Evaluating Identity Preserved Wheat

More and more we hear the term Identity Preserved (I.P.) describing a feature of various commodities, in an effort to achieve a premium in a specific market place. I.P. wheat is one of the leading commodities in this I.P. premium arena. As wheat harvest is over and seed is being purchased for fall planting, you may be considering IP wheat production. It is important to thoroughly evaluate all aspects of I.P. wheat production and contract options prior to locking in production acres.

Like any new venture or niche market opportunity, a thorough analysis of your current farming enterprise and I.P contract features will provide you with the information necessary to make the best management decision. A basic S.W.O.T. analysis of your operation in light of the I.P. wheat production opportunities will provide this information.

A basic S.W.O.T. analysis evaluates your operation internally and externally. Internally you evaluate the Strengths and Weaknesses, and externally you evaluate the Opportunities and Threats.

The strengths and weaknesses of your operation in light of I.P. wheat production may be noted in terms of your past wheat production history, intensive crop management abilities, financing of additional input needs, production equipment availability, grain drying and storage ability and trucking capabilities.

In evaluating opportunities and threats, the availability of a contract itself would be the opportunity, and threats would include things such as weather, diseases, insect and weed pressure, and the like.

Other points to consider in I.P production include the following:

  • Understanding the yield potential of an I.P. variety vs. a normal variety.
  • Understanding the contract quality requirements of an I.P. variety and the potential negative downside to not meeting contract specifications.
  • Will the company buy the grain if it does not meet the specifications, and at what price?
  • What is the pricing risk of sprouted wheat?
  • What production data (especially independent data) is available on variety characteristics, preferably from fields in your area?
  • How and when will delivery of the crop to the buyer be handled?
  • What are the additional input requirements and estimated expenses?
  • How do intensive management requirements translate to additional fuel costs, equipment wear, and soil compaction issues?
  • What is your time availability in terms of additional management requirements such as field scouting, chemical/fertilizer applications, harvest, potential drying, storage and transportation?

It is just as important to evaluate what is included in the contract, as to consider what is not included in the contract. For example: What is the acceptable vomitoxin level, and what occurs if you surpass that level? What if everyone else surpasses that level, and all the available I.P. wheat contracted misses the specifications by a few points or even few tenths of a point? Supply and demand in a limited I.P. marketplace interacts slightly different than that of the regular market.

I.P. contracts are an exciting opportunity for growers to increase the potential profit margins of existing acreage and long-term assets. The better understanding a producer has of the commodity and contract being considered, both the positives and negatives, the better the management decision will be.

Managing Feed Input Costs

Given massive price swings in the feed markets in the past year, planning for and managing feed costs must be a priority for successful managers. Tools and data available from The Ohio State University include an analysis of ‘good deals’ in the dairy feed component market provided by Normand St. Pierre, the tracking of typical core swine feed costs provided by Brian Roe, and historic regional cash crop prices and basis for corn, soybeans and wheat provided by Matthew Roberts. Bookmark these links as they are updated regularly:

Normand St. Pierre updates his analysis of feed costs in the bi-monthly Buckeye Dairy News. Access current and past issues at http://dairy.osu.edu/

Matthew Roberts provides a historical perspective at:
http://aede.osu.edu/people/roberts.628/extension/basisprices/index.php

Brian Roe looks at two typical swine feed rations at http://aede.osu.edu/people/roe.30/livehome.htm

The Impact of Energy Costs on Agricultual Production

Like other sectors of the US economy, agriculture has also kept a weary eye on energy prices. While gasoline prices, hovering near $2.00, catch the attention of consumers. Agricultural producers must also watch fertilizer, natural gas, and, often, propane prices to gauge the effect of fluctuating costs on their bottom lines. Recent volatility in energy prices has left many producers worried and wondering what, if anything, can be done to mitigate higher energy costs.

Energy costs directly affect row crop producers in four ways: nitrogen fertilizer costs, drying costs, hauling charges, and fuel costs. Each of these differs in the effect on profitability as well as the ability to minimize exposure the price risk.

Nitrogen fertilizer costs consist of two components: the cost of the natural gas needed to produce the fertilizer and the cost of transport and storage, which is relatively stable. Recently, natural gas prices have become significantly more volatile as domestic US production has grown only slightly in the last five years, and are unlikely to increase dramatically in during the next five years. However, much of the electric generation capacity being built and planned will consume natural gas, increasing domestic demand at a rate higher than domestic production will match. Increased imports and rationed demand are expected to make up the difference. Additionally, the higher price of oil is also pushing up prices of natural gas, as a partial substitute.

To an average Ohio farmer, increases in natural gas prices over the last two years have increased fertilizer costs by roughly $5/acre of corn, or about 3% of variable costs. The impact of increased drying costs, due to higher natural gas, propane, and electricity prices is less severe, about $2/acre of corn.

Fuel costs, specifically diesel, are the other major energy cost incurred by farmers. Fuel is used not only for on-farm machinery, but also for transportation of the harvested product to market. In the last year, prices for both “on-road” and “off-road” diesel fuel have increased by about 25%, increasing the cost of operating farm machinery by an average of $1.80/acre for corn and $1.10/acre for soybeans. Fuel for transport will cost an additional $1.00/acre for corn, and $0.25/acre for soybeans.

For an average Ohio farmer, the higher prices will increase direct costs by approximately $10/acre of corn and $1.40/acre of soybeans. It is likely that higher energy costs will also be felt indirectly, through higher chemical and machinery costs, but those increases are much harder to predict.

Unfortunately, there are limited options for coping with higher energy prices on the farm. The largest cost increases occur from higher fertilizer and drying charges. While fertilizer has already been applied for the current year, the high prices should be a motivation for reassessing N application rates this fall and next year. Many producers continue to apply more N than needed, and a reduction to the recommended rates will be even more profitable with high Nitrogen costs. There is less that can be done with drying costs; most producers already take advantage of air-drying to the extent that it is possible, so it is unlikely that higher drying costs can be avoided. The situation for fuel costs is much the same.

These prices also beg the question of whether energy cost risk, like that of the commodity prices themselves, can be profitably managed. The answer is yes and no. For most farmers, the only available risk management instruments for energy costs are forward contracts for fertilizer and fuel. In the past, approximately two-thirds of nitrogen fertilizer was priced prior to use. While the rising volatility in natural gas markets has made these forward contracts even more desirable, it has also made them less attainable. For three months last fall, most elevators and fertilizer distributors were refusing to lock prices on anhydrous. The only avenue for pricing at that point was to take physical delivery and store the fertilizer on-farm until use. This is an unattractive option both from a cash-flow standpoint as well as a safety standpoint: the recent thefts of anhydrous increase the risk of accidents or losses on the farm. Therefore, I would recommend starting to watch anhydrous prices this fall as they become available, and lock them when possible.

Are You Prepared Financially?

This year is proving, to many producers, to be one filled with uncertainties. The vagaries of weather, the markets, international trade issues, and many others affect your financial prosperity. Whether you are, personally, about to have a good, great or lousy year the question remains the same. How are you doing financially? And by that I mean compared to: one year ago, the past three year average, and, most importantly, to your budget for this year.

During my 30+ years in agriculture I have known many producers that ran a million dollar business out of their check books. In today’s economic environment a check book is no longer adequate, you must keep accurate financial and production records that are consistently and thoroughly analyzed to learn what is happening in your business.

A farmer called me out to his farm to help him figure out why he could no longer borrow operating money. He had a computer and fairly sophisticated farm accounting software package. The bottom line is that he used the accounting system to write his checks and prepare information for his accountant to file federal and state taxes. With a little bit of extra entries into the accounting system we found two clearly defined trends that were present five years prior and continued to get worse. He didn’t have a clue because he was to busy “farming!”

County Extension Educators (we used to call them agents) have access to very powerful financial and production analysis tools you can use. Give your local educator a call and schedule a time to complete a FINAN analysis <http://www.cffm.umn.edu/Software/FINPACK/FINAN.asp> or a FINLRB budget projection <http://www.cffm.umn.edu/Software/FINPACK/FINLRB.asp>. This is not a luxury, in today’s economic environment, it is a necessity.

Subscribing to the Ohio Ag Manager electronic newsletter

Farm business managers, agribusiness managers and Extension Agents are encouraged to subscribe to receive the Ohio Ag Manager electronic newsletter at the beginning of each month.  Interested parties can subscribe electronically to this newsletter by sending a blank e-mail message to: ohioagmanager-on@ag.osu.edu. Contact David Marrison if you experience problems subscribing.

Workers' Compensation-Don't Bet the Farm

Most small businesses are one accident, divorce or death away from a disaster. Ohio ‘s farms are no exception. While we don’t want any of these events to occur, there are tools to help minimize the impact of work-related accidents or illnesses on our farms. Every farm should:

  1. Conduct regular safety training for everyone who works on the farm
  2. Look for and correct potential safety hazards on the farm
  3. Carry Workers’ Compensation Insurance

Workers’ compensation coverage provides protection to workers who are injured or contract work-related illnesses in the course of their employment. Coverage includes medical expenses as well as a portion of wages if the situation results in the employee being unable to work during recovery. The employer is also protected from the sudden, full impact of an employee’s accident-related expenses.

There are a few misconceptions about the relationship between agricultural businesses and workers’ compensation:

Fact: “All Ohio employers must provide workers’ compensation coverage for their employees.”
Concern: Not all Ohio farm businesses that should have workers’ compensation coverage, do. Ohio ‘s farms are small businesses. Businesses almost always have employees. Whether those employees are family members or non-family members, if they receive a paycheck your farm must carry Worker’s Compensation Coverage through the Ohio Bureau of Workers’ Compensation (OBWC).

Fact: “Sole proprietors, partners. or farm corporate officers do not have to carry workers’ compensation coverage for themselves.”
Concern: While these persons do not have to carry workers’ compensation coverage for themselves, they will not be eligible for coverage through OBWC if they are injured in a job-related accident or contract a job-related illness. Unfortunately, their or their spouse’s personal health insurance may not cover treatment of job-related injuries or illness either. Fortunately, persons that fall under these classifications may elect Optional supplemental coverage to avoid a lack of coverage in case of work-related illness or injury.

Fact: Workers’ compensation coverage premiums add a significant payroll expense.
Concern: Worker’s compensation premiums add a significant payroll expense! Each farm’s premium rate is determined by the types of jobs that they have. While larger businesses can receive an “experience rating” adjustment based on their claim history, farm businesses do not. As businesses with relatively few employees, one accident can seriously affect the farm’s premium for the four years included in a farm’s rating.

Fact: Group rating programs can reduce workers’ compensation premiums.
Since farms tend to be small employers, OBWC offers sponsoring organizations such as the Pork Producers Council, Ohio Dairy Producers and the Ohio Farm Bureau to organize groups of employers with good safety records to apply for coverage as if they were a single, larger business. By carefully selecting farms with good safety practices and few claims, the group is able to negotiate for premium reductions. In 2002, the average group rating discount was 70%, while the maximum discount was 95%.

Potential savings from group rating participation is substantial. For example, a farm with an annual workers’ compensation liability of $10,000 would save $7,000 if they participated in a 70% group. If they had a very good safety record and were invited to participate in a 95% group, their premium liability would be reduced by 95% to $500. Total savings will be somewhat less depending on the enrollment fee charged by the group rating program sponsor.

How do farms participate in a group rating plan?

Now is the time for farms to do their research and apply to group rating plans. A group plan covers a year beginning July 1 through the following June. While a farm may only be a member of one group that is submitted to the OBWC at the end of each February, they can investigate membership in more than one plan. Plans will offer different rating levels. One plan may offer a 50% group, while another may put together a 95% group.

You must give the group permission (they will send you a form) to evaluate your record with OBWC. After evaluation, they will either extend an invitation to participate in their group or not. The better your safety and claims record, the more likely you are to be invited into a program.

Unfortunately there is not a program that objectively evaluates a group sponsor’s performance. However, do ask questions of the group sponsor before you sign your (carefully reviewed!) contract. Also, the underwriters at the OBWC welcome your calls to discuss the history of a particular group. The underwriter’s office can share with you historic performance and trends for the group sponsor as well as rating levels they achieved, etc. Contact the Underwriter’s office at (614) 466-6773.

Group Rating Programs

More than a hundred group rating program sponsors are listed on the OBWC web site: www.ohiobwc.com Select “Ohio Employers”, “Programs”, “Group Rating” and then hit the “detail” button for the complete list. If you have an e-account and your policy number, the site will provide you with groups that specialize in your particular industry group. If you don’t have an account, call the Underwriter’s office and they will send a packet of information to help you make a selection.

There are many risks associated with farming. Good managers realize that we can control some risks and manage others. Farms with a few hours of hired labor a year must carry workers’ compensation coverage. Farms with thousands of hours of hired labor a year must carry workers’ compensation coverage.

Farm owners must be covered through supplemental workers’ compensation coverage or their personal health insurance and disability insurance policies. Premium costs can be controlled through safety training and group rating programs. Inattention to these details is a gamble.one that can cost you and your family the farm.

References
“Alternative Rating Plans”, August 2004, http://www.ohiobwc.com
“General group rating information requirements”, August 2004, https://www.ohiobwc.com/employer/programs/grinfo/generalgrinformationrequirements.asp
“Understanding Group Rating” Fact Sheet, Ohio Bureau of Workers’ Compensation, October 2003

Market Alternatives: Yellow Pearch

U.S. per capita fish consumption is up some 50 percent since the 1980s – now worth nearly $1 billion. An aging population and increasing ethnic diversification should increase consumption another 25.2 percent by 2020, according to USDA. With declining natural fisheries worldwide, aquaculture production has grown rapidly. Interest in capturing more of the industry in Ohio is up, based on inquiries to the aquaculture program at OSU South Centers at Piketon. Production budgets for yellow perch – a species aquaculture specialists believe has great potential – are available online at http://aede.osu.edu/people/moore.301/aqua/perch-1000-pond.htm, but a number of marketing questions remain. Most Ohio producers don’t have the volume to enter mass markets and consumer preferences for yellow perch aren’t well documented. Research due out this fall from AED Economics and OSU South Centers should help us better understand both Ohio’s production potential for this species and consumers’ fish preferences, purchase and consumption patterns, product attributes that guide purchases, and the role of price in purchase decisions. For information on the market study team, contact Stan Ernst. For aquaculture production, e-mail Laura Tiu at South Centers.

Note: “Market Alternatives?” will be a regular feature of this newsletter focusing on new or emerging market opportunities and related farm enterprises.

Organic Foods: What Consumers Will Pay More for

Best estimates by researchers at Ohio State are that organic food sales exceed $10 billion, with recent annual growth rates of 15 to 20 percent. That’s still only 2 percent of total U.S. food sales, but enough to capture the interest of more producers. What’s driving this growth?   Professors Neal Hooker and Marvin Batte in AED Economics recently asked Ohio consumers why they buy (or don’t buy) organic. 51 percent say nutrition is their primary motive; followed by a desire for pesticide-free food, a desire to support environmentally-friendly agriculture, and an idea that organic foods taste better. Those who don’t buy say organic foods are priced too high; don’t like the taste or appearance; or have concerns about nutrition or safety of organic foods. Batte, Hooker and their students asked shoppers in urban, suburban and rural groceries what attributes of organic foods they’d pay most for. Pesticide-free foods caught the greatest premium (39 cents more per box of cereal); 100-percent organic content commanded a 32.5 cent premium; locally grown foods a 30.6 cent premium; and enhanced flavor was worth 26.6 cents. Reports and data from this research are on the researchers’ web pages or directly at http://aede.osu.edu/resources/docs/pdf/DL17AFRV-ZRD8-OWNK-R8ETVPJMEKVM6E64.pdf and http://aede.osu.edu/resources/docs/pdf/QYABMCT1-9VNX-GW1A-BAFBW09OXPEKM1K2.pdf

Note: “Research Update” will be a regular feature of this newsletter highlighting new and emerging research from OSU on agribusiness, management and related policy topics.