines of credit. Credit is an important operating tool for farms with debt, and credit levels have risen from $47 billion in 2003 to $58 billion in 2008. Farm lenders hold a 9.1% stake in the total value of farming assets.

Lenders look at the debt to asset ratio as a primary indication of financial health of an operation, and USDA reports that only 2.1% of farms had a debt to asset ratio above 60%, which is a benchmark for lender decisions. Those few farms had about 20% of the total farm debt, with the balance held by rural residence farms.
Of all of the farming operations tracked by USDA, how would their financial stress level measure up?
• 868,000 or 42% of farms have low levels of working capital that would cover less than 20% of their expenses.
• 43,000 or 2.1% of farms have a high debt to asset ratio of more than 60%.
• 304,000 or 14.7% of farms have low term debt coverage of less than 110%.
• 22,000 or 1.1% of farms have potential financial stress, but they hold only 6.4% of total debt.

USDA notes the current financial stress of the nation will be absorbed better by farm operations than non-farm households because of greater net worth, however, they will share in the mortgage stress, as well as employment issues. Unlike most of the non-farm population with investments in securities that are declining in value, farm investments are in farm assets, and the farm real estate market remains strong. With the issue of health insurance so important for farm families, USDA found that 12.6% of farm families had no form of health insurance, compared to 15.8% for the general population.

Summary:
Farm household income, from farm operations is expected to drop 30% compared to 2007, but that will be covered by an increase in off-farm income, so expect very little change in farm household income compared to last year. About 70% of farms carried no debt, but of those with debt, only 1% were in a financially precarious position. The 30% of farms with debt had an average 10% debt to asset ratio. Farm sector debt will rise for the fifth consecutive year, with nearly half for real estate loans. Lenders remain important to agriculture, and currently hold 9.1% of the value of assets, and are providing $58 billion in annual lines of credit.

Stu Ellis

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December 17, 2008

USDA Is Doing Its Year End Bookwork, But Where Do You Fall Amidst Those Big Numbers?

Record levels of farm income for crop producers, continued financial stress in the livestock industry, rising costs of inputs and cash rents, followed by turmoil in outside markets and the start of an economic recession have marked the past two years in agriculture. On the whole, USDA says agriculture is in a strong financial position as we prepare to turn the page on the calendar. However, high incomes have not always translated into strong balance sheets, and in a two part series, we’ll first look and farm and household income, then evaluate the financial strength of various types of farms.

USDA’s analysis of the past year is the large increase in the value of crop production, quickly followed by the rising cost of crop production. With a 20% increase over the previous high in 2007, the 2008 value of crop production is estimated at $181 billion helped by a strong demand for feed, oilseeds, and food grains. Cotton and tree crops did not share in the wealth.

Net farm income is forecast at $86.9 billion, about the same level at 2007 and 42% above the 10 year average. Net cash income is expected at $90.7 billion, up $3.3 billion from 2007 and is higher because of the carryover of 2007 crops into 2008. The value of livestock production is forecast at $143.4 billion, up from $138.1 billion in 2007, a 4% rise helped by most species and livestock products, except dairy. USDA economists said the second highest corn crop on record and the fourth highest soybean crop were met by strong demand and corresponding prices, helped in part by the biofuels industry and foreign demand. Reduced global supplies and higher incomes in developing countries also pushed up demand.

For corn farmers, food, seed, and industrial use has increased 23% with ethanol using about 1 billion more bushels of corn in 2008 than in 2007. With an annual price increase of $1.19 per bushel, cash receipts for corn are expected to rise $16 billion over 2007. Cash receipts for wheat will be $5.5 billion more than 2007, helped by record yields and prices that began the year at record levels before declining. Soybean receipts will also be up $5.5 billion over 2007, helped by higher prices that overcame a smaller crop to sell.

Cash receipts for cattle will reach a new high of $50.6 billion, while cattlemen face high feed costs, and have responded with some herd liquidation. Pork producers saw a $16 billion increase in cash receipts despite lower prices, however they were helped by strong export demand. Dairy receipts dropped 1.6% after a record year in 2007.

But not everyone had a share in the wealth because of the diversity of US agriculture. The Cornbelt was the big winner. But states in the East, Southeast, and Mountain areas were in drought mode and saw irrigation and hay expenses higher than normal.

Government payments will rise in 2008 to $12.5 billion, up from $11.9 billion in 2007, but that is primarily the result of payments going to cotton producers, which accounted for 87% of the counter-cyclical payments.

USDA also found $17.5 billion in farm related income generated by farmers who hire out for custom farming, contract livestock feeding, insurance indemnity payments, co-op patronage, and agri-tourism income.

On the expense side of the ledger is a $38.1 billion jump in production costs to $292.5 billion. That would be 77% of gross farm income and the 6th consecutive annual increase. Feed expenses are the largest sector of the increase at $8.7 billion, but the number of grain consuming animal units is also up 2%.

Crop expenses will total $51.8 billion, up 34% from last year, despite a 7% cut in corn production which uses the most inputs. Seed expenses will be $3.3 billion, or 28% more than 2007. Fertilizer will be $10.4 billion more, which is a 64% increase, but because of the energy-driven downtrend in prices, farmers may wait to purchase fertilizer in early 2009.

Of the 2.1 farm businesses tracked by USDA, there will be differences in their income prospects. Net cash income will be
• Up 38% on mixed grain farms.
• Up 64% on wheat farms.
• Up 53% on corn farms
• Down 46% on cotton and rice farms
• Down 13% on specialty crop farms
• Down 17% on beef cattle farms.

Average net cash income is forecast to increase by 33%, which would be the largest year-over-year increase among both crop and livestock farms.

Summary:
A demand-driven market for crops, fueled by bio-fuels and foreign consumers, helped push net farm income to its highest level ever, but in the shadow of the upward curve is another curve representing crop production costs, as well as the cost of livestock feed, which have nibbled away rapidly at profitability. Production expenses are well above prices for most livestock species. While farm income in the past year has been good, the wealth was not evenly distributed.

Stu Ellis

Posted by Stu Ellis at 12:41 AM | Comments (0) | Permalink

December 4, 2008

VeraSun Owes You Money. What Happens Now?

Whether it is a sign of the recessionary times or the volatility in the corn market, VeraSun ethanol plants have bitten thousands of Cornbelt farmers with management decisions following a declaration of bankruptcy. VeraSun was a major corn market for the Midwest, but has now become a major indicator that the glass can be half empty as well as half full.

VeraSun is one of the largest ethanol producers in the nation, with 17 plants in 8 Cornbelt states buying millions of bushels of corn. When the oil, ethanol, and corn market went up, all cylinders were firing. But when the oil and ethanol markets came back down, but corn purchase contracts remained at premium levels, the engine began misfiring and VeraSun locked up with a bankruptcy filing at the end of October. And agricultural law specialist Roger McEowen at Iowa State University expects every farmer dealing with VeraSun to have questions about what comes next. In the December Ag Decision Maker newsletter McEowen says October 11 is an important date in relation to delivery of corn to a VeraSun facility.

If corn was delivered before October 11, the farmer is an unsecured creditor and any payment may be months away. Farmers who delivered corn between October 11 and October 31 will be considered a priority creditor and will get paid. But there is a major catch which is making many farmers unhappy, and even drew the ire of the National Corn Growers Association. By cashing a check, the farmer agrees to accept current market prices for corn, and not the price that was established by the original agreement, which was at a much higher price. Further, the farmer is expected to continue delivering corn to VeraSun at the prevailing market prices.

McEowen urges farmers and elevators which receive a VeraSun check with the endorsement provision to take the check to their attorney for consultation before cashing it. That will allow farmers to obtain legal advice about doing business with a company in the throes of bankruptcy, and the farmer’s obligations to deliver grain in the future.

The ag law specialist says the federal bankruptcy code lets VeraSun decide whether to honor grain sale contracts during the time the bankruptcy proceeding is underway. He says that will let VeraSun decide what price to pay, as corn market prices fluctuate. And he adds that farmers and elevators are obligated to deliver corn, but VeraSun is not obligated to buy. McEowen says if a farmer sells the corn elsewhere, and VeraSun demands delivery, then the grain will have to be delivered regardless of the cost of the transaction to retrieve the corn.

One benefit on the side of the farmers and elevators is the ability to establish a time frame for honoring the contracts and the delivery of the corn. If VeraSun rejects the contract, then the farmer or elevator can sell the corn wherever and whenever. However, that rejection also gives the producer the opportunity to file a claim against VeraSun for damages. For example, if the contract with VeraSun was for $6 corn, and the contract was rejected by VeraSun, causing the corn to be sold for $3, then the farmer has a $3 claim against VeraSun, and will get in line with other creditors to divvy up what is left.

VeraSun’s plants are located in:
Linden and Reynolds, Indiana
Albert City, Charles City, Dyersville, Fort Dodge, and Hartley, Iowa
Woodbury, Michigan
Janesville and Welcome, Minnesota
Albion, Central City, and Ord, Nebraska
Hankinson, North Dakota
Bloomingburg, Ohio
Aurora and Marion, South Dakota

McEowen says he will provide updates for farmers and elevators on his website at the Center for Ag Law and Taxation.

Summary:
Thousands of Cornbelt farmers are faced with significant challenges due to the bankruptcy filing of the large ethanol refiner VeraSun. The first challenge is whether payment will be made for corn delivered before October 11, and a subsequent challenge is a check endorsement restriction that requires future deliveries of corn, if the check is endorsed for grain delivered after October 11. Farmers are urged to consult with an attorney to become aware of the vagaries of doing business with a company in the midst of bankruptcy.

Stu Ellis

Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink

December 1, 2008

Farm Income And Expenses For 2008: The Very Big Picture

How will your 2008 income compare to 2007? Every possible income and expense item probably shifted up or down, but if you are average, USDA says there will be little change. No one is average, of course, but on the whole, net farm income is forecast at $86.9 billion this year, compared to $86.8 billion in 2007. The real story is that a lot more money went into your bank account and a lot more went out of your bank account.

USDA’s initial estimate of 2008 farm income, outgo, and what’s left, shows little change at the bottom line compared to last year. Economists say the large increase in the value of farm production was offset by rising costs of production. The value of crop production was estimated at $181 billion, up $30 billion from 2007, but the value of livestock production will only be up 4%, unlike the 20% rise in crop production. The farm contribution to the national economy in 2008 will be up 2% from 2007 and up 30% over the average of the past 10 years.

Unlike some past years when farm income rose from farm program payments, 2008 farm income results from volatile, but strong commodity prices. And USDA notes that due to the demand from foreign buyers and the biofuels industry, commodity prices have been high despite high levels of production. Due to increasing demand for corn for ethanol refining, and competition for acreage from the soybean processing industry, prices have been raised for numerous other crops. And drought in several competing nations has increased the export trade for many US commodities.

Cash income for food grains is forecast to rise $6.5 billion compared to 2007, with wheat taking 85% of that increase due to larger yields and higher prices. The value of cash receipts from livestock and livestock products is forecast at $143.5 billion, up $5.6 billion from 2007, and will produce 44% of the cash receipts in 2008, compared to 48% from 2007. Beef, pork, and poultry receipts are all higher, while dairy declined. High feed costs caused many producers to operate below the cost of production, and herd liquidation was common. Meat exports helped due to the weaker dollar and the growing standard of living around the world.

Despite the level farm income, payments to stakeholders will rise about 5% from last year. Those payments representing interest paid to banks, rent paid to land owners, and salaries paid to farm labor were all agreed prior to the year, and are not subject to the up and down movement of commodity sales, production expenses, and net income.

USDA knows you are busy at the end of the year with tax planning, and that may be more complex this year, comparatively. Fuel, fertilizer, and some chemical prices, which have been high, may continue to decline, but due to uncertainty some farmers may lock in 2009 costs with some pre-payments. With farm income expected to decline in 2009, that may provide a lower tax bracket for some farmers and that will cause 2008 income deferral and expense pre-payment at the end of this year, as well as income averaging that will include this year and next when 2009 taxes are paid.

The USDA economists also know that not all of you are in the same category. They say states that lead in corn, soybean, and wheat production will lead in income, but states that are heavy in livestock production will see feed expense negate livestock profits.

While income is up, expenses were even higher. Following a jump of more than $20 billion in 2007, 2008 expenses will be up another $38 billion, and a $100 billion increase since 2002. Crop expenses will rise $15 billion, the largest jump on record. Since 2002, fertilizer is up 191% and seed is up 71%. In the livestock sector, feed expenses will rise 23%, the largest jump ever. Total expenses are forecast at $292.5 billion, representing 77% of gross farm income.

In farm program payments, direct payments will be down 4% due to fewer farmers taking advanced payments in this calendar year. Counter-cyclical payments will be down about 30%, but only cotton and peanut producers are receiving them. Marketing loan payments will drop from more than $1 billion in 2007 to only $90 million this year. However total farm program payments will rise from last year’s $11.9 billion to $12.5 billion this year, due to a variety of miscellaneous disaster relief payments.

Summary:
Due to higher grain prices, the value of 2008 crop production will be much higher than last year, but due to higher production costs, net farm income will be about the same as 2007. The value of livestock production will be higher as well, but due to high feed costs, net income from livestock operations will be marginally higher and many producers operated in the red during 2008. Higher costs for fertilizer, fuel, and feed pushed farm expenses to 77% of gross farm income, and expenses have increased $100 billion in just five years.

Stu Ellis

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November 26, 2008

Income Taxes: Do You Want To Pay More Or Less?

Did you have record or near record farm income in 2008? Are you a cash basis taxpayer? Should you be thinking about or working on tax planning prior to the end of the year so any adjustments can be made? If you have answered “yes” to any of these questions, we have some potential ways to reduce your tax liability.

Most grain farmers made record amounts of income this year because of high commodity prices, and should spend time with their tax preparer prior to the end of the year to make any necessary decisions that will reduce their tax liability. Purdue economist George Patrick offers several cost recovery alternatives for 2008. They include the Modified Accelerated Cost Recovery System (MACRS), the 50% additional first year depreciation, and the expanded Section 179 expensing for 2008.

Depreciation offers the opportunity to recover the cost of assets, and MACRS offers the further opportunity to place assets in varied length classes with a 150% declining balance, and a later shift to straight line depreciation. The classes vary from 3 years to 20 years and contain specific farm assets. For example the 3 year MACRS would be breeding hogs and semi-trailer tractors. 7 year MACRS would be most field equipment and grain bins. 20 year MACRS includes farm buildings, barns, and machine sheds.

Patrick says the fastest cost recovery is afforded by the 150% declining balance method, and said a $10,000 grain bin would have a cost recovery of $1,071 its first year and $1,913 in the second year. Patrick says once a depreciation method is selected, it must be used for the life of the asset, and that decision should be made when it is placed into service. For a farmer who expects to have higher levels of income in future years, Patrick says a slower depreciation method would be preferred.

The recent Economic Stimulus Act that bailed out several Wall Street entities, extended to rural route America, with an increase in the Section 179 expensing limit up to $250,000 for the current tax year. Qualifying property purchased this year can be expensed, rather than depreciated. Your tax preparer will help you remember the limit falls back to $125,000 for 2009. The qualifications include:
1. Farm equipment, grain handling equipment, buildings, breeding livestock, and field tile, if purchased by an active farmer and not a cash rent landowner.
2. The property can be new or used, but inherited property is not eligible.
3. Although real estate is not allowed, the “boot” portion of any other 1031 exchange property is eligible.
4. If the qualified property exceeds $800,000 in value, the expensing election is phased out dollar for dollar above that amount.
5. The expensing deduction is limited to one’s taxable income, but a schedule F income can be increased by a spouse’s off farm income.
6. It is not necessary to use the entire $250,000 expensing limit, and several small items can be aggregated to take advantage of the provision. Patrick says, “Generally, it will be more advantageous to allocate the expensing deduction to longer-lived assets and to assets that are likely to be kept in the business for their entire depreciable life.”

The Purdue economist says the recent Economic Stimulus Act also provided for additional first year depreciation equal to 50% of the adjusted basis of qualifying assets placed into service this year. To qualify, it must:
1. The property must be new.
2. It must qualify for the MACRS system for 20 years or less.
3. If the property is not purchased, a binding purchase contract must be signed in 2008.
4. The property must be placed into service in 2008.
5. The Alternative Depreciation System is not required.

These changes for 2008 encompass assets purchased or placed in service in 2008, and they do not provide for any changes for older property on your depreciation schedule. Patrick says, “There are trade-offs between the present value of tax-savings in one year due to rapid write-offs versus tax-savings being spread over several years.”

Summary:
Changes in the tax code, spurred by the Economic Stimulus Act recently approved by Congress to help jump start the economy, can be a boon to farmers who may have used some of their record 2008 income to purchase farm assets, including buildings and machinery. Cash basis tax paying farmers would be wise to consult with a tax preparer prior to the end of the calendar year to discuss the changes and possibly reduce their tax liability.

Stu Ellis

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November 25, 2008

Riding The Roller Coaster Of Prices, Costs, And Profitability

Rising costs of grain production and falling commodity prices are old headlines. But when you read to the bottom of the story, what are some of the implications that were not on the surface? When you sell the grain and pay the bills for the 2009 crop, your prospects for 2009 and 2010 income and cash flow may be uncertain.

In a farm financial prospectus, prepared for U.S Senator Byron Dorgan of North Dakota, agricultural economists Richard Taylor and Won Koo at the North Dakota State University paint a bleak picture for profitability. They observe that farm commodity prices periodically rise and shift to a higher level. But after that period of profitability, production costs overtake the commodity price jump and farmers enter a period of financial stress.

They point to the Russian wheat deal of 1973 which more than doubled farm income in North Dakota from 1972 to 1973. At that time fuel prices rose 111%, fertilizer prices rose 118%, and total farm expenses went up 67%. But expenses remained high after grain prices returned to a lower levels and farm income in 1976 was only 11% of what it was in 1973. Rural banks and the Farm Credit System all suffered.

The economists report current gross returns have increased $300 to $400 per acre, leading to higher net farm income. But production costs have risen 50% to 60% over the past four years. In 2008, fertilizer, costs increased 120%, energy costs went up 76% and total production costs are 56% higher than in 2004. Seed costs have increased 120% for wheat, 90% for beans and 93% for corn since 2004. They report higher production costs will result in lower income in future years compared to the past two years, since commodity prices have declined, but production costs have remained high. They forecast breakeven prices for corn at $3.60, for beans at $8.00, and wheat at $6.20 by 2010.

By the year 2010, in the more productive Red River Valley the North Dakota State University economists are calculating a non-land production cost of $408 for corn, $210 for soybeans, and $252 for wheat. Cow-calf production costs in 2010 are forecast at $550 per head, compared to $370 in 2004.

While production costs rise, the economists say that is tolerable, if gross returns rise in lockstep, but without that, financial difficulties will increase. The economists pencil in a $5.11 average price for corn in 2009 and $5.39 in 2010 and $11.93 for beans in 2009 and $12.32 in 2010.

With the help of those market prices, the North Dakota State University economists project profitability for corn and soybeans prior to deducting land costs. The per acre net returns of $220 to $250 for corn, and $134 for soybeans will allow minimal land rent and returns to labor and management. They expect production costs to increase in the foreseeable future, but say it is unknown if the current levels of commodity prices can be sustained. An issue that will be of concern to many is the observation by the economists that producers, responding to high input prices, will increase the supply, and that will put further downward pressure on prices. And such a price fade will reduce net returns, causing farm income to be substantially lower in 2010.

Summary:
The current decline in commodity prices and rise in production costs is nothing new. Similar periods have occurred previously after upward jumps in commodity prices. And while they may return to somewhat lower levels, production costs do not, and financial stress results on producers. One common response is to increase production to overcome lower returns, but that raises the overall supply and puts downward pressure on prices once again. In the near term, economists are expecting lower net income for the next two years.

Stu Ellis

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November 20, 2008

Farm Leasing #4: Fair Lease Analysis.

This series on farm leasing has covered variable leases, relationships between owners and operators, and we conclude by looking at how to calculate a fair cash rental rate. The amount the owner wants and the amount the operator is willing to offer are both good starting points, and they will meet somewhere in the middle if an agreement is eventual. But how do you calculate a starting point and what is a fair agreement that does not take advantage of the other party?

Cash rents are replacing crop share arrangements as the dominant means of renting farmland, in part because an aging generation of owners does not want the record keeping fuss and their non-farm heirs are unfamiliar with fertility, biotech seed traits, and the FSA. And many operators find mailing a check once or twice a year is easier than sending monthly reports. So what is a reasonable approach to determining the rental rate?

At Iowa State University economists William Edwards and Don Hofstrand suggest a handful of alternatives, which may or may not work on your operation.
1) The going rate in the neighborhood can be a guide, if the farm in question is nearly identical to others in the region. Surveying other owners and operators to get a range of cash rental rates will allow a close determination, which can then be adjusted up or down because of pluses or minuses on the farm.
2) Rental rates can be tied to the long term average yield of crops on the farm, and then multiplied by the county average for cash rents. If that county average is $1.50 for corn and $4 for beans and the farm’s long term yield average is 160 bushels for corn and 45 bushels for beans, then the rent would fall in the $180 to $240 range.
3) By calculating a gross value of the crop, using the yield and an easily understood price, the owner would get a percentage of the gross, such as 35% or 45% with higher values for higher quality land. Calculations could be made for all crops and then averaged.
4) The owner’s investment in land should provide a return, just as if it were invested in some other equity, business, or security. The rental rate could be keyed to that expected return on investment. A 5% return on $5,000 farmland would result in a $250 cash rent.
5) If the operator, who is managing the books for the cash rent operation, computes the crop revenue and the cost of production, the owner’s cash rent share could be 50% of the net income. The owner benefits from not having to deal with crop-share details.
6) Another alternative based on production records is the tenant’s residual. Once the production expenses are deducted from the gross revenue, including machinery and labor costs, and a fee for management, then the residual becomes the rental payment to the landowner.

In addition to these possibilities in determining a fair rent, what is really fair in terms of a reasonable rental rate within the realm of today’s costs, prices, and yields? Software products have been developed by Extension economists to provide help with that issue.

Fair Rent, supplied by the University of Minnesota indicates what is affordable per acre, what happens if yields, prices, or costs vary, what yields will be required for the rent to be covered, and which share alternatives are better. The software cost is $95.

Farmland Lease Analysis, supplied by the University of Illinois aid tenants and landlords in determining the returns and risks from different farmland leases based on individual farm records and the arrangements of the proposed lease. The program offers comparisons of three types of leases: share rent, cash rent, and dry bushel leases. The software can be downloaded without charge.

Summary:
After two years of high commodity prices and rapidly rising rents and landowner expectations, many farm operators may be forced to accept cash rental rates above levels that can be expected by today’s lower commodity prices. How high an operator can bid should be determined by an analysis of production costs and break-even prices. There are many ways to determine a fair rent, but whether the rent is fair is determined by whether both sides of the arrangement are treated equally.

Stu Ellis

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November 19, 2008

Farm Leasing #3: Landowner and Operator Relationships.

The operator who leases a farm becomes the steward and caretaker of that property on behalf of the landowner. The landowner’s family may have obtained the property from a land patent in the 1830’s, homesteading in the l880’s or it may have been purchased at auction last week. Nevertheless, the operator has two responsibilities, to himself and to the landowner, and in this series on farm leases; the landlord-tenant relationship is prime.

While the owner is supplying the money-making asset, it is up to the operator to generate the cash that will feed his own family and provide a return on the owner’s investment. So, the operator has two objectives, and both can be achieved simultaneously, say Ohio State economists LeeAnn Moss and Bernie Erven, who compare the relationship to borrower-lender, employer-employee, and husband and wife.

While farm operator demographics change slightly, for the most part increasing in average age, the landowner demographics are primarily senior citizens who live some distance from the farm and don’t have the energy and ability to manage it. Farm managers are periodically involved, but where they are not, the farm operator must ensure the landowner has an adequate comfort level that the farm is in good hands. The greater the comfort level, the stronger the relationship, and the longer the tenure the operator may have on the land. In the bulk of cases where that suddenly changes, it is the result of the death of the elderly landowner, the inheritance of the land by a younger non-farm-familiar generation who wants to put out the land for auction to get the top dollar.

In a stable relationship, Moss and Erven say the nature and extent of the relationship can have a significant influence on the type and terms of the lease. “Keeping the landlord happy” is an exercise in good public relations, which involves: regular communications, information updates on trends, costs, and crop conditions, and keeping the property in good condition while welcoming the landowner like part of the family.

Moss and Erven suggest a multi-point strategy to establish a good relationship and build on that bond over time:
1) A written lease establishes a business relationship that leaves little to uncertainty.
2) A resume will show your past accomplishments, future goals, and your farming philosophy.
3) A periodic report on your objectives will tell the landowner what is planned to eliminate any surprises on the part of the operator.
4) Provide detailed information through written reports or even a website focused on the farm with pictures, verbal reports, markets and crop conditions, and a private page for confidential landowner information.
5) Improve the appearance of the property with removal of older trees and brush, removal or updating of buildings, removal or repair of fence, to make them think you know how their parents kept up the farm.
6) Acknowledge holidays, birthdays, or losses in the family. Create social opportunities when convenient that incorporates the owner into your own family.
7) Educate and schmooze the next generation about the farm, to establish their trust of an operator as an authority and the best possible operator for their economic interests.

Building a relationship between operators and landowners may also involve numerous issues that should be discussed at the outset, with continual updates to ensure both sides are thinking along the same lines. Those include common goals, level of risk aversion, leasing preferences, the sophistication of communication methods, attitudes toward change, any types of financial constraints, and how far each is willing to go to solve problems. When each party understands the thinking of the other, then the chance for a long term relationship is improved.

Similarly, there are issues that can quickly destroy a relationship. Those factors that should be avoided include: unclear communication, stereotyping, using the wrong method of communication, and the wrong language, not providing feedback, not being a good listener, and other impediments to clear understanding of each other.

Summary:
While the relationship between a farm operator and the landowner is primarily a financial and business relationship, its tenure and success will be enhanced by a good understanding of each other, the needs of each individual, and knowing what the other party’s priorities are. Just as in a marriage, communication is an integral part to hold the relationship together.

Stu Ellis

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November 18, 2008

Farm Leasing #2: Variable Cash Rents Becoming More Important.

It was a watershed phone call Monday. The voice on the other end, who identified himself as a cash rent farm operator, said the owner thought it was probably time to switch to a variable cash lease. Not every farm owner will be so open-minded and realistic, but one by one, that may happen around the Cornbelt to help operators dilute the red ink in the coming year. Let’s have another go at flexible or variable cash leases in our special focus on farm leasing this week.

Variable cash leases will provide more flexibility for the operator than a cash rental lease, but will not be as burdensome on the owner as a crop share lease. Variable or flexible rents will have a base rental rate, and will be adjusted up or down by a multiplier that is usually driven by price, yield, or both. Risk is shared by both the operator and the owner, so both will share in the financial rewards of good yields or high prices. And the owner will be less likely to lose a good operator to financial pressure should yields or prices plummet.

Purdue economists have developed a flex rent calculator, which will not calculate an actual rent, but will provide insight to how the alternatives will treat both the landowner and the farm operator.

The spread sheet uses Excel software and allows financial changes to be made and calculates the outcomes.

An explanation package helps users understand how to enter various alternatives, and provides the results in graphs and tables.

Iowa State economist William Edwards says the most common flexible cash lease in Iowa calls for the owner to receive a percentage of the gross revenue, such as 35% to 45%, with higher amounts for more productive land. The next most popular calls for a base rent that might have been used prior to the recent rise in grain prices, and then adjusted with a bonus based on yield or price.
1) Yield determinations can use elevator scale tickets, combine monitors, or bin capacity.
2) Price determinations can be based on local elevator, processor, or feedlot prices, based on a pre-determined date, an average of dates, or a futures contract value.
3) Boundaries can also be set that would be top and bottom limits on yields or prices which Edwards says keeps the rent in a predictable or more desirable range.

Ohio State economists Robert Fleming and Donald Breece provide example calculations and formulas that can be used as a guide. They also provide several dozen examples of real flexible cash leases from past years, which provide some insight, however actual values would need to be updated.

University of Illinois economists Gary Schnitkey and Dale Lattz offer yet another variation, based on crop insurance parameters. Their reasoning is that hedging is not an effective tool for determining values between years, which is the time frame for setting cash rent leases. Those parameters are the expected county yield as determined by USDA’s Risk Management Agency for the Group Risk Income Plan, the base price that is established by USDA at the end of March and the rent factor which is a negotiated multiplier that determines the share of county revenue received by the land owner.

Summary:
Flexible cash rents have the power of rewarding both the land owner and the operator in times of good yields and high prices, but call for both sides to share the downside risk. Flexible or variable cash leases will be an important leasing tool in the coming year, with uncertain profitability. Calculation of the variables, such as price, yield, or various multipliers is an important factor that should not be left for the last moment, and is going to be different for nearly every Cornbelt operation.

Stu Ellis

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November 17, 2008

Farm Leasing #1: Know Everything You Need To Know.

Harvest is winding down across most of the Cornbelt, although some areas still have a lot of standing corn. But where fieldwork is diminishing, bookwork is increasing, and that includes working on crop budgets for 2009, taxes for 2008, and making leasing arrangements for the coming crop year. Marketing plans may not be able to support breakeven prices from crop budgets, unless cash rents can soften. Our focus for the week is going to be on farm leasing: what is a fair lease, flexible leases, owner-operator relations, and setting cash rents.

What should you pay for cash rent? Whatever the owner wants is a starting point and it goes down from there. In rent auctions, someone may be willing to pay more than you, but land should never be rented if it is going to be a losing proposition. If your sharp pencil says you cannot make any money above a certain level, that higher bidder may not be able to make any money either. Renting a farm can frequently be an emotional decision, and emotions can get you into financial trouble.

Enter the leasing decision with a solid checklist of factors that may allow your bid to go up, or keep it below a certain level. Purdue economist Craig Dobbins offers 16 factors that should be checked in setting cash rent. Among them is current fertility levels, which may have been mined by the prior tenant, and puts you behind the 8-ball to start. Another issue Dobbins wants you to assess is the status of tiles and drainage. This past year would be a good litmus test for serious problems if there were any. An additional issue involves those “non-itemized” services expected by the owner, such as plowing out his snow-clogged driveway or repairing the facilities you are renting. While there is nothing wrong with the latter issues, it may be appropriate for you to add fees, or receive a rental rebate.

Farm leasing documents can come from a variety of sources. Every county Extension office can supply a lease form or direct you to a website to download and print your own. Others can be obtained from attorneys in rural communities. Many landowners will supply a lease their attorney wrote, but you must always remember, whoever wrote the lease made it fair for himself. And just like a cash rent offer, that is the starting point. A simple lease may be a page long. But the shorter the lease the more questions that are left unanswered and the more contentious a solution could become. Ohio State economist Donald Breece offers a lengthy checklist of issues that should be covered in a lease to reduce the amount of assumptions that need to be made and only serve to get someone in trouble.

One of the issues that Breece suggests, which may not be at the top of your agenda, includes a statement that your rental of someone’s farm is not the development of a partnership, which could create unforeseen liability issues. Another addresses the issue of what happens to a growing or unharvested crop should the lease be terminated, and what are the exact factors that would cause termination of the lease.

If a sample lease would help get the process started for you, the Land Grant Universities offer a lease form that can be use for both crop share or cash rental arrangements. While the document is 10 years old, it is quite usable in its basic form and covers most of the issues that would be applicable for a Cornbelt farm lease. One of those is the use of arbitration to settle any differences, which goes a long way to keeping problems out of the court, where expenses can mount up quickly.

Summary:
With high production costs, and relatively low market prices that will challenge profitability, the prudent farm operator should eliminate all potential risk in the leasing of acreage. That is accomplished with the help of a thorough lease document that itemized all possible issues that might arise, and gives a solution process for unsettled issues. However, prior to signing a lease, a prudent farm operator will have checklist of issues that will either be addressed in the lease or that can be checked for correct information prior to signing the legal document. No one should sign on the dotted line, and then ask, “Oh, what about….” You won’t be happy with the answer.

Stu Ellis

Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink

November 6, 2008

A Mutually Beneficial Approach To Cash Rent Leases.

The farm leasing season is underway as cash renters around the Cornbelt try to lock in as much farmland as possible for the coming crop season. With profitability expected to be slim, many farmers will think money will only be made on volume. However, trouble is brewing for cash rent farmers whose input costs are going up, commodity prices are going down, and affordable land is either scarce or not worth farming. Unfortunately, too many farmers will be signing leases without doing the math to know whether it will cash flow.

Bruce Johnson calls it an economic headwind that agriculture is fighting. He is Professor of ag economics at the University of Nebraska, and explores our volatile times in the current edition of the Cornhusker Economics newsletter. Johnson cites the global financial troubles that he believes will launch a long and deep global recession. While agriculture is not suffering as are other industries, there is that potential which would stem from a downtrend in the demand for food and fuel.

Johnson says in light of such volatile times, both farm land owners and operators who are negotiating cash rent leases, need to ask the question, “What would be fair and reasonable to both parties?” He says the answer is neither simple, nor applicable to everyone.

Current levels of risk are your top priority. And Johnson says both tenant and landowner need to realize that reality. Landowner must realize the operator has all of the risk and causing cash rents to be bid up is a serious risk exposure, in light of higher production costs and lower commodity prices. He even suggests holding 2009 rents at 2008 levels. Johnson’s Farm Lease Calculator indicates little justification for higher rents in 2009.

A demand for more rent must be linked with acceptance of more risk. Johnson says “no pain, no gain” should be the mantra for cash rent negotiations. A landowner not wanting the responsibilities of paying crop input bills and marketing the crop should accept a flexible cash lease that identifies a variable rent based on market or production factors. But both parties should be thoroughly informed about how the rent is calculated.

In times like this the crop share lease is the most fair to all. The crop share lease equitably shares the costs and revenue from a farming operation, but because of its management requirements landowners have moved away, and operators have been agreeable because it offered less profit opportunity. Johnson believes the global economic storm should bring the crop share lease back into use.

Good relationships are key to success. Johnson says mutual trust, forthrightness, and integrity are more important than ever in today’s challenging times. He says all parties to the operation should be striving for a fair and equitable leasing arrangement, and everyone wins when that is achieved.

Summary:
Cash renters of farmland will be financially squeezed during the coming year if they have to pay increasingly higher rents on top of rising production costs and declining crop prices. Land owners should not be demanding higher rents in the wake of the current recession because the potential for reduced food and fuel demand will further depress prices and increase the financial risk for cash rent operators. Both sides of the lease should share the risk, possibly through a flexible cash rent lease that is tied to either production or prices. The goal of the land owner and the operator should be to make the lease fair to both parties.

Stu Ellis

Posted by Stu Ellis at 12:56 AM | Comments (3) | Permalink

November 5, 2008

Will Energy Prices Break Your Budget And The Bank?

Gasoline prices are half of what they were in mid-summer. Crude oil prices in the mid-$60 range is less than half of its mid-summer peak above $140 per barrel. So everything is hunky dory…..that is, until you realize the cost of diesel fuel forgot to drop along with the cost of other fuels. And agriculture’s thirst for diesel fuel will strain many farm budgets for the coming year.

Farm income is at record high levels, but profitability is not, and energy prices will continue to have a dampening effect on the farm economy. Jason Henderson, vice president of the Federal Reserve Bank of Kansas City, says, “Ultimately, soaring energy prices threaten to slow the booming farm economy.” His analysis indicates energy price dynamics will also have an impact on credit conditions for the 2009 growing season.

The fact of the matter in the crude oil market, says Henderson, is that developed countries have slowed their demand for oil, while developing countries have sharply increased their consumption, as indicated by China’s 50% increase in appetite for oil since 2001. On the supply side is a slow down in production, due to production policies in non-OPEC countries. With decreasing supply and increasing demand, prices for both crude oil and natural gas have set record highs.

Higher energy prices mean higher costs for farmers, since both fuel and fertilizer are energy-based inputs. Henderson says farm inputs are 20% above year ago levels, with the largest increases in fertilizer and fuel, which have doubled from 2007 prices. As a result, Henderson says the expectation of bankers is that farm income has retreated at a time of higher commodity prices. 2008 corn production costs were 25% higher than 2007, soybeans were 15% higher, and wheat was 20% higher.

Henderson says the Federal Reserve survey of bankers indicates they are expected farm income to remain strong with the help of higher commodity prices, but by the middle of 2008, commodity prices began to fade and input prices remained at high levels, causing corn revenue expectations to decline 21% below prior projections, with similar trends for soybeans and wheat.

With USDA forecasts for corn, soybean, and wheat production costs to rise another 5% in 2009, the higher costs are focused on seed, fuel, fertilizer, and chemicals, pushing up breakeven prices to $4.13 for corn, $9.18 for soybeans, and $7.61 for wheat. The trend in costs will cause farm debt to rise as well in line with the additional capital required to plant a crop. Loan demand is expected to rise sharply in coming months as farmers borrow to pay fertilizer bills for 2009 production.

The Federal Reserve’s Jason Henderson says the higher production costs and thinner profit margins will slow down the growth in farmland values, since they are based on the capitalization of expected returns to production. Cornbelt land values rose nearly 15% and Great Plains land values rose nearly 19% in the first quarter of 2008. Both slowed as the year wore on, and their future depends on production costs and crop prices says Henderson. He rhetorically asks if the farm boom has reached its peak, and says its sustainability will depend on production costs and crop prices. While prices could mean high profits, the combination of weaker prices and higher costs are a risk to the farm economy.

Summary:
As commodity prices fade and production costs continue to rise, profitability is called into question for 2009 crops. Higher costs are noted for several energy-based inputs, and with diesel fuel prices remaining high, the cost of planting and harvesting the 2009 crop could be a primary dynamic in the calculation of breakeven prices. The higher production costs will also be a factor in increased farm debt and requests for credit.

Stu Ellis

Posted by Stu Ellis at 12:59 AM | Comments (1) | Permalink

November 4, 2008

Have You Thought About Ways To Save Money On Soybean Production?

As input costs rocket upward and commodity prices weaken, Cornbelt farmers will be looking for innovative ways to find profitability in 2009. Some general concepts can be explored here, but exact methods will depend on the ingenuity of farmers who best know their farms and their management abilities. Nevertheless, after looking yesterday at ways to reduce the cost of corn production; today let’s sharpen the pencil again and turn our attention toward soybeans.

In general, opportunities for saving on costs of production can be targeted toward alternative choices for crop inputs and modification of typical farming practices. The ag economists at Ohio State University provide a series of cost saving ideas that may be applicable to your soybean operation.

1) Seeding rate may be one of the first targets of your attention, but it all depends on the type of soil on your farm. For solid beans in 7” rows: plant 225,000 seeds per acre in light soil where plants may reach 20”; or 175,000 seeds per acre in medium soils where plants reach 30”; or 125,000 to 150,000 seeds per acre in dark soils where plants are 40”.
2) Use a similar concept for narrow and conventional row spacings. By trimming 10% per acre on seeding rate, the savings would add to more than $3 per acre in a Roundup Ready system.
3) Herbicide expenses can be reduced with the use of Roundup Ready soybeans, which OSU economists calculate at $11 per acre, which includes both the herbicide and the seed savings.
4) Generic crop chemicals can also provide savings of 10%, which would be $2 per acre.
5) Being able to buy fuel in bulk quantities requires a large payment, but your savings may be worth it. Bulk purchases may yield a 20 cent savings per gallon on diesel fuel, and that is more than 60 cents per acre savings. If soy-diesel is comparatively priced, it will benefit your engine, the air, and the price of soybeans.
6) The wise use of inoculants can also provide revenue. The OSU specialists say, “Every dollar invested in inoculants gives you an Average Minimum Return of $2.00 per acre over time.” Compare your total cost with the potential return.
7) Seed treatments can also provide a financial benefit in soybean production. The economists estimate each dollar invested in a seed treatment would mean an average minimum return of $1.50 per acre over time. Again, compare your total cost with the potential return.
8) Bulk fertilizer purchases may also provide a chance for savings on soybean production costs. If a bulk purchase offers a 5% discount that would work out to be $1.40 per acre.
9) If a light bar or other guidance system is installed, you will have a capital equipment cost, however researchers have found that net revenues of up to $30 per acre can be realized. Operating speed is increased, fatigue is decreased, meaning more acres can be covered. Overlaps and skips are also reduced, which has a beneficial impact on fuel, labor, and machinery costs. With more precise driving, compaction is reduced and yields are increased with a $15 per acre increase in revenue.
10) Seed purchases can be made early to take advantage of pre-payment discounts. An 8% discount would mean a nearly $3 saving per acre with Roundup Ready seed.
11) Reduction of tillage will reduce fuel costs along with machinery repair and labor. Compared to a conservation till system, Ohio State specialists say there is a nearly $4 net savings with a no-till system, and that takes into account comparable yields and extra herbicide for the no-till system.
12) Inflating tractor tires to recommended levels will provide fuel savings since slippage is reduced. An 8% fuel savings means 56 cents per acre savings in a no-till system.
13) Consider the use of Group Risk Insurance, if your farm fits the parameters of the plan. Compared to CRC, there is $4.50 per acre savings with GRP.

Summary:
High production costs and low commodity prices necessitate the need to look for ways to cut back on production expenses. Small reductions in seeding rates, shopping around for herbicides, bulk purchases of fuel and fertilizer can all provide savings of $1-3 per acre each. With other adjustments, and changes in practices, soybean producers will be able to increase their potential for profitability.

Stu Ellis

Posted by Stu Ellis at 12:13 AM | Comments (0) | Permalink

November 3, 2008

Would You Be Interested In Saving Money To Grow Corn?

Landowners are demanding high cash rents. Fertilizer, seed, and other input prices are rising. Commodity prices are withering as the value of the dollar skyrockets. What are your plans for maintaining profitability in 2009? Some of your effort may be focused on trying to cut expenses; but where do you start? Well, let’s start with corn. Sharpen your pencil, and…..

The farm management team at Ohio State University has provided some guidelines for cost saving ideas and innovations in crop production for both corn and soybeans. We’ll saving soybeans for tomorrow, so let’s explore ways to save money on corn production.

1) Seed companies want to sell you seed with a variety of traits, but make your selection wisely to ensure you are not buying traits that are not needed. Save $5 per acre if you do not get the corn borer gene. Some spots around the Cornbelt will not need a corn rootworm trait on first year corn, and that would save $15 per acre. Glyphosate resistant corn costs $11.50 extra, and this may be the year to adjust your weed control program to avoid glyphosate resistance.
2) If you are planting corn after soybeans, the nitrogen benefit is worth $10 per acre, by saving 30 lbs of nitrogen. That same crop rotational program will allow better weed control that might save $1.22 per acre and a conservation tillage system.
3) The use of generic crop chemicals will allow a $1.22 savings on herbicide.
4) It takes a large check to make a bulk fuel purchase that may have a 5,000 minimum, but you may save $0.20 per gallon, and that represents nearly $1 per acre on a conservation tillage system.
5) Bulk fertilizer purchases are also a possibility to save $3.76 per acre or 5% on your fertilizer bill.
6) Evaluate the cost differential between anhydrous ammonia and urea. OSU economists calculate a nitrogen savings of $8.76 per acre, based on a 146 lb. application rate.
7) Side dressing anhydrous ammonia in the spring will save $7 by not having to buy n-serve in the fall for anhydrous application.
8) The use of a light bar or a guidance system will have a capital outlay, but the technology has been show to increase net revenue by up to $30 per acre.
9) If you have not yet purchased your seed corn, review the university seed performance data for your state, then take advantage of early purchase discounts. OSU economists say that represents an 8% savings or $2.70 per acre.
10) Check your tire inflation pressure to conserve on fuel. Too much slippage could cost an additional 8% per acre or nearly $1 base on fuel savings.
11) Decrease tillage where possible, and save as much as $7 per acre over fuel, repairs, and labor.
12) Consider the use of Group Risk crop insurance if it fits your farm. Versus CRC, GRP would save $2.50 per acre on the county yield insurance.

Summary:
Profitability will be the challenge for most farmers in 2009 because of the continued hike in production costs and the continued decline in commodity prices. Farmers will be forced to pare down their production expenses, and saving $1 here and $3 there will add up eventually to increase your profit opportunity. Savings are available in a variety of production costs, including seed selection, fertilizer application and timing, herbicide selection, crop rotational choices, and a variety of other opportunities.

Stu Ellis

Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink

October 30, 2008

Farmers And Lenders Will Soon Have A Relationship, Just Short Of Marriage.

The farm lending season is only a couple months away and for many farmers it will be the start of a new relationship with their lender. Your financial partner will ask more questions, want more details, implement more controls, and be much closer to your decision-making process than ever before. Even though you may be a good financial risk, the credit industry is being overhauled from top to bottom and that means a change for the way Cornbelt agriculture conducts its business.

Although your lender will probably not call and say he’s noticed you bought an extra bucket of grease, your next conversation may well indicate the lender knows exactly how much money is in your checking and savings accounts, and how much of your crop is at risk for either price or production. Some lenders have already been operating with that scrutiny, and all will be moving in that direction. The ones who seem like they are already a member of the family may get a bit closer, all in an effort to prevent the loss of their investment in a farming operation that turned inside out.

The Purdue University ag economics staff looked at the impact on agriculture resulting from the mortgage and credit crisis and Wall Street’s meltdown and Purdue economist Mike Boehlje examined the implications on farmers and the implications on lenders. Boehlje says the dynamics in the capital and credit markets, combined with the potential for a global recession, will affect the business relationship between borrowers and lenders, including farmers and agricultural lenders. The price volatility in the commodity markets and the increased costs for agricultural inputs raises the level of risk for farming and Boehlje says lenders will be more cautious in their lending policies. That will take the form of many more questions that will be asked about risk management, demands for additional collateral, and possible limitations on the amount of credit available.

• Typical ag lenders have not been impacted as seriously by the mortgage lending problems, nor the freezing up of credit and capital available to them. However a farmer who has suffered a financial challenge may find more difficulty in getting a lender to provide credit.
• Ag lenders are aware that commodity prices the past two years have provided revenue for farmers to have good repayment capacity, but because of the current financial environment lenders may want more documents that indicate cash flow and risk management tools that have been implemented such as forward contracts and crop insurance.
• Interest rates are not expected to significantly increase as the Federal Reserve keeps interest low to spur the national economy, but the cost of funds will be higher to the Farm Credit system which depends on bonds that carry higher rates of interest. Those costs may be passed on to borrowers. Longer term interest rates are expected to increase slightly.
• Loans may carry additional restrictions that control the use of the money, such as a mandate to carry crop insurance or to obtain prior approval for any capital purchases, regular updates on inventories held, reports on challenges to production, examination of bank accounts, and regular visits to the farm to inspect the premises. Boehlje says the additional regulatory oversight will substantially increase the workload of loan officers, and subsequently increase the cost of lending for the credit institutions.
• With the increase in crop input costs, many farmers will be seeking increased levels for their operating loan, and lenders may subsequently require more documentation about capital outlays for those inputs. Boehlje says lenders may further inquire about the solvency of the input supplier, and whether or not pre-payment of inputs will significantly reduce 2008 income tax liabilities.
• Competition among lenders may increase because of the differences in the cost of funds and the appetite for risk that lenders are willing to maintain. This could impact differences in interest rates, but the intensity of competition will primarily be driven by the overall financial atmosphere.
• Lenders may be forced to decline loan requests more often during the current financial stress, or in the alternative approve only partial credit requests. Boehlje says refusing a loan request may sometimes be in the best interest of the lender and borrower.

Summary:
While agricultural lenders have generally been insulated from much of the credit and capital crisis, farmers and farm loan officers can expect that it will have an impact on “business as usual.” Credit will be available to worthy customers at low and more competitive interest rates, but lenders will require more documentation, impose more restrictions on the use of their money, and more closely monitor their relationship with borrowers. Lenders will have an increased workload as a result, and the increased cost of lending will have to be absorbed by lenders.

Stu Ellis

Posted by Stu Ellis at 12:45 AM | Comments (1) | Permalink

October 22, 2008

Revenue Crop Insurance: Will You Be Getting An Indemnity Check?

Anyone with revenue crop insurance may be wringing their hands with glee as a result of the movements in grain prices this year. But across the spectrum of various types of crop insurance, there will be some folks happier than others. Which group will you be in?

If you have Crop Revenue Coverage, Revenue Assurance, or Group Risk Income Protection there may be an indemnity check with your name on it says Art Barnaby, agricultural economist and risk management specialist at Kansas State University. His recent newsletter indicates that the lower prices in the grain market, compared to the spring base prices last March, should trigger payments to many farmers with revenue coverage.

For example, the spring guaranteed price for soybeans was $13.36 per bushel. Currently, the closing Futures prices for the November contract are shaping up to be $9.38. If that continues:
1) Holders of RA policies could receive a $3.98 check per bushel, unless they had an extraordinary yield.
2) Holders of CRC policies, which limit the loss to no more than $3.00 per bushel, should receive the maximum $3.00.
3) Holders of GRIP policies, which limit the loss to no more than $3.00 per bushel, should receive the maximum $3.00.

Regarding the CRC soybean policies, Barnaby says, “Based on current market prices, it will require no yield loss for 80% and 85% CRC coverage insured corn and soybean farmers to collect on their CRC policy. However, most CRC coverages are 75% or less.”

The GRIP policies analyzed by Barnaby will likely pay indemnities for both corn and soybeans. Since GRIP uses the October closing prices for both November soybeans and December corn Futures. Currently, that unofficial average is $4.23 per bushel, compared to the spring guaranteed price of $5.40 per bushel. If you have a GRIP policy, Barnaby says your county yield will have to exceed its expected average by 16% on beans and 12% on corn to prevent a payment.

While all three types of revenue crop insurance are based on the combination of yield and price, CRC and RA are more yield oriented and GRIP is more price oriented, since it is based on a county’s average yield. Barnaby says he’ll be surprised if there is not a large number of counties generating GRIP payments because of the decline in grain prices from the spring to the fall. And he says it will be a test of the accuracy of the USDA’s yield estimates made by the Risk Management Agency.

If you are in the category of “I didn’t get as much as my neighbor,” changing types of crop insurance may be your priority for next year. However, that may not really be the answer. One of the uncontrollable issues is what the USDA’s Risk Management Agency does with the yield expectations. If your county yield is set too low, GRIP will never pay off. If it is set too high, GRIP is guaranteed income. Additionally, RMA's crop insurance ratings for some counties are not actuarially sound, and in some counties farmers will almost always get a payment and in others they almost always will never get a payment.

There may be icing on the cake for those who signed up for SURE (the new permanent disaster program). Although the rules had not been written by sign-up time, it was created to provide a payment to producers who suffered a revenue loss as a result of yield or price declines. Don’t spend the money yet because it is based on the marketing year average and since that will not be known until next September, a payment for problems during the 2008 growing season will not arrive for another year at the earliest. Two qualifiers are either a 50% yield (or revenue) loss or the alternative is a disaster declaration by the Secretary of Agriculture. Since rules are still being written, a SURE payment is not yet a “sure” thing.

Summary:
Corn and soybean prices last spring were higher than they are currently, and that decline figures into the calculation for payments for revenue types of crop insurance, such as CRC, RA, and GRIP. Indemnity payments for each may be slightly different because of different rules applying to each of them, however, the payment will replace some of the value lost with the decline in commodity prices in the past several months. The USDA may also provide a SURE disaster program payment to some producers, based on the price performance, that payment will not be issued for another year, if at all.

Stu Ellis

Posted by Stu Ellis at 12:45 AM | Comments (0) | Permalink

October 21, 2008

Ethanol Subsidies: Are They A Plus Or A Minus?

Despite many years of supply management farm policies that included target prices, loan rates, and deficiency payments, many farmers indicated they would rather get their income from the marketplace. For the past two years, that has happened. Or has it?

Early years of government farm subsidies were designed to not only keep farmers on the land, but to provide low cost food to the urban public. Compared to most other countries the US has maintained the lowest cost for foods, despite the run-up in food prices earlier this year. But agricultural economist Dermot Hayes and his colleagues at Iowa State University say farm income is still subsidized, it is just disguised a bit.

The Iowa State research investigates the relationship among farm income, federal subsidies, and public financial support for the ethanol industry. They define ethanol subsidies as:
1) The 51¢ per gallon blenders’ credit that will drop to 45¢ in January.
2) The Renewable Fuels Standard that requires increasing amounts of gasoline to contain 10% ethanol over time.
3) The 54¢ per gallon tariff on imported ethanol.

The researchers attempt to look at the overall ethanol, gasoline, and fuel market and determine the financial benefit of the subsidies, and then calculate the financial benefit to agriculture and energy industries.

Instead of criticizing the subsidies as many economists, they contend the blenders’ credit and the tariff on Brazilian ethanol are a wash, since any Brazilian ethanol would benefit from the blenders’ credit. Additionally, they say the ethanol mandate was the result of high energy prices and was an effort to offset them. As part of the ethanol demand benefits to corn growers, the researchers say there was a reduction in government price subsidies to corn and other crops as a result.

Included in their calculations is a $1.3 billion benefit for the US corn market from the current federal ethanol policy, but at the same time the government has saved $3.45 billion because it was not making loan deficiency payments, as it was in 2005 and 2006. In 2007, the financial benefit to corn, ethanol producers, gasoline consumers, and taxpayers was a total of $2.65 billion.

The Iowa State economists concluded that the US ethanol subsidy was positive when all of the pluses and minuses were totaled. And they say that is a surprise, because the first economic principle that applies to subsidies is that they will distort the market. One factor that helped was that US grain markets were not competitive prior to large scale ethanol production plants because of the farm program subsidies. They conclude the ethanol subsidies actually provide a positive benefit across several industries, and reducing the market distortion from farm program payments the distortion caused by the ethanol subsidies reduces the net effect.

Summary:
Economic studies of agriculture, and particularly subsidies, usually cast a negative light on the time-worn policy. However, considering the financial benefits received by corn growers in a variety of farm program payments, and at the same time looking at the financial benefits of the ethanol subsidies to agriculture, energy, and consumers, it is possible to say the US biofuels promotion policy has resulted in a beneficial program that has reduced outlay of farm program payments and boosted other industries and consumers.

Stu Ellis

Posted by Stu Ellis at 12:56 AM | Comments (2) | Permalink

October 16, 2008

If You Have A Conservation Problem, USDA May Have The Funds To Help Fix It.

As you work through your fields with a combine and the yield monitor seemingly falls asleep, you know that you have entered one of those floodprone areas of the field that never grew a crop in 2008. The lack of production may cause you to wonder about the availability of conservation program funding in the Farm Bill for projects that would restore productivity. This was one of those years that identified the trouble spots.

The current electronic issue of Choices Magazine says the current era of conservation programs began with the CRP in 1985, but it did not really address environmental issues very well on non-productive land, and did nothing to help with land that was in production. Those were the focal points of the latest legislation. Following look at the historical trends of conservation funding, the Virginia Tech, Michigan State, and Colorado State ag economists who authored the article note that funding for conservation increases by $4 billion over the life of the new legislation, increasing it up to $7 billion annually.

Land retirement programs, such as the CRP, will play a diminishing role with fewer acres and fewer dollars allocated. For example in the coming five years, contracts will expire on 10% of the CRP acres per year leaving their continuation in question, and total acreage will drop from 34.7 million to 32 million. Some CRP contract holders will have options to utilize the land for biofuel production, wind turbines, and grazing. At the same time the Farmable Wetland Program will increase to 1 million acres; and the maximum for the Wetlands Reserve will increase 30% to more than 3 million acres.

Working lands programs get the most attention in the new legislation, and funding for that will increase 61% over the life of the Farm Bill, and will be 45% of the program funding by the time it expires. EQIP funding increases by 74% in the next five years and will pay up to 75% of cost share for adoption or maintenance of eligible practices. The EQIP funds can be used for conservation related issues in organic production, forest management, water conservation, or irrigation practices. There is a six year maximum benefit of $300,000 for EQIP. The new Conservation Stewardship Program will see its funding rise 200% from the levels of its predecessor the Conservation Security Program. The new CSP will enroll nearly 13 million acres per year, but payments will average $18 per year per acre, and rules will be simpler than in the prior Farm Bill.

The Agricultural Land Preservation Program uses funds to prevent the sale of development rights in the future. Funding will triple in the program that protected 533,000 acres in the last Farm Bill. The Grasslands Reserve Program, designed to protect grasslands, will expand ten fold and enroll 1.22 million acres over the next five years. Up to 10% of the enrollment can come from expiring CRP contracts.

Despite the expansion, there are some program restrictions. Payment limitations will be in effect for land owners. Additionally, the funding for NRCS staff comes from annual USDA appropriations, and expansion of staff for technical assistance is doubtful in future years.

The ag economists writing the article indicate the program funding is designed for widespread distribution, instead of being targeted to the most serious problem areas. Additionally, spending for conservation programs did not keep pace with appropriations for commodity programs, and implementing conservation projects will be unlikely if a choice has to be made that sacrifices commodity program payments. Another concern is the lack of manpower to help implement the practices and monitor the programs. They also note the potential policy conflict that will occur between the need for conservation and the need for acreage to produce biofuels.

Summary:
The new Farm Bill provides added funding for conservation programs, much of it to help landowners with soil and water issues on land that is in production, and may have been either damaged from 2008 flooding or was prone to declines in crop production as a result of ponding. While funding for cost share projects may be available, there will be some staff limitations that will restrict the use of the funds. USDA will have a significant amount of funds to provide assistance to more landowners in the next five years, compared to the past Farm Bills.

Stu Ellis

Posted by Stu Ellis at 12:26 AM | Comments (0) | Permalink

October 14, 2008

Cash Rents Are Increasing For Cropland, But What About Forage And Pasture Land?

If either the USDA or the landowner does not renew a contract on Conservation Reserve Program acreage and it becomes available for cash rent, what would be a fair rent for it? It is probably not class A farmland or it would be in corn and soybeans and not CRP. But if it could be row cropped, how much should a land owner reasonably expect and how much should an operator reasonably offer?

When the global financial dilemma is resolved and demand returns to the commodity market, the bidding race will be on for acreage. Some of the land in the CRP will be a target for crop production, but what is it worth, and how is that determined? Iowa State University agricultural economists looked at how the biofuel demand spurred the acreage war and its impact on cash rents, and found that the resulting cash rent trends for pasture and forage land in Iowa would probably predict what would occur if CRP lands came into production. Their analysis notes that cash rents for Iowa farmland rose 18% from 2007 to 2008 because the biofuel demand pushed up commodity prices and created a bidding war for corn and soybean acreage. That was the impact for tillable farmland, but what about pasture and hay ground?

There is a variety of methods for determining the cash rental rate for farmland, including corn yield estimates, a cost-based method, changes in corn prices, and others. The economists used the results from a long-standing survey that Iowa State University takes to determine what farmers are paying for cash rents. However, the survey contains only limited data for land that is not row-cropped. The economists examined the current cash rent data and adjusted the rent levels to compare with an index of farm input costs. They found that between 2007 and 2008, the rental rate for cropland rose 3% in real terms, but in the same period the cash rent rate rose 13% for alfalfa hay fields, 9% for grass hay fields, 13% for improved pasture, and 16% for unimproved pasture. Their question to answer was whether the biofuel movement caused such an increase in cash rents for land that was not going to be involved with biofuel production.

What would cause such an increase?
1) The market for feeder calves improved and that requires more rental demand for pasture.
2) Corn and soybean price movements will have an impact on non row crop land.
3) Cash rents for row crop land are higher around metropolitan areas because of higher land values.
4) Land that is productive enough for row crops is also productive for hay and pasture.
5) Rents will be low in areas where there is an abundance of non-row crop land.

The Iowa State economists conclude that a higher corn price because of ethanol demand will cause some landowners to convert pasture to row crop production, and the demand from feeder cattle production will push up the rental rates for the land that is not producing corn and soybeans. They also found that farmers who buy corn to feed livestock lose because of the ethanol policies and farmers who rent pasture and forage land also lose by having to pay higher cash rental rates. And cow-calf operators who own their pasture land come out even in the end.

The economists forecast that higher returns to corn production because of the biofuel demand will encourage more CRP acreage to be converted to row crop production, or to production of cellulosic ethanol feedstocks, and that might put a greater demand on land that is not in row crop production currently.

Summary:
The rising commodity prices last winter indicated a bidding war for corn and soybean acres, but the process also caused higher cash rents for land that is not even in row crop production. Land that is used for hay and forage production and even pasture is commanding higher levels of cash rent because of the demand for biofuels and cattle production. The trend indicates that land coming out of the Conservation Reserve could draw cash rents that would parallel the higher rents being seen for the non row crop farmland.

Stu Ellis

Posted by Stu Ellis at 12:05 AM | Comments (0) | Permalink

October 8, 2008

If Your Eyes Are On Some New Equipment, Make Sure They Are Also On The Bottom Line

Strong prices, strong yields, and strong marketing discipline the past two years have provided you with substantial revenue and the opportunity to reduce debt, increase assets and update machinery. But the machinery issue can be rather complex when you evaluate all of the issues involved in the replacement process.

If a visit to the equipment dealership is on your post-harvest agenda, study the recommendations and strategies offered by Iowa State ag economist William Edwards in the latest Ag Decision Maker. The point that Edwards drives home is the fact that machinery investment and costs of operation can easily shift a farming operation from high to low profitability and vice versa.

As the hours grow on your equipment and the paint fades a bit, the cost of owning and operating it also changes over time. Depreciation and interest cost diminish; repair costs increase; and fuel generally stays the same. At some point the decision to replace that equipment is made, and it could be for several reasons:
1) At some point the cost of ownership changes from a slow decline to a slow incline, but your decision should be implemented before large repair costs set in.
2) Reliability is a key decision element, if the equipment is prone to breaking down and threatens the timeliness of planting or harvesting.
3) Pride of owning equipment with new paint is a significant factor in making the decision to purchase.
4) Changes in technology may require equipment to be updated to work in concert with other equipment in your operation.
5) Capacity is a major factor, particularly if the operation is expanding and larger equipment is a necessity.
6) The farm machinery market goes up and down, and if equipment can be purchased at bargain prices, many operations will take advantage.

Edwards says replacement strategies include:
1) Frequent replacement minimizes breakdowns, but is the more expensive approach.
2) Replace something every year helps overall budgeting
3) Replace when cash is available levels out tax liabilities, but threatens machine integrity.
4) Keeping it forever is the least cost approach, but risks periodic crises.

Acquisition alternatives are financed by the operator in an outright purchase, by a third party lender, or in a variety of leases. An operating lease with a dealer retains the equipment for several years with the choice of return or purchase. A finance lease allows the operator to take depreciation, but termination arrangements are widely variable. And a rollover plan allows new equipment to be obtained annually, but the operator never gains equity in the equipment.

Edwards says there are a wide variety of income tax considerations that operators should observe in machinery acquisition.
1) It is generally advantageous to depreciate the item as rapidly as possible, because it saves taxes today and allows use of the funds longer.
2) Section 179 expensing will allow a maximum of $250,000 for 2008 returns.
3) Final quarter limitation places tax restrictions on equipment purchased late in the year.

Should you trade equipment, or should you sell your old equipment and buy new? Edwards says that depends on whether a taxable loss will result. He says sell and buy if a tax gain will result and you are in a low tax bracket. But he says if the machine is sold for less than its final tax basis, a capital loss is created. And if there is a loss on the sale, the trade will be preferred over a sell and buy transaction.

Summary:
Machinery purchases and replacement will be increasing toward the end of the calendar year, but many transactions have significant tax implications. Tax advisors may need to be consulted along with the machinery salesman. The strategy for machinery replacement and purchase should include analysis of cost, to insure that breakeven prices for crops are not significantly increased.

Stu Ellis

Posted by Stu Ellis at 12:07 AM | Comments (0) | Permalink

October 7, 2008

At What Floor Does This Elevator Stop?

The grain market had been on the down escalator, but over the weekend it stepped off and got on the down elevator. New crop corn futures have lost more than $3.60 in value and new crop bean futures have dropped nearly $7.00 since the summertime highs. Is this really a result of supply and demand dynamics?

“Some” of the recent decline reflects the larger supplies revealed in USDA’s September Grain Stocks report, says Extension Marketing Specialist Darrel Good at the University of Illinois. Good says soybean stocks were 55 million bushels more than anticipated and corn stocks were 48 million bushels higher. But while Good says there are some supply issues “at play,” much of the recent decline in prices reflects what the market believes the future demand for corn and beans will be in the wake of the meltdown in credit markets, domestic economic growth, and global economic growth.

In his weekly newsletter Good cites many factors that identify an economic slowdown, which “threatens the robust domestic and export demand for U.S. agricultural commodities enjoyed over the past two years.” He says that widespread slowdown could weaken demand for meat, which affects livestock, which affects feed, which affects the grain market. Such a slowdown, he says will weaken the demand for oil and gasoline, which implies lower ethanol prices and a lower breakeven corn price for ethanol producers.

Alan May at South Dakota State University in his weekly newsletter “There’s really no point in talking about any of the basic fundamentals of grain supply and demand this week other than the fear of what the big picture for the economy will have on grain demand.” May says there are few answers for the farmers who have many questions, and that it “could become more difficult to chart the course of your farm business in planning for future purchases of inputs, machinery, etc. Credit availability and possible stiffening of credit requirements are concerns as well and all of this eventually leads to the question of how to efficiently market the grain you raise.”

Good’s response is one that you probably would not have expected to hear three months ago. “For the 2008 crop, the lower prices now being experienced may be partially offset by insurance payments, particularly for soybeans, for those who have revenue insurance products. For those who decide to hold inventory in anticipation of an eventual price recovery, the Commodity Credit Corporation loan program can be a source of some cash flow.”

May, at South Dakota State, reminds you that farmers have little control what is paid for inputs and what is received for commodities sold, “Although the recent events may make your business decisions more difficult, your approach to managing your business should really be nothing new. You have never been in control of the prices you pay and the prices you receive so you will continue to do what you have always done; find ways that you can manage your risk.” He says farmers must use the risk management skills they have for going through economic uncertainty with success. Among those are:
1) You will shop around for the best prices you can for inputs.
2) You will evaluate the efficiency of the right application of herbicides, fertilizers, etc.
3) You will continue to evaluate the goals of your business and work with your lender to manage your credit wisely.
4) You will know your cost of production and employ strategies to capture profitable prices when the market offers them.
5) You will use crop insurance and perhaps some of the livestock insurance products to manage price and production risk.

Good underscores the tight margins that farmers will have for the 2009 crop, if high cash rent has to be paid. He says at current prices, neither corn nor beans will be buying any additional acres, and if the demand continues to weaken from the economic ailments, an increase may not be needed.

Summary:
Corn and soybean prices have lost nearly half of their value from the summer highs, and markets continue to fall because of domestic and global economic weakness. Supply issues have changed little, but market observers are concerned about the overall demand for grains, for feed, for livestock, and for meat in the wake of the economy. The falling prices have threatened margins for farmers because of high input prices, however, there does not seem to be any solution, other than farmers managing their inputs and production costs.

Stu Ellis

Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink

September 17, 2008

In A Carbon Market Farmers Can Be Paid For Current Agricultural Practices.

While global warming is, and may always be, a topic of controversy, it provides an opportunity for profit by farmers. In essence, those who believe in global warming blame it on the increased release of greenhouse gases, which include carbon dioxide. And the large emitters of carbon dioxide will voluntarily pay anyone who can capture and retain carbon to offset their emissions that will result in financial penalties. Farmers are among those wearing white hats coming to the rescue.

The international concern over greenhouse gas accumulation in the atmosphere was boosted by the 1997 Kyoto Protocol treaty. While US diplomats have declined to endorse the controversial politics surrounding the movement, the US has moved in the direction of reducing carbon dioxide emissions according to the April 2008 goal that would stop their growth by 2025. That is an opportunity for farmers, according to ag economists Luis Ribera, Joaquin Zenteno and Bruce McCarl at Texas A & M University. Their research report says there is no widespread policy that will create a significant value for farmers to offset greenhouse gas emissions by industry, but there is an international and a small domestic voluntary carbon market.

Such a carbon market allows emitters of greenhouse gases to either reduce their own emissions or pay someone else to reduce emissions and that creates a payment that can be bought and sold as long as someone can reduce net emissions cheaper than the emitters themselves could. Such a market would bring together a power plant that burns coal to generate electricity with a farmer whose agricultural practices can put carbon into the earth, in what is called a sequestration activity. Those include:
• Changes in tillage practices
• Crop rotations
• Land conversion to grasslands
• Creation of forests
• Alteration of livestock herd size
• Livestock feeding, manure management
• Crop fertilization
• Biofuel feedstock production

While some changes that farmers may make may be costly, they have to be less expensive than any payment that would be received from the carbon market, and if a farmer makes a voluntary change today, it may not be recognized in the future, if there is a mandatory policy to change. The domestic carbon market has established a price for carbon, much like the price for any commodity, and it is about $6 per metric ton of 2,204 lbs., while the European market has carbon valued at $35 per metric ton because of heavier regulations. If the US adopts the Kyoto Protocol, economists believe the value would rise to $250 per metric ton.

The Chicago Carbon Exchange (CCX) was created in 2003 and trades contracts of 100 tons of carbon dioxide, with the current annualized rate of 100 million tons being traded. To participate, a farmer or group of farmers would have to have the ability to represent 10,000 tons of carbon dioxide, and that would require about 25,000 acres of cropland. Since that is beyond the means of most farmers there have been associations formed to aggregate the carbon sequestration much like an elevator aggregates grain for sale in large volumes. The Texas A & M ag economists say crop producers must make a five year commitment to conservation tillage or no-till and two thirds of the soil surface must be undisturbed and two thirds of the residue must remain. Also soybeans cannot be planted for more than two years out of the five, so a corn and soybean rotation would begin with the corn crop. Depending on the location, farmers would be credited with sequestering 0.2 to 1.0 tons of carbon dioxide per acre. Most of the Cornbelt would be credited with 0.6 tons per acre. Out of the $6 per ton value, several fees would be deducted, which may reduce the value to $5, then that is applied to the actual rate of carbon sequestered per acre, with may be in the $2 to $3 range.

Summary:
Environmental pressures to reduce carbon dioxide emissions may provide financial gain for farmers who have the ability to remove carbon from the atmosphere through a wide variety of agricultural practices. Such payments would come from the buying and selling of carbon. While payments may not be large, some payments may offset the loss of revenue from changing tillage practices or the expense of moving to other agricultural activities. Payments could greatly increase in the future, if there is more public pressure toward reducing greenhouse gas emissions.

Stu Ellis

Posted by Stu Ellis at 12:53 AM | Comments (0) | Permalink

September 16, 2008

What Are You Paying For Seed Corn, And Just Why Is That?

Seed corn salesmen have been calling regularly to book your 2009 order, and you have been appalled at the price increase. “High tech, it does everything,” they say, and while that may be true, seed companies implement pricing strategies that are high tech themselves. What is behind seed corn pricing, anyway?

Shop rags come in a bundle, just like seed corn traits, and while that comparison is only intended to depict bundling, it serves to indicate whether you buy one or many, the price will be strategically adjusted depending on many factors. A trio of University of Wisconsin ag economists, Guanming Shi, Jean-Paul Chavas, and Kyle Stiegert, analyzed at component pricing, bundle pricing, and mixed bundle pricing, the latter of which allowed farmers to have a choice of traits and dominated the other strategies.

Research shows a 67-fold increase in genetically modified crops planted in the US and around the world in the past 12 years, bolstering the economic power of a few large biotech firms that have been formed with both vertical and horizontal mergers. The WI ag economists analyzed the trends in seed corn pricing from 2000 to 2007 with the industry dynamics in full swing, particularly comparing the pricing of genetically modified (GM) bundled seed with conventional seed corn, while gauging the market power of the biotech firms.

Interestingly, the pricing information did not come from the companies, but from over 38,000 farms in 48 states which bought seed in nearly 169,000 transactions. When the complete data was distilled, it covered 94% of the total seed varieties. Regarding the biotech share of the seed corn market, it expanded from 27% in 2000 to over 74% in 2007. And while some hybrids are available for only a few years, biotech and conventional hybrids disappear from the market at the same rate.

The WI researchers found that depending on your state, there is an automatic premium added, except for Kentucky. “Ordered from high to low premium, these states are: Nebraska ($7.50), Iowa ($7.00), Kansas ($6.86), Missouri ($6.31), Illinois ($5.96), Minnesota ($5.24), Colorado ($5.01), South Dakota ($4.75), Pennsylvania ($3.93), and Indiana ($3.70). This shows that the main corn-producing states in the Corn Belt charge more for corn seeds (e.g., Illinois or Iowa). It suggests that seed companies do price discriminate across regions.” Not surprisingly, the introduction of biotech varieties increased seed prices, but for both biotech and conventional seed. They also found that large farms pay more for seed, possibly due to the fact they are more productive and willing to pay more for high quality seed. Additionally, the average price rises about 2% per year, which is less than the inflation rate.

The WI trio examined seed corn pricing in Illinois in 2004 to illustrate how stacked traits were actually priced:
• Conventional seed corn averaged $88.33 per bag.
• The Bt corn borer trait added $20.49
• The Bt rootworm trait was alone worth $27.28.
• One herbicide tolerant trait was priced at $14.51, another at $6.83.
• Double stacking of corn borer and rootworm traits added $35.51.
• Triple stacking of corn borer, rootworm, and herbicide tolerance added $37.30.
• Quadruple stacking added $39.45 for corn borer, rootworm and both herbicide tolerant traits.
• The market power of the seed company added over 8% to the price.

Summary:
Great advancements have been made in seed corn technology since the turn of the century, and farmers have had choices of purchasing conventional seeds, or biotech seed with a variety of different genetic traits focused on either insect resistance or herbicide tolerance. Seed companies, which frequently merge to acquire increased market power, also acquire new technology which allows them to offer seeds that have multiple traits packaged in one hybrid. Pricing of the traits can become complex, and has rapidly increased over time, but has also allowed farmers to purchase combinations of seed with some degree of savings within a bundled trait package.

Stu Ellis

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September 11, 2008

The ACRE Program: Will It Help Your Farm? You Will Soon Have To Decide On Sign-up.

Have you made the decision yet, whether to switch from traditional farm program payments over to the ACRE program? Well, that is no problem if you have not yet decided, and you are not alone in that regard. The best route is to find out more about ACRE and get the thoughts of some of the thinkers who have tried to analyze its benefits and shortfalls for various farms. We’ll visit with more today.

ACRE is an acronym for Average Crop Revenue Election, and offers an alternative to Farm Bill support programs by helping farmers manage their risk. University of Minnesota ag economist Kent Olson says on the surface ACRE may be appealing, but he says, “The choice greatly hinges on whether commodity prices will stay at or near current levels or decrease—even if they don’t drop all the way to levels seen just two years ago. The choice also depends on the variability of the individual farm’s yields and that farm’s State yields.” But he is quick to say there are complexities to the program that may cause some to avoid it. Olson’s analysis indicates that making the decision to switch to ACRE will not come easy for anyone.

Olson works through the complex calculations within the ACRE program, along with the traditional direct and counter-cyclical payments which will be cut by 20% for anyone opting for the ACRE program. Additionally, the ACRE program comes with a 30% reduction in the loan rate. He says the farmer’s choice between the traditional and ACRE program can be evaluated by total government payment, which Olson calculated on 17 farms scattered in Minnesota. They were either corn and soybean farms or wheat and soybean farms with acreage ranging from 149 to nearly 2,000.

Olson used four price scenarios:
1) National price higher than the ACRE guarantee. His results found that in the first scenario, total government payments are greater for each farm under the traditional program instead of ACRE. The ACRE payment is less than the 20% loss of direct and counter-cyclical payments.
2) National price higher than the ACRE guarantee, but the ACRE guarantee prices are higher and closer to the market projections. (Which could happen next year if national prices stabilized at current levels and raised the ACRE guarantee for 2009.) Olson found this scenario provides a greater total government payment for corn and soybean farms under the traditional program, but ACRE returns more for wheat and soybean farms because the ACRE guarantee for wheat is higher than the expected national price for wheat.
3) Drastic drop in national prices, but the ACRE guarantee would not decrease in the first year. Olson found that total government payments for each farm would be more under the ACRE program than the traditional program, due to the revenue guarantees based on higher prices before the price drop.
4) Market prices and ACRE guarantees return to price levels from 2001 to 2005. (Unlikely.) Olson found the total government payment greater for each farm under the traditional program instead of ACRE.

Olson says the choice between the traditional and ACRE program depends upon your view of where future market prices will be. He says if you expect prices to remain at or above the ACRE price guarantee, the traditional program is the best choice. However, if national market prices fall, the ACRE program becomes the better choice.

He says it is impossible to offer any key for a farmer to decide which is best because of the complexity of the rules, the requirement for the whole farm to be in ACRE, price and yield uncertainty, and the variation in the relationship between farm and state yields. Olson says in making a decision, you are on your own.

Summary:
Before the next planting season, farmers will have the opportunity to stay with the traditional price support program of direct and counter-cyclical payments, or opt for the ACRE program which may or may not provide more financial help. ACRE’s complex calculations will provide more financial benefit under certain market scenarios, but it is up to a farmer to determine if those scenarios will occur.

Stu Ellis

Posted by Stu Ellis at 1:06 AM | Comments (1) | Permalink

September 4, 2008

Payment Limitations: Where Agriculture Policy Collides With Farm Business Economics

How many acres do you farm, and how quick will you fly wallet-first into the new payment limitations in the 2008 Farm Bill? If it is your 1,200 acres of corn and soybeans, what about your share of the family operation? With higher commodity prices the past several years, and higher levels of adjusted gross income, you may already be ineligible for farm program benefits for next year. Payment limitations were one of those Farm Bill issues that few commercial farmers wanted to debate. But whether or not the local FSA offices gets to see your tax return, payment limits may be one of the elements that go into your decision of whether to sign up for the farm program.

Regardless of your decision whether to sign up for the ACRE program, there are adjustments on payment limits for the traditional farm program benefit package. The limit on Direct Payments is $40,000 per person. The limit on Counter Cyclical Payments is $65,000 per person. Marketing loan benefits do not have any payment limits according to Neal Harl at Iowa State University, who said Congress worked hard to revise the definition of “person” which has been a controversial issue over time. His analysis may be valuable to farmers, their tax advisors, and their legal advisors.

In past legislation, person included legal entities, but the new law restricts “person” to a natural living, breathing, individual. Regardless of direct or indirect ownership of a farming operation, payments will be restricted by amount and by that person’s financial status. And if a teenage member of the family is given ownership, payments to anyone under 18 count against the limits of the parents.

Most farmers will remember the “three entity” rule, which in prior Farm Bills, allowed owners and operators to receive farm program payments from as many as three farming entities. The 2008 legislation repealed the “three entity rule” and places the financial cap on a person.

Harl says the payment limitation provisions in the Farm Bill attempt to clarify the legality of payments going to tenants and land owners. A cash rent tenant is eligible for farm program payments if they do not contribute labor, but in that case, they must be involved in the management of the operation or significantly contribute equipment to the operation.

When changes of ownership occur, FSA will accept changes if they are bona fide, such as in the death of someone or the addition of a family member to a farming operation. New owners and operators are eligible in the event of death of sale of an operation. But Harl says there is an important restriction. “Payments may not exceed the amount the prior owner was entitled to receive under the terms of the contract at the time of death of the prior owner.”

Another change in definition clarifies the term “actively engaged.” This is primarily of importance to land owners, whose involvement in the farming operation may draw questions at the local FSA office. Payments will be restricted to persons who make a significant contribution of capital, management, equipment, or land and also contribute personal labor or management. Additionally, the contributions need to be at risk, and any share of losses need to be parallel to one’s contributions.

All of the qualifications may be moot; if one’s adjusted gross income is above the eligibility threshold. That is $500,000 of non-farm income or $750,000 of farm income. Since income levels can vary significantly, Congress allowed the adjusted gross income to be averaged over three years. Anyone above the thresholds would be prohibited from direct and counter-cyclical payments, marketing loan gains and LDP’s, and several other miscellaneous payments.

The threshold is raised to $1,000,000 for receipt of payments for any conservation programs, unless two thirds of the income is from agriculture.

Summary:
Farm program benefits change in each Farm Bill and the 2008 version included more restrictions on who can receive farm program payments. Throwing out the old “three entity rule” Congress redefined “person” and set payments limits on a live individual instead of a legal business entity. Additionally, payments will not be made to anyone with adjusted gross income above certain limits.

Stu Ellis

Posted by Stu Ellis at 12:59 AM | Comments (1) | Permalink

September 2, 2008

ACRE And SURE: When Ag Policy Morphs Into Farm Business Economics.

Conversations in coffee shops, elevator offices, marketing clubs, and local Farm Bureaus have been focused on the new ACRE and SURE programs which certainly bring complexity to the new farm program. Sign-up just isn’t what it used to be! Farmers are going to have to do some bookwork and serious thinking ahead of time about whether to shift from traditional direct and counter-cyclical payments to ACRE, and whether to enroll all of their land in CAT policies to qualify for SURE disaster payments. Answers won’t come easy, but the more information available, the easier the decisions.

ACRE is an acronym for Average Crop Revenue Election. SURE is an abbreviation for Supplemental Revenue Assistance, and both are new in the 2008 Farm Bill designed to push farmers toward risk management practices than to offer government payments regardless of the need. Ohio State University agricultural economist Carl Zulauf has produced another analysis of the Farm Bill which may help make decisions that will be required this winter.

SURE is the result of some Members of Congress efforts to create a permanent disaster program as part of the Farm Bill, instead of approving annual programs spurred by drought or other adverse weather. Considering that crop insurance covers risk between planting and harvest, SURE helps with whole farm losses and covers the deductible in the crop insurance. SURE payments are generated by a complex set of calculations that subtract crop insurance indemnity payments, but the program requires either crop insurance coverage or CAT policies at a minimum. Zulauf says SURE is an incentive to buy at least 75% individual crop insurance. Farmers with high yield variability and single crops will be strong candidates for SURE. And Zulauf suggests that the benefits of the SURE program will cause some farmers to convert to 100% corn or 100% beans, and eliminate small acreage crops and any cropping diversity.

ACRE is an optional program designed to provide a price support based on state-level prices and yields. Anyone opting for the ACRE program will sacrifice 20% of any direct payment and 30% of any marketing loan benefit, and cannot revert to the traditional programs once the ACRE election is made. ACRE payments are also based on a complex calculation with the payment triggered by a decline in revenue. Compared to Counter-cyclical payments in the 2002 Farm Bill, ACRE is based on state revenue and CCP was based on US season average price. For ACRE, the state revenue target changes annually and follows the market, but to get a payment state revenue must fall below its guarantee and farm revenue must fall below a farm’s ACRE guarantee.

Going into the 2008 Farm Bill, and with farmers facing decisions that need to be made when USDA finishes writing regulations this winter, Zulauf has projected some of the important benchmarks.
1) ACRE payments, even with the lower direct payment, can be expected through 2012, if corn prices remain above $2.87, beans above $6.35, and wheat above $4.39. However, payments are not guaranteed because farm revenues must also meet thresholds.
2) Based on large declines in state revenue over multiple years (since ACRE is based on a 5-year Olympic average) corn would receive an ACRE payment 74% of the time, soybeans 79% of the time, and wheat 77% of the time.
3) The ACRE program limits revenue changes to no more than 10% up or down from one year to the next, and based on that rule, corn would be eligible for an ACRE payments 48% of the time, soybeans 49% of the time, and wheat 58% of the time.
4) When state yields decline by 10%, ACRE payments are triggered in two out of three years.

Zulauf says ACRE protects against revenue declines, but is a poor substitute for crop insurance and should complement an insurance program. And he says ACRE payments should be capitalized into the value of land. And he expects that ACRE payments will approach zero within a few years.

Summary:
ACRE and SURE programs will help farmers with risk management, not price protection, but details are still being written by USDA. Farmer may be pushed to purchase 75% crop insurance coverage to supplement the programs and be eligible for program benefits. Since the ACRE program replaces 20% of Direct Payments, farmers must determine if the loss of $3-5 per acre is worth the opportunity for longer term ACRE benefits.

Stu Ellis

Posted by Stu Ellis at 12:06 AM | Comments (1) | Permalink

August 25, 2008

Fertilizer: The Latest Chapter In The Changing Face Of Agriculture.

First there were significant upward moves in grain prices. Then the marketing world caved in with elevators eliminating forward contracts as marketing tool. As farmers compare notes and listen to experts about the changing face of agriculture, everyone is bracing for the next jolt in farming’s roller coaster.

Farmers need to have their seat belt buckled for changes in the fertilizer industry says Iowa State University ag economist Roger Ginder. He says the good old days are gone in the retail fertilizer market. Undoubtedly you have heard about nitrogen and potash being sold for upwards of $1,000 per ton for the 2009 crop. But Ginder says the change in the industry goes beyond the price chart on the wall of the dealer. He’s becoming concerned about farmers being able to find fertilizer retailers. His article in Iowa State’s Integrated Crop Management News points to changes several years ago as the start of the trend. The bankruptcy of Farmland Industries eliminated many retail fertilizer outlets, and then CF Industries pulled back to wholesale distribution centers. Ginder says fertilizer may be a global industry, but its links to the grassroots level is disappearing.

The global nature of the industry requires integrated logistics, more lead time in production and delivery, and more issues with international exchange rates in a volatile market. With Farmland and CF Industries woven into the fabric of farming, it made profitability more difficult when trying to balance the upstream production with the downstream sales and application. Ginder says fertilizer has to move into warehouses unpriced ahead of the spring application season, and there is too much price risk for companies needing to watch their profitability. The fertilizer industry now has players that are more production and distribution oriented than farmer oriented. Without the ability to hedge price risk in fertilizer, Ginder says, “There is no good mechanism for retailers to manage the inventory price risk they are forced to accept.” With the rising prices for fertilizer, the price risk is magnified, and lenders are reluctant to help assume the risk.

The changing face of the retail fertilizer market will impact farmers who both wait to buy and see prices continue to rise and who buy early only to see prices fall later. In addition, Ginder says farmers will face the risk of supply availability. The local or regional dealer may not be large enough to commit to the minimum quantity being offered by the fertilizer producer, and pay for it in advance. Some Cornbelt farmers heard fertilizer dealers earlier this year ask for 2009 orders with a pre-payment requirement to guarantee delivery.

The fertilizer retailers that remain in the business will be faced with a number of challenges, such as maximum and minimum orders and pre-payment, and without any other means of managing risk, those parameters will be passed on to farmers. Ginder says fertilizer dealers may be unable to fill all customer orders, and farmers may find it more difficult to price shop. Ginder says the solution may require farmers to build a relationship with a fertilizer dealer and maintain frequent communication.

Summary:
Changes in the fertilizer industry have come at the macro-economic level, shaking out some companies that either could not keep up, or elected to change their business practices and reduce their retail level exposure. Those changes included global production issues, international exchange rates, and distribution challenges. The impact on production agriculture is that farmers may have to place orders a year in advance along with a pre-payment, and may be unable to get exactly what is needed.

Stu Ellis

Posted by Stu Ellis at 12:16 AM | Comments (0) | Permalink

August 20, 2008

How Much Money Are You Wasting On Tractor Operations?

You might complain to a spouse if you think money is wasted managing the home, but does your spouse complain if money is wasted managing the farm? Don’t let your spouse know that your tractor is a big money pit, but just resolve to make some adjustments that you can brag about later to your friends on how you increased your tractor’s efficiency.

Sorry, but entering tractor pulls is not part of the regimen toward increasing efficiency. That is part of the 150 million gallons of fuel wasted each year by poor tractor performance. At $4 per gallon, that is $600 million that could remain in agriculture’s collective pocket. To assist with your personal initiative of improving tractor performance and fuel efficiency, Mike Staton and Tim Harrington of Michigan State University and Reed Turner of Canada’s Agriculture Technology Centre, created a factsheet that will provide how-to steps in achieving that goal. Their efforts focus on proper ballast for optimum performance, proper tire inflation, and tractor operations.

Ballast

1) Tractor weight and weight distribution on the tractor pertain to the ballast. Over ballasting wastes fuel and creates undue wear on the drive train. Under ballasting wastes fuel and causes undue tire wear.
2) The addition of tractor weights should be keyed to the PTO horsepower, and as field speed increases, weights should be reduced to control soil slip.
3) Weight distribution on the tractor depends on the type of the tractor, whether 2 or 4 wheel drive and whether it is a mechanical front wheel assist. The factsheet provides the correct ratio for weight distribution.
4) To determine front and rear axle weights, the tractor should be properly weighed. If weight is needed, cast iron weights are the most flexible, but an inexpensive method is filling the tires equally with fluid. And if front weights are added, keep in mind they put more weight on the front axle than indicated and reduce the rear weight because the front axle becomes the fulcrum.

Tires

1) Radial tires should be selected over bias ply because of their footprint, and need for lower air pressure. The largest affordable tires should be selected for a 4 wheel drive tractor which allows lower inflation pressure and more footprint on the soil to reduce compaction.
2) Duals are frequently added to 2 and 4 wheel drive models to improve traction and performance, but should not be added to MFWD tractors for performance. On a MFWD tractor, the front tire firms the soil for the rear tire, but an extra rear tire lifts the tractor off the soil surface.
3) Tractor tires should be inflated to the lowest recommended pressure; and keep in mind that correctly inflated tires improve performance by 6%. Tests indicate a tractor with properly inflated tires will out pull a tractor with over inflated tires. Check tire pressure when cold; and ensure tires on the same axle are equally inflated.

Operation

1) Wheel slip indicates the proper tire inflation and ballast; and can be measured with either a performance monitor, comparing wheel revolutions, or by inspecting the lug marks in the soil. Slip should be 10-15% for 2 wheel drive tractors and 8 to 12% for MFWD and 4 wheel drive tractors.
2) Gear up and throttle down is the practice for saving fuel expenditures, and higher speeds with lighter loads will increase fuel efficiency 13% to 20%.
3) Don’t overload the engine, and check on the exhaust or quickly increase the throttle setting. If the engine responds, it is fine; but if the response is delayed, drop to the next lower gear and throttle up.
4) If a tractor is not being worked for 5-10 minutes, the engine should be shut off to conserve fuel.
5) Keep a regular maintenance schedule and remember replacement of air and fuel filters will lower fuel consumption by 4%. Reduction of unnecessary field trips will reduce fuel consumption, which includes elimination of deep tillage, if the soil does not need it.
6) Use of a guidance system reduced field time up to 11% on a model 1,800 acre farm.

Summary:
Wheel slippage, imbalances, and tire inflation issues can all be corrected with minimal effort and you have just overhauled your tractor’s performance and operational efficiency. Weight distribution can be resolved with both cast iron weights or fluid inserted into tires. Significant fuel savings can be achieved by operating the tractor in higher gears, but with the throttle back. Regular maintenance can also increase efficiency with new oil and fuel filters.

Stu Ellis

Posted by Stu Ellis at 12:50 AM | Comments (1) | Permalink

August 11, 2008

ACRE: How Close Are You To Deciding Whether To Sign Up? (UPDATED)

The ink on the new Farm Bill is quickly drying, although USDA has yet to write many of the regulations needed to implement the new farm policy. However, the framework is in place and Cornbelt farmers this winter will be faced with a decision on whether to switch from the traditional program of direct payments to the new ACRE program. If you have not investigated the impact on your farm, beware that farm program signup will soon begin and you will have a significant decision to make.

Beginning with the 2009 crop, the Average Crop Revenue Election (ACRE) program becomes effective, which replaces the blend of direct and counter cyclical payments in the 2002 Farm Bill. Farm operators and cropshare landowners will have the chance to switch to the ACRE program at anytime during the life of the Farm Bill, but will not have the option to switch back, so it requires understanding of the ramifications.

Extension educators and others will undoubtedly offer seminars to help with decisions, but increased familiarity with the program will help when decision time comes. Ohio State University economist Carl Zulauf provides some insight about the impact of the ACRE program on Cornbelt farmers. Zulauf says several risk management options are available:
1) Traditional programs assist with managing the risk of low market prices over a period of time.
2) Crop insurance assists with managing specific farm risk with crop production between planting and harvest.
3) ACRE assists with managing the risk of a decline in revenue of a crop over a short period of years.
What Zulauf has found is that between planting and harvest, there is a much greater risk of price and revenue declining than yield declining. Between 1974 and 2006, corn revenue declined at least 10%, 38% of the time, but never declined more than 25%. During the same years, soybean revenue declined at least 10%, 24% of the time, but never declined more than 25%.

The ACRE program is a state revenue protection program, and the program will issue a payment if the state average yield times the US average price is less than a revenue guarantee. The revenue guarantee uses national prices, state yields, and cannot change more than 10% from year to year. (Many farmers are looking at high guarantees for the initial year based on current prices.)

However, farmers who opt for ACRE will have a sacrifice to make, which is a 20% cut in direct payments and a 30% cut in their marketing loan rate. The tradeoff for the lower support prices is the opportunity for a higher ACRE payment. Zulauf says in the 26 primary agricultural states ACRE payments will more than cover the loss if the US average cash market price exceeds $2.87 for corn, $6.35 for soybeans, and $4.39 for wheat. At breakeven prices, the lost revenue per acre from traditional programs would approximate $4.87 for corn, $2.30 for soybeans, and $3.05 for wheat. As a result, Zulauf says corn would generate an ACRE payment 36% of the time, soybeans 37% of the time and wheat 33% of the time. However, 75% to 79% of the time, there would be multiple year scenarios that would generate ACRE payments for corn, beans, and wheat.

Other issues that Zulauf says are of importance to your bottom line:
1) ACRE protects revenue beyond the crop insurance period, and may encourage multiple year investments such as P & K application.
2) ACRE will not compensate for production risk, so crop insurance is recommended.
3) ACRE benefits areas with higher yield variability.
4) ACRE payments should be capitalized into land values.
5) With today’s highly volatile grain prices, will ACRE more than compensate for the 20% reduction in direct payments?
6) USDA is in the process of writing the regulations, and when the program is ready for implementation, unexpected impacts are to be expected.

Summary:
Cornbelt farmers will need to evaluate the new ACRE program for its potential revenue benefits to their farm. While this optional program comes with a 20% reduction in direct payments and lower loan rates, it provides a longer term revenue support program extending beyond the period of protection by crop insurance. Payments incorporate state and national averages, with limits on how much payments can decline from year to year.

Have you decided yet if ACRE is for your farm? What factors will enter into your decision? What will it take for you to feel prepared to make a decision?

UPDATE (Aug. 13) Iowa State University economists have developed calculators and decision aids for you to use in making estimates of revenue, prior to your decision whether to sign up for ACRE. Find the calculators and Frequently Asked Questions here.

Stu Ellis

Posted by Stu Ellis at 12:20 AM | Comments (1) | Permalink

August 4, 2008

Do You Have Money Flowing In From A Pipeline?

If you don’t have an underground pipeline crossing your farm, you probably know someone who does. And to meet US energy demands, construction of underground pipelines carrying natural gas and crude oil is increasing. Thousands of Cornbelt farmers and landowners are in negotiation with dozens of pipeline companies on easement issues and reparations for the damages related to pipeline construction. But once a landowner has negotiated the best deal possible, what are the resulting tax benefits and liabilities?

Most of the underground pipeline projects criss-crossing the US are under the oversight of the Federal Energy Regulatory Commission, which keeps track of projects, and must approve all aspects of the pipeline construction process. For a list of proposed nearby pipeline projects, consult FERC.

Agricultural Tax Law Specialist Gary Hoff at the University of Illinois says the negotiators for the pipelines will typically approach landowners to offer a financial package that includes several issues:
1) An easement to allow the company permanent access to its pipeline as it traverses your property. The easement may be on the order of 25 feet on either side of the pipeline, which gives the pipeline personnel access to repair or test the line and otherwise be on your property within that 50 foot span.
2) A work easement that may be wider than the permanent easement and wide enough to allow construction workers to operate and park vehicles, pile topsoil and subsoil, and temporarily lay pipe before it is placed into the trench for welding.
3) Crop damage within the work easement resulting from the construction, if growing crops were destroyed or damaged when the pipeline was laid.
4) Crop yield damage for several years within the construction zone where soil was disturbed.

Hoff says some of the payments are going to capital and some will be operational, and because of that they will be treated differently by the Internal Revenue Service.

Easement payments are treated by the IRS as a sale of land, and because the easement will be based on so many feet through your property by so many feet across, an acreage calculation will have to be made. Essentially, those acres are being sold for the price paid for the easement, and it could be a substantial number of dollars per acre. When you subtract your basis in the farmland from the price paid per acre by the pipeline company, the IRS requires the capital gain be reported from the sale of the easement. With the necessary adjustments for depreciation of improvements, Hoff says the capital gain would be reported on Form 4797, Sale of Business Property.

Sometimes an easement will reduce the value of the property; particularly if the farm were ripe for housing or commercial development and the pipeline easement interfered with the development. With the proper appraisal, the basis in the property could be reduced and that would change the capital gains tax liability.

Regarding other payments received from the pipeline company, Hoff says they should be itemized because they fall into different categories for tax liability:

1) Temporary easement: rental payments reportable as supplemental income on Schedule F.
2) Crop damage payments: crop income reportable as profit from farming on Schedule F.

In crop share leases, the crop damage payments would be split between operator and landowner and reported on Form 4835 Farm rental income for the landowner. In cash rent leases, crop damage and yield reduction payments would go to the operator and reported on Schedule F as profits from farming.

Summary:
Numerous farm operators and landowners throughout the Cornbelt may be impacted by the expansion of pipelines carrying energy commodities, as construction crews cut swaths through growing crops and disrupt strips of topsoil. Compensation is typically offered for both the purchase of easements, which is treated as a capital gains tax liability, as well as crop damages and yield losses which are reported on IRS Schedule F forms. Landowners and operators should carefully breakout the various payments from a pipeline company to ensure they are correctly addressed.

Stu Ellis

Posted by Stu Ellis at 12:56 AM | Comments (3) | Permalink

July 17, 2008

Buckle Your Seat Belt When Planning For 2009 Crop Expenses

Corn has, or will have reached, pollination; soybeans are blooming; and you are thinking it may be time to revisit your marketing plan since crop prospects look better than they did last month. And marketing will be more important than ever for the new crop, since it will have to pay the freight on higher priced inputs for the 2009 crop. If you have not yet looked at the cost of production of next year, that’s OK, we have.

Some farmers have been asked for a 100% prepayment for fall fertilizer, if they plan to order any. Others have heard that some units of seed corn will be similarly priced to what a tank of anhydrous ammonia used to cost. University of Illinois Extension Farm Management Specialist Gary Schnitkey has been exploring 2009 production costs to see if there is any profitability potential. His recent newsletter makes you wonder!

On average the non-land costs for corn will be $529 per acre, up $141 from the current year and 85% higher than the four year average. For soybeans, the non-land costs will be $321 per acre, up $82 from the current year and 78% over the four year average.

Fertilizer is the heavyweight. You will shell out more than twice as much in 2009 as you did in 2008, and Schnitkey estimates the cost at $215 per acre for corn and $98 for soybeans. That takes into account anhydrous ammonia at $1,000 per ton, DAP at $1,000 per ton and potash at $900 per ton. He says prices may vary depending on location, timing, and international energy markets. But if those are the prices you have to pay, they represent a 171% increase for anhydrous ammonia over 6 years, 302% for DAP and 456% increase for potash over the same period.

Seed costs run a close second. Schnitkey says count on a 25% increase in seed costs for 2009 compared to what you paid this past spring, and that includes both seed corn and seed beans.

Crop insurance premiums increase with little surprise. Higher values for crops mean higher premiums to insure them and Schnitkey calculates $27 for corn and $12 for soybeans, but premiums will be higher for revenue types of insurance.

Other costs rising as well. Fuel and machinery costs should be budgeted at $88 per acre, up $12 from 2008 corn and $75 for soybeans, a $9 increase. With many farmers trading machinery more rapidly in recent years, depreciation has gone up as well, which Schnitkey computes at $27 for 2009.

On the revenue side, your marketing plan will have to be precise and well-executed. Current prices exceed $6 for corn and $14 for soybeans which would provide a $641 return to land and operator for corn and $486 return to land and operator for soybeans.

Breaking even will be a significant challenge. The non-land costs of $529 for corn and $321 for soybeans do not include cash rent, which could average $200 and up on average to good land. That raises costs to more than $700 per acre for corn and over $500 for soybeans. Using Schnitkey’s example of 191 bushel yields for corn means a break even price of $3.82 and $9.65 for soybeans, based on a 54 bushel average yield. Yields that are less than that amount will push break-even prices higher. And Schnitkey says large income losses would occur if price returned to more traditional levels. He adds that the higher costs of production expected next year may also influence cash rent bids, marketing plans, and crop insurance decisions.

Summary:
Significantly higher prices for fertilizer, seed, fuel, and crop insurance will necessitate the use of a sharp pencil in formulating 2009 crop budgets. While prices are preliminary, they indicate non-land costs will rise rapidly, and that will impact how much farmers can bid for cash rent and their requirements for crop insurance coverage.

Stu Ellis

Posted by Stu Ellis at 12:31 AM | Comments (1) | Permalink

July 16, 2008

An Idea For Leasing Farmland Now, And Finalizing The Rent Later.

It may seem like we’re rushing the season, but both farm operators and landowners are probably thinking year around about calculating a fair rent the next time a farm lease is signed. While the leasing season begins after harvest and extends to about planting time across the Cornbelt, just about anytime is appropriate to discuss what is fair for both sides and offers the flexibility that variable yields and volatile prices demand. Let’s take a look at one option that can be tried and tested until it is time to sign on the dotted line.

The movement away from crop share leases and toward cash rent leases created havoc in determining what is a fair rent for farmland, particularly in a time of unprecedented grain price volatility. Agricultural law specialists Don Uchtmann and Bryan Endres offer one idea which adjusts cash rent with futures prices. The fluctuating market creates variability to the rent payment in line with the options that land operators and land owners have in marketing their grain.

Uchtmann and Endres suggest that a base cash rent be negotiated, then adjusted by the futures market, with an actual cash rent determined and set about March 1. They contend that land owners and operators, regardless of their locale, can obtain the necessary information to monitor the changes in rent between the time of negotiation and the time it is locked in at the outset of the planting season. The authors suggest that the flex factor could be indexed to input costs, county or actual yields, or other dynamics.

The ag law specialists suggest that an agreement can be signed at anytime stipulating a base cash price. At that time, there is a notation of the value of a specific futures contract, such as the Dec 2009 corn futures. When it is time to actually set the cash rent prior to planting, a subsequent notation is made about the value of the same futures contract, and the difference in those values would be used to adjust the base cash rent. The latter value could be an individual date or it could be the average closing prices over a period of time, such as USDA’s Risk Management Agency uses to determine crop insurance guarantees.

Uchtmann and Endres provide an example in which a $200 per acre base cash rent is negotiated in the fall when the December futures price for corn is at $6.50. On the date when the actual rent is set, the futures price is $7.15, which is a 10% increase that would be used to raise the base rent from $200 to $220 for the actual rent.

They contend an early date of signing a lease would provide continuity, and allow the operator to take care of any fall tillage, fertilizer application, pre-payment of seed purchases and order crop protection chemicals at special prices. The land owner would not have to wait for the following spring to negotiate a higher rent that might reflect an upward movement in market prices. Additionally, the rent is set about the same time that crop insurance decisions are made and those can be adjusted to the needs of the lease.

The land owner should be aware that the rent would be applicable to self-employment tax, and the issue of agricultural use valuations would be important in estate planning. The third issue of dividing farm program payments should also be discussed with the FSA office, however, this variable cash rent lease is not dependent upon production or yield to determine the cash rent amount.

The success of the lease is dependent upon all parties understanding it and understanding how the parameters are calculated, such as which futures contract is used, and when payments are made. In an effort to keep everyone knowledgeable, everything in the lease, should be written, and examples possibly given. Uchtmann and Endres not only provide a detailed example, but even a sample letter from the operator to the landowner that explains all calculations of the payments being made and how the numbers were derived.

Summary:
With the complexity of the grain market and production problems caused by the weather, the creation of a fair and equitable cash rent lease can be a significant challenge for both the operator and landowner. To facilitate an early leasing of farmland in the fall, but without determining a final rent figure until next spring, it is possible to negotiate a base rent that can be adjusted with an index of the futures market activity. The final determination is made just before planting, which benefits the operator on crop insurance decisions, and allows fall tillage opportunity with other marketing and business decisions to be made in a timely fashion.

Maybe you have a different method, and if so, please share it.

Stu Ellis

Posted by Stu Ellis at 12:46 AM | Comments (3) | Permalink

July 9, 2008

Someone Wants To Buy My Hay, But What Do I Charge For It?

The addition of ethanol to the markets for corn helped push up corn prices, and to compete for acreage, soybean prices went up as well. Wheat prices climbed also to compete for acres, and that left hay, which was not to be left out of the party either. Hay prices have risen to ensure enough is produced, but since hay is not traded in Chicago, Minneapolis or Kansas City, what is the value of hay?

That is a good question, says Rory Lewandowski of Ohio State University Extension. His observations in the July edition of the OSU Ag Manager newsletter indicates that he believes hay is at least worth the nutrients it removes from the soil plus the cost of producing it. But he asks rhetorically, “Whether hay is actually worth what it costs to produce it is yet another question.” Let’s work through his estimates and see how close you are to his final answer.

Lewandowski uses a couple of recent anecdotes to frame the discussion. A land owner who was renting hay ground thought he should get $2 out of the $5 charged by the operator for small square bales. Another anecdote indicates that a lot of grass is being baled and will reduce the price of hay.

Lewandowski totaled up 40 lbs of nitrogen, 13 lbs of phosphate and 50 lbs of potash which are removed from the soil for each ton of hay produced. Depending upon the source of the replacement fertilizer, the ton of hay consumed $71.81 to $81.95 worth of nutrients. Spreading the fertilizer is an expense that might be hidden so Lewandowski used a $4.50 per acre rate for applying dry bulk fertilizer. He says if you are questioning the decision to account for the fertility cost, then consider the fact that those nutrients are removed from the soil and will not be available for corn, soybeans, or some other crop the following year. Even if you did not fertilize this year, your cost of production in the hay will have to reflect an expensive application in a future year.

The cost of machinery, labor and other expenses can be gathered in your state’s custom rate sheet or farm machinery cost estimates. You’ll have a mowing and possible conditioning cost, raking, baling and hauling. Utilizing cost per ton will allow prospective buyers to comparatively shop. And fertility produces more hay and that means more tons per acre. Add the mechanical costs to the nutrient cost and you may have a charge of $100-plus for a ton of hay.

If that seems to be a high price for someone to pay, maybe your fertilizer price is less or maybe application charges were built into the nutrient cost. Your mowing, raking, baling, and hauling charge could be a bit less as well, or maybe even more. If your hay contained alfalfa or another legume, its nitrogen contribution to the soil could mean a reduction in price.

But instead of lowering the cost, maybe your hay has been tested at various labs, and its quality can be certified. Owners of horses are looking for quality hay and may be able to pay more for a quality product they can read the nutrient value. Instead of lamenting the lack of a futures market for hay, there may be a hay auction nearby, or one within trucking range that would help you determine the value of the hay plus the basis. Nevertheless, the cost of hay needs to reflect its content and the cost of production. But you have also not paid yourself for the enterprise to produce and sell the hay, which is a return to labor and management. Add 25% to 30% to the basic cost, and that is your income that is necessary to feed your family and provide a profit.

Summary:
No matter how much demand there is for corn, soybeans, wheat, and other grains, there will always be a demand for good hay for horses and livestock, and its value will be competitive with row crops. Determine its value, either by auctions of relatively comparable hay, or by determining the value of the nutrients the hay removes from the soil plus the cost of baling, with a return to labor and management.

Stu Ellis

Posted by Stu Ellis at 12:23 AM | Comments (1) | Permalink

July 2, 2008

A New Crop And A New Market. Are You Up For The Challenge?

The food versus fuel debate may also fuel a more rapid development of the cellulosic energy industry. Policies are pushing energy companies away from coal-based carbon footprints and toward biomass fuels that are more “green.” But what market opportunity does that mean for land owners and farm operators who can produce biomass?

Federal and state policies toward bioenergy and the impact that ethanol has had on the corn market may spur incentives toward biomass use as a feed stock at power plants. To help policy makers and farmers get ready for that occasion, Purdue economists Sarah Brechbill and Wally Tyner tried to identify the production costs of switchgrass and corn stover so farm operators could begin to determine if that was an opportunity for profitability. Their report looked at the cost of corn stover collection and transportation, and at the cost of switchgrass production, harvesting and transportation.

With corn stover, calculations were made for the nutrients that were removed from the soil and the cost of replacement fertilizer, which was determined to be $15.64 per ton of stover removed. Other negatives were determined to be more soil compaction, soil erosion, and water erosion. With switchgrass, the initial cost of establishing the stand was amortized with an 8% interest rate, with additional costs of mowing, spraying weeds, and a land rent charge.

Harvest can either be hired or accomplished with owned equipment, and for the latter, equipment costs were amortized at 8%, and fuel and labor was added. Bales stored at the edge of the field until called in by the power plant will lose dry matter, and that was calculated as well for both crops. Distance from the field to the plant is an expense, based on the need to transport bulk commodities with a lighter weight, and the Purdue economists say the average marginal transportation cost per mile was computed at 20¢.

Calculating the production costs per ton of product, and averaged over various sized farming operations, totaled $34.92 for corn stover and $55.34 for switchgrass. That would be the cost at the farmgate, and transportation is added to that. Combined, the cost for corn stover ranged from $38.22 five miles away from the plant to $45.54 for a 50 mile haul. For switchgrass, the cost of production and transportation is $58.05 if five miles from the plant to $65.37 if 50 miles from the plant.

The Purdue economists looked at biomass producing between 1% and 10% of the total heat production at the power plants to generate electricity where coal had been the only source to date. Corn stover is less expensive for a plant to acquire, but produces less heat. Switchgrass produces more heat, but is more expensive to acquire. On the emissions comparison scale, the biomass alternatives produce much less than coal, but switchgrass loses a bit more in carbon credit because it is taking carbon from the soil and releasing it during combustion.

The bottom line, according to Brechbill and Tyner, “In nearly all cases, although use of biomass offsets some coal costs and CO2 emissions, it is not enough to offset the costs incurred from purchasing the biomass.” Based on costs of CO2 at the Chicago Climate Exchange at $5.22 per ton, the breakeven costs of both corn stover and switchgrass are higher.

Brechbill and Tyner conclude that corn stover is less costly of a product than switchgrass, but produces less heat and has less value, but switchgrass has a higher value, but would require a larger carbon credit to be efficiently used. Uniformity of production across the Cornbelt is an issue that will have to be resolved if biomass powered energy plants are to depend on farmers for a crop, and the resource of an individual farmer will likely determine whether to engage in that activity.

Summary:
For power plants wanting to reduce their coal consumption, an opportunity exists for farmers to produce biomass products such as corn stover or switchgrass that would release less CO2 than coal. Corn stover is less costly to produce, but would demand a lower market price due to its lower heat generating capability, compared to switchgrass. However, farm operators will have to decide on investment in equipment, as well as opportunity costs with other crops, and even negative impacts on the soil in case of corn stover.

How much time and energy would you spend on penciling out the numbers to determine if this venture would be worthwhile?

Stu Ellis

Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink

June 26, 2008

A Salvage Checklist For Flooded Farmsteads

In addition to fields, floodwaters have claimed homes, farm buildings and grain bins this spring, creating permanent damage to improvements on thousands of Cornbelt farms and destroying millions of bushels of stored grain. Owners of many farmsteads are returning home to inventory the damage, but also wonder what can be salvaged. Let’s develop a checklist and action plan to address those questionable issues.

A good checklist is provided by Iowa State grain quality specialist Charles Hurburgh and colleague Dan Loy in the Animal Science Department. Their factsheet on flooding and stored grain will provide guidance to many Cornbelt farms.

• Flood damaged grain is considered contaminated because of the unknown toxins in the floodwaters. It cannot be used for anything and is destined only for disposal. Health officials may have preferences for where it goes.
• Consider tile and pit water to be contaminated with animal waste and chemicals, along with any storm sewers, which become contaminated in floods.
• In a grain bin that was partially submerged, the grain that remained several inches or more above the high water mark should be in good condition. However, it must be removed from the top, since it will be compromised by the contaminated grain through regular bin emptying methods.
• Grain that is wet will provide a haven for toxins, and with warm temperatures mold will grow fast. Clean grain that is wet will spoil within hours in the summer.
• If grain is wet only from rain water because of a leak in a bin, the grain can be dried and clean, tested for mycotoxins, and then used without delay.
• Grain that comes in contact with muddy soil should also be considered as contaminated, even if the grain was initially dry, but became scattered on the ground during subsequent salvage.
• The Food and Drug Administration’s guidelines on grain handling allows for washing and high temperature drying, as long as it did not remain in floodwaters for any length of time, and the water was clean. If the grain is reconditioned, the FDA must give written consent before it is sold. The grain can be dried and either immediately feed to livestock or ensiled for later feed use.
• Livestock can be fed wet corn, but the ration should be recalculated to account for the high moisture content. Whole, wet soybeans can also be fed as the protein portion in a livestock ration, but the ration should be recalculated to accommodate the change.
• If livestock are being fed DDGS, the addition of whole soybeans that might be wet could create problems with excess fat content in the ration. Raw soybeans can be fed to sows, but they need to be heat treated to be fed to younger pigs.
• Submerged grain bins that were full of grain may be at the end of their useful life. The soaked grain will be expanding and bin seams will split, bolt holes could enlarge, and caulked seals will be compromised. Doors may no longer shut. Other structures, such as stirring devices may no longer work properly. Bin foundations may have deteriorated. Bin design engineers may be needed to assess the damage to grain bins.
• On bins and other farm structures, electrical wiring may also have been compromised. Controllers, motors, fans, and other powered equipment may be ruined, but should not be energized when still wet.
• Wooden structures may be totally ruined, because of drywall and insulation deterioration and the introduction of molds to structural areas.

Summary:
Farm structures may have been substantially damaged during the flood, which includes electrical components and foundation damage. Grain bins that were submerged may be holding grain that is swelling and will cause bin failure. Grain that was submerged in the flood cannot be used for feed or food and should be destroyed. If grain became wet from the rain, and has not yet spoiled, it can be washed and reconditioned, then used with written consent of the FDA. And, yes, grain elevator managers face the same issues as farm operators.

Stu Ellis

Posted by Stu Ellis at 12:35 AM | Comments (0) | Permalink

June 11, 2008

How Do You Make That Business Decision About Replanting?

Monday, the agronomic issues of replanting were recapped, and today the business issues of replanting will be in the spotlight. And these will be quite important, particularly if you have crop insurance. Replanting a crop covered by insurance is like a dog with bad breath. You don’t want to go there, if you don’t have to, but sometimes it is necessary. And this year it is necessary for you and most of your neighbors.

There will be quite a few familiar faces lined up at your crop insurance agent’s office this year, because this spring has been a nightmare, and it is not over yet. Your agent and the adjusters will be burning the midnight oil, but to help you understand the replanting issues, University of Illinois farm management specialist Gary Schnitkey has assembled a series of factsheets addressing the replanting issue.

1) Crop Insurance: Final Planting Dates, Late Planting Period, and Prevented Planting.

Your final planting date depends on your state and latitude, and it would be impossible to list all of them here. There is a good chance your final planting date for corn is either past, upon you now, or will soon occur. The final planting date for soybeans may be 10-15 days later. After the final planting date, USDA provides a 25 day long “final planting period” in which your guaranteed yield slowly declines at a rate of 1% per day, and then holds steady at 60% of the guarantee.

You should know:
• You can receive a prevented planting payment, if your problems are common in the vicinity.
• Your payment is 60% of the final guarantee, unless you signed up for 65% or 70%.
• You cannot plant an alternate insured crop in the late planting period, but can, after it expires, but that crop only has a 35% guarantee.

2) Crop Insurance/Cropping Decisions for Corn with Questionable Stands with APH, CRC, IP, or RA Insurance.

If your corn crop is less than satisfactory and you want to replant, consult your crop insurance agent before you take another breath.
• You can do nothing, but that might not meet the smell test of “good farming practice.”
• You can replant corn with the help of an indemnity check, but you will not get one if you do not contact your agent.
• You can work with your agent to declare the crop a failure, which may not be easy, and will probably require a test strip left in the field to determine final yield, and that will be deducted from your final indemnity check.
• If the field is destroyed, and an alternate is planted, your first crop may be eligible for a 100% payment, but the second crop will not be insured. If you want to insure the second crop, it would be eligible for a 65% yield guarantee, if you took the 35% guarantee on the first crop.
• The only instance of getting a 100% payment on two crops is for double crop soybeans, but that needs to be demonstrated as common practice on your farm.

3) Crop Insurance/Cropping Decisions When No Crop Has Been Planted and APH, CRC, IP, or RA Insurance has been Purchased.

Just for discussion, assume that the final planting date has passed, the final planting period is underway, and you have yet to plant any of your crop. You have the choice of either planting the crop with a reduced guarantee or taking a prevented planting payment.

• If the crop is planted, your full guarantee will be reduced by a small percentage which declines 1% per day, up to 25% for 25 days after the final planting date.
• By taking the payment, which is 60% of the guarantee, other farmers must be experiencing similar problems; you are allowed to plant an alternative crop. By not planting the second crop, you are eligible for 100% of the prevented planting payment.
• Another choice is to plant a second crop, which can be insured at 65% of the guaranteed rate, but any indemnity payment on the failed crop is limited to 35%.

So the question is: What is your decision (of course, made jointly with your crop insurance agent)?

Gary Schnitkey has provided a decision aid to assist in the process of deciding and evaluating your alternatives.

Summary:
The issue of replanting a crop comes up infrequently, and most farmers rarely have to address the alternatives. However, before any crop is replanted, your insurance agent should be consulted, if the crop is insured and if you want to receive an indemnity check for the weather damage. There are a wide range of benefits, including payments for failed crops, payments for alternative crops, and payments for prevented planting of any crop. However, rules must be followed and insurance agents can guide you through the process.

Stu Ellis

Posted by Stu Ellis at 12:04 AM | Comments (2) | Permalink

June 4, 2008

Capture The Wind And Capture More Profitability.

As crude oil costs rise, so will the cost of many other forms of energy, particularly electricity, much of which is generated by burning fossil fuels. Electric rates will impact many rural homes, and particularly irrigators if pumps are wired into the farm grid. You may have wanted to tell the local utility company to “come get its stuff,” seeking independence from electric bills. Now, you may be able to reasonably plan for that day to arrive.

Windfarms are being developed across wide areas of the Cornbelt and Great Plains, in addition to other parts of the US. But along with the commercial installations of 300-500 towers, many individual farms are investigating the opportunity of installing a turbine to generate private electricity and cut energy costs. Economists Brian Frosch and Joe Outlaw at Texas A & M University have created a guide detailing what farmers should consider if plans are being developed to erect a wind turbine. The Texas economists say average residential electric prices increased 58% from 2002 to 2006. Depending upon state utility regulators, electric prices could be much lower or much higher, but the Texas rate of 12.7 cents per kilowatt hour is a place to start.

Unless a wind energy company has approached you about erecting a turbine on your property, you’ll probably want to consider a small wind application, which is up to 100 kilowatts of capacity. That consists of a tower and turbine, and costs $3- $5,000per kilowatt of generation capacity. But the economists advise that before you write the check, a thorough review of all applicable laws should be conducted. Such a system would be connected to the larger electric grid and that requires the approval of the local utility, since it will be purchasing excess power back from your turbine. The checklist also includes zoning restrictions, the interconnection with the utility, and particularly the availability of wind. The smaller applications require an annual average wind speed of 11 miles per hour, and that will have to be determined by the proper instrumentation.

Prior to tower construction, zoning issues will come into play, including height restrictions if airports are nearby. Turbine size is another consideration, since it has to be large enough to provide the electricity required, but your electric bill should be a good resource for that information. The economists say the turbine should be mounted at least 30 feet higher than existing structures and trees if it is within 300 feet of anything that might modify airflow. Connected to the turbine wiring will be an inverter, which links your system to the commercial grid, and which comes with an agreement from the utility to purchase your excess electricity at the going rate.

If you are part of the footprint for a large windfarm, you’ll probably consult with an attorney about the leasing of land for the developer to erect a turbine tower. That will ensure your lease terms are fair and may include some of the other leasing arrangements the company has agreed to with your neighbors. The Texas economists say most wind energy leases have a 20 year term, and provide electricity royalties from 2% to 6%; and that is approximately $2,000 per year. A lengthy list of resources is also provided by the Texas A & M economists.

Summary:
Whether your goal is ecological or saving money, one of ways to achieve both is a wind turbine for your farm. Smaller applications are available compared to the large commercial installations. Farmers wanting to explore the possibility have numerous resources available at the Texas A & M website, which detail leasing arrangements for commercial operations, as well as zoning issues, and help with determining the size of turbine appropriate for your farm.

Stu Ellis

Posted by Stu Ellis at 12:32 AM | Comments (0) | Permalink

June 3, 2008

The World Wants Your Commodities, And It Has Money To Buy.

Cornbelt farmers are still “king of the hill” when it comes to world export trade. The latest statistics from USDA indicates farm exports will be well beyond the $100 billion benchmark, providing more support to grain and livestock market prices. World food importers are lining up at the US farmgate.

USDA’s May Outlook for US Agricultural Trade forecasts current fiscal year farm exports will surpass $108 billion, up 32% from 2007, and nearly double the export business in 2003. Grain, oilseeds, and meats make up two-thirds of the increase, attributed to both higher prices for commodities along with greater volume spurred by exchange rates.

USDA economists expect corn exports to reach a record of 63 million tons, which is approximately 2.5 billion bushels, worth $12.9 billion. The typical competition from China is absent because of internal needs, and competition from Argentina is absent because of its export policy controversy.

Soybean exports are expected to reach $20.7 billion, up nearly 10% from February because of increased soybean sales at a time when Brazil would normally have been driving the market. That is due to the declining value of the Dollar and the rising value of the Brazilian Real which make US soybeans more price competitive. In addition to the volume, soybean values are higher as well.

As pork producers have recently discovered, the export market for US meat is hot as well. USDA says exports of livestock, poultry, and dairy products will total more than $20 billion, up 10% from 2007, helped primarily by dairy products, but also pork and broiler meat. Part of the reason is the continuing drought in Australia and New Zealand that has tightened global dairy supplies.

Prospects for continuation of these trends may soften a bit, as world economic growth slows due to higher energy costs, and foreign banks being impacted by the US home mortgage crisis. The Dollar is expected to further weaken which will keep US exports stronger than economists thought would happen earlier in the year. The Chinese economic engine is expected to slow slightly due to higher prices for raw materials and slower growth in Europe and North America. Crude oil prices will be 40% above 2007 levels, with gasoline, diesel fuel, and heating oil all up more than 20% from last year.

On the flip side of the coin is the issue of products imported into the US, and for agriculture that is focused on fertilizers. Prices were 65% higher in April of 2008 than in April of 2007, which offsets some of the profitability for Cornbelt farmers. The fertilizer issue results from increased competition from India and China wanting more fertilizer, and the value of the Dollar which makes imported products more expensive.

Summary:
Cornbelt agriculture will continue to profit from strong export business due to many factors. An abundance of food in the US compared to spot shortages in other parts of the world has brought buyers to the US. Currency exchange rates continue to favor exports, and increased commodity prices have not driven buyers away, but have helped push export values higher. Corn, soybeans, and wheat have been at the forefront of the strong world demand for US farm products, and recent increases in exports of pork have pushed up hog prices due to international trade.

Stu Ellis

Posted by Stu Ellis at 4:46 AM | Comments (0) | Permalink

June 2, 2008

High Commodity Prices: A New Plateau Or Top Of A Price Cycle?

Commodity price euphoria that has blown across the Cornbelt and breezed down Wall Street is still a bit ethereal. Most farmers are still trying to find the handles to determine whether it is the real thing, and how to hold on. Are we going to financially operate from a new and higher platform, or will we return to price levels somewhere reminiscent of the recent past. The farm gate is going to dust off its crystal ball today.

Agriculture today is a product of several dynamic forces, pushing and pulling on supply and demand. Purdue agricultural economist Mike Boehlje has identified three forces influencing supply and two influencing demand which he says is shaping the future of agriculture.

1) Ethanol and energy. By next year, 30% of the US corn crop will be refined into ethanol, and while demand for ethanol will continue, corn will have to yield to cellulosic sources. Boehlje says there are even concerns that in the coming year, the transportation infrastructure will not be able to handle ethanol demand. He also says the growing food and fuel debate will challenge the ethanol industry, along with questions about its environmental benefits and the controversial tax subsidy and tariff structure. He suggests there are other ethanol growing pains, but the federally mandated goal of 36 billion gallons by 2022 supports the corn ethanol market.

2) Exports and exchange rates. Export demand for corn is high, despite the volume going into ethanol refineries and its subsequent higher value. Both corn and soybean exports as well as wheat have grown dramatically, which Boehlje says is the result of strong economies in China and India and their purchasing power. Parallel to that has been the decline in the value of the dollar, and the Purdue economist says it will be important to watch personal income growth in Asia, food demand from Asia, and the currency relationships. While Boehlje says the low value of the dollar has bolstered US exports, it has increased the cost of imported products, such as fertilizer. And he believes the value of the dollar may be to blame for 50 to 60% of the increased cost of production.

3) Food vs. fuel debate. Food prices have increased globally because of higher energy and transportation costs, but critics have frequently stopped looking beyond higher commodity prices. Additionally, wheat shortages have been weather related, and some biofuels have consumed some of the commodities that were once only destined for food stores. But Boehlje says there is a real prospect for a reduction in the growth of animal protein consumption in developing countries, which had been an exciting development prior to the biofuel age. He says higher costs of corn and other feeds will stifle increased production of meat animals. Such a scenario is changing the food consumption patterns in developing countries because of reduced purchasing power. Boehlje says, “To put this issue in context, one must remember that the growth in demand for agricultural products prior to ethanol was not from the domestic food market, but from the export market; and the fastest growing agricultural exports were in fact the animal protein complex.”

4) Global production. Farmers around the world have access to the same production technology and capital markets available to the US farmer, but unlike other productive areas of the globe, land and water resources in the US are at capacity. While the US could produce more livestock, that industry is constrained by environmental regulations and social preferences. The US will face more global competition from lower cost producers, and from producers which can use technology to produce more crops and livestock.

5) Weather and wheat. Wheat has been a problem for world producers for several years because of short crops, but that will not continue says Boehlje, and he says many areas of the world can expand production with new technology and increased acreage. He says in a 3-4 year span, the global supply-demand scenario for wheat could reverse from its current position of 30 year lows in stocks, which would cause a dramatic decline in wheat prices. He urges farmers to watch wheat acreage, yield, and production, which will be encouraged by current prices.

Summary:
Crop production costs are rising from higher input costs, and commodity values could be impacted by a global recession, that will dampen food demand, commodity prices, and farm income. The agriculture industry is well positioned financially to weather an economic storm that would be felt at the farm level. Farmers should monitor the changing economic climate, to determine if we are in a new paradigm of perpetual prosperity for agriculture. The five factors will help determine the direction the trends will take and when a cyclical downturn will occur.

Stu Ellis

Posted by Stu Ellis at 12:03 AM | Comments (1) | Permalink

May 22, 2008

Do Younger Farmers Or Older Farmers Score The Best On Financial Performance Measurements?

If you are an older farmer, is your financial position better because your debt is paid off? Are younger farmers operating more in the red than a middle aged farmer? Do middle aged farmers have any financial advantages over farmers in other age groups? You may be surprised with the answers that the farm gate has today.

Granted, the results of our survey do not include every farmer in the US, nor even a sample across the Cornbelt. But the financial survey was taken by the Kansas Farm Management Association, by Gabriel Weeden and Michael Langemeier of Kansas State University. They divided 964 farmers into groups that were 45 and younger (group 1), 46 to 55 years (group 2), 56 to 65 years (group 3), and finally, 66 and older (group 4). Their farm records allowed the researchers to make evaluations across a wide variety of financial yardsticks to measure farm financial performance, based on age.

Just for benchmarking, all of the farmers were sole proprietors and their average age was 55.49 years. The average farm had a value of farm production of $220,355, net farm income of $41,643, total assets of $840,584, total acres of 1,698, and owned approximately 35% of the total acres operated.

Among the findings were:
• Group four had the lowest value of farm production with $138,781 and group one had the largest with $245,303.
• Group one had a net farm income of $50,613 while group four’s net farm income was $25,233. The net farm income for group four was also approximately $20,000 less than that for groups two and three.
• The fourth age group had the second largest asset base with $901,342, which was significantly different than the first age group, which had $640,205 of total assets.
• For total acres, age groups one and four were not significantly different, but group two and three were significantly different from these two groups.
• Age group four had the lowest total acre average with 1,444 acres.
• All age groups had a significantly different percent acres owned, ranging from 22% for group one to 56% for group four.

Group four had the least profit margin of 1%, while the first group had the greatest at 11%. In that older group 55% of the farms had a negative profit margin. Similarly, the oldest group had the lowest asset turnover ratio (efficiency of asset utilization) of 15%, while the youngest had the most of 38%. The ratings were similar for return on assets.

The expense ratio, which includes expenses and depreciation, was similar for all four age groups, but the older farmers had the highest of 1.04, which indicated it was not covering unpaid family and operator labor. On average, none of the age groups were earning an economic profit, but 27% in group one were doing so, and none of the farms in the oldest group were doing so. The value of farm production was $207,112 for group one and $129,327 for group four. Regarding debt, group four had the least with 1%, and the other three groups were not statistically different from each other.

Group one had the most corn income, and the least wheat income. Group four had the most wheat income and the least corn income. Group one had the most income from livestock and group four had the least.

The Kansas State economists think they know why the financial performance was the poorest for the older group of farmers. They may have been subsidizing younger relatives trying to expand, or they may have been sharing crop or livestock income with their children. The economists also thought the older farmers may be satisfied with a low income, as long as cash expenses are covered, and may not have been concerned with the lack of return to labor and management.

Summary:
Conventional wisdom may have older farmers being more financially successful than younger farmers, because the older farmers have had a longer time to pay off debt and accumulate high performing assets. However, that may not always be the case, as seen with nearly 1,000 Kansas farmers. The older farmers had the worst financial performance of four age groups, but they may also have been sharing income with more family members and may have been subsidizing other family members.

Stu Ellis

Posted by Stu Ellis at 12:24 AM | Comments (0) | Permalink

May 21, 2008

Crude Oil Prices, Crop Production Costs, And Marketing Plans: Are You Covered?

You may have begun the spring tillage and planting season with full diesel storage tanks at home. But they may be getting empty, and what will you have to pay for the next fill up. Regardless of the price, the cost of fuel will have a more significant impact on your profitability this year than when you penciled out crop budgets last winter. Petroleum expenses are nibbling away more profits every day.

35 years ago, a barrel of crude oil sold for $3.15, but we’re not even going to lament the good old days, because they are gone and won’t return. Even 2007 began with $68 oil and today we are at twice that amount. There is nothing you can do about it, except react to the reality and be aware of the impact that crude oil prices have on corn and soybean production. To help with the understanding, agricultural economists Gary Schnitkey and Anuj Gupta at the University of Illinois have analyzed the impact in their latest newsletter.

As the price of oil increases, which has been 138% from 2003 to 2007, the cost of corn and soybean production has also risen. That would be $100 per acre or 42% for corn and $45 per acre or 28% for soybeans. When the cost trend is calculated back to 1972, each $1 increase in crude oil prices results in a $1.51 increase in corn production cost per acre and $0.90 for soybeans. And due to the recent upward trend in crude oil prices, corn costs will be $48 higher than 2007 and soybean production costs will rise $29 per acre.

Schnitkey and Gupta say crude oil price and production costs move together. Analyzing prices over the past 35 years, corn has an 82% correlation with crude oil prices and an 84% correlation with the Consumer Price Index. In the same time period, soybeans have a 75% correlation with crude oil prices and an 86% correlation with the Consumer Price Index. The relationship with the CPI means corn and soybean production costs are also highly correlated with inflation rates.

In the past five production seasons, Schnitkey and Gupta say corn production costs rose $100 per acre, with $59 of that attributed to oil price increases and $14 for inflation-driven costs. For soybeans in the past five years, production costs have risen $45 per acre and $39 of that is attributable to crude oil increases and $8 for inflation. Using that economic model, the researchers believe that $120 crude oil would raise corn production costs by $78 per acre, and soybeans by $47 per acre over 2007 production costs. If (when) crude oil reaches $150 per barrel, corn will be $124 more expensive to produce than in 2007 and soybeans will be $74 more.

The bottom line in the research is the fact that production costs continue to rise with higher petroleum prices, and those higher costs will have to lead to higher market prices if farmers are going to remain profitable.

Summary:
It is no surprise that crop production costs are rising rapidly, generally in lock-step with higher prices for crude oil. Economic research has show a direct correlation between corn and soybean production costs, crude oil prices, and inflation. Oil prices currently are practically double what they were at the outset of the 2007 production season, consequently, corn will be nearly $100 per acre more expensive to produce and soybeans will be $50 to $75 more expensive to produce than last year.

Stu Ellis

Posted by Stu Ellis at 12:41 AM | Comments (2) | Permalink

April 23, 2008

And Where Did Your Farm Score Financially In 2008?

Neither you nor your ancestors had a year quite like 2007. High yields and high prices offset high production costs, and as a result returns to labor and management were higher for farmers in almost all soil types. This comes as no surprise to your corner of the Cornbelt, but your neighbors were having the same type of year and the statistics are there to show it.

Taking a slice out of the middle of the Cornbelt, economist Dale Lattz at the University of Illinois examined the farm records of 2,748 grain and livestock operations. In addition to the grain operations, hog returns were lower because of feed costs, but dairy returns were higher despite high feed costs, and that resulted from higher milk prices.

Farm wages, formally known as return to operator labor and management, averaged $171,507. Find yours by taking your net farm income, then subtracting a fair return to your equity in machinery and land. The statewide average was nearly $100,000 higher than 2006 and about $88,000 above the five year average. The labor and management return statistic has fluctuated as low as $38,707 in 2005, up to the $171,507 of 2007.

So what contributed to your farm wage:

1) The average corn yield was the highest on record, and the average soybean yield was the fourth highest. The year end inventory price of corn was $3.75 and soybeans were $10.00. However, average sales prices were above those inventory prices. Crop returns average $657 per acres, and were an all time high.
2) Grain farms averaged a return to labor and management above $183,000, compared to dairy farms at $117,000, beef farms at $55,000, and hog farms at $52,000.
3) Government farm program payments contributed very little, and were the least since 1996; and totaled 3-4% of gross farm income. Compare that to 20% for 2005.

And what reduced your farm wage:

1) Per acre crop costs averaged $144.87, about $20 more than 2006. That was due to higher costs for fertilizer, seed, and pesticides. Fertilizer prices are up 70% from 2003, seed up 53%, but pesticides were down 1%. Fuel and oil averaged $21.03 per acre, twice the amount in 2003.
2) Costs per bushel increased for both corn and soybeans, and the statewide average was $542 and $416 respectively. Farms producing 190 bushels per acre averaged $2.85 cost per bushel and $8.14 for soybeans on farms averaging 51 bushels per acre. Over the past five years, the average cost is $2.66 for corn and $7.34 for beans.
3) All livestock enterprises experience substantially higher feed costs than previously, and were the main reason for hog returns that were lower than 2006. Farrow to finish producers averaged $7-8 per head below breakeven levels. Dairy returns were $2,360 above feed costs per cow, helped by milk prices that were 38% higher than 2006. Slaughter cattle prices received were $18 per CWT lower than the price paid for replacement cattle, and returns were the least for the past five years.

And what are the prospects for 2008:

1) Grain prices continue to be high into the fall delivery period.
2) With high yields, earnings should continue to be good.
3) Significant cost increases, particularly for fertilizer, will occur.
4) Increased cash rent payments will cut into operator revenue.
5) High feed costs will continue to challenge feeding operations.
6) Accurate financial planning will be required, along with risk management tools.

Summary:
With high yields and high prices, 2007 brought the highest farm income ever with an average return to labor and management about $100,000 more than 2006. However a trend toward higher grain production costs and livestock feeds can easily shift the record revenue to lower levels. Economists are warning about higher production cost for 2008, along with higher cash rents and higher feed costs. They urge farmers to closely monitor cash flow and use risk management tools.

Stu Ellis

Posted by Stu Ellis at 12:27 AM | Comments (0) | Permalink

March 26, 2008

Do You Really Think Soybeans Will Be More Profitable Than Corn This Year?

So you are going to plant more soybeans this year, you say? Half of your acreage? More than half? Mad at anhydrous ammonia prices and planting 100% soybeans? Booked beans for $13 and planning on retiring? Well, we’ll all find out next Monday morning when USDA releases its Prospective Plantings Report, and then it will be time to make adjustments if your intentions are different than what the market wants. Instead of gut feelings, have you penciled out the revenue returns? We have, and they may be different than what you think!

Your acreage decisions should be based on relative profitability of corn and soybeans say Gary Schnitkey and Darrel Good, University of Illinois agricultural economists, whose latest newsletter will make many Cornbelt farmers rethink any radical cropping decisions for 2008. Granted, Schnitkey and Good looked at Illinois farm returns, but their findings were consistent across all 9 crop reporting districts in Illinois and those will probably be representative of nearly all of the Cornbelt.

They found that corn income exceeded soybean income anywhere from $230 to $277 per acre. Schnitkey and Good used trendline yields and March 20 bids for beans and corn, which ranged from $4.70 to $4.90 for corn and $10.61 to $11.06 for soybeans. Yields throughout the study ranged from 132 to 173 bushels for corn and from 36 to 52 bushels for soybeans.

If you are questioning crop production costs, you will be interested to know that Schnitkey and Good created crop budgets for last fall and this spring, comparing crop income and rising production costs. Last fall, the non-land production costs were projected at $364 for corn and $215 for soybeans, which favors corn by $149. The numbers were recalculated this spring with anhydrous ammonia prices rising from $580 in the fall to $700 in the spring. The spring budget put non-land costs at $389 for corn and $227 for soybeans, which favors corn by $162.

Even with the increased nitrogen cost, soybeans are still less profitable than corn. Schnitkey and Good acknowledge that $700 may still be less than what farmers had to pay for a ton of anhydrous ammonia. However they say a $100 per ton increase will only increase per acre costs by $8.90, and that will not eliminate the advantage that corn has on crop returns per acre.

Schnitkey and Good calculate a 50/50 rotation to provide a $488 per acre average revenue. Increasing corn acreage to 2/3 provides a $498 per acre average revenue. And planting 100% corn provides a $520 per acre average revenue.

The economists also provided some qualifiers, and said the relative corn and bean price could change and that would impact the profitability projection. Any variance in yield will impact the revenue, and there will be some minor adjustments for yield drag on corn following corn. Additionally, pestilence is a risk that would need