Category: Farm Management

The United States Department of Agriculture National Agricultural Statistics Service (USDA-NASS) releases monthly indexes for input prices paid and output prices received. These indexes include collecting survey responses for output and input prices for agricultural production, crops, livestock, and food commodities. The spread between these two indices often helps understand where farmers are getting price squeezed and how their profit margins are impacted. Current farm income instability from inflationary pressures, high interest rates, and several supply chain disruptions (e.g., the Russian-Ukraine war and Panama/Suez Canal) are forcing farmers to pay higher input costs while receiving lower commodity prices, emphasizing the need to consider these indexes into the future. 

These price indices measure the change in prices paid (and received) relative to a point in time—2011 in this case (Figure 1). The base year is often chosen during a time without prevailing inflation or major supply chain disruptions (Schulz, 2022). 2011 was a good year for agricultural production and profitability. As such, using 2011 as a base year is a way to highlight how better or worse-off agricultural producers are compared to a good year. 

Figure 1. Crop Output Prices Received vs. Input Prices Paid

Figure 1 compares the annual index value from 2000-2024 for the two indices with 2011 as the base year. The price received index in 2012 was 102.8%, meaning that the crop price received, on average, in 2012 was 2.8% higher than in 2011 (base year = 100%). The red circle in Figure 1 shows the beginning of a divergence between input and output prices. In 2013, when writing the 2014 farm bill, the index for input prices paid was almost exactly the index for output prices received. This is where most of our current farmer safety net support stems from, and since then, we’ve seen a major divergence in the two indices, with the widest gaps between 2014 – 2020 (USDA-NASS). From 2021 – 2022, we saw both indices increase, but the gap remained, and the divergence has grown wider in 2023 and 2024 due to declining commodity prices. 

Another way to view the indices is to calculate how they change year to year. Figure 2 plots the same indices as Figure 1 but shows the yearly change between the index values. Using this percentage change helps producers understand 1) the volatility of crop output prices and 2) the magnitude of change as compared to the previous year. A key takeaway is that input prices are less volatile (in terms of yearly % change) than output prices. Secondly, the percentage change in crop output prices between 2023 and 2024 (-13.8%) is much larger than the percentage decrease in input prices (-1.38%) during that period.

Without any relief in the form of improved crop prices received, figure 1 suggests farmers will continue to suffer from cost/price squeezes and eroding profit margins. Further, figure 2 shows the magnitude of that spread between the indices in Figure 1; if input and output prices continue this trajectory, an improved farm safety net will be warranted. This will be at the forefront of every producer’s mind, with ongoing Farm Bill debates in 2024.  

Figure 2. Year-over-Year % Change in Input and Output Crop Prices

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References

Schulz, L. (2022). Disentangling Input and Output Price Relationships. Retrieved from: https://www.extension.iastate.edu/agdm/articles/schulz/SchSep22b.html

The Observatory of Economic Complexity (OEC). (2024). Fertilizers in Russia. Retrieved from: https://oec.world/en/profile/bilateral-product/fertilizers/reporter/rus

USDA-Economic Research Service (2024). Farm Sector Income & Finances: Highlights from the Farm Income Forecast. Retrieved from: https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/highlights-from-the-farm-income-forecast/

USDA- Economic, Statistics, and Market Information System. (2024). Agricultural Prices. Retrieved from: https://usda.library.cornell.edu/concern/publications/c821gj76b?locale=en

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Loy, Ryan, and Hunter Biram. “The Disparity Between Crop Prices Received and Input Prices Paid.” Southern Ag Today 4(28.3). July 10, 2024. Permalink

The University of Tennessee Institute of Agriculture hosted the 2024 Beef Improvement Federation Conference two weeks ago. One session that spurred on great conversations was estate transition planning and what that entails. Table 1 displays the Southern Ag Today states and the age break downs of total producers. Kentucky has the highest percentage of producers that are under the age of 35 (10%). For the age range of 35 years to 64 years, all states have over 50% of their producers in this category. But, six states (TX, VA, MS, GA, SC, and FL) have 40% of their producers in the 65 years of age and older category, with Mississippi having the highest percentage at 42%. Farm management is often thought about only from a financial performance (income statement, balance sheet, cash flow statement) standpoint, but sound farm management also includes planning for the future, including estate and management transitions. 

A large number of producers in the Southern region are potentially nearing retirement or are over the age of 65 years. This would suggest that estate transition planning should start becoming a priority. If the goal of the farm is to stay a farm, then at some point in the future, the farm will change hands. Transition planning can become a huge task if no plan has ever been thought about or developed. Often, producers indicate that they don’t know where to start. That is understandable. Thus, a good starting point could be, “What is adequate retirement income?” Building upon this question could solve questions like: “What are my lifestyle costs? Will costs change in retirement (life care)? How much income will come from social security, pensions, savings, investments, and the farm?” Each farm is different and has diverse challenges like trusts, multiple families/individuals in the operation, debt amounts, urban encroachment, and many more. 

However, starting the conversation is the most important step for everyone involved in the process. The key to this falls on the shoulders of the parent(s). Not only is it awkward for the child, or children, to start this conversation, but if there are multiple children and one takes the lead, it can have unintended consequences. But just initiating the conversation is the start. Throughout the process, there are many tools that can be utilized: a will, power of attorney, advanced healthcare plan, healthcare agent, trusts, insurance, letter of last instruction, and easements. While the previous sentence has a lot of moving parts, having a team of professionals could aid in the process and make it easier. The team could include an attorney, accountant, financial planner, lender, extension educator, business consultant, and communication specialist.

The topic of estate transition is diverse, and it looks different for every operation, but starting the process is never the wrong step. This article only scratches the surface, but below are resources available to you to start. 

University of Tennessee: Farmland Legacy- https://farmlandlegacy.tennessee.edu

University of Minnesota- https://agtransitions.umn.edu

Iowa State University- https://www.extension.iastate.edu/bfc

Table 1. Age Group Break Down of Total Producers for Southern Ag Today States

		Percent of Producers in Age Group
State	Total Producers	<35	35-64	65 and Older
TX	402,876	6%	52%	41%
OK	124,743	9%	53%	37%
AR	67,425	9%	54%	36%
LA	42,551	8%	54%	38%
KY	119,132	10%	55%	35%
VA	67,798	8%	52%	41%
TN	107,817	7%	53%	39%
NC	72,479	9%	54%	38%
MS	52,025	7%	51%	42%
AL	62,777	8%	53%	39%
GA	67,082	7%	53%	40%
SC	38,097	8%	51%	41%
FL	79,253	7%	53%	40%

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Martinez, Charley, and Kevin Ferguson. “Estate Transition Planning.” Southern Ag Today 4(27.3). July 3, 2024. Permalink

Agricultural lenders listed liquidity and working capital as their top concern for producers this crop year, according to a survey conducted by the American Bankers Association and Farmer Mac last August. This is likely an indicator that lenders are seeing the outlook for lower commodity prices while at the same time retaining elevated input costs, including interest rates on operating notes. Because of the nature of agriculture, where there are months when cash outflows exceed inflows during the growing season, liquidity and working capital should be a priority every year, regardless of market outlook.

Liquidity is a producer’s ability to meet their cash financial obligations as they become due. Working capital is a measure of liquidity that measures how much current assets exceed current liabilities. 

Current assets and current liabilities are found on the balance sheet. Current assets include cash and other assets that can be converted to cash relatively quickly, while current liabilities include any debts that are due within a year or less. Some examples of current assets include cash, inventories of crops, market livestock, livestock products and supplies, accounts receivables, prepaid expenses, marketable stocks and bonds, and the cash value of life insurance. All of these can be quickly converted to cash to pay any debts that come due. Current liabilities are debts or obligations that must be paid within a year’s time or less, including accounts payable to merchants and suppliers, current notes payable and the current payments required on long-term notes payable to lending institutions.

Liquidity, by definition, is related to cash flow. In agriculture, a pro forma cash flow statement is a great tool to estimate cash flows and working capital balances for the upcoming crop year, providing an idea of the approximate timing and size of inflows and outflows. Of course, it is difficult to truly predict the future. As a result, producers need to have an appropriate amount of working capital on hand to provide flexibility in meeting uncertain cash flows. 

An example of this occurred during the planting season this year. The weather was unusually wet in some areas this past month, leading to saturated soils that caused seedling damage. Some producers had to make the decision to replant some of their fields. Those who had the working capital available were able to afford this unexpected cash outflow. Liquid reserves, by means of working capital, are necessary for the sustainable operation of the farm business every year.

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Sources/Resources:

Fall 2023 Agricultural Lender Survey Results. (Nov 6, 2023). The American Bankers Association and Farmer Mac survey conducted August 2023. https://www.aba.com/-/media/documents/reference-and-guides/2023-ag-lending-survey-report.pdf Obtained online Jun 10, 2024.

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Smith, Amanda R. “Liquidity and Working Capital a Priority.” Southern Ag Today 4(26.3). June 26, 2024. Permalink

An increasingly important decision facing farmers is incorporating conservation and ecosystem services into their production activities. U.S. state and federal agencies, market-based entities, and non-governmental organizations are all developing programs that modify how food and fiber are produced with respect to environmental concerns. Local soil and water conservation districts and the USDA Natural Resources Conservation Service provide cost share for specific conservation activities. One of the roadblocks to ecosystem service contracts and conservation practices is involving both landowners and tenants on land that might be eligible for the programs offered. Many ecosystem and conservation services contracts have longer terms than the underlying lease on the land. Most require the landowner to agree to the contract but then the tenant is responsible for complying with the contract provisions. This situation requires landowners and tenants to successfully navigate the negotiation of incorporating conservation practices into their farmland leases.

To help farmers and landowners augment a traditional lease, we suggest a four-step process: 1) understand objectives; 2) explore opportunities; 3) communicate; and 4) document the agreement. 

Understand objectives. Both landowners and tenants have various objectives in farming a piece of land. Landowners have objectives as diverse as profit maximizing to recreational enjoyment to improving the environment. Tenants also have various objectives – including making a profit, efficient use of existing assets, and family lifestyle. However, the first, and often only, objective discussed is the financial objective. Both landowner and tenant approach the other with the goal of settling on a rental rate that satisfies both. Because conservation has implications for the long-term value of the land, it is easier for the tenant to assume the landowner might value a lease change that involves conservation activities. Therefore, the tenant can merge financial goals (maintaining long-term investment) with conservation goals. 

Explore Opportunities. Conservation activities are site-specific. A conservation plan for one field may not be appropriate for an adjacent field for numerous reasons. Exploring opportunities is a transaction cost. Transaction costs include education about alternatives, investigation into sources of assistance, obtaining a viable conservation plan, and estimating the cost of enacting the conservation plan. The party most interested in modifying the lease is likely the one who will need to incur the bulk of the transaction costs. These expenses may occur before communication with the other party begins. 

Communicate. Success is enhanced by approaching the other party with a clear but flexible plan that acknowledges the other’s objectives and meets their educational needs. The act of beginning a conversation can reveal objectives and opportunities for meeting both party’s objectives. Communication takes time. The person receiving a request needs time to think about how it fits with his/her objectives. Often, a counterproposal is made that needs to be considered by the other party. Multiple discussions are common for all but the simplest changes. Even when a plan is agreed to, drawing up the final details and finding resources takes time. Waiting until lease renewal is due is not a good time to propose a change. Change needs to be proposed months before a lease renewal date so that neither party is rushed or rejects it outright for lack of time to think through the consequences. 

Document the agreement. Incorporating conservation practices into leases is not common practice in the U.S., so there is a danger of not understanding what each party agreed to do. Documenting the agreement in a written lease prevents misunderstanding. Because conservation activities tend to span more than a single year, the lease agreement may move from an annual lease to a multiple-year lease. Some ecosystems services programs (e.g. carbon credits) may go directly to the landowner, therefore rental rates need to be adjusted to incentivize the farmer to implement the practice on lease ground. For example, in the first year or two, when cover crops are planted, the landowner might reduce rent by a fixed dollar amount with the agreement that it will rise back to a more customary rate in year three. The same effect can be obtained by the landowner agreeing to pay for part of the expense of planting cover crops for years one and two but ceasing to pay after that. This way of incentivizing cover crops involves agreeing upon both the rental discount (or payment) amount and the number of years. These types of agreements need to be in writing so that they are not forgotten or become a point of disagreement in the future.

For more details see Massey and Hefley (2023) available at: https://extension.missouri.edu/publications/g421

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Taylor, Mykel, and Ray Massey. “Incorporating Conservation Practices into Leases.” Southern Ag Today 4(25.3). June 19, 2024. Permalink

Farmland value represents the most important component of an agricultural producer’s net worth and asset value, accounting for more than 80% of the average farm balance sheet, according to a USDA survey. Therefore, monitoring farmland value per acre is crucial, as it affects farmers’ and ranchers’ ability to secure additional funding from lending institutions, given that these lands are used as collateral.

Farmland Value Increase in the Short-Term

In the last couple of years, despite interest rate hikes that have increased the cost of funding for farmland purchases, the demand for agricultural land and farm profitability have remained strong. Strong demand, coupled with a limited supply of agricultural land, average agricultural land prices soared by 7.7% in 2023, according to the USDA.

Recent record-high farmland value increases in the Corn Belt region have sparked discussions about the seemingly slower increase in the southern region. While it is true that some Corn Belt states experienced 30% to 40% increases in farmland values over the past couple of years, examinations of broader regional changes and long-term trends present a different picture.

According to the USDA, since 2021, cropland values in the Southeast (Alabama, Florida, Georgia, South Carolina) and the Southern Plains (Texas and Oklahoma) have increased by 20% and 22%, respectively, making these increases comparable to those in the Corn Belt states (22%). Delta states (Arkansas, Louisiana, and Mississippi) experienced a 12% increase, falling short of other regions. Increases in pastureland values were more consistent across regions. Delta and Southeast states saw increases of 12% and 13% in pastureland values, similar to the 14% increase in the Corn Belt states. In the Southern Plains, pastureland values soared in 2023, reaching a 20% increase.

Farmland Value Increase in the Long-Term

While some southern states may seem to lag behind in growth rates in the short term, long-term trends show robust growth for these states. Between 2014 and 2023, the Southern Plains states experienced the highest increase in cropland value (50%), while the Southeast and Delta states each saw a 40% increase. Cropland values in the Corn Belt states increased by 18% during the same period. Looking at pastureland, the dollar value per acre in the Delta states increased by 39%, followed by the Southern Plains (34%) and the Southeast (30%). Pastureland value in Corn Belt increased by 22% for the same period.

Moving Forward

While it is true that farmland value increases have been sluggish for some states in the South, production specialties and long-term trends should not be overlooked.

For 2024, it is generally expected that farm profitability will decrease, especially for crop producers, adding downward pressure on cropland values along with high farmland loan interest rates. However, due to the limited supply of farmland and strong demand for agricultural land, it is expected that farmland values will remain steady or experience a slight increase.

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Kim, Kevin. “Farmland Value Trends in South.” Southern Ag Today 4(24.3). June 12, 2024. Permalink