Making the Base Acre Reallocation Decision

By: Chris Bruynis, Assistant Professor and Extension Educator

Questions have been asked if there is any way to determine which base acres are the most valuable under the 2014 Farm Bill.  Historically direct payments were greatest for corn, followed by wheat, and then soybeans. But with direct payments eliminated with the current farm bill, farmers are looking for guidance in making the decision between retaining their existing base acres or reallocating them to reflect the 2009-2012 actual planting acres. This article will attempt to provide some guidance based on potential Agriculture Risk Coverage – County (ARC-CO) and Price Loss Coverage (PLC) payments.  The Agricultural Risk Coverage – Individual will not be discussed, but maximum program payments would be similar to the ARC-CO since it follows the same 10% revenue cap rules. Click to download Making the Base Ace Reallocation Decision article

Cropland Value, Cash Rent and Crop Input Outlook 2015

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

Cropland values in Ohio have increased again in 2014. Data from the Oho National Ag Statistics Service (NASS) shows an increase of 8.9% for bare cropland in Ohio for 2014. According to NASS data, bare cropland averages $5650/acre, up from $5190/acre the previous year.

The Western Ohio Cropland Values and Cash Rents Survey (AEDE) conducted in January 2014 found that the value of average western Ohio cropland in 2014 would be $7142 per acre. Other data from this survey can be found at: http://ohioline.osu.edu/ae-fact/pdf/Western_Ohio_Cropland_Values_AEDE-15-14.pdf

The Chicago Federal Reserve Bank and Purdue University both conducted land value surveys in 2014. The Chicago Fed survey (October 1) of bankers found Indiana land values of “good” farmland increased by 3% year-over-year (the entire 7th Fed District decreased 2%) while Purdue (June 30) found that the Indiana statewide annual increase in cropland values ranged from 6.4 to 7.1% depending on the productivity of the farmland.

Crop profit margins were low to negative in 2014 as lower crop prices coupled with sticky input costs to create a low margin environment. This past eight year period (2006 through 2013) 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.

So all of this begs the question, “Where are land prices headed in 2015?” Low crop profit margins will put downward pressure on farmland prices. Still healthy equity positions and stable interest rates will lend positive support for farmland values in 2015. Financial health in the sector may counter-balance the effects of lower profits to underpin land values. Which of these opposing fundamentals is the strongest will determine which direction land values move in 2015. At present, these competing fundamentals suggest relatively flat cropland values in 2015.

Variable costs for Ohio’s major field crops for 2015 will be similar to 2014. Variable costs for corn for 2015 are projected to be $376 to $460 per acre. Variable costs for 2015 Ohio soybeans are projected to range from $209 to $229 per acre. Wheat variable expenses for 2015 are projected to range from $188 to $232 per acre.

Returns to land for Ohio corn (Gross Revenue minus all costs except land cost) are projected to be -$43 to $124/acre for Ohio Corn in 2015 depending on the land production capabilities. Budget projections for 2015 soybeans show returns to land to be $10 to $168. 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 2015 futures prices (less basis), 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

Similar fundamentals are at play for cash rental rates. Limited profitability will pressure rental rates to move lower however strong equity positions will continue to support rental rates. As with land values, these competing fundamentals will likely cause rental rates to remain relatively flat compared to last year.

Crop input costs offer a mixed bag of change. Energy costs are predicted to be lower. Seed costs will range from modestly lower to modestly higher depending on seed company, genetic package and newness of hybrid or variety. Crop protection chemicals will likely follow the same pattern as most products will increase in price while some (generic glyphosate in particular) will decrease.

Fertilizer continues to be the most volatile of the crop input costs. Most fertilizer products are at slightly higher prices compared to last year at this time. Production issues, short gas supplies, plant turnarounds and political unrest have lent support to higher prices. Lower profit margins will compete with logistical concerns and strong equity positions to create the potential for relatively flat fertilizer markets in 2015.

At this point there is little evidence to suggest that “normal” winter to spring price patterns will not occur. This would suggest reasonably flat market prices then increasing as demand ramps up into late winter/early spring. Even with this potential scenario likely, low projected crop profit margins will likely restrain demand and restrict fertilizer price increases to relatively small percentage increases.

Weaker than expected demand as a result of low projected crop profit margins could change this scenario if this weaker than expected demand pressures sellers to lower prices to stimulate demand.

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 article may prove to be incorrect due to changes in supply and demand and other political and economic related events.

Good News for Ohio Farmers! Tax Extender Bill Passes

By David Marrison. OSU Extension Educator

The United States Senate passed the Tax Extenders Bill (HR 5771: Tax Increase Prevention Act of 2014) by a vote of 76-16 on Tuesday, December 16 and was signed into law by President Obama on December 19, 2014.  This bill was previously passed by the House of Representatives by a vote of 378-46 on December 3, 2014. This bill “extended” a number of key tax relief provisions that expired either at the end of calendar year 2013 or during 2014. In total the bill includes 72 individual, business and energy tax extenders.  It should be noted the extenders are only good for 2014.  Congress will have to go back to the drawing board in 2015 to see if they wish to extend any of the tax extender provisions for 2015 and beyond.

The two major portions of this legislation which farmers, and other business owners, were waiting anxiously for include the extension of bonus depreciation and Section 179 Expensing.  This legislation includes a one-year retroactive extension of the 50 percent bonus depreciation for new property acquired and placed in service during 2014 (2015 for certain property with a longer production period).  The legislation also extended the Section 179 Expensing.  Many farmers have been using Section 179 expensing to depreciate new and used equipment in the year of purchase.  However, in 2014, this deduction was set to drop to $25,000 with phase-out provisions kicking in for any dollars spent over $200,000.  The tax extender legislation returns the Section 179 Expensing level to $500,000 with the phase-out provisions not kicking in until $2 million.  The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also were also extended through 2014.

Some additional tax extenders which have an agricultural interest include:

  • Extension of special rule for contributions of capital gain real property made for conservation purposes. The provision would extend through 2014 an enhanced deduction for contributions of capital gain real property for conservation purposes. This provision also would extend the enhanced deduction for certain individual and corporate farmers and ranchers. A qualified conservation contribution is a contribution of a real property interest to a qualified organization, exclusively for conservation purposes.
  • Extension of incentives for biodiesel and renewable diesel. The provision would extend through 2014 the $1.00 per gallon production tax credit for biodiesel, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2014 the $1.00 per gallon production tax credit for diesel fuel created from biomass.
  • Extension of special allowance for second generation biofuel plant property. The provision would extend through 2014 50 percent bonus depreciation for cellulosic biofuel facilities.

Some of the most popular tax extenders important to the American taxpayer include:

  • Extension of above-the-line deduction for qualified tuition and related expenses. The provision would extend through 2014 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers).
  • Extension of deduction for certain expenses of elementary and secondary school teachers. The provision would extend through 2014 the above-the-line deduction for the eligible expenses of elementary and secondary school teachers. The deduction is capped at $250 and covers expenses that otherwise would have to be itemized.
  • Extension of tax-free distributions from individual retirement plans for charitable purposes. The provision would extend through 2014 the ability of individuals at least 70½ years of age to exclude from gross income qualified charitable distributions from Individual Retirement Accounts (IRAs. The exclusion may not exceed $100,000 per taxpayer in any tax year.
  • Extension of credit for energy-efficient new homes. The provision would extend through 2014 the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy efficient home that meets qualifying criteria.

Details about the legislation can be found at: https://www.govtrack.us/congress/bills/113/hr5771

New Program to Manage Financial Risk Available to Farmers

By: Dianne Shoemaker, OSU Extension Field Specialist, Dairy Production Economics and Barry Ward, OSU Extension, Leader, Production Business Management, Department of Agricultural, Environmental, and Development Economics

Was 2014 a profitable year for your farm? Which enterprises were profitable?  Which were not?  How does your farm compare to similar farms in efficiency?  In profitability?  What does the competition look like?   Recent volatile feed, grain, milk, land and rental markets have created uncertain profit margins and financial security concerns.

Completing a farm financial analysis is an effective way for farms to know their costs of production, profitability, and financial ratios. Farms can track year-to-year changes, identify problems early, and benchmark against peer farms as well as control information critical to effective participation in risk management programs.

The Ohio Farm Business Analysis and Benchmarking Program can help farms answer these questions by completing a financial analysis of the whole farm and each enterprise.  An analysis will provide a farm with:

 

Year’s Beginning Balance Sheet

Income and Cash Flow Statements

Year’s Ending Balance Sheet

Financial Standards Measures

Enterprise Analysis including:

-Cost of Production

-Benchmarking Reports

Can’t go back and find the information needed to analyze 2014?  Through the Ready, Set, Go program, you will learn what financial and production information to keep and how to collect it in real time.   By the end of 2015 you will have everything needed to analyze how your farm business performed and will learn how to use your analysis to manage your farm and your farm’s risk.

Choose from classes, on-line webinars or videos along with personal assistance to guide you through the year from start to finish with a Farm Business Analysis.   Cost for the program is $100 per farm which will include up to 3 on-farm consultations.

For more information, contact Dianne Shoemaker at shoemaker.3@osu.edu or Christina Benton at 330.533.5538

 

 

 

Ohio Field Crop Enterprise Budgets – 2015 Projections

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

Preliminary Enterprise Budgets for 2015 Ohio field crops have been completed and posted to the Farm Management Website of the Department of Agricultural, Environmental and Development Economics.

Yield projections are based on the Ohio trend line yield using USDA National Ag Statistic Service (NASS) yield estimates for the period 1970 through 2014. This yield projection is used as the average (middle column) yield in budget projections (Ohio corn yields are projected to be 163.1 bu/acre using this data). Low and high yield scenarios are located in columns to the left and right of the average column and are set at 20% lower and 20% higher than the calculated Ohio average trend yield.

Updated Enterprise Budgets can be viewed and downloaded from the following website: http://aede.osu.edu/research/osu-farm-management/enterprise-budgets

Enterprise Budget projections updated for 2015 include: Corn-Conservation Tillage; Soybeans-No-Till (Roundup Ready); Wheat-Conservation Tillage, (Grain & Straw).

Our enterprise budgets are compiled on downloadable Excel Spreadsheets that contain macros for ease of use. Users can input their own production and price levels to calculate their own numbers. These Enterprise Budgets have color coded cells that allow users to plug in numbers to easily calculate bottoms lines for different scenarios. Detailed footnotes are included to help explain methodologies used to obtain the budget numbers. Budgets include a date in the upper right hand corner of the front page indicating when the last update occurred.

Grain Marketing in Challenging Times Webinar Series Offered

Grain marketing will be increasingly more important to future success of the farm business in the next few years due to tighter profit margins associated with lower grain prices. Ohio State University Extension and the OSU Department of Agricultural, Environmental and Developmental Economics are offering a grain marketing series titled Grain Marketing in Challenging Times. This series, offered through a weekly webinar for five weeks, will allow farmers to learn how to set critical grain pricing targets and strategies from the comfort of their home. The series of classes will focus on using futures and options; making a marketing plan to fit your farm business; utilizing crop insurance as a grain marketing tool; and financial statement analysis in relationship to your grain marketing plan.

The series will kick off on Tuesday, February 3 starting at 11:30 am and running through 1:30 pm and will cost $69.00. The class will meet virtually on five consecutive Tuesdays (February 10, 17, 24 and March 3) and will host three follow-up programs on grain market outlook: one after planting, one pre-harvest and one post-harvest (dates TBA during the class).  Each webinar will be recorded and made available to class participants to review either as make-up for missed classes or to listen again to capture the more important concepts discussed. Chris Bruynis, Assistant Professor and OSU Extension Educator will be the host for the class and Matt Roberts, Associate Professor, OSU Department of Department of Agricultural, Environmental and Developmental Economics will be the instructor. To register for the class, go to https://www.regonline.com/grainmarketing15.  Registration will close on January 28, 2015. For more information go to http://ross.osu.edu and look under agriculture and natural resources for the flyer or email Chris Bruynis at bruynis.1@osu.edu.  Click to access the Grain Marketing Flyer.

Big data and UAVs on the farm? Webinar will address legal issues

by Peggy Hall

OSU’s Agricultural & Resource Law Program is pleased to announce its inaugural webinar, Big Data and UAVs:  Legal Issues for Agriculture, scheduled for Friday, December 12 at 1 pm.  This is the first webinar in the program’s new “Ohio Food, Agriculture and Environmental Law Webinar Series,” offering monthly legal webinars on issues of importance to Ohio agriculture.

The webinar will feature John Dillard, an Associate Attorney with the law firm of Olsson Frank Weeda Terman Matz, PC in Washington, DC and a leading expert on legal issues with technology and agriculture.  With a background in agriculture and experience advising clients in the food and agricultural industries, Dillard will present a practical analysis of the legal issues raised by agriculture’s increasing use of large data sources and UAVs.   Dillard authors a blog, Ag in the Courtroom, on AgWeb.com and Legal Ease, a column in Farm Journal magazine. He has appeared on national television and radio agricultural programs to discuss legal issues that affect agriculture.

Future webinars in the Ohio Food, Agriculture and Environmental Law Webinar Series will feature other national and state experts discussing legal issues of importance to Ohio agriculture.  Topics in the series will include:

The 2014 Farm Bill: Guiding a Client through the New Law, with Bill Bridgforth of Ramsay, Bridgforth, Robinson & Raley LLP, Pine Bluff, Arkansas on Friday, January 9, 2015 at 1 pm. 

Managing Pollutant Discharge Risk on Farms, with Chris Walker and Jack Van Kley of Van Kley & Walker LLP, Dayton/Columbus, Ohio and Tom Mehnke of Mehnke Consulting LLC, Greenville, Ohio on Thursday, February 12, 2015 at 1 pm (tentative).

Introduction to Food Law:  What You Need to Know to Build a Food Law Practice, with Jason Foscolo of Foscolo & Handel PLLC, Sag Harbor, New York on Thursday, March 12, 2015 at 1 pm.

Nursing Home Costs & Medicaid:  The One-Two Punch to the Family Farm with Craig Vandervoort of Sitterly & Vandervoort Ltd, Lancaster, Ohio on Friday, April 10, 2015 at 1 pm.

Rights and Remedies for Protecting Your Water Supply in Ohio with Joe Reidy of Frost Brown Todd LLC, Columbus, Ohio and Peggy Kirk Hall of OSU’s Agricultural & Resource Law Program on Thursday, May 14, 2015 (tentative).

For information on how to access the complimentary webinars and archived recordings, visit the “webinars” tab on http://aglaw.osu.edu.

 

The Forgotten Variable: Yield and the Choice of Crop Program Option

Carl Zulauf, Ohio State University, and Gary Schnitkey, Jonathan Coppess, and Nick Paulson, University of Illinois at Urbana-Champaign

November 2014

Price is the focus of almost all discussions about the one time irrevocable opportunity to choose among Agriculture Risk Coverage – county (ARC-CO), Agriculture Risk Coverage – individual (ARC-IC), and Price Loss Coverage (PLC).  This article instead focuses on the forgotten variable ▬ yield.  Yield can play an important role in the decision.

Yield Types Impacting Crop Program Choice

►  Program Yield ▬ fixed yield on file with the Farm Service Agency (FSA) used to calculate PLC payments

■    It is either (1) the updated program yield [90% of 2009-2012 FSA farm average yield], (2) current program yield [default yield], or (3) FSA update replacement yield [75% of 2008-2012 average county yield].

►  Yield component of ARC benchmark revenue ▬ 5-year Olympic average [removes low and high] yield per planted acre in county (ARC-CO) or yield per planted acre for ARC-IC farm unit

►  Yield per planted acre in county or farm ▬ component of crop year revenue for county (ARC-CO) of ARC-IC farm unit and thus impacts payment by ARC-CO and ARC-IC, respectively.

Yield Consideration I ▬ Updated Program Yield vs. County Average Yield

►  The higher the program yield relative to county average yield, everything else constant; the more attractive is PLC relative to ARC-CO.

►  Farm yield data for farms with a complete set of yield data for the 2009-2012 crop years in the Illinois Farm Business Farm Management (FBFM) program were used to replicate the updated program yield ▬ 90% of the simple average of farm yield from 2009 through 2012.  County yield data from the U.S. Department of Agriculture (USDA), National Agriculture Statistics Service (NASS) Quick Stats data base (http://www.nass.usda.gov/Quick_Stats/) were used to replicate the ARC-CO yield component for the 2014 crop year ▬ Olympic average of yields for 2009 through 2013 for the county in which the FBFM farm was located.  For 11% of the FBFM farms with corn, the replicated program update yield exceeded the replicated ARC-CO yield component (see Figure 1).  The comparable number for soybeans was 29% of FBFM farms with soybeans.  These results for FBFM farms suggest that the ARC-CO yield component will likely exceed the PLC program yield for most, but not all, Illinois farms.  Thus, everything else the same, the level of yield will likely favor ARC-CO for most farms in Illinois.

Yield Consideration II ▬ Growth in Yield

►        Both ARC programs use a moving average of yield whereas PLC uses the fixed program yield.

►  There is no reason at present not to expect that, given normal weather, yields will continue their historical increase through 2018.  As a result, ARC’s yield component and thus benchmark revenue should increase on average through 2018.

►  Yield trends vary by crop (see Figure 2).  Thus, at the aggregate crop level, the method used to calculate ARC’s yield component has the most value for peanuts and corn and the least value for oats and sorghum.

Yield Consideration III ▬ Farm Average Yield vs. County Average Yield

►  ARC-CO and ARC-IC pay on 85% and 65%, respectively, of program base acres.  Thus, for ARC-IC to be a competitive option some factor or factors have to compensate for ARC-IC’s fewer payment acres.

►  One potential compensation is an ARC-IC yield benchmark component that is (much) higher than the ARC-CO yield benchmark component and the PLC farm payment yield.  If 1 program crop and the same percent payment rate for both ARC programs are assumed, the ARC-IC yield benchmark component needs to be more than 30% higher than the county yield benchmark component in order for ARC-IC to pay more than ARC-CO.  Other situations result in a different breakeven yield.  Using the Illinois FBFM farm and USDA Quick Stats county data sets to replicate ARC-CO and ARC-IC Olympic average yields for the 2008-2012 crops, the ARC-IC benchmark yield component exceeded the ARC-CO benchmark yield component by at least 30% on 3% and 5% of FBFM farms with corn and soybeans, respectively (see Figure 3).  This simple analysis suggests a relatively small number of farms may find ARC-IC of interest due to higher farm than county yields.

Other potential compensations are a FSA farm with highly variable production and the planting of fruits and vegetables on the FSA farm.  These compensations are discussed in more detail in the article, “2014 Farm Bill: Making the Case for Looking at ARC-Individual.”

Yield Consideration IV ▬ Variability of Farm Yield to County Yield

►  County yield is usually less variable than individual farm yield because it is an average across the diverse array of agro climates, farm management styles, and production systems in a county.

►  However, the relevant variable for comparing ARC-CO and ARC-IC is the variation in the ratio of farm and county yield to the 5-year average yield used to calculate the ARC revenue benchmark.  Average yield also varies, potentially offsetting some variation in farm and county yield.

►  Figure 4 presents for the 1977-2012 crops, the average absolute variation in yield for an FBFM farm and its associated county relative to the 5-year average for the FBFM farm and county.  Due to availability of data, the average is a simple average and not the Olympic average of yield used by ARC-CO.  Usually the difference between the simple and Olympic average is not large.  For corn, on average, farm yield for a year was 18% different than the 5-year average for the farm for that year.  It may have been lower or higher, but the average difference was 18%.  In comparison, the average absolute difference for corn county yield was 16%, or 11% less variable than farm yield relative to the farm average.  Average absolute difference for soybean county yield was 11%, or 26% less variable than the farm level variability.  These results suggest that on average yield variability is higher for corn than soybeans and for a farm than county.  However, the difference in variability between farm and county is not huge.  Thus, while higher yield variability at the farm level gives ARC-IC an advantage over ARC-CO, especially for corn; the advantage is not sizable in Illinois in general.  Moreover, if more than 1 crop is planted on the ARC-IC farm unit or if the producer has more than 1 FSA farm in a state enrolled in ARC-IC, revenue is averaged over all program crops planted on the entire ARC-IC farm unit, further dampening the difference between variability for the ARC-IC farm unit and the county.

Summary Observations

►  Price has received most of the attention in discussions over which crop program option to choose.  However, yield is also a factor.

►  When examining ARC-IC, a consideration is whether yields on the ARC-IC farm unit are much higher than the associated county yields in order to compensate for ARC-IC’s 20% fewer payment acres.  A simple analysis suggests a relatively small number of farms may find ARC-IC of interest due to higher farm than county yields.

►  Diversification is a common strategy when managing uncertainty.  Thus, farmers with multiple FSA farms may want to consider diversifying their farms across programs.  If diversification is desired, yield comparisons can be useful in making the diversification decision.  Everything else the same, ARC-CO is more attractive for FSA farms when county yield is high relative to the FSA’s farm yield and farm payment yield.  PLC is more attractive for FSA farms when farm payment yield is high relative to both the county and farm Olympic average yield.

►  Remember future yield is not known with certainty.  It is not unreasonable to expect that yield will be below trend in at least one of the 2015-2018 crop years.

►  It is not clear that variability of yield relative to its 5-year average is all that much larger on average in Illinois for the farm than for the county.  This finding suggests consideration should be given to how to appropriately assess FSA farm yield variability relative to county yield variability.

►  In sum, the various yields that affect payments by a farm program option matter.  How much weight should be assigned to these different yields and to yield in general depends on the farmer and the farm.  But, to not think about yield is to potentially end up with a misguided farm program choice.

The authors thank the Illinois Farm Business Farm Management (FBFM) program for the farm level data used in this analysis.

Click here to access complete article complete with Figures—Yield and Farm Program Decisions

U.S. Farm Input Price Dynamics, 1981-2013

By: Carl Zulauf, Professor, and Nick Rettig, B.S. Department of Agricultural, Environmental, and Development Economics Ohio State University

The sharp drop in crop prices over the last 2 years has focused attention on farm input prices.  In particular, how closely do farm input prices follow crop prices?  To put this question in historical perspective, this article looks at various aspects of the dynamics of U.S. farm input prices since 1981.  Findings include that, after adjusting for general price inflation, not all farm input prices have increased, that farm input prices do adjust with crop prices, that the adjustment varies by input but is a lag process that becomes larger over time, and that, on average across the inputs examined in this article, the adjustment process appears to reach closure after approximately 5 years. To download the full pdf document Click Here.