Cattle: Cull Cow Price Trends

During the past month I’ve gotten several questions concerning cull cow prices and cull cow marketing. This month I’ll take some time to discuss cull cow price patterns and consider one possible cull cow marketing strategy.

Cull cow prices are on many producers’ minds as the cattle cycle begins to turn and cow populations begin to rise. Calf prices will inevitably decline over the next few years, and cow-calf operators may be finally willing to part with some of those problem cows. When is the best time to pull the trigger on those cows? Looking at cull cow prices from Kentucky from 2001 to 2005, there are some strong seasonal patterns that should inform this decision. There has been a $10 (20%) difference between the high and low price month over the past five years. May, June and July have been the peak months during this time frame, with the only exception being 2003. In 2003 cull cow prices peaked right before the US border closed following the BSE case in Washington state. November through March have tended to be the lowest price months.

The other regularity in the Kentucky cull cow market has been the price spread between different cull cow grades. The difference between the lean and boner cow grade is the largest; on average during the last year, moving up from the lean to the boner cow grade added about $6 cwt. to the final price. The price difference between boner cows and the next higher grade class (breakers) is more modest – an average of $1.60/cwt during the past 12 months.

These two facts suggest that some modest cull cow management and marketing could provide returns. For example, suppose in January of 2005 you identified a possible cull cow weighing 750 pounds. If you sold her right away and she graded in the lean class, you would have received $42.84/cwt or $321. Suppose you put her on a feeding program that averages a gain of 1.5 pounds per day for 150 days. Weighing 975 pounds in mid-June, you ship her off and she qualifies as a boner cow and receives $56.10/cwt or $547. In this case it would have been a $225 increase in revenue: an additional $8/cwt from hitting the seasonal high; an additional $6/cwt for moving up a grading class; and an additional 225 of cow to sell. This particular feeding program would have broken even for a cost of gain near one dollar per pound. Below are some statistics for boner cow prices reported in Kentucky from 2001-20005 (thanks to Lee Meyer and Kenny Burdine at Kentucky for help with this data). I’ll be posting some various cow price statistics on my web site ( http://aede.osu.edu/people/roe.30/livehome.htm ) to help inform your own decision making on this topic.

KY Boner Cow Prices ($/cwt) 2005 Difference
Breaker- Boner –
2005 2004 5 yr ave Boner Lean
Jan 47.49 46.43 41.43 1.66 5.52
Feb 50.51 46.20 43.54 1.89 5.87
Mar 51.97 44.98 44.24 1.99 6.89
Apr 53.52 48.18 45.55 2.18 7.01
May 56.50 52.41 48.00 1.96 7.01
Jun 56.37 52.91 48.24 2.46 6.68
Jul 55.19 54.78 47.62 1.32 5.62
Aug 51.90 53.88 46.40 1.16 6.01
Sep 50.25 52.86 45.20 1.44 6.07
Oct 47.65 50.07 42.92 1.28 5.92
Nov 46.35 49.07 42.32 1.42 5.14
Dec 47.07 48.97 43.32 1.19 6.03
Ave 51.23 50.06 44.90 1.66 6.15


Frequently Asked Questions about the WTO”

A new Ag Policy Brief entitled “ Frequently Asked Questions About the WTO” is available on farmdoc at:

http://www.farmdoc.uiuc.edu/policy/ag_policy_briefs/abp_06-01/apb_06-01.html .

The article addresses a broad range of issues including: In general, what is the WTO? Why is it important for the U.S. to follow the WTO trade rules? How does the WTO relate to Illinois? Who started the organization and why? How was the United States involved? Who wrote the WTO rules that we hear about? What authority do those rules have over the U.S.? What are the benefits/consequences of complying or not? What happens if a country doesn’t comply? What is the Doha Round, and why do we hear it mentioned so often? Is there a link between the Doha Round and the 2007 Farm Bill? Is there a link between the WTO cotton decision and future corn and soybean programs? All of the Ag Policy Briefs are available in the farmdoc Policy section at:

http://www.farmdoc.uiuc.edu/policy/index.html

Succession Planning or Asset Transfer?

At some point in a person’s life they start to think about their business and assets they own relative to the next generation. The difficulty that many farmers face is determining how to treat their children “the same” while protecting the son or daughter that has remained on the farm. While there are no easy answers, there are some ideas that can provide some direction for the parents.

Separate the business (operations) from the assets: There are many ways this can be accomplished through the use of business entities such as Limited liability companies, partnerships, etc. There are several reasons this is helpful. First, this allows the parents to critically examine the business to determine if the business is sustainable for the next generation. If not, then there is only the concern of transferring assets. Remember, renting assets, such as land, and being actively engaged in the business of farming is distinctly different. Secondly, by separating the assets and business, parents can start transferring the business much sooner than the assets. Distributing assets to all offspring becomes less disruptive to the business, especially if buy/sell agreements or long term lease agreements providing for use of the assets by the business are in place. Finally, there are some liability protections that can be provided to the family’s assets being held separate from the business operations.

Develop the next generation of managers: Experts write that often businesses fail when transferred to the next generation. Everyone knows a story where this has occurred. Is the oldest child automatically going to be the next business manager? Is it a birth right? But isn’t this often the default that our deep agriculture heritage dictates? Parents of a viable business need to carefully assess the strengths and weaknesses of their children and groom the child best suited to manage the business. If none of the children have the capacity (or desire) to manage the demands of a modern farm, maybe it would be best to look at in-laws or simply hire a farm manager. Your children might be better off financially long-term.

Protect the business operation’s control of assets: Dividing the farm into five equal or equitable parts does not need to end a prosperous farm business if there are protections in place. A death, a divorce, or even a marriage can create a situation that can end a business. Planning for all these events by using the tools available to the family can be a wise investment. I understand that attorneys are expensive, but talk to someone who had to sell the farm because of a divorce settlement or death of a family member and they will tell you that the investment in an attorney’s time for planning is cheaper than the cost of a life altering event!

Communicate, communicate, and communicate: Most people have heard that the three keys to a business success are location, location and location. People may even have heard they need to communicate their wishes to the next generation to avoid fighting and feuding among siblings following their death. Even though this sound fairly simple, it is amazing how often this does not occur. It might be difficult to tell your oldest son that his youngest sister is the executor of the estate or that the management of the business is being passed to the son-in-law, but communicating these critical decisions is essential to the future not only of the business but of your family.

Succession planning, which includes estate planning, is not easy. There are many difficult decisions that need to be made, relative to the business, the assets, and the next generation. Do not avoid making the decisions because you hope the rules will change next year or you believe you might offend a son or daughter. I have never met an older person who told me they wish they spent less time planning. Decide what is best for your situation and communicate that decision with all who will be affected by it.

Farmland Rental Agreements and Resources

The Midwest Plan Service offers free examples of leasing agreements for farm land, buildings, and pastures. These were developed by farm management specialists from North Central Land Grant Universities. This is the web site:

http://www.public.iastate.edu/~mwps_dis/mwps_web/leases.html

These forms provide owners and renters with a guide for developing an agreement to fit their situation. However, they are not intended to take the place of competent legal advice pertaining to contractual relationships between two parties. The Midwest Plan Service has many other resources as well, (publications about ag. engineering, building design, air quality, manure management, agribusiness, tillage, and grain handling) the main web site is:
http://www.mwpshq.org

The Ohio State University Extension web site called Ohioline includes a series of fact sheets about farm rents and leasing, http://ohioline.osu.edu/fr-fact/index.html . Topics include cash and share rental of land, tax and legal considerations, an agreement checklist, building rental, and one about tenant and landlord relations.

Conducting Successful Family Business Meetings

I’m too busy. We’ll start after the corn is planted and the hay is made. We tried them before and they didn’t work. We’ve never needed them before. We all get along. Why should I care what my son-in-law or daughter-in-law thinks about the farm? These are just a few of the excuses people give for not conducting family business meetings. You can probably think of others. However, conducting family business meetings can have a very positive influence on the success of your business. Let’s take a look at some reasons to consider holding these meetings.

Building a Stronger Family.

Family meetings can give individual members an opportunity to develop leadership, conflict management, listening, speaking, and management skills. They can also help members understand their role in the successful transition of the business and can help them to develop strategic, capital, estate, or succession planning knowledge.

Meeting together as a family on a regular basis can help members understand what it is they all have in common that will make succession smoother and the business successful. Throughout the process members will learn a lot about themselves and the business. Although conflicts will still arise, the purpose of these meetings is not to focus on the conflict, but rather to focus on building a stronger family through open and honest discussion.

Building a Stronger Business.

Not only can these meetings benefit family members, they can also send a message to employees that the family is committed to the future of the business and helping their employees be successful as well. Family members who have been involved in the process early on and are well-informed are more likely to promote effective planning for the successful transfer of the business.

Plan for Future Business Ownership.

Too often, if at all, family meetings happen because of some abrupt change like the death of the senior manager and some issues faced at this time may not be handled as well as they could have been had family members been involved in discussions and planning about the business and its transition to the next generation. Regular family meetings can help answer questions about the present owners’ financial needs and goals along with those of the next generation.

Plan Family Participation in the Business.

This can be a difficult decision for many families, especially when spouses are involved or children are not actively involved in the business, but have their own ideas about the future of the business. Which family members should be involved? Are in-laws welcome to be involved in discussions? What if there are conflicting goals among family members? What if a family member doesn’t have the ability to successfully manage the business? The earlier you begin holding effective family meetings the earlier you can avoid potential conflicts. Allowing young children to be involved in discussions helps them to better understand the business, decide what future they have in the business and helps parents determine the commitment of their children before making plans for expansion or other change in the business.

Open Up the Succession Process.

Unless it is clearly obvious and communicated openly who the next successor of the family business will be some members may question how and why the decision was made. Family meetings provide a way to communicate how the process was done and why the decision was made. Explaining that the process was carefully and objectively made with a clear plan in place can go a long way in avoiding hard feelings or misunderstandings. Family meetings can also send a message to family members that the new successor will be accountable to the family business.

Family meetings can also be useful if there is no obvious family successor. In this situation family meetings can help to develop alternatives such as naming a non-family successor or liquidating the business.

Recognizing and Resolving Conflict.

It is no surprise that conflicts arise in every family business and if disputes over the future of the business – which family members are involved in the process, succession, family members’ roles in management, or other issues are allowed to multiply, they can only divide a family and do nothing for the long-term success of the business. The key to resolving conflict is to acknowledge it early on in the process and to realize it is normal. If you are dealing with a particular issue that may cause real conflict the use of an outside, objective facilitator may be helpful.

Learn More.

If you want to learn more about this topic, consider purchasing a copy of the book “Family Meetings: How to Build a Stronger Family and a Stronger Business”, 2 nd edition, 2002.

Fuel and Fertilizer Price Outlook 2006

Higher fuel and fertilizer prices greatly impacted input costs in 2005 and are delivering more of the same in 2006. The outlook numbers laid out in this article can be used to tweak budgets for 2006. Outlook information presented here was developed with data from the Energy Information Administration, USDA, university research, futures markets and retail sector surveys.

Fuel

As of March 7th, the Energy Information Administration (EIA) pegged the average price for Crude Oil at $63.74 per barrel for 2006. The EIA indicates the Henry Hub Natural Gas prices are expected to average $8.11 per thousand cubic feet (mcf) in 2006. EIA projects Natural Gas for residential usage to average $13.02 per mcf. The Henry Hub in Louisiana is the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region’s prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast , the Midwest , and up to the Canadian border. Natural Gas Futures quotes are available via the online New York Mercantile Exchange at: http://www.nymex.com/ (Natural Gas Futures are traded as million British Thermal Unit (mmBtu). One contract equals 10,000 mmBtu. Natural Gas is sold wholesale per thousand cubic foot (mcf). Btus per cubic foot of natural gas do vary. One cubic foot of natural gas = 1000 to 1031 Btu. One thousand cubic feet (1 mcf) of natural gas = 1to 1.031 mmBtu.)

Examining oil and gas futures together with Ohio State University Extension Budgets and Outlook shows us that the average price of off-road diesel increased 54% from 2004 to 2005. With off-road diesel pegged at $1.85/gal average for 2005, prices are expected to increase 19% in 2006. Off-road diesel is expected to average $2.20/gal giving us a price increase of 19% over 2005.

Propane prices increased approximately 20% from 2004 to 2005. The price of propane is expected to increase 17% and average $1.40/gallon in 2006.

Fertilizer

Nitrogen

One question that we would all like to find an answer to is whether the lower price of natural gas will have any impact on nitrogen prices by the time farmers are ready to side-dress nitrogen in corn fields. (Yes. There are many out there with at least some unpriced N needs.) Natural gas prices have fallen substantially since the end of December 2005 when the Henry Hub price for Natural Gas was around $15 per thousand cubic feet (mcf). Since then, the Henry Hub natural gas price has fallen below $8 per mcf.

So, what does this mean for our N prices? Surveys of some of our retail distributors indicate that we won’t see any appreciable price decreases by our late spring side-dress window. Lower N prices ($0.28-$0.32/lb. actual N) may not be seen until later this summer or early fall. Many retail managers expect a 6 month or longer lag between Natural Gas price decreases and appreciable decreases in retail N prices. Natural Gas Futures prices began their decline in late December ’05. With a six month lag between lower natural gas prices and N prices we may not see any appreciable price decreases until late June or early July, which may miss our primary side-dress window for much of Ohio . With a shorter time lag some of our late spring N needs may be priced at lower prices. This may vary somewhat by company as some companies may have priced most, if not all, of their prospective N needs from manufacturers for the entire growing season.

The average price of nitrogen increased 15% from 2004 to 2005. Evaluating Natural Gas, DAP, Urea and UAN Futures together with surveys of industry personnel leads to the conclusion of higher N prices again in 2006. Using anhydrous ammonia as our base for projections, N is expected to average $0.335 per pound in 2006. (NH3 price of $550/ton equals price per actual pound N of $0.335.) This is a 22% increase over 2005. A second and more optimistic scenario assumes N price declines by side-dress time to allow some of our N needs to be priced at $0.30 per pound which equals an NH3 price of $480/ton.

Nitrogen fertilizer prices are expected to remain relatively high in the next 12-24 months. One possible bright spot is the construction of new anhydrous ammonia and urea manufacturing plants in the world. Ammonia production capacity is expected to increase 9% by 2008 and urea capacity by 17% which may ease some of the tightness in the market in the latter part of this decade and allow N prices to decrease or at least remain flat.

Retail Survey: (2/9/06)

Anhydrous Ammonia:   $600/ton

28%       $270/ton

Urea       $405/ton

Retail Survey: (3/23/06)

Anhydrous Ammonia:   $565/ton

28%       $250/ton

Phosphorous (P 2 O 5 )

The average price of phosphorous fertilizers increased approximately 24% from 2004 to 2005. Increases in anhydrous ammonia prices and transportation costs together with strong world demand continue to pressure phosphorous fertilizer prices. These pressures will lead to more price increases for the 2006 crop production year with the price for P 2 O 5 expected to average $0.3125 per pound or a 5% increase over 2005. (This equates to a MAP price of around $325/ton).

Retail Survey: (2/9/06)

MAP:       $337/ton

DAP:       $332/ton

APP (10-34-0):     $315/ton

Retail Survey: (3/23/06)

MAP:       $320/ton

Potassium (K 2 0)

Although world potash production continues to increase, demand has increased at a faster pace. Demand in growth areas such as Asia and South America have contributed heavily to price increases in farm-gate potash. Potash prices increased 19% from 2004 to 2005. Potash prices for the 2006 crop year are expected to average $0.205 per pound compared to $0.155 per pound in 2005. This is a price increase of 32% over 2005. (K 2 O price of $0.205 per pound equals Potash at $250/ton.)

Retail Survey: (2/9/06)

Potash:       $275/ton

Retail Survey: (3/23/06)

Potash:       $255/ton

Summary of Crop Production Costs Outlook for 2006

Amount

Increase
Diesel (Off Road) $2.20 /gal 19%
Propane

$1.40 /gal 17%
Nitrogen

$0.335 /lb. 22%
P2O5

$0.3125 /lb. 5%
K2O

$0.205 /lb. 32%
Seed

2.5%
Crop Protection Chem.

0%
Operating Loan Rate 7.75%

19%
Land Cash Rental Rates

0-1%

Budgets -2006

Looking at each input separately doesn’t have the same impact that the total increase in variable costs shows. The following is my summary of what total variable costs will look like in our corn and soybean budgets for 2006. Keep in mind that these total variable costs don’t include cost of land, machinery and other capital investment, labor, or management charge.

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Income Tax Issues with Contract Production

In general, contract farming arrangements with livestock integrators, seed companies and processors leave the farmer with less risk, fewer management decisions, and no marketing choices.  A few years ago, The Ohio Income Tax School workbook covered the issue of whether a contract farming taxpayer has the potential of losing many of the characteristics of a farming business, that allow favorable tax treatments, available only to farmers.

The taxpayer must be a farmer to take advantage of the:
1.  Exception to the estimated tax penalty
2.  Deduction of soil & water conservation expenses
3.  Deduction of fertilizer expenses
4.  Discharge of indebtedness rules
5.  Exemption from FICA taxes on non-cash wages
6.  Exemption from the prohibition of cash accounting for corporations
7.  IRC Section 179 expensing (Taxpayers must be in a trade or business)
8.  Income averaging (Schedule J), a taxpayer must have farming income

Some processors are reporting payments to growers on Form 1099-MISC, checking the rent box.  It is tempting for a grower to report these payments on Schedule E as rental income, instead of Schedule F as farm income.  In this way, the grower would avoid self-employment tax.  However, it is difficult to justify the reporting of the payment on schedule E since the grower is materially participating in production in most cases.  The 2005 Farmer’s Tax Guide, IRS Publication 225 list the tests for material participation for self-employment tax purposes.  For example, a producer raises hogs for a contractor and is paid $32 per pig space.  The grower feeds the hogs, inspects the pigs daily, orders feed when needed and cleans the building between groups.  He is also paid an incentive payment for meeting production efficiency standards.  The contractor owns the hogs and is at risk for death loss or health problems. Since the grower materially participates in hog production and has production risk, he should report the income on Schedule F as Farm Income.

Assume the same facts as the above example, but the grower is now retired and hires his daughter to feed and care for the hogs.  He pays his daughter for her labor and management, plus gives to her the manure for her families crop farming operation.  In this case, the grower is not materially participating in hog production and should report his income on Schedule E.  The same would be true if the building is leased to an integrator.  Deductions for depreciation,  insurance, real estate taxes and building repair would also be included as expenses on Schedule E.

What about the employment status of a contract grower?   It could be said that if a farm producer enters a contract with an integrator, the producer should have wage income, rather than income for farming.  In this case, the producers building would be investment property, rather than used in a trade or business. This classification as an employee would be unlikely, however, unless the risk of loss on part of the farmer is eliminated or greatly reduced by the terms of the contract.  In this case, the producer would be participating in the growing process, but might not meet the risk of loss test to be classified as a farmer.

Generally, payments made by most contract integrators to growers should meet the IRS requirements for this income to be considered as farm income, and subject to self-employment taxes.  It should be noted that The Ohio Income Tax School offers income tax education opportunities for tax practitioners and others with professional interest in the subject of income tax management. Check future issues of this newsletter for registration information about income tax schools, held in November and December.