Economics

How Will the Invasion of Ukraine Affect U.S. Agriculture?

by: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County

 

Russia’s Invasion of Ukraine: The Global Impact

The shock to global commodity markets following Russia’s invasion of Ukraine is expected to be the largest in the post-war period, and certainly since the oil crisis of the 1970s.  Over the past 30 year, the two countries have become major agricultural exporters, accounting for a quarter of global grains trade in the 2021-22 season (International Grains Council, March 9, 2022).  Across key commodities, they account for a 34, 18, 27 and 75 percent share of volume traded of world wheat, corn, barley, and sunflower oil respectively (International Food Policy Research Institute, February 24, 2022).  With Russia blockading ports on the Black Sea, 16 million tons of grain are currently stranded in Ukraine, USDA forecasting Ukrainian-Russian wheat exports to fall by 7 million tons in 2021-22, Australian and Indian exports only partially filling the gap (USDA/WASDE Report, March 9, 2022)   Also, despite reports of some spring crops being planted in Ukraine, outgoing Agriculture Minister Roman Leshchenko expects total area sown to be reduced by 19 million acres (Reuters, March 22, 2022).

Not surprisingly a market shock of this magnitude has affected both the volatility and level of prices, wheat futures at one point moving above $14/bushel, and eventually falling back to just over $10/bushel, reflecting uncertainty among traders about the invasion.  In turn, the increase in grain prices, are having a significant effect on global food prices and hence food security.  Even before the invasion, several factors were already driving up food prices, including poor harvests in South America, strong global demand, supply chain issues, reduced global stocks of grains and oilseeds, and an input cost squeeze mostly due to rising fertilizer prices.  Adding in the effect of the invasion, global food prices are now reaching levels not seen since the so-called “Arab Spring” of the early 2010s (UN/FAO, March 2022). Continue reading →

ARC/PLC Program Election and OSU Extension Decision Tool

by: Chris Zoller, Extension Educator, ANR, Tuscarawas County

Introduction

The 2018 Farm Bill reauthorized the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) safety net programs that were in the 2014 Farm Bill. Producers must enroll in ARC/PLC for the 2022 crop year through their local Farm Service Agency office. The signup period for the 2022 crop year is open now, and the deadline to enroll and make amendments to program elections is March 15, 2022.

If changes are not made by March 15, 2022 deadline, the election defaults to the programs selected for the 2021 crop year with no penalty.

 ARC/PLC Program Options

Producers again have the option to enroll covered commodities in either ARC-County, ARC-Individual, or PLC. Program elections are made on a crop-by-crop basis unless selecting ARC-Individual where all crops under that FSA Farm Number fall under that program. ARC program payments are made when crop revenue falls below a guaranteed level, while PLC payments are made when a crops specific effective price is lower than its reference price.

Reference Prices

While the 2018 Farm Bill does allow for reference prices to change, indications are that we will not see any changes in 2022.  The established reference prices are: corn $3.70; soybeans $8.40; and wheat $5.50.  Unless we experience significant reductions in yield and/or price, it is unlikely any ARC/PLC payments will be made this year.

Decision Tool

OSU Extension has a newly updated software program to assist producers with evaluating ARC/PLC scenarios and options.  This tool is available by contacting your local Extension Educator or by accessing it on-line at: https://farmoffice.osu.edu/farm-management-tools/decision-aids

Ohio Farm Custom Rate Survey 2022 – Responses Requested

By: Barry Ward, Leader, Production Business Management

The Ohio Farm Custom Rates Survey data collection has launched once again. The online survey for 2022 is available at: https://go.osu.edu/ohiofarmcustomratesurvey2022

A large number of Ohio farmers hire machinery operations and other farm related work to be completed by others. This is often due to lack of proper equipment, lack of time or lack of expertise for a particular operation.  Many farm business owners do not own equipment for every possible job that they may encounter in the course of operating a farm and may, instead of purchasing the equipment needed, seek out someone with the proper tools necessary to complete the job. This farm work completed by others is often referred to as “custom farm work” or more simply “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Custom farming providers and customers often negotiate an agreeable custom farming machinery rate by utilizing Extension surveys results as a starting point. Ohio State University Extension collects surveys and publishes survey results from the Ohio Farm Custom Survey every other year. This year we are updating our published custom farm rates for Ohio.

We kindly request your assistance in securing up-to-date information about farm custom work rates, machinery and building rental rates and hired labor costs in Ohio.

This year we have an online survey set up that anyone can access. We would ask that you  respond even if you know only a few rates.  We want information on actual rates, either what you paid to hire custom work or what you charged if you perform custom work. Custom Rates should include all ownership costs of implement & tractor (if needed), operator labor, fuel and lube. If fuel is not included in your custom rate charge there is a place on the survey to indicate this.

You may access the survey at: https://go.osu.edu/ohiofarmcustomratesurvey2022

If you prefer a document that you can print out and fill out by hand to return, email Barry Ward at ward.8@osu.edu

The deadline to complete the survey is March 31,2022.

A flurry of tax proposals in Congress

Source: Peggy Kirk Hall, Associate Professor, Agricultural & Resource Law

 

Taxes, Taxes and More Taxes.  

WOW … Just WOW!! 

Part II

 

You can count on tax law to generate interest in the agricultural community and that’s certainly the case with several tax bills recently introduced in Congress.  Within the last month, members of Congress proposed a flurry of tax proposals that could impact agriculture if enacted.  Of course, passing tax legislation is always difficult and subject to partisanship, and we expect that to be the case with these bills.

Here’s a look at the tax proposals receiving the most attention.

Death Tax Repeal Act of 2021.  Sen. Thune (R-SD) and Rep. Smith (R-MO) are the primary sponsors of S. 617 and H.R. 1712, companion bills introduced March 9 that propose to repeal the federal estate tax, which the sponsors claim to be “the most unfair tax on the books.”  The Act would also repeal the generation-skipping tax and make modifications to the computation of the federal gift tax, beginning at 18% under $10,000 and incrementally increasing by an additional 2%.  Cosponsors of the Senate proposal includes 30 other Republicans, and the House bill has 137 cosponsors including one Democrat.  The bills were referred to committee but have yet to see any further action.

For the 99.5 Percent Act.  Introduced March 25 by Senators Sanders (D-VT), Gillibrand (D-NY), VanHollen (D-MD), Reed (D-RI) and Whitehouse (D-RI) to “tax the fortunes of the top 0.5% and reduce wealth inequality,” this bill would reduce the federal estate tax exemption from its current level of $11.7 million per individual.  Under the proposal, estates in excess of $3.5 million per individual and $7 million per couple would pay the estate tax, which would begin at 45% for estates between $3.5 and $10 million.  The tax would increase incrementally, reaching 65% for estates over 1 billion.  The proposal would also reduce the lifetime gift tax exemption from its current level of $11.7 million to $1 million but would not reduce the annual $15,000 per person per year gift tax exemption for cash gifts.  It would limit the exemption for gifts to trust at $20,000 per year.  Protections for farmland include allowing farmland value to be lowered by up to $3 million for estate tax purposes and increasing the maximum exclusion for conservation easements to $2 million.  The bill would also prohibit reduced valuation for assets held in a pass-through entity, affecting the 35% valuation discount that is typical for farmland LLCs.

Sensible Tax and Equity Promotion (STEP) Act.  A group of Democrats in the Senate introduced the STEP Act on March 29 in an effort to “close the stepped-up basis loophole by taxing unrealized capital gains when heirs inherit huge fortunes on which the original owner never paid income taxes.”  The proposal would tax the transfer of property that has a net gain either during lifetime or at death.  During lifetime, a completed transfer to a non-grantor trust or individual other than spouse would be subject to tax but the first $100,000 of cumulative gain would be exempt.  At death, the first $1 million of appreciated assets would pass without taxation.  Transfers to charity, spouses, charitable trusts, qualified disability trusts would be exempt, as would gains on residences up to $250,000 per individual or $500,000 for married couples.  Taxes on illiquid property such as farms and some farm assets could be paid in installments over a 15-year period, and any taxes paid under the Act would be deductible from the federal estate tax.  The bill would also require gains on non-grantor irrevocable trusts to be reported every 21 years.

Corporate Tax Dodging Prevention Act.  Another bill by Sen. Sanders (D-VT) would go after the corporate tax rate.  The bill would restore the top corporate tax rate to 35%, its level prior to the reduction to 21% by the Tax Cuts and Jobs Act of 2017.  It also includes a number of provisions to reduce the ability of corporations to avoid paying federal taxes by moving income and profits offshore.

We are likely to see several more tax proposals in Congress in the coming year and time will tell whether any of them will have traction.  Some may merely be bargaining chips among the many legislative agendas in Washington.  One thing is certain–tax bills will continue to generate interest in the agricultural world, so we’ll keep readers updated on these and future proposals.

Expect Farm Liquidity to Decline in 2021

 

by: Chris Zoller, Extension Educator, ANR, Tuscarawas County

Liquidity is the ability of a farm business to quickly convert current assets to cash to pay short-term (less than 12 months) cash obligations, debt, family living, and taxes. It is one of several measures used to gauge farm financial performance over time. The United States Department of Agriculture Economic Research Service (USDA-ERS) is forecasting a decline in farm sector liquidity in 2021.  This article will discuss working capital, current ratio, and times interest earned ratio financial measures.

Working Capital

Continue reading →

Farm Office Live Continues!

Source: Barry Ward, David Marrison, Peggy Hall, Dianne Shoemaker – Ohio State University Extension

“Farm Office Live” continues this winter as an opportunity for you to get the latest outlook and updates on ag law, farm management, ag economics, farm business analysis and other related issues from faculty and educators with the College of Food, Agricultural and Environmental Sciences at The Ohio State University.

Each Farm Office Live begins with presentations on select ag law and farm management topics from our specialists followed by open discussions and a Q&A session. Viewers can attend “Farm Office Live” online each month on Wednesday evening or Friday morning, or can catch a recording of each program.

The full slate of offerings remaining for this winter are:

  • March 10th 7:00 – 8:30 pm
  • March 12th 10:00 – 11:30 am
  • April 7th 7:00 – 8:30 pm
  • April 9th 10:00 – 11:30 am

Topics to be addressed in March include:

  • Coronavirus Food Assistance Program (CFAP)
  • Proposed Stimulus Legislation
  • General Legislative Update
  • Ohio Farm Business Analysis – A Look at Crops
  • Crop Budget & Rental Rates

To register or view past recordings, visit https://go.osu.edu/farmofficelive

For more information or to submit a topic for discussion, email Julie Strawser at strawser.35@osu.edu or call the farm office at 614-292-2433. We look forward to you joining us!

Ohio Farm Custom Rates 2020

Farming is a complex business and many Ohio farmers utilize outside assistance for specific farm-related work. This option is appealing for tasks requiring specialized equipment or technical expertise. Often, having someone else with specialized tools perform a task is more cost effective and saves time. Farm work completed by others is often referred to as “custom farm work” or more simply, “custom work”. A “custom rate” is the amount agreed upon by both parties to be paid by the custom work customer to the custom work provider.

Ohio Farm Custom Rates 2020 reports custom rates based on a statewide survey of 377 farmers, custom operators, farm managers, and landowners conducted in 2020. These rates, except where noted, include the implement and tractor if required, all variable machinery costs such as fuel, oil, lube, twine, etc., and the labor for the operation.

Some custom rates published in this study vary widely, possibly influenced by:

  • Type or size of equipment used (e.g. 20-shank chisel plow versus a 9-shank)
  • Size and shape of fields,
  • Condition of the crop (for harvesting operations)
  • Skill level of labor
  • Amount of labor needed in relation to the equipment capabilities
  • Cost margin differences for full-time custom operators compared to farmers supplementing current income

Some custom rates reflect discounted rates as the parties involved have family relationships or are strengthening a relationship to help secure the custom farmed land in a cash or other rental agreement. Some providers charge differently because they are simply attempting to spread their fixed costs over more acreage to decrease fixed costs per acre and are willing to forgo complete cost recovery.

The complete “Ohio Farm Custom Rates 2020” is available online at the Farm Office website here

 

Source: https://farmoffice.osu.edu/farm-mgt-tools/custom-rates-and-machinery-costs

 

U.S. Farm Liquidity Measures Projected to Decline in 2020

By: Chris Zoller, OSU Extension

Liquidity is a measure of the ability of a farm to use cash or ability to convert assets to cash quickly to meet short-term (less than 12 months) liabilities when due.  Data from the United States Department of Agriculture Economic Research Service (USDA-ERS) forecast a continued decline in 2020 of liquidity on U.S. farms.  This article discusses two metrics, the current ratio and working capital, to evaluate liquidity.

Click here for Article (access the figures)

Working Capital

USDA-ERS projects farm working capital to decline from the 2012 level of more than $160 billion to $52 billion in 2020 (see Chart 1).  Working capital is the value of cash and short-term assets that can easily be converted to cash minus amounts due to creditors within 12 months.  These are considered “short-term” assets and liabilities.  Having adequate working capital is important for a farm to meet obligations as they come due, take advantage of pre-pay discounts, and manage through price declines or unexpected expenses.

Like many things in agriculture, knowing how much working capital a farm needs varies based on several factors.  These include farm size, farm type, and market volatility.  The working capital to gross revenue ratio is a measurement of the working capital divided by the gross sales of the business. This ratio measures the amount of working capital compared to the size of the business.  Lenders prefer a working capital to gross revenues ratio of 40 percent or better. This means that if the business has $1 million in gross sales, working capital would need to be $400,000 or 40 percent of $1M.  When the working capital ratio falls below .20, a farm may have difficulty meeting cash obligations .in a timely manner.

Chart 1. (Source: USDA-ERS, February 5, 2020) (see PDF version to access charts)

Current Ratio

The current ratio is calculated as total current assets divided by total current debt (or liabilities).  Current is defined as less than 12 months.  Current assets include: cash, accounts receivable, fertilizer and supplies, investment in growing crops, crops held for storage and feed, and market livestock.  Current liabilities include: accounts payable/accrued expenses, income and social security taxes payable, current portion of deferred taxes, current loans due within one year, current portion of term debt, and accrued interest.

USDA-ERS expects the value of current assets to decline 3.5% and current liabilities to increase 2.3% in 2020.  The current ratio of U.S. agriculture was 2.87 in 2012 and is projected by USDA-ERS to fall to 1.42 in 2020 (see Chart 2).  If a farm has $100,000 in current assets and $70,000 in current liabilities, the current ratio equals 1.42.  A current ratio of 2:1 or greater is desirable and indicates a farm has $2 in short-term assets for every $1 in short-term debt.

Chart 2.  (Source: USDA-ERS, February 5, 2020)  (see PDF version to access charts)

Management Tips

Farm financial management is critical in today’s volatile environment.  Consider the following management tips:

  • Complete an annual balance sheet. Using your numbers, calculate trends.
  • Compare your numbers with recommended benchmark values.
  • Discuss your numbers with your lender.
  • Contact your local Extension educator or enroll in the Ohio State University Extension Farm Business Analysis and Benchmarking Program (https://farmprofitability.osu.edu/).