Ethanol and Livestock – Management Issues and Resources

More ethanol plants will be coming to Ohio and to other livestock regions around the United States , which has led some to question how this will impact the livestock sector. While the ‘when’ and ‘where’ of additional Ohio ethanol plants are constantly evolving, livestock producers will have to deal with the fundamental fact – less corn will be available for feed while more ethanol byproducts will be available.

Over the next few months we will tackle several questions that have been surfacing about the emerging livestock-ethanol situation and update a set of links to resources that provide some of the most recent research on the topic.

Question: As the supply of ethanol co-products increases, how will that affect the price of the co-products?

John Lawrence, Iowa State University and director of the Iowa Beef Center , responds:

“There have been several examples of when co-product has been free for the hauling as new plants come on-line, dryers malfunction, or something is out of spec, but this is not a long run sustainable price. Economics suggests that as the supply of co-products out paces demand prices will be lower. What is the lower bound? It depends on alternative markets for the co-product. One alternative are other buyers including livestock production in other states and countries. The storage and long distant movement suggests that plants will have to dry the product with is costly at current natural gas prices. A second alternative is the co-product’s value as fuel for the plant. There is some price at which the plant is better off to burn DGS than sell it at too low of a price. Burning is likely to require additional investment into equipment and take time for plants to make that decision and get it installed. However, in the long run burning may set the lower price for DGS. A third alternative is to spread the DGS on the ground as fertilizer. There is some nitrogen and phosphorous value.”

For more information on ethanol by-products and the livestock sector, consider these links below:

Iowa Beef Center – Ethanol Co-Products for Cattle Feeding

http://www.iowabeefcenter.org/content/ethanol.htm

Illinois – Using Illinois By-Product Feeds in Livestock Feeding Programs

http://ilift.traill.uiuc.edu/distillers/index.cfm

Missouri – By-Products Links for Dairy Producers

http://agebb.missouri.edu/dairy/byprod/index.htm

National Corn Growers’ Association Distilled Grain Feeding Recommendations – All species

http://www.ncga.com/ethanol/pdfs/111005DGFeedingRecommendations.pdf

Wisconsin – Ethanol Co-Products and Dairy

http://www.das.psu.edu/dairynutrition/documents/shaverdistillppt.pdf

Minnesota Distillers Grain Byproducts in Livestock Feed Resources Page

http://www.ddgs.umn.edu/

Ohio 's Income Tax Schools for Practitioners

The Ohio Income Tax Schools are designed for tax preparers with some experience preparing and filing federal tax returns for individuals and small businesses. Instruction focuses on tax law changes and on the problems faced in preparing tax returns. The tax school workbook also will cover changes in filing Ohio tax returns. Highly qualified instructors will explain and interpret tax regulations and recent changes in tax laws.

Participants in the Tax Schools receive a 700-page workbook prepared by the Land Grant University Tax Education Foundation, especially for the income tax schools held in Ohio and 30 other states. The workbook is available only as a part of tax school registration. This year participants will also receive RIAs Federal Tax Handbook.

The $260 registration fee includes the workbook and other reference materials, instructor fees, meals, meeting rooms, and other expenses.

The locations and tax school dates are:

Ashland: Tuesday-Wednesday, November 14-15
Fremont: Thursday-Friday, November 16-17
Columbus: Monday-Tuesday, November 20-21
Zanesville: Tuesday-Wednesday, November 28-29
Lima: Thursday-Friday, November 30-December 1
Dayton: Tuesday-Wednesday, December 5-6
Kent: Tuesday-Wednesday, December 5-6
Chillicothe: Thursday-Friday, December 7-8

A web site is available for registration:  http://aede.osu.edu/programs/TaxSchool/

2007 Agricultural, Food, and Public Policy Preference Survey: Ohio's Outlook

September 2006

In November and December 2005, 3,000 Ohio farmers were randomly selected for a survey regarding issues and policies that could be topics during the 2007 Farm Bill debate. A total of 622 returned surveys were determined to be useable for this analysis. Major findings are:

1. The goals for the farm bill that Ohio farmers most support are (1) “to enhance opportunities for small and beginning farms; (2) “to reduce U.S. dependency on non-renewable energy sources;” and (3) “to assure a safe, secure, abundant, and affordable food supply.”

2. Two goals that directly speak to the economic situation of farmers and historically are associated with farm bills, “enhance farm income” and “reduce price and income risk” had net support of approximately 50% but nevertheless ranked near or at the bottom among the eight goals listed in question A-1. Thus, among Ohio farmers, the goals of the farm bill extend beyond farm income and risk.

3. No consensus exists regarding which crop support programs should be cut if cuts are needed.

4. If farm support programs are removed, a large share of Ohio farmers believe their financial situation will be worse off after five years.

5. Among potential new programs, bioenergy production received the most support followed by assistance and funding for food safety programs.

6. Farmers who receive payments from a program are more likely to support the program than farmers who do not receive payments from the program.

7. Ohio farmers are divided on whether farm program payments are capitalized into land values.

8. As a group, Ohio farmers support provision of technical and financial assistance for addressing environmental problems associated with farming.

9. Ohio farmers support for further free trade agreements is mixed.

10. As a group, Ohio farmers want labeling and traceability explored as food system options.

To view the complete paper go to:

http://aede.osu.edu/resources/docs/pdf/UNT91BB4-IG5J-8M1U-PX6XTYA24SL4I2UG.pdf

Designing Effective Pay-for-performance Systems for Employees and Suppliers: Part V – Team Incentive Plans

When performance outcomes are impacted by the actions of a team of people working together and when individual contributions are difficult to measure, it may be appropriate to design team based incentive schemes. For example, many business projects (e.g. marketing plans, launching new products) involve teamwork. However, pay-for-performance plans are much more complex for teams and are much more sensitive to strategic manipulation and “gaming” by team members. Thus, managers must be extremely careful in designing team pay-for-performance schemes to avoid negative unintended consequences.

When several members contribute to a project but there is no good measure of any one member’s “output,” there is potential for free riding because it is hard to determine who has contributed the most. Most people can probably remember instances in which team members shirked on group projects in high school or college. When pay is contingent on team output, incentives for each team is muted because (a) low effort by an individual can be easily disguised and (2) the reward for one’s contribution is spread over the entire team so that it has reduced marginal impact on the individual’s pay. For example, for a given output, Q, the team is awarded some dollar amount P . This P would be disbursed among all team members so that each gets P/n for a team of size n . That is, everyone

gets paid the same even if not everyone has worked hard. The bigger the team, the bigger are these problems. Only in the case when team members are fully awarded for their contribution will optimal incentives arise, but this is difficult to accomplish when individual contributions are hard to measure. It is also impossible to pay each team member P because it would simply be too expensive and not self financing (payments will exceed gains from the incentive plan).

One solution is to hire a third-party to manage the team. This third party would promise to pay each member the full amount P , but in exchange, each member has to make an up-front payment to the third party (e.g. entrance fee), but this is rarely feasible in practice.

Also, there is evidence that group incentive plans may lead to high turnover of better performers (Malkovich and Newman). Top performers may feel that it is unfair that incentives for high individual performance should be diluted and spread across all employees in the group, regardless of their contribution. Top performing employees may leave if they feel that there is too much free riding and their “just share” of compensation is distributed to others who free ride.

An upside of team incentives is that it can also signal to workers that cooperation is a desirable norm and are often enthusiastically accepted by workers. Therefore, it is often not difficult to get many employees to buy into a team incentive plan.

Possible solutions to the team incentive problem:

  1. Have team members monitor each other. But this can be difficult if teammates don’t want to “snitch” on each other. In some cases, it works. For instance, many professional sports teams have designated captains whose jobs are to provide leadership and crack a whip on those who are not trying hard.
  2. Create awards in which members can nominate teammates. Provide a cash bonus for being nominated. This puts a positive spin on the idea of team members monitoring each other.
  3. Improve performance measures of individual activities if possible. For example, rather than measuring customer satisfaction of an entire department, see how customers of specific individuals rate their experience.
  4. Might have both team output goals and individual goals. That is, individual incentives kick in only after team goals are met. This signals that cooperation is desirable and at the same time addresses the free rider problem. However, this requires that individual contributions be measurable.

A more detailed discussion of these issues can be found in the book by Brickley, Smith and Zimmerman, and the book by Milkovich and Newman.

A Note on Relative Performance Plans

Relative performance plans are pay-for-performance plans that are based on how an employee performs relative to other employees. For example, one can design a tournament scheme where those that rank in the 80 th percentile or higher receive a bonus and those that rank below the 20 th percentile are fired. In the broiler industry, tournament style compensation plans are built into the contracts written by integrators for growers. Growers are typically compensated based on how they perform relative to other growers under contract with the integrator.

Are relative performance plans desirable? The answer is it depends on the type of risk facing the employees. If there is a common random factor that affects all employees, then relative performance compensation is desirable. For example, suppose the entire tournament cohort of growers is affected by a common weather shock which simultaneously reduces the productivity of all growers in the group. Because grower compensation under tournaments is determined by relative performance and not absolute performance, growers would be insulated from a common shock. On the other hand, had the growers operated under a fixed performance standard contract, each grower would feel the full brunt of the weather shock because it becomes more difficult for each grower to meet the fixed performance standard. Thus, tournaments are an important instrument for mitigating certain types of risks.

As another illustration, students typically prefer grading curves (relative performance scheme) if there is great uncertainty about the difficulty of a professor’s exams. If the professor writes an exceptionally difficult exam, an absolute grading scale would harm the students. For instance, if nobody scores above 90%, no “A’s” would be awarded and overall class great point average would be low. On the other hand, a curve would protect students from unreasonable exams.

Possible downsides of using relative performance schemes are that they may promote excess competition and employees may try to sabotage each other. Moreover, some researchers have found that people may perceive them to be less fair than absolute performance payment systems so that employers may have to pay more to induce employees to participate in a relative performance plan (Wu and Roe). Thus, relative performance plans should only be used in the following circumstances:

1. When there is a large common random factor.

2. Teamwork is not important.

3. There are clear performance measures for each individual.

4. There is little opportunity for employees to sabotage each other’s performance; i.e. they work relatively independently of each other.


References

Brickley, J.A., C.W. Smith, and J.L. Zimmerman. Managerial Economics and Organizational Architecture. 2 nd Edition. Boston , MA : McGraw-Hill, 2001.

Milkovich, George T. and Jerry M. Newman Compensation , 6 th Edition. Boston , MA : McGraw-Hill, 1999

Wu, Steven and Brian Roe. “Tournaments, Fairness, and Risk.” American Journal of Agricultural Economics 88(2006):561-573.

2005 Ohio Landscape and Nursery Economic Impact Study

A survey entitled “Ohio Landscape & Nursery Economic Impact Study” (a.k.a. “Green Industry Survey”) was conducted from February 2006 to June 2006 to attempt to document the economic size and importance of Ohio ‘s nursery and landscape industry in 2005. This study was designed to measure changes in the industry from similar previous studies. This project was undertaken with the financial support of the Ohio Nursery and Landscape Association (ONLA) with the support of The Ohio State University Extension Nursery, Landscape and Turf Team. Research was conducted through the OSU Department of Agricultural, Environmental, and Development Economics The list of licensed nursery dealers and nursery producers was provided by the Ohio Department of Agriculture (ODA).

Based on our survey results, we estimate the value of all sales by certified nursery stock dealers and producers in Ohio was $4.13 billion for 2005. The annual growth rate was 12.1% between 2001 and 2005. Of this total, approximately $3.36 billion was from licensed nursery dealers and $770.3 million from licensed nursery producers. Among enterprise sub-sectors of the total population, Landscape Services continue to be the high-sales leaders for the industry in Ohio at about $1.9 billion for combined Landscape Construction/Installation, Maintenance, and Design sales. Landscape maintenance alone grew 23.3% from 2001 to 2005.

The total number of employees in the nursery industry is still somewhat hard to determine using the existing methodology. However, the trends we saw in 2001 continued in 2005. We projected 241,735 workers employed at some level of the nursery and landscape industry in 2005, with an annual payroll for the industry of nearly $3 billion. Mixed enterprises (businesses participating in multiple subsectors, all of which are less than 50% of the total enterprise) are the largest labor demander with the combined landscape enterprises maintaining a strong second position in this study. The nursery and landscape industry contributed an estimated $491 million in taxes (property, sales, FICA, and income) in 2005.

Specific data and trend interpretation following previous study guidelines are contained in the full document at:

http://aede.osu.edu/resources/docs/pdf/PEL40PQJ-1MOH-CTRD-1JT7PH8GGWT2UGXI.pdf

Additional analysis will be conducted using the data set obtained in this project and will be available from the Department of Agricultural, Environmental, and Development Economics. For more information on this report or other aspects of this research, contact Stan Ernst, Ernst.1@osu.edu .

Transition Planning Workshops Slated for Winter 2007

Planning is one of the most critical functions of management. Planning decisions can range from the short term of addressing the everyday “fires” of the farm business to long range planning for retirement, transition and estate planning. One area in which many farmers feel uncomfortable planning for is the future of the farm without them. As farmers plan for the long term success of their business, there are a myriad of decisions to be made. Some of the questions that often arise include: Who will manage the business in the future? How much money will I need to make it through retirement? How do I treat each offspring fairly when it comes to dividing up our farm? How will I know if my kids are ready to take over the farm? What are the legal hoops that need to be jumped through to pass the farm on without hurting the financial standing of the farm? How can we plan so the farm will be profitable for multiple generations? Is there enough equity in the farm that I can retire without selling out?


OSU Extension is pleased to announce that four “Building For the Successful Transition of Your Agricultural Business” workshops will be held across the State of Ohio during January, February, and March 2007. Each of these two-day workshops is designed to help family businesses develop a transition plan for their family business. The sessions will challenge you to examine your business to the core and to actively plan for the future. These sessions will help farm families come together to develop a plan for the farm’s future, discover ways to increase family communication, plan for retirement, and learn strategies for transferring management skills and the farm’s assets from one generation to the next. These workshops are made possible by a grant received from the North Central Risk Management Education Center.


The first workshop session at each location will help all members of the family business analyze the current status of the business, determine where the business is going, and plan for the future. Participants will learn how responsibilities can be shared between generations and how the new generation of managers can be developed. Participants will examine the strengths, weaknesses, opportunities and threats to their business and will develop a shared vision for the future. This workshop session will challenge family members to honestly communicate with one another when planning for the future. Dr. Bernie Erven, Professor Emeritus from The Ohio State University, will be the keynote speaker for this session.

The second workshop session will feature the nuts and bolts of transferring a family business from one generation to the next. This workshop will allow participants to learn more about business organization structures and strategies, how to treat on-farm and off farm heirs, how to equitably transfer assets, how to plan for adequate retirement income, and how buy-sell agreements, trusts, and life insurance can be utilized in succession planning. Dr. Paul Wright and Robert Moore from Wright Law Co. LPA in Dublin, Ohio will be keynote speakers for the second workshop.

The program dates and locations are:

January 23 & 24 (Carroll County)

Carrollton Days-Inn

1111 Canton Road

Carrollton, Ohio 44615

Local Contact: Mike Hogan (330-627-4310)

January 25 & February 7 (Henry County)

Northwest State Community College

22600 State Route 34

Archbold, Ohio 43502

Local Contact: Greg Labarge (419-337-9210)

February 26 & 27 (Pickaway County)

Deer Creek Resort & Conference Center

22300 State Park Road 20

Mt Sterling, Ohio 43143

Local Contact: Mike Estadt (740-474-7534)

February 27 & March 6 (Marion County)

All Occasion Catering

6989 Waldo Delaware Road

Waldo, Ohio 43356

Local Contact: Steve Ruhl (419-947-1070)

All sessions will be held from 9:00 a.m. to 4:30 pm. A special evening program is being developed for the sessions in Carroll and Pickaway Counties. The registration fee for attending the two-day workshop will be $75 for the first member of a family and $50 for each additional family member attending. Registration includes workshop notebook, refreshments and lunch for both sessions.  Registration is due 10 days prior to the first session at each location.

Local information can be obtained by contacting the local host (see numbers listed above).  Registration and hotel details can also be found at:   http://ohioagmanager.osu.edu/calendar/RME-2006.php

Credit Issues for Ohio 's Farmers. What is in the Cards?

Challenging financial times come and go as part of the natural cycle of agricultural businesses. While this familiar pattern is decades-old, today’s financial tools provide new opportunities, as well as perils for the unsuspecting farm business.

More than 12 years ago, we began to see farm balance sheets with accumulated credit card debt of many thousands of dollars. This current, unsecured debt is showing up in both the farm business and personal columns of the balance sheet.

While unusual, these balances can approach and pass the $100,000 mark. A frequent “fix” for a farm with some unencumbered assets is to roll the credit card debt “down” the balance sheet into an intermediate or long-term loan with scheduled payments…using livestock, machinery, equipment or land as collateral. Caution: Is it in the best interest of the family to take unsecured credit card debt and to secure it with farm business assets? It may be wise to obtain some financial or legal advice before making this kind of a decision. Furthermore, will the underling problem(s) be addressed with this refinancing “solution”?

While forcing the farm to make regular payments to pay off the credit card debt, this “fix” may only briefly take care of the problem of high interest rates, late payment penalties and, possibly, calls from collection agencies. Before taking this step, the farm’s management team has to ask: why was credit card debt accumulated? Has the underlying problem been identified? Can it be fixed? How will it be fixed?

Why are credit card balances accumulated? There are many reasons, and they will vary from farm to farm. Business reasons might include depressed commodity prices, increasing input costs, insufficient operating capital (pre-planned lines-of-credit), inefficient or unprofitable business operations, a farm trying to support too many families for its’ scale of operations, etc.

Personal reasons might include living beyond the available family living dollars, unexpected medical events, poor planning (or no planning!), or an unclear understanding of smart use of credit cards.

To help understand the use of credit cards for both personal and business expenses and the implications of credit card use on credit reports, credit scoring and other business factors, we begin our “Credit Issues for Farmers: What is in the cards?” series.

Look for future articles addressing the basics of credit cards, credit reports, credit scoring, minimum payments, and strategies for managing credit card debts.

Production Economics of Ohio Dairy Farms 1996-2005

Click Below for PDF version

Production Economics of Ohio Dairy Farms 1996-051

For the past ten years financial and production data was collected from Ohio dairy farms, participating in educational programs. Using the computer program FINACK, Farm Business Planning and Analysis instructors and Extension Educators submitted data into the national farm financial data base, FINBIN. Located at the University of Minnesota , the Center of Farm Financial Management maintains one of the largest and most accessible sources of farm financial and production benchmark information in the world. FINBIN places detailed reports on whole farm, crop, and livestock financials at your fingertips. Their web site is: http://www.finbin.umn.edu/ .

Using the larger FINBIN data base, benchmarks can be established and Ohio farm data can be compared with confidence. The average Ohio dairy herd is just over 100 cows and Minnesota reports farms of similar size. The cost of production is determined on a cow and replacement (whole herd) basis and includes an opportunity cost for home grown feed. In other words, homegrown feed, such as corn and alfalfa hay, is valued from a twelve month average farm value, reported by the Ohio Agriculture Statistics Service. For example, the total feed cost per hundred weight of milk sold (including feed for the replacements) in 2005 was $7.29 for 6 Ohio farms averaging 104 cows (19,063 pounds milk sold/cow/year) and $6.60 for 421 Minnesota farms averaging 116 cows (20,671 pounds). To be most profitable, the goal is $6.50 total feed cost per hundred.

Dairy farm financial goals are important to consider and comparisons of these goals are every bit as important as production goals for the long term viability of a business. The following are these goals:

•  Return on Assets > 7%

•  Return on Equity >ROA

•  Operating Profit Margin 20 to 30 %

•  Asset Turnover 50 to 75 %

•  Term Debt Coverage 1.25 to 1.50

•  Expense as % Income < 75 %

•  Debt to Asset < 40 %

Financial Summary of Dairy Farms in OH & MN (market value) 1996-2004

Ohio Ohio Minnesota Minnesota
Average Top 20% Average Top 20%
NFI $51,011 $127,335 $66,017 $192,635
ROA % 4.2 8.4 7.4 10.8
ROE % 3.0 9.2 9.1 15.0
OPM % 12.9 19.9 23.0 29.5
Asset TO 32.8 42.0 32.1 36.4
Term Debt 163 197 144 212
Work. Cap. $18,775 $22,183 $31,095 $71,065
Exp. % Inc. 80.9 74.4 76.4 71.7
D/A Ratio 33 33 44 42

Cost of Production-Dairy with Replacements- Ohio 1996-2005

Feed Cost/cwt. Ohio Dairy Farms-

Cow & Replacements

Net Returns per Cow on Ohio Dairy Farms 1996-2005

Text Box: 10 Year Average Net Return/Cow   $403 per year

2005 Minnesota Dairy Farm Data by Size of Farm and Individual Operator: http://www.finbin.umn.edu/0607.aspx

“Large herds have consistently produced more milk per cow, have received higher prices for their milk, and have earned much higher whole farm net incomes but they have also had higher costs per head. Those trends continued in 2005 but the difference in costs was out-weighed by the production and price advantage, resulting in slightly higher returns per cow for larger herds.”

“While large herds generated more milk per cow, they also had higher expenses. The expenses shown include all direct and overhead expenses and either actual payments or a charge for owner/operator labor and management. Compared to 51 to 100 cow herds, those with over 500 cows paid $170 more for feed and $300 more for non-operator labor. Their depreciation and interest costs were only slightly higher, somewhat negating the theory that recent expansion costs explain the difference. There was evidence of significant size economies in only a few overhead expense categories such as insurance, utilities, and operator labor expense.”

“Consistent with previous years, large herds received a higher price per hundredweight, but the difference seems to be diminishing. The largest herds received, on average, just $.44 more per cwt. than herds of 51 to 100 cows. That difference has been as much as $1.00 in previous years.”

Large herds earned much higher net incomes than smaller herds on both a whole farm and per operator basis . These results are consistent but with greater magnitude compared with previous years. We might call this the Wal-Mart effect—you can make a lot of money on a small margin (although their margin was not that small in 2005) if you have enough volume.”

Seminars Scheduled for Agricultural Lenders

The Ohio State University Extension has scheduled two seminars in western Ohio for Agricultural Lenders. The dates are Tuesday, October 24 th at the Hancock County Extension office in Findlay and Wednesday, October 25 th at the Champaign County Extension office in Urbana. Topics which will be covered at these seminars include:

Prospects for Success and Growth of an Ethanol Industry in Ohio – Ohio is poised to have several ethanol plants built in the next few years. As fuel prices drop, what is Ohio ‘s future in the ethanol industry? The speaker is Dr. Matt Roberts, Grain Marketing Specialist, with Ohio State University Extension. Dr Roberts has a strong background in the energy markets.

Ohio ‘s New Household Sewage Rules – The Ohio Department of Health plans to implement new septic rules in January of 2007 that could impact where houses are constructed in rural areas. The speaker is Jean Caudill of the Ohio Department of Health.

Production Costs on Ohio ‘s Dairy Farms – Dairy farmers in Ohio are experiencing low milk prices at a time when input costs have risen sharply. The speaker is Dr. Don Breece, State Farm Management Specialist, who tracts production costs on many Ohio dairy farms using the FINPACK program.

Lending to Farmers Who Contract With Large Livestock Farms – Ohio is experiencing rapid growth in the dairy industry and the swine industry. We’ll discuss the need for capitol for businesses such as custom manure hauling, livestock transportation, feed delivery, hay harvest and silage chopping. The speaker is Eric Dresbach, president of the Midwest Professional Nutrient Applicators Association.

Updated Farm Land Survey and Cash Rent Rates – Ohio State University Extension has recently released the new custom rate chart and also updated their survey of farm land prices. The speaker is Barry Ward, OSU Leader, Production Business Management.

Additional information and a registration form for the Ag Lender Seminars can be downloaded at http://putnam.osu.edu/natural_resources_environment/2006-ag-lender-seminar . You can also contact your local extension office and ask them to access the Ag Lender information on the Putnam County Extension office web site.