Getting your Farm & Family Affairs in Order Webinar on January 9, 2014

by: David Marrison, OSU Extension Educator

Farm accidents, cancer, disability, heart attacks, failing health, and death are all words farmers do not like to hear. Farming is the nation’s second most dangerous occupation in the United States. This combined with the aging farm population, could mean that your farm business might lose one of its key managers un-expectantly. Is your farm ready for the unexpected? Have you prepared the next generation to run your farm business after you are gone?

To help address the “ah-crap” moments caused by the unexpected, OSU Extension is pleased to be offering a webinar titled “Getting your Farm & Family Affairs in Order.” This webinar is open to farmers across the country and will be held on: Thursday, January 9, 2014 from 7:00 to 8:30 p.m. EST

David Marrison, OSU Extension Educator & Associate Professor will be the featured speaker for the webinar. Learn how to develop an emergency contact list for your farm and how to develop letter of instructions to your their heirs regarding their financial matters. Learn how to consolidate all of your financial and personal information (real property, savings & investment accounts, legal documents) in one easy document. This will help you get a better handle on your finances and allow you to get a jump start on your estate plan. Learn the “opossum approach” to checking to see if your heirs are ready to run the farm business. Take time to organize your financial matters for your peace of mind. This program will save you hundreds of dollars as you plan develop your succession, retirement, and estate plans. Get your affairs in order so you can concentrate on your family, career, and bucket list!

No pre-registration is required and producers can attend by logging on to: http://carmenconnect.osu.edu/ohioagmanager/ Participants are encouraged to test their computer systems out by logging onto the web site before the program. More information about this program can be obtained by contacting David Marrison at marrison.2@osu.edu or 440-576-9008

The Ohio State University Extension Small Farm Program announces the 2014 Ohio New and Small Farm Colleges

by Tony Nye, Extension Educator

Are you a small farm landowner wondering what to do with your acreage? Are you interested in exploring options for land uses but not sure where to turn or how to begin? Have you considered adding an agricultural or horticultural enterprise but you just aren’t sure what is required, from an equipment, labor, and/or management perspective? Are you looking for someplace to get basic farm information? If you or someone you know answered yes to any of these questions, then the OSU Extension Small Farm College program may be just what you are looking for.

OSU Extension is offering a program targeted at the new and small farmer. The Ohio New and Small Farm College is an 8 week program that introduces new and even seasoned farmers to a wide variety of topics. The program will teach participants how to set goals, plan, budget, and where to find resources available for them if they chose to start a small farming operation. The courses will layout how to manage financial and farm records. Extension Educators will illustrate many different enterprises that can be profitable on land as small as one acre. The educators will show the benefits and pitfalls of each enterprise so that the participant will be able to pick and chose what may work best for them and what suits their interest. To round out the experience, a tour will be held around area farms so that participants can see first hand how small farm life works, and also make contacts of practicing farmers in the area.

The Small Farm College was originally conceived as a way to help southern Ohio’s tobacco farmers make the transition away from that crop as government subsidies were phased out. OSU extension educators soon realized such programming also could benefit rural landowners who own small acreage in the countryside. Since 2005, past regional Southern Ohio New and Small Farm Colleges have helped 631 individuals representing 476 farms from 52 Ohio counties improve the economic development of their small family-owned farms. This program can help small farm landowners and farmers diversify their opportunities into successful new enterprises and new markets. And, it can improve agricultural literacy among small farm landowners not actively involved in agricultural production.

Many program participants don’t expect to make a living off the land, but do want to recoup something, said organizer Tony Nye of OSU Extension in Clinton County. First time farmers want their interaction with their land to be productive. “They like living in the country, getting their hands dirty,” Nye said. “That has been their motivation for buying land.”

The New and Small Farm College will be conducted at three locations this year. The first college will be held in Warren County at the OSU Warren County Extension office, 320 E. Silver Street, Lebanon, Ohio on Thursdays, beginning January 9, 2014 through Thursday, February 27, 2014. Classes run from 6:30 – 9:00 p.m. each week. This class will be limited to the First 40 registrations.

The second college will be held in Athens County at the OSU Athens County Extension Office, 280 West Union Street, Athens, Ohio on Mondays, beginning January 3, 2014 through Monday, March 24, 2014. Classes run from 6:30 –9:00 p.m. each week. This class will be limited to the First 50 registrations.

The third college will be held in Shelby County at the Bistro Room at “A Learning Place”, 201 Robert M. Davis Parkway, Piqua, Ohio on Mondays, beginning February 10, 2014 through Monday March 31, 2014. Classes run from 6:30 – 9:00 p.m. each week. This class will be limited to the First 50 registrations.

The cost of the course is $150 per person, $100 for an additional family member. Along with the vast resources and knowledge gained, participants will receive a notebook (per each $150 registration) of all resource materials, a soil test, refreshments, and the bus tour. Registrations are now being accepted. Individuals interested in the program may contact the each host county at the following phone numbers: OSU Extension Warren County (513) 695-1311, OSU Extension Athens County (740) 593-8555, and OSU Extension Shelby County (419) 305-6504

Registration brochures for the program can also be found online at the following websites http://warren.osu.edu , at http://athens.osu.edu , or at http://shelby.osu.edu and are also available in area Ohio State University Extension offices.

For further information contact Tony Nye, OSU Small Farm Program Coordinator at (937) 382-0901 or E-mail at nye.1@osu.edu .

Grain Marketing Webinar Series to be offered Online

Source:  Chris Bruynis, Assistant Professor and Extension Educator, OSU Extension

Growers, who want to experience grain marketing using real-world strategies without any of the real-world risks, can take advantage of a series of courses taught by Dr Matt Roberts from Ohio State University’s College of Food, Agricultural, and Environmental Sciences.

Participants will learn how to use futures and options; make a marketing plan to fit their farm business; use crop insurance as a grain marketing tool; and how to understand financial statement analysis in relationship to their grain marketing plan.

The courses, to be offered Jan. 7 and 21; Feb.4 and 18; and March 4, will be taught online and will offer participants the ability to experience grain marketing simulations using marketing options commonly used in grain marketing without the risk of actually taking a position on real bushels. The series of online courses enables farmers to log in from the comfort of their home office allowing more people access to the courses.

Using the Commodity Challenge, a program managed by the Center for Farm Financial Management at the University of Minnesota, growers will participate in a grain marketing simulation exercise that allows use of all the marketing options used in grain marketing without the risk of actually taking a position on real bushels. The online-trading simulation features real-time cash, futures and options quotes for corn, soybeans and wheat from local markets here in Ohio. Participants can use basis contracts, puts, calls, and can sell cash on the market, basically all of the tools we have in real life without any of the real risk of marketing real bushels.

The workshops are from 11:30 a.m. to 1:30 p.m., with each course building on information taught in the previous course. Participants missing a session will have the opportunity to view a recording of the webinar if they want to learn the information. Registration for the online classes is $135, but each participant can earn part or all of the cost back through their participation in the course.

Part of each participant’s registration costs will be placed in a pool that will be distributed back to participants based on how well they market their grain in the commodity challenge. Those who sell their challenge grain for the average of all course participants will earn a refund of $100 from their registration fee. Those who do above the course average will earn more than $100 and those who do less than the course average will receive less than $100. The refund is an incentive to give participants a reason to do as well as they can in the commodity challenge.

Additionally, participants will want to check with their local Extension office to see if supplemental meetings will be held. Some ANR Educators will be meeting with participants in supplemental meeting to further enhance the grain marketing course and assist with questions participants might have.

Registration can be found at https://www.regonline.com/grainmarketing.  There is a $25 non-refundable service fee for cancellations. For more information about the program, contact Bruynis at bruynis.1@osu.edu or 740-702-3200.

Farmland Leasing Workshops Offered Throughout Ohio

Source: Barry Ward, Assistant Professor, OSU Extension Leader, Production Business Management, Department of Agricultural, Environmental and Development Economics and Peggy Hall, Assistant Professor, OSU Extension Director, Agricultural & Resource Law Program

 Ohio State University Extension will be offering Farmland Leasing Workshops throughout Ohio this January through March 2014.

Landowners and farmers both are encouraged to attend as factors affecting leasing options and rental rates will be discussed along with analyzing rent survey data to determine how this data can be used in negotiations.

Flexible cash lease arrangements will be discussed as an alternative to fixed cash leases. The pros and cons of fixed and flexible leases will be explored. Participants will spend time with the presenters in analyzing good and bad leasing practices.  Presenters will also discuss legal issues in farmland leasing and help participants to begin to develop a written lease for their farm.

Workshop presenters include Peggy Hall, Assistant Professor, OSU Extension Director, Agricultural & Resource Law Program and Barry Ward, Assistant Professor, OSU Extension Leader, Production Business Management.

 

Topics to be addressed in the workshop include:

•             Farmland leasing options: fixed and flexible cash leases

•             Factors affecting leasing options and rates

•             Evaluating cash rent survey data

•             Legal issues in farmland leasing

•             Analyzing good and bad leasing practices

•             Developing a written lease for your farm

 

Dates and Locations of Leasing Workshops:

January 13, 6 – 9 pm: OSU Extension Defiance/Fulton Counties

http://fulton.osu.edu/ or http://defiance.osu.edu/

January 15, 5:30 – 9 pm : OSU Extension Darke/Montgomery Counties

http://montgomery.osu.edu/ or http://darke.osu.edu/

February 5, 6 – 9 pm: OSU Extension Crawford County

http://crawford.osu.edu/

February 10, 1-4 pm: OSU Extension Champaign, Shelby, Union Counties

http://champaign.osu.edu/ or http://shelby.osu.edu/ or http://union.osu.edu/

February 12, 1-4 pm: OSU Extension Hancock County

http://hancock.osu.edu/

February 17, 1-4 pm: OSU Extension Wayne County

http://wayne.osu.edu/

February 17, 6-9 pm: OSU Extension Knox County

http://knox.osu.edu/

March 10, 11am – 2:30pm: OSU Extension Ashtabula County

http://ashtabula.osu.edu/

March 10: OSU Extension Mahoning County

http://mahoning.osu.edu/

March 12, 9am -noon: OSU Extension Fayette/Clinton Counties

http://clinton.osu.edu/ or http://fayette.osu.edu/

Ohio Farmland Preservation Summit Set for February 5, 2014

COLUMBUS, Ohio – Farmers, landowners, planners, local officials, land trust leadership, economic development professionals and anyone interested in preserving farmland in Ohio can take part in an annual farmland preservation summit Feb. 5 designed to gather local and national experts on the subject to promote methods to support this valuable natural resource, organizers said.

The 14th annual Ohio Farmland Preservation Summit is designed to help interested parties learn various techniques, tools and methods to preserve farmland, said Mike Hogan, an Ohio State University Extension educator and Sustainable Agriculture coordinator. OSU Extension is the outreach arm of the College of Food, Agricultural, and Environmental Sciences (CFAES).

During past farmland summits, experts have presented tools on legal ways for people to preserve farm land, he said. But this year, the summit will offer more information geared toward farmers and how they can preserve farmland, he said.

“The goal is to offer a more holistic approach, looking at the bigger issues in farmland preservation, including offering a program track for farmers interested in preserving farmland,” Hogan said.

He said the summit will also focus on some of the larger, more important issues in Ohio right now, including presentations on:

• Preserving Farmland with Farm Business Succession Planning
• Current Trends in Farmland Preservation – What’s Next and When Is It Coming to Ohio
• Pipeline Development in Ohio – The Real Natural Gas Challenge to Farmland Preservation

The summit is from 9 a.m. to 4 p.m. and will take place at Ohio State University’s Nationwide and Ohio Farm Bureau 4-H Center, 2201 Fred Taylor Drive, just across from the Schottenstein Center on the Columbus campus.

The summit will feature opening remarks from Bruce McPheron, vice president for agricultural administration and CFEAS dean. The event will also feature breakout sessions on a variety of topics, Hogan said, including natural resource conservation programs, taxation issues and farmland preservation, agriculture security areas and farmland preservation 101.

The summit will also feature an exhibition space and a lunch featuring Ohio foods.

Registration is $50 and includes continental breakfast and lunch. Deadline to register is Jan. 31.

The summit is sponsored by OSU Extension, Farm Credit Services of Mid-America, Ohio Farm Bureau Federation, The Andersons and the Western Reserve Land Conservancy.

Click here to access the registration flyer

Writer
Tracy Turner
614-688-1067
turner.490@osu.edu

Source
Mike Hogan
740.653.5419
hogan.1@osu.edu

2014 Standard Mileage Rates for Business, Medical and Moving Announced

Source: Internal Revenue Service

WASHINGTON — The Internal Revenue Service issued on December 6, 2013 the 2014 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
• 56 cents per mile for business miles driven
• 23.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The business, medical, and moving expense rates decrease one-half cent from the 2013 rates. The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2013-80 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Number of Generations a Farm Has been in a Family

By: Carl Zulauf, Fahri Yavuz, and Bradley Lubben, Professor, Ohio State University; Professor, Ataturk University, Turkey; and Assistant Professor, University of Nebraska,

Overview:  On October 23, 2013, the lead author published a farmdocdaily post titled, “Putting the Age of U.S. Farmers in Perspective,” available at http://www.farmdoc.illinois.edu/.  It has generated considerable attention.  This follow-up post adds another perspective to this discussion by focusing on one finding from a survey published in the “Attributes of U.S. Farms by Number of Generations the Farm has been in a Family,” Journal of the American Society of Farm Managers and Rural Appraiser, 2004, available at http://portal.asfmra.org/userfiles/file/journal/zulauf135_138.pdf.  This article contains more details about the survey and the findings from the survey.

 Survey:  The survey was a random sample of farmers in 26 states during 2001.  Responses were weighted based on the survey methodology to generate a population estimate for each state.  The state estimates then were summed to obtain estimates for the 26 states as a group.  The 26 states contained 1.4 million farms, or 64% of all U.S. farms in the 2002 Census of Agriculture

The survey question of interest in this post is what family generation does the current operator represent on the farm or ranch?  No other information was provided.  Thus, respondents in the same objective situation could have answered the question differently depending on their interpretation of their specific situation.  Despite its subjective nature, the question allows the farmer respondent to provide an indication of how long the farm has remained in the family across generations.

Findings:  Survey respondents classified 36% of their farms as 1st generation farms (see figure 1).  This share was only slightly less than the 39% share classified as 3rd and higher generation farms.  Only 10%, 3%, and 1% of survey respondents classified their farm as a 4th, 5th, and 6thplus generation farm, respectively.

Summary Observations:  Farm culture emphasizes the role of family generations.  However, this survey found that 1st generation farms occupied an important place in the U.S. farm sector in 2001.  There is no reason to believe that this situation has changed appreciatively

Unsurprisingly, 1st generation farms were smaller than higher generation farms.  Nevertheless, 10% had sales of $100,000 or more in 2001 and 2% had sales of $500,000 or more.  In comparison, the 2002 Census of Agriculture reported that 15% of all U.S. farms had sales of $100,000 or more and 3.3% had sales of $500,000 or more.  Thus, the presence of 1st generation farms among the largest U.S. farms is not far off the national average, suggesting farms can grow quite large in one generation.

The relatively large presence of 1st generation farms in this study suggests that entry into farming is not as difficult as conventionally presented.  This does not mean it is easy.  Nevertheless, the likely entry of more 1st generation farmers is another reason for believing that the next generation of farmers may be easier to find than some suggest.

Farmland Value, Cash Rent and Crop Input Outlook 2014

by: Barry Ward, Leader, Production Business Management
Department of Agricultural, Environmental and Development Economics

Cropland values in Ohio have increased again in 2013. Data from the Oho Ag Statistics Service shows an increase of 12% for bare cropland in Ohio for 2013. According to their data, bare cropland averages $5600/acre, up from $5000/acre the previous year.

The Ohio Cropland Values and Cash Rents Survey (AEDE) conducted in January 2013 shows that the increase in value of Western Ohio cropland in 2013 would be 6.8 to 15.4% depending on region and land class. The Chicago Federal Reserve Bank and Purdue University both conducted land value surveys in 2013. The Chicago Fed survey (October 1) of bankers found Indiana land values of “good” farmland increased by 18% year-over-year (the entire 7th Fed District increased 14%) while Purdue (June 30) found that the Indiana statewide annual increase in cropland values ranged from 14.7 to 19.1% depending on the productivity of the farmland.

Crop profitability prospects were positive in 2013 as they have been for the most part since 2007. Profit margins in 2013 are projected to be positive as high yields should compensate for lower prices in most regions of Ohio.

This past seven year period has been one of the most profitable periods in the last 50 years of crop production. These profit streams and healthier balance sheets have led many farmers to seek an investment option for these profits and many have chosen to invest in land. Investors outside of agriculture have also been actively seeking farmland as an investment alternative.

With many dollars and buyers chasing farmland, it isn’t a surprise to see land values increase again substantially in 2013. Crop profitability along with low interest rates have been the primary drivers of this run-up in cropland values. The relative scarcity of farmland has been a contributing factor in increasing cropland values.

So all of this begs the question, “Where are land prices headed in 2014?” The key factors – crop profitability and interest rates – both show indications of “unfriendly” moves in 2014. Crop profits are projected to be lower (possibly negative) and interest rates have moved higher since last year. Does this mean land values will decline?

The projected numbers for 2014 point towards flat to lower cropland values for 2014. Projected budgets for Ohio’s primary crops for 2014 show the potential for little to no profits (possibly losses). The Federal Reserve has indicated that it plans to maintain current low interest rates through mid-2015 although mortgage rates have moved higher.

Returns to Land (Gross Revenue minus all costs except land cost) are projected to be $12-$213/acre for Ohio Corn in 2014 depending on the land production capabilities. Budget projections for 2014 soybeans show returns to land to be $62-$248. Wheat budget projections for 2014 find returns to land to be between $25 and $159 per acre. This is assuming current prices of inputs and present December, November and September 2014 futures prices, respectively. These projections are based on OSU Extension Ohio Crop Enterprise Budgets available online at: http://aede.osu.edu/research/osu-farm-management/enterprise-budgets
The Income Method of Capitalization, an appraiser’s method of valuing assets, yields flat to lower land valuations based on 2014 projections for returns to land and interest rates.

For example, using a $213/acre return to land (the high yield scenario of the projected corn return to land for 2014) and a 4% capitalization rate, farmland would be appraised (valued) at $5325/acre. Using the return to land of the high yield scenario for 2014 soybeans ($248) yields an appraised value for land of $6200. These are only examples and are not meant to reflect the land value for your area. Lower “returns to land and/or higher interest rates would yield lower “appraised” land values using this approach.

There should be a note of caution in deriving budgets and using the Income Method of Capitalization for valuing cropland for 2014 and beyond. Assumptions used to formulate these budgets and appraisals may change. Profit margins may change from what we are presently projecting. Interest rates, currently at low levels, may increase further.

One factor that may support land values heading into 2014 is the financial strength in the sector. Crop farmer balance sheets have generally improved during this past seven year period. Financial health in the sector may counter-balance the effects of lower profits and potentially higher interest rates to underpin land values. Which of these opposing set of forces is the strongest will determine which direction land values head in 2014.

Cash rental rates will move based on where they are in relation to the current market. Rents at the low end of the market may have some upside potential yet as they catch up to the current market. Rents at the high end of the market will be sticky as operators may be reluctant to ask for relief after one year of low prices for fear of losing part of their land base. Flex leases will likely decline due to lower crop prices.

Producers that want to continue to operate their existing rented land base will have to pay at or near the market rate for their area. See the “Western Ohio Cropland Values and Cash Rents 2012-13” Factsheet online at:
http://aede.osu.edu/about-us/publications/western-ohio-cropland-values-and-cash-rents-2012-2013
to see data on yields and cash rents for various land classes.

To manage risk of volatile crop and input markets, producers and landowner should also consider flexible cash leases. Producers and landowners should also understand and attempt to quantify in some way the non-cash benefits provided by the producer to the landowner and vice-versa.

Fertilizer
Fertilizer continues to be the most volatile of the crop input costs and cost management of this important input may be a primary factor between being a low cost or high cost producer. Fertilizer prices are lower compared to last year at this same time and many producers are asking themselves if this is the right time to buy. While it is hard to know exactly what direction and when prices will move it is smart to keep up-to-date on important fertilizer product fundamentals.

Healthier farmer balance sheets and continued positive crop profit prospects have signaled the global marketplace to increase planted acreage. These same factors have also caused producers to maintain or increase fertilizer application rates which has led to strong global demand. Healthy balance sheets may allow producers to continue to invest in high levels of fertility to attempt to capture high yields.

On the flipside, large northern hemisphere crops have dampened prices which may lead to tighter profit margins in the short to medium term. These tighter margins may be a precursor to more judicious use of fertilizer as producers look to cut input costs. In addition, recent profits in the fertilizer sector have spurred investment and expansion in fertilizer manufacturing. This expansion may potentially lead to larger supplies that may weigh on prices. One other factor weighing on global demand has been the depreciation in currencies of certain developing nations that have been important fertilizer importers.

Nitrogen (N)

Retail prices have decreased year-over-year for all 3 commonly used nitrogen fertilizers in Ohio. Urea Ammonium Nitrate (UAN) 28% Nitrogen price has decreased approximately 15% while Anhydrous Ammonia (NH3) price has decreased 24% since one year ago. Urea prices have declined approximately 25% at the retail level.

Nitrogen fertilizer price fundamentals are slightly different for the three primary nitrogen fertilizers used in Ohio as their supply and demand fundamentals differ. For example, urea is used as a nitrogen fertilizer in many parts of the world that UAN and NH3 are not due to its relative ease of handling and application.

Key issues impacting nitrogen fertilizer prices are crop profit margins, specifically corn profit margins, and nitrogen fertilizer production expansion both domestically and globally.
These two primary fundamentals should dictate nitrogen fertilizer prices in the short to medium term as they will be the primary determinants of the supply/demand balance.

Potentially lower corn profit margins due to lower global corn prices and somewhat “sticky” crop input costs will possibly dampen N fertilizer demand. This result may lead to supply outpacing demand and may weaken prices. We may already be seeing nitrogen prices react to lower corn prices and lower potential net returns in 2013 and 2014 as nitrogen manufacturers attempt to move product in an ever increasing wait-and-see marketplace.

The other primary fundamental issue impacting nitrogen fertilizer markets is actual and proposed expansion in nitrogen manufacturing both domestically and globally. A combination of lower domestic natural gas prices (the primary ingredient in manufactured nitrogen fertilizers) due to the expansion of natural gas extraction and the recent period of relatively high net profits in crop production have led to higher profit margins in nitrogen manufacturing. These high margins in nitrogen fertilizer manufacturing have led to a number of brownfield expansion and greenfield (new manufacturing site) development proposals. Although several existing manufacturing sites have been expanded or brought back on line and several new sites have moved forward with permitting and design, many potential additional expansions and new site developments are not certain to be built. Industry sources reports that 30 some nitrogen manufacturing expansions or new constructions are being considered in the U.S. alone. The same industry source proposes that less than half will be finished.

With lower potential crop margins affecting demand and more manufacturing capacity globally affecting supply, the short and medium term prospects for nitrogen prices appear to be flat to lower.

Factors that may lead to N price increases include:
+ Large corn acreage prospects for the U.S. again
+ Strong crop farm balance sheet

Factors that may lead to N price decreases include:
– Lower crop prices leading to tighter margins
– Low domestic natural gas price
– More domestic N production coming online Giesmer, La; Donaldsville, La; Augusta, Ga; etc.
– More domestic N production to potentially be built

Phosphorous (P2O5)
Retail prices of phosphorous fertilizers have decreased approximately 15-20% since last year at this time. With low crop prices in store for next year and probable low to negative margins, phosphate fertilizer prices will likely be flat to lower. A short, fall application window may further burden demand and increase world supply. The Ma’aden Phosphate facility in Saudi Arabia is at or near full capacity and should also keep the relative supply/demand balance at a surplus.

One wildcard may be farmers’ potential willingness to fertilize at high levels in spite of low crop prices to attempt to offset those low prices with higher yield. Crop farmer balance sheets are in excellent shape and they may be willing to continue to spend on higher levels of fertilizer inputs.

Potassium (K20)
The retail price of potash has declined approximately 12% since one 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 – Members: Potash Corp., Mosaic, Agrium) and Belarusian Potash Co. (Members: OAO Uralkali and OAO Belaruskali) controlling much of the global potash supply. One estimate is that these two entities control 70% of the global potash marketed. In recent years these two entities have utilized a strategy known as “matching supply with demand”. In other words, they have curtailed supply to support potash prices. This strategy has worked well enough that some analysts contend that the potash mining and manufacturing business has had profit margins of up to 75% in recent years. But all of that may be changing.

On July 30th, Russia’s OAO Uralkali’s board of directors announced that it would no longer export potash through Belarusian Potash Co. (BPC). This most likely will change the dynamics of the global potash trade and has already impacted global prices. Some analysts have stated that there have been disagreements in the past between Uralkali and Belaruskali that have been resolved rather quickly. Vladislav Baumgertner, Uralkali CEO, cited violations of the exclusive exporting arrangement by their partner, Belarusian Potash, as the reason for Uralkali’s decision to leave the consortium. Decree No. 566 by the Belarusian President on December 22, 2012 cancelled the exclusive right of BPC to export Belarusian potash. Following this decree, Belaruskali has made a number of export deals outside of BPC.

Baumgertner, Uralkali CEO, has stated that that this is not a temporary fall out between Uralkali and Belaruskali and that Uralkali will pursue a volume over price strategy to meet profit goals. He has also been quoted stating that the international potash price may decline up to 25% in one interview.

Potash Corp. CEO, William Doyle has downplayed the breakup of the other potash consortium first of all stating that the break-up would be temporary and that “logic would prevail.” He also stated that no one producer can determine price in response to Baumgertner’s assertion of global price declines.

With the August arrest of Baumgertner at the hands of Belerusian authorities, the messy affair in eastern Europe took an unfortunate turn. Baumgertner was eventually moved from jail into a house arrest setting. A sale of 21.75% of Uralkali from Suleiman Kerimov to Mikhail Prokorov’s Onexim Group was seen as a first step in reuniting the Russian and Belarussian companies and allowed for Baumgertner to be finally extradited back to Russia on November 22nd where he remains in detention awaiting trial. Whether he will actually stand trial is anyone’s guess. A recent purchase of a 20% share in Uralkali by Uralchem may signal a reunion of the two potash companies. The CEO of Uralchem, Dmitry Konyayev, said his company would support a reunion of the two potash giants. And since Uralchem is controlled by Belarus born Dmitry Mazepin, more weight may be given to this possibility.

The bottom line is that with the break-up of BPC (temporary or not), the global potash market price has declined. Midwest wholesale prices have declined $25/mt and more in some areas. The short term prospects will likely be dictated by the consortium events and potential crop returns (dictated by crop price levels) for 2013 and prospects for 2014. The fundamentals suggest flat to lower (possibly much lower depending on Uralkali’s export activities) potash prices through the end of the year.

Another important long term supply and demand issue in the potash industry is BHP Billiton Group’s announcement on August 20th that it will invest an additional $2.6 billion in the Jansen Potash project in Saskatchewan. Jansen may be the world’s best undeveloped potash resource and may be capable of supporting a mine with annual capacity of 10 million metric tons for more than 50 years.

Factors that may lead to K price increases include:
+ Strong crop farm balance sheet
+ Canpotex members may further curtail production?

Factors that may lead to K price decreases include:
– Lower crop prices leading to tighter margins
– Belarusian Potash Co. breakup may increase potash available on the global market?

Outlook information presented here was developed with data from AEDE research, the Energy Information Administration, USDA, other Land Grant research, industry newsletters, 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.

Insurance Coverage of Corn and Soybean Production Cost since 1980

by: Carl Zulauf, Professor
Ohio State University, November 2013

Overview: Since 2006, crop insurance has been the dominant crop safety net program. However, the prosperity that has characterized this period may be coming to an end. Thus, crop insurance may perform differently in the future than during the past few years. Therefore, this post examines the performance of crop insurance since 1980 on an important metric: how well has insurance covered the cash plus land cost of producing corn and soybeans.

Data: Beginning with 1975, the U.S. Department of Agriculture (USDA), Economic Research Service has surveyed farmers about their cost of producing the major program field crops, including corn and soybeans (see http://www.ers.usda.gov/data-products/commodity-costs-and-returns.aspx). This study specifically examines cash cost plus the charge for land. Cash costs include, among others, seed, fertilizer, chemicals, custom operations, fuel, repairs, and hired labor. Farms often borrow money for their cash plus land costs to cash flow production between the planting and harvesting of a crop. Thus, these costs are a common concern for banks and other providers of credit. It is important to note that the USDA cost of production data are not strictly comparable over time due to changes in the survey methodology and information collected. Nevertheless, the data set provides a reasonable perspective on the cost of producing these crops over time.

The average U.S. cash plus land cost for a year was divided by the average yield per planted acre reported by farms in the USDA survey. This average cost per bushel is then compared with the insurance price for the year at various insurance coverage levels. The insurance prices are from the USDA, Risk Management Agency (see http://www.rma.usda.gov/). Because the overwhelming majority of farms purchase the harvest price option (HPO), this insurance feature was modeled by calculating a 5-year Olympic moving average (removes the high and low) of yield. If the yield for a year was less than the 5-year Olympic average, then the harvest insurance price replaced the plant insurance price. To allow for the calculation of the 5-year Olympic average, the study begins with 1980. Last, because the insurance prices are futures prices, the cash minus futures basis was calculated to adjust the futures price to a cash basis. The cash price used in this calculation was the crop year average price reported by USDA, National Agricultural Statistics Service (see http://www.nass.usda.gov/Quick_Stats/). The cash price averaged $0.35 under the corn insurance futures price and $0.43 under the soybean insurance futures price over 1980-2012.

Corn:
This discussion focuses on 85% insurance — the highest available individual farm insurance. In every year since 2006, 85% insurance more than covered the average U.S. cash plus land cost of producing corn (see Figure 1). In contrast, during the 27 years from 1980 through 2006, 85% insurance covered on average only 95% of the cash plus land cost for corn. Moreover, the cost coverage ratio was less than 100% in 74% of these 27 years. Thus, in the great majority of years prior to 2007, a farm with the average cash plus land cost of producing corn could not cover this cost even when purchasing 85% insurance. The lowest corn cost coverage ratio was 67% in 1987.

Soybeans: The same picture emerges for soybeans as for corn except that 85% insurance covered a larger share of cash plus land cost. Eighty-five percent insurance covered on average 151% of the cash plus land cost for the 2007-2012 soybean crops (see Figure 2). In contrast to corn, 85% insurance also on average covered average soybean cash plus land cost even prior to 2007 (average cost coverage was 106%). Nevertheless, in 41% of the years prior to 2007, 85% insurance did not cover the average cash plus land cost of producing soybeans. Perhaps the best illustration of the higher cost coverage offered by insurance for soybeans is that, between 1980 and 2006, 80% insurance would on average have covered the average cash plus land cost of producing soybeans.

Summary Observations: A notable difference exists in the cost coverage performance of insurance for corn and soybeans before and after 2007. During the last 6 years, 85% insurance has more than covered the average U.S. cash plus land cost of producing corn and soybeans. Especially for corn, this was not the case prior to 2007. The decline in corn and soybean prices over the last 6 months suggests that insurance’s cost coverage performance over the next few years may be closer to that prior to 2007 than during the last 6 years. In short, farmers, credit suppliers, insurance providers, and policy analysts need to be careful about assuming that insurance will cover the cash plus land cost of producing corn and soybeans. Moreover, this study examines the average cost of producing in the U.S. Thus, the concern over the cost coverage of insurance is even more relevant for farms with above average cash and land cost of production.

The preceding observations suggest that farms and their credit providers may have interesting conversations this winter about the appropriate level of insurance. Credit providers may want higher levels of insurance to increase the cost coverage ratio. In contrast, farms may want to purchase lower levels of insurance because their premiums are higher for 80% and especially 85% insurance not only because coverage is higher but also because federal subsidy levels are lower. It is therefore not clear that farmer spending on insurance will decline even with the lower prices, which translates into lower insured values and thus lower premiums, everything else constant. Everything else constant does not hold in this situation since the cost coverage ratio is likely to be lower.

Another potentially important observation is the historical difference in the cost coverage ratio between corn and soybeans. The higher cost coverage ratio for soybeans probably reflects the lower cash costs per acre associated with producing soybeans relative to corn. The combination of lower cash costs plus a potentially greater cost coverage ratio may push farms to substitute some soybeans for corn in their rotation, especially for high cash cost farms. A common topic of policy discussion for Title 1 commodity programs is the planting distortions associated with fixed target prices. Relatively little discussion has surrounded the potential issue of planting distortions among the various program crops caused by crop insurance.

Last, this study reinforces why credit lenders are vocal supporters of crop insurance. For corn and in particular soybeans, crop insurance offers significant coverage of cash costs associated with producing a crop. A growing policy concern has been the perceived increasing role of dealer credit to farms for purchasing inputs. While we certainly do not understand the potential implications of this situation, crop insurance, especially at high levels of insurance, potentially mitigates this concern, at least for the initial year. But, insurance prices are reset each year and will fully follow prices lower. Thus, high cash cost producers may ultimately find themselves in trouble if they cannot adjust costs to lower prices in one year. Hence, it is important for farms to have a strategic plan for cost flexibility. An associated policy implication is that crop insurance has a hole as a safety net program — multiple year declines in price and revenue. Thus, it is important for the current farm policy debate to consider what is the appropriate multiple year safety net that complements insurance. This publication is also available at http://aede.osu.edu/publications.  

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