Crop Input Outlook 2013

Barry Ward, Leader, Production Business Management
OSU Extension, Department of Agricultural, Environmental and Development Economics

Crop profitability prospects for 2013 are positive for the three major row crops in Ohio. Input costs have increased from last year but high crop futures prices for 2013 crops will allow producers to plan for positive margins next year. OSU Extension Enterprise Budget projections show positive returns for corn, soybeans and wheat in 2013. These budgets are available online at: http://aede.osu.edu/programs/farmmanagement

OSU Extension Budgets show projected variable (cash) costs for corn, soybean, and wheat production to be 4%, 6% and 2.5% higher, respectively in 2013 versus 2012. Higher commodity prices and higher costs point to another risky production year as the cash investment in an acre of corn will top $400 (excluding land, machinery and labor costs) and in some production scenarios be closer to $450 per acre. The cash investment in an acre of soybeans or wheat will be in the $200-$260 range.

Fuel
The Energy Information Administration (EIA) estimates the average price for Brent Crude Oil at $103.75 per barrel for 2013 which is a 7.3% decrease from 2012. This is due to slightly lower oil consumption growth projections for 2013. The EIA projects natural gas prices to increase 3 percent in 2013. Expected tightness in the market is the reasoning, but this projection is harder to reconcile with the increased production capabilities in the U.S.

Fertilizer
Fertilizer continues to be the most volatile of the crop input costs and cost management of this important input may be the difference in being a low cost or high cost producer in 2013. Fertilizer products have seen prices slightly higher to slightly lower compared to last year.

Increases over last year and likely will continue to increase due to higher crop commodity prices and positive profitability prospects for 2012. Healthier farmer balance sheets and continued positive crop profit prospects have signaled the global marketplace to increase acreage (if possible) and maintain or increase fertilizer rates and led to strong global demand driven markets. On the flipside, the E.U. and U.S. sovereign debt issues and potential economic slowdowns are factors, if unresolved, may lead to a slowdown in fertilizer demand and flat to lower prices.

Nitrogen (N)
The retail price in November/December in Ohio was $845-925/ton for anhydrous ammonia (5% increase over year ago) and $388-460/ton for UAN (28%) (7% increase over year ago).

Factors that may lead to N price increases include:
+ High crop prices and crop profitability
+ Large corn acreage prospects for the U.S. again
+ Strong farm balance sheet
+ Mississippi barge traffic may be delayed due to low water levels

Factors that may lead to N price decreases include:
– Slow world economy
– Low domestic natural gas price
– More domestic N production coming online Giesmer, La; Donaldsville, La; Augusta, Ga; etc.
– More domestic N production to be built – approximately 9.3m tons (present capacity 13m t)

Nitrogen fertilizer manufacturers are presently operating at profitable levels due to higher N prices and relatively low natural gas prices, but this fact hasn’t led to supply outstripping demand as the entire supply chain has been more cautious in getting caught in a repeat of the 2008 upside-down fertilizer market.
With the high correlation of nitrogen price to corn price, future movements in nitrogen prices will more than likely take their cues from movements in price of corn. There may continue to be a disconnect between foreign/domestic port prices and Midwest prices as the low Mississippi river levels continue to restrict fright up and down the river.

Phosphorous (P2O5)
Di-ammonium Phosphate (DAP) in November/December in Ohio was $634-690/ton (9% decrease over year ago) while mono-ammonium phosphate (MAP) was $644-700/ton (9% decrease over year ago).

Factors that may lead to P price increases include:
+ High crop prices and crop profitability
+ Strong farm balance sheet
+ Mississippi barge traffic may be delayed due to low water levels

Factors that may lead to P price decreases include:
– Slow world economy
– Residual soil P (due to drought) may dampen demand

Potassium (K20)
The retail price of potash in December in Ohio was $555-640/ton (7% decrease from year ago).
The potash industry essentially operates as a duopoly (two firms, in this case, two consortiums, with dominant control of the market) with Canpotex (Canadian Potash Exporters) and Bellarussian Potash Co. controlling much of the global potash supply.

Factors that may lead to K price increases include:
+ High crop prices and crop profitability
+ Strong farm balance sheet
+ Potash Producers have begun to curtail production

Factors that may lead to K price decreases include:
– Slow world economy
– Residual soil K (due to drought) may dampen demand


Seed and Crop Protection Chemicals
Company price data and industry sources indicate seed prices for 2013 to be 5-10% higher.
Crop protection chemical prices will see similar increases except glyphoste, which has seen a 50% increase in price for many of the different glyphosate products.

For more information on AEDE/OSU Extension Policy and Outlook offerings:
http://aede.osu.edu/programs-and-research/agricultural-policy-and-outlook-conferences

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys. While gauged to the best of this author’s capabilities, forward looking statements contained in this document may prove to be incorrect due to changes in supply and demand and other political and economic related events.

2013 Agricultural Policy and Outlook Conference Preview Meeting – December 3, 2012

Barry Ward, Leader, Production Business Management
OSU Extension, Department of Agricultural, Environmental and Development Economics

On Monday, December 3, 2012, Ohio State University’s College of Food, Agricultural, and Environmental Sciences kicked off its 2013 Agricultural Policy and Outlook Conference Series with a special preview meeting hosted by Bruce A. McPheron, Vice President for Agricultural Administration and Dean of the College.

The preview meeting, which included over 125 attendees from the State of Ohio, was held at Ohio State’s 4-H Center. The event featured presentations and Q and A with experts from AEDE, who discussed issues the food and agricultural community should expect in 2013. The event focused on policy changes, as well as market behavior with respect to farm, food, energy resources and the environment.

The full schedule of event speakers, including topic overview briefs, presentation files, and presentations can be found online at:
http://aede.osu.edu/programs-and-research/agricultural-policy-and-outlook-conferences

The Dean’s preview event kicks off a series of county meetings to be held statewide in early 2013. More information on these meetings can be found here: http://aede.osu.edu/programs-and-research/agricultural-policy-and-outlook-conferences/county-meetings

If you would like more information, or if you have any questions on the Agricultural Policy and Outlook Conference Series, please contact Dr. Matthew C. Roberts at roberts.628@osu.edu or 614-688-8686.

ACRE Payments not Probable in Ohio for 2012

By: Chris Bruynis, PhD, Assistant Professor & Extension Educator, OSU Extension.

Recently I read an article that suggested that an Average Crop Revenue Election (ACRE) payment might be possible for the corn crop in Illinois. So, I thought maybe it might be possible here in Ohio. We have relatively good estimates from the National Agricultural Statistical Service (NASS) on the 2012 yield for Ohio. Corn yield is estimated at 123 bushels per acre and soybeans at 43 bushels per acre. Corn represents a decline of approximately 22% and soybeans are down 10% from the five year Ohio Olympic average.

The ACRE revenue guarantee for corn in Ohio is $627. To calculate the actual crop revenue for the state, simply multiply the state average yield times the market average price for the year. The market year starts in September of 2012 and goes through August 2013. Since the market average price is not known, one can determine what the market price needs to be less than by dividing the ACRE revenue guaranty by the average yield. For corn this would be $5.10 per bushel. For September through November the Market year average is $6.76 and the USDA is projecting it to be $7.60 for the year. Unless something drastic happens in the grain markets, it is highly unlikely there will be an ACRE payment in Ohio for the 2012 corn crop.

The same calculation can be made for the soybean crop. By dividing the Ohio soybean revenue guarantee of $493 by the average yield of 43 bushels per acre you get the market year average price beans need to be less than. This calculation yields a MYA price of $11.46. So far in the 2012 marketing year the soybean price average is $14.10 and the USDA is projecting an average price of $14.90.

Readers may wonder why other states such as Illinois appear to be in line for an ACRE payment while Ohio does not. The answer is relatively simple. The average corn yield for Illinois was 101 bushels per acre and their ACRE revenue guarantee for corn was higher than it was in Ohio due to higher corn yields historically. This resulted in a greater percent loss for their farmers.

Don’t feel that farmers in other states are special because they may receive some assistance through ACRE. I am sure they would rather have had the additional yield to sell for the prices offered during the past months than the ACRE payments.

1099 Forms for Agriculture: a 2012 Update

By: David Miller, EA, Farm Management Specialist, Emeritus

As the end of 2012 is quickly approaching, the question of issuing 1099s is coming to the forefront again. In 2011 there were two new questions on Schedules F, C & E and Form 1065 (the partnership return) that have an impact on whether or not you will need to issue 1099s for 2012.  The first question on the schedules is “Did you make any payments that would require you to file Form 1099s? yes/no”. The second question is “If yes, did you file all required Form 1099s? yes/no”.

The penalties for not filing 1099s are $100 per form that should have been filed, and if the IRS determines that you intentionally disregarded the regulations, the penalty is $250 per form. So it is necessary to file 1099s if needed, and you certainly do not want to answer “yes” to the first question and “no” to the second question. As one tax professional I know stated, that would be like waving a red flag in front of the IRS. You would just be opening yourself up to questions from the IRS.

Requirements for 1099 MISCs:

The rules state that if you (as a Sch F, C or E filer or you file a partnership return) pay an individual or an unincorporated business $600 or more for rents or services for your business, those payments are to be reported to that person or business on a 1099 MISC by January 31, 2013. Some of the most common payments that are reported for farm businesses are those for cash rents, custom work, repairs and maintenance, accounting & tax work, vet services and legal expenses.

If you pay a neighbor $600 or more for cash rent, a 1099 MISC is required. If you hire a neighbor to round bale your hay, harvest your grain or chop your silage and you pay them $600 or more, a 1099 MISC is required. If you hire a contractor to do bulldozer/backhoe work or to construct a building and you pay them $600 or more and they are not incorporated, a 1099 MISC is required. If you pay your accountant $600 or more to help with your book work and do your tax returns and their accounting practice is not incorporated, a 1099 MISC is required. If your veterinarian (or other person providing services to your farm business) is either a sole practitioner or in a partnership and you pay the firm $600 or more in 2012, a 1099 MISC is required. And finally, any payments of any amount made to an attorney or law firm for business purposes is required to be reported on a 1099 MISC.

LLCs – to 1099 or not to 1099:

If a business you are paying or have paid is organized as an LLC (limited liability company), that business is taxed either as a sole proprietorship, a partnership or a corporation. So, if the LLC is not taxed as a corporation and you pay them $600 or more for rents or services rendered, a 1099 MISC is required.

Farm-related expenses that are not subject to being reported on a 1099 MISC are feed, seed, fertilizer, farm supplies, fuel and other non-service items.

1099 INT

If you have borrowed money from an individual for business purposes and you pay them more than $600 interest during the year and that interest is deductible on Schedule F, C or E, a 1099 INT is required to be issued to that individual.

Information needed for 1099s

To complete a 1099, you will need the name of the person, their address, their social security number or employer identification number, the amount paid and what the payment was for. First, you will need to go through your records to determine who you paid, how much they were paid and whether they should get a 1099 or not. Second and most important, you need to get their social security number or employer identification number. The Form W-9 is an IRS form used to get names, addresses and ID numbers. The best time to get this information is before you pay the person that has done the work.

The deadline for sending 1099 forms to the person or business is January 31, 2013.  Form 1096, the Annual Summary and Transmittal of U.S. Information Returns, along with the IRS’s copies of the 1099s that you issue must be filed with the IRS by February 28, 2013.  Copies of these forms can be ordered from the IRS at their website: http://irs.gov.

Bank Drafts & Oil and Gas Related Payments

By: Clif Little, Extension Educator, Guernsey & Noble Counties

The provisions of an oil and gas lease and right-of-way grant, outlines payment details and can be a complex element of a lease or grant. Understanding these provisions is integral when considering the financial aspects of an oil and gas lease or right-of-way grant.  In modern oil and gas transactions landowners are often offered a signing bonus in consideration for granting a lease or right-of-way grant.   It is a common practice for companies to offer this payment in the form of a bank draft once the agreement is signed and notarized.  For many landowners who are accustomed to exchanging paper notes or personal checks for things they purchase, a bank draft can be a new financial experience.  Understanding the elements of a bank draft can assist a landowner who may come across one when entering into oil and gas related agreements.

A bank draft in simple terms is a “conditional” form of payment to be honored within a described time period.  The draft itself may appear similar to a personal check.  One key element that typically appears in a bank draft are a list of conditions for payment. The conditions of payment are important for a landowner to review prior to signing any agreement.  A number of companies involved in shale development and the leasing of land utilize bank drafts. A landowner may be informed that this is the standard form of payment. However, it is important to know that the landowner may have the option to control the form of payment. Ultimately, the landowner determines the standards of payment. The wording contained within the bank draft can have serious effects in terms of when a landowner may expect payment. Terminology and conditions written into the bank draft can cause a substantial delay or cancellation of payment, even in cases where landowners have clear title and ownership.

How Bank Drafts Work

A transaction involving a bank draft may occur between a landman (a landman typically refers to an agent who serves to secure mineral rights to a private property through negotiations with a landowner) and a landowner.  A landman may offer a bank draft in exchange for a signed and notarized agreement. The landowner may be instructed to take the draft to the bank.  Some banks are not familiar with the type of bank drafts oil and gas companies use for payment and may not know how to process the draft.

If a landowner should choose to utilize this form of payment, it is important to have the leasing company’s bank contact information. Next, the landowner’s bank or the landowner sends the bank draft to the leasing company’s bank. There is potentially a cost associated with this transaction, either in the form of a bank charge or a priority mail charge. After which, the company’s bank confirms and notifies the sending party that the bank draft has been received. Bank drafts typically contain language which details time parameters for paying the landowner. The conditions may stipulate a specific length of time a company has before they must honor the draft.  After the party which sent the draft is notified that it has been received, the time limit included in the draft for payment to the landowner begins.

During this time period the landman or company often records a memorandum of the lease or grant, creating a cloud on the landowner’s title that the landowner must have removed from the title if payment is not received in due time.

What are the Conditions of the Bank Draft?

Although each respective company has their own preferences and conditions in terms of bank drafts, there are a number of key features that a landowner should be aware of. The following are key terms and conditions that surface within a typical bank draft presented to a landowner:

Payment within a specified period of time.  There is not a standard for this time period; it can range from 15 days to 180 days or more.  Landowners should keep in mind that these are not calendar days but are typically business days.  Weekend and holidays do not usually count in this time period.  There are a number of reasons for this payment within a specified period of time. A company may find it desirable to include this stipulation to delay payment in order to check title thoroughly, investigate production potential of the area being leased, secure more areas of interest, secure a purchaser of the lease, or grant, etc.  A landowner has the right to negotiate this period of time included in a bank draft before signing.

Payable on approval and/or approval of title.  This term can be vague and confusing. What exactly does payment on approval mean? Landowners should request a clear explanation of what constitutes clear title and what does not. This should be put clearly in writing in the bank draft and the lease or grant. Likewise, define what constitutes company non-approval of payment and secure it in writing.

Nether party shall be liable for payment.  This is the most significant feature of a bank draft.  Can a company back out of the deal if they are short on funds? What if the company could not tie-up enough acreage in your area?  It may be that neither the landowner nor the company is bound to honor the lease.  Prior to signing, it is advisable to consult an attorney in considering the “no liability” aspect of a bank draft.

Alternatives to the Bank Draft

It is possible to work with companies and have them conduct thorough research, prior to signing an agreement and exchange the lease or grant for an unconditional, nonrefundable, certified check. Another method is to keep the signed notarized original lease or grant in your attorney’s office and exchange it for payment after the company has had time to research the title. It also may be possible for your bank to hold the lease or grant in escrow and then exchange it for payment.

Summary

The conditions of payment described in bank drafts are a critical component of an oil and gas lease and right-of-way grant for landowners and their attorneys to consider.   Have your attorney look at the entire document including the payment terms and bank draft prior to signing.   If you choose to accept a bank draft, define what is considered clear title, limit the “no liability” clause and keep the days to payment as short as can be negotiated.  In addition, it is advisable that the lease or grant memorandum not be officially recorded on your property until you have been paid in full.

 

Tax Treatment of Income from Drought Related Livestock Sales

By: Chris Bruynis, Assistant Professor & Extension Educator

Producers that were forced to sell all or part of their livestock herd as a result of this past summer’s drought, and the resulting shortage of feed, have some options to defer the income from their 2012 tax return to future tax returns. There are two different tax treatments available to defer recognition of the weather-related sales of livestock income that is in excess of the producer’s normal business practice. The first option, called an involuntary conversion, applies to draft, breeding, or dairy animals that will be replaced within a 2-year period. The second option, a 1 year deferral of income, applies to all livestock and allows a 1-year postponement of reporting the sales proceeds as taxable income.

Involuntary conversion rules state that the breeding, dairy, or draft animals need to be replaced within two years. This delay of gain recognition can be postponed up to four years if there is a persistent drought. One of the requirements of this election is that the replacement animals are of the same type as the relinquished animals.  When the animals are replaced the taxpayer’s basis in the new livestock is equal to the basis in the livestock sold plus any amount above the proceeds received from the sale of the livestock sold.  If there is a persistent weather condition lasting 3 years or longer that makes it infeasible to replace the livestock with similar livestock, the taxpayer can elect to replace livestock with any property, including real property, used in the farming business. This election does not require the producer to reside in a declared disaster area.

The 1 year deferral of income allows a producer that is in a federally declared disaster area to defer the income until the following tax year.  If the taxpayer decides to use this election, only income from excess sales of livestock, defined as sales above normal or usual sales, can be deferred.   To use the 1 year deferral election the taxpayer must meet four conditions. They are:

  1. Their principle business must be farming
  2. They must be using the cash method of accounting
  3. They must document that the sale would not have normally occurred in the current tax year, and
  4. The weather related disaster caused the sale of the livestock.

In addition to deferring gain from the sale of livestock due to weather related disasters, farmers have other tax management tools such as prepaid expenses, deferred payment sales, income averaging, and net operating loss rules to minimize the impact of the income fluctuations.  Please consult your tax professional to see if deferred recognition of gain or one or more of the other tax tools listed makes sense for your income tax return.