Category: Farm Management

It may seem that barely covering expenses with little positive net farm income means a business is “treading water.” Ideally, a farm would generate revenues that exceed total expenses each year and have cash and other resources to reinvest into the business. However, agriculture can be highly variable from farm to farm and year to year. Reaching incremental financial goals can help producers hit economic targets and minimize risk. To think of financial well-being as a ladder, the bottom rung is financial loss, and the highest rung is maximum profitability. Each rung that is attained is a higher position and further away from financial harm. 

It may not be flashy, but a farm that can generate revenues to break-even and pay down debts has indeed climbed several rungs on the financial ladder. It may not afford much extra cash or the ability to expand the operation, but the business is still making progress. To think of the equation total farm assets – total farm liabilities = farm equity, covering all variable and fixed expenses means the farms equity is continuing to grow. Over time, the owner(s) continues to own more of the business until an ownership change or business dissolution. Either way the owner has accrued increased net worth over time. 

Of course, there are other items that impact total farm assets or total farm liabilities. Asset values can change from year to year. In some cases, they could be quite volatile depending on the valuation method. For discussion, we’ll assume an adjusted cost basis with no major adjustments. Fixed asset accounts can decrease because of depreciation, but we assume this expense is a fixed cost of the business. Liabilities are useful and, in some cases, necessary, but a farm taking on unnecessary liabilities can tip the scales away from the owner, allowing creditors to own more of the operation. Liabilities such as bank loans allow the business to leverage resources to increase production, profitability, efficiency, and other measures. If the farm incurs aliability but the increase in assets is greater than the liability + interest over time, then it will add to the farms’ equity. It’s not always possible to understand the impact of a decision right away, it may take several cycles before seeing the resulting change in farm equity. For an asset purchase with a loan, the initial impact on equity will likely be zero. $100,000 farm asset increase – $100,000 farm liability increase = $0 change in farm equity. However, the influx of cash resulting from the asset’s productivity, allowing the business to cover the depreciation of the item, interest, and debt payments, can have a positive impact on farm equity.

It is important to consider context, too. A farm with successive losses but is now at break-even would seem to be making progress. A farm that has had big years but is now at break-even could signal a downward trend, or it could be merely a speedbump resulting in a short-term modest return.  In general, a business that is paying down debts is contributing positively to farm equity and adds financial resiliency to the business. Should the operation need to borrow again in the future, end up with a financial loss one year, or eventually sell out, the farm will be in better financial position because of the previous farm equity contributions made. 

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Burkett, Kevin. “Building Equity.” Southern Ag Today 4(23.3). June 5, 2024. Permalink.

Everyone who buys or sells feeder cattle regularly understands that in most markets, the price per pound decreases as cattle get heavier. This can create a challenge for pricing cattle in situations where weight is not known with certainty. Final weight is uncertain in forward contracts, internet sales, and when cattle are sold off the farm but hauled to another location to determine pay weight. In these situations, cattle are often sold with a base weight, and the price is adjusted downward as the weight of the cattle exceeds that base weight. As an illustration, let’s consider a backgrounder that sold cattle via an internet auction with an advertised base weight of 800 lbs. and a price slide of $8 per cwt. Let’s further assume that the cattle sell for $240 per cwt in the auction and will be hauled to a weigh station the following week to determine the pay weight.

If those steers were to weigh exactly 800 lbs, no price adjustment is needed. The pay weight is 800 lbs. and the price is $240 per cwt for a total of $1,920 per head. However, if the cattle weighed 850 lbs., the price is adjusted downward because they are 50 lbs. above the base weight. With an $8 per cwt slide, the price would be adjusted downward by $4 per cwt (50 lbs. is half of a cwt). With a pay weight of 850 lbs. and an adjusted price of $236 per cwt, the per head total is $2,006. Price slides can get much more complicated than this, but this simple illustration captures the process well enough for this discussion. As long as the price slide is not so large as to actually result in a lower value per head, the seller is typically happy to have more lbs. to sell. In the previous example, the cattle sold for $86 more than they would have had they weighed right at the base weight.

Now, I want to focus this discussion on the difference between the artificial price slide used to adjust the price for cattle weighing above the base weight and the actual market price discount as cattle get heavier. The table below illustrates this point in relatively simple terms. Suppose the market price for an 800 lb. steer is $240 per cwt and the market price for an 850 lb. steer of the same type and quality was $235 per cwt. This would imply that the actual price discount in the feeder cattle market was $10 per cwt and the market value of those 850 steers would be $1,997.50 per head (850 lbs. x $235 per cwt). If a seller advertised that group of steers with a base weight of 800 lbs. and a $10 per cwt price slide, the price slide and the market discount for weight would match perfectly. The final price would be the same even though the pay weight exceeded the base weight. This scenario is shown in the middle row of the table below, but this will not be the case when differences exist between the market discount for weight and the price slide.

If the artificial price slide is less severe than the market discount as cattle get heavier, then the seller is actually better off if the pay weight exceeds base weight because the lower artificial price slide would result in a smaller price discount due to the additional lbs. This is illustrated below with the $8 per cwt price slide and note that the final price is higher for these steers. Previous research has found evidence that sellers tend to underestimate weights in these situations (Brorsen et al., 2001). Conversely, if the market discount is greater than the price slide, the seller would actually receive a lower final price than had they advertised the cattle with the higher base weight to begin with. Note that the $12 per cwt price slide below, which exceeds the market discount, results in a lower final price. In situations such as this, sellers have no incentive to overestimate weight (Burdine et al., 2014).

In theory, price slides used for selling cattle with weight uncertainties should evolve with the market. But my experience has been that they are often slow to adjust, whereas market conditions change very quickly. The key point from this discussion is that a price slide is most efficient when it is roughly equal to the market discount as cattle get heavier. In those situations, there is no incentive for sellers to underestimate weight when selling cattle on a slide and there is little true penalty if they do. Buyers and sellers both need to understand the implications when prices slide and market weight discounts diverge, as this can have an impact on both parties.

Base weight	Sale Price	Pay Weight	Price Slide	Final Price per cwt	Final Value per head
800	$240	850	$8 per cwt	$236	$2,006.00
800	$240	850	$10 per cwt	$235	$1,997.50
800	$240	850	$12 per cwt	$234	$1,989.00

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References:

Brorsen, B. W., N. Coulibaly, F. G. C. Richter, and D. Bailey. 2001. “Feeder Cattle Price Slides”. Journal of Agricultural and Resource Economics. 26: 291-308.

Burdine, K.H., L. J. Maynard, G.S. Halich, and J. Lehmkuler. 2014. “Changing Market Dynamics and Value-added Premiums in Southeastern Feeder Cattle Markets”. The Professional Animal Scientist. 30:354-361.

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Burdine, Kenny. “Understand the Implications of a Price Slide When Buying and Selling Cattle.” Southern Ag Today 4(21.3). May 22, 2024. Permalink

Starting December 24, 2024, the EU will require all imported soybeans to be deforestation-free and traceable to specific fields. Archer Daniels Midland (ADM) and the Farmers Business Network (FBN) have launched a Deforestation-Free Soybean Program to meet this requirement. This EU mandate will affect all elevators selling soybeans to Europe, prompting additional verification platforms across the U.S.

For Southern soybean producers, selling soybeans to ADM may require enrollment in ADM’s Deforestation-Free Soybean Program via the FBN website/app by June 1, 2024, and the submission of field boundary data by July 15, 2024. Enrollment is free, and by submitting field boundary data, FBN will use satellite imagery to verify that the soybeans were grown on land not deforested after December 31, 2020. Table 1 lists the ADM locations across the U.S. participating in the Deforestation-Free Soybean Program, with southern locations in Arkansas, Kentucky, and Tennessee impacted.

What constitutes not deforested? A field where more than 1.24 acres of trees were forested (including fence rows). Early indications also suggest that some ADM locations will only accept deforestation-free soybeans, albeit at a premium. ADM is offering up to a $0.15/bushel premium if farmers enrolled in the program and an additional $0.05/bushel if enrolled by May 1, 2024, and field boundary data submitted by June 1, 2024. 

For more information on enrolling in the program, please visit ADM’s re:source website here and contact your local ADM elevator for specific requirements. If you choose not to enroll in this program, selling to a different elevator could incur additional costs, particularly if your typical ADM site does not accept unenrolled soybeans. Understanding hauling costs and local basis when delivering to a different market is important, as it can impact fuel, labor, other operating costs, and marketing strategies. Contract options may be limited, and local basis could be affected.

The push for non-deforested beans may affect local markets and grain marketing decisions in the future. Similar premiums will likely be offered for other sustainable agriculture efforts, such as carbon sequestration. These changes provide opportunities but also challenge producers to adapt quickly to evolving market conditions.

Table 1. ADM locations participating in the Deforestation-Free Soybean Program

State	ADM Locations
Arkansas	Helena
Illinois	Creve Coeur, Curran, Decatur, Farina, Gulfport, Havana, Hennepin, Hume, Mendota, Mound City, Mt. Auburn, Niantic, Ottawa, Ottawa South, Quincy, Sauget, Spring Valley, Taylorville, Tuscola
Indiana	Evansville, Mt. Vernon, Newburgh, Rockport
Iowa	Burlington, Clinton
Kentucky	Henderson, Livingston Point, Silver Grove
Missouri	Center, Charleston, Montgomery City, New Madrid, Novelty, Shelbina, St. Louis
Ohio	Toledo
Tennessee	Memphis

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Shockley, Jordan, and Grant Gardner. “Management and Marketing Implications of Deforestation-Free Soybeans in the Southern Region.” Southern Ag Today 4(21.3). May 22, 2024. Permalink

The USDA recently released data from the 2022 census of agriculture. In 2022, cover crops were planted on 6.2% of the total cropland acres in the South, surpassing the national average of 4.7% for the 48 contiguous states. In fact, the top five counties in the US in terms of percent of cropland in cover crops were all from the South, located in Virginia, Maryland, and Florida. However, there is substantial variation in the adoption of cover crops across counties, as shown in Figure 1. Maryland led the way with 27.3% of its total cropland acres in cover crops, followed by Virginia at 15.2%. On the other end of the spectrum, Louisiana and Arkansas had the lowest rates, at 3.2% and 3.4%, respectively. 

Figure 1: 2022 Southern Cover Crop Adoption Rate by County, as Percent of 2022 Cropland

Between 2017 and 2022, there has been a significant change in cover-crop adoption across the southern states. Texas saw the largest increase in cover-crop area in the US, adding over half a million acres, corresponding to a 1.9 percentage-point increase as a percentage of 2022 cropland. The remaining states in the South combined for a net increase of just fifty-thousand cover crop acres. This was largely due to the disadoption of the practice, as six states observed decreases in cover-crop acreage from 2017-2022. In fact, 49.8% of counties in the southern states saw disadoption over the period – as demonstrated by the blue counties in Figure 2 – disadopting over one million acres of cover crops in total. Overall, the adoption of cover crops decelerated between 2012-2017 and 2017-2022, driven by the increased number of counties that experienced disadoption.

Figure 2. Change in Cover Crop Adoption Rate by County (2017-2022)

These patterns help us understand how the cover crop adoption rate in the South has changed. The adoption of cover crops has expected benefits, including soil health, erosion control, weed and water management, and carbon sequestration. Patterns of adoption over time should reflect areas where realized benefits and any additional subsidy (state, federal, or private sector) outweigh the costs of implementation.  Similarly, disadoption is likely an indication of producers experiencing cover crop expenses that exceed any realized or perceived benefits. Acres fluctuating in and out of cover crops may have implications on the credibility and stability of voluntary carbon markets and contracts tied to the practice.  One thing is clear: the costs and benefits of cover crop systems are dynamic and can vary significantly by producer, commodity, and region.

References

U.S. Department of Agriculture. 2024. 2022 Census of Agriculture. Washington, DC: U.S. Department of Agriculture, National Agricultural Statistical Service.

U.S. Department of Agriculture. 2019. 2017 Census of Agriculture. Washington, DC: U.S. Department of Agriculture, National Agricultural Statistical Service.

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Okonkwo, Emmanuel, Wendiam Sawadgo, and Alejandro Plastina. “Cover-crop Acres up in Texas, Stagnant Across Rest of the South.” Southern Ag Today 4(20.3). May 15, 2024. Permalink

The USDA’s Transparency in Poultry Grower Contracting and Tournaments ruling became effective on February 12, 2024. This ruling modifies the Packers and Stockyard Act by adding several additional requirements to be met by “Live Poultry Dealers,” or what most contract growers know as integrators or poultry companies. The rule requires integrators to provide two disclosure documents: The “Live Poultry Dealer Disclosure Document” and the “Tournament Specific Input Disclosure.” A fact sheet covering the rule and its requirements can be found here: https://www.ams.usda.gov/sites/default/files/media/PoultryGrowerFactSheet.pdf

The USDA also has a webinar that goes into further detail about the rule:  https://www.youtube.com/watch?v=ndz_gw4dpfM   In this webinar, USDA states that they expect implementation to evolve for each company as they make changes to comply, and they will work with companies to assist in compliance. 

One of the requirements of interest is for integrators to guarantee an absolute minimum number of flocks per year and a minimum number of birds placed, or pounds of birds produced, per year on the contract grower’s farm. The results of this part of the ruling could be both positive and negative for growers. 

On one side there is the contract broiler grower who has invested a large amount of capital to build a farm. A new broiler farm consisting of four 54’ x 500’ barns can cost $2 million or more to build and get ready for birds. The grower then must cover the utility and labor cost of growing the birds, both of which are steadily increasing. With interest rates above 7% currently, a grower would face over $400,000 in annual costs for his loan and expenses. This makes any form of income guarantee important to growers, as well as lenders. Before the new ruling, the best information available was company-provided estimates for grower income based on averages over time. The new ruling requires companies to guarantee a minimum number of birds per flock and flocks per year but not flock payments or final gross revenue. Under typical competitive pay programs, final flock payments are affected by bird growth, which is affected by on-farm management and cannot be guaranteed. Thus, the final flock payment to a specific farm could still vary significantly from company averages and is unknown until the end of the flock. This kind of income risk can make farm budgeting difficult and can drive growers to a defensive cost-saving posture as their only predictable form of income protection. Such cost-saving management decisions can negatively impact the birds’ performance and decrease the income potential for the grower and increase cost of production for the company. In such cases, a guarantee of income could be beneficial if it were sufficient to cover all or most known cash flow needs. Some companies had begun implementing modified pay programs with some income guarantees before this ruling came out. 

On the company side, the placement guarantee rule leaves out the biological variability of producing broilers. There is an old saying, “don’t count your chicks before they hatch.” Poultry companies must plan months ahead and “count the chicks” before the eggs are laid. Sometimes, these expectations are not met for uncontrollable biological reasons, and there just aren’t enough chicks to go around. There is no language in the ruling that takes this into consideration. 

There is also no language that addresses problems that can and do occur at the farm and company level that could interrupt timely placement and affect a farm’s number of flocks placed per year – whether that be planned, like plant maintenance or holidays, or unavoidable, like an HPAI outbreak. Sometimes, individual farms must perform maintenance or repair damage that would delay flock placement for several days or longer on that farm. Sometimes, integrators may need to respond to market downturns with placement changes. Such situations would typically only affect a percentage of a company’s broiler growers and only for a short time as well, though longer impacts have been known to occur in times of severe market struggles, like what happened with COVID-19. If the timing of any of these situations were right, they may keep an affected farm from getting the stated minimum number of flocks in one year.  

These real-world situations may result in companies not contractually guaranteeing what they normally may expect growers to receive, nor what they desire to process through the plant, but instead guaranteeing significantly less to avoid running afoul of the rule. This makes obvious sense and protects the company, but creates additional problems for the grower, especially when it comes to securing financing for new facilities. There is a significant possibility that financial institutions would only be able to calculate income potential generated from the guaranteed minimums. Such a decreased income could hinder growers from obtaining loans. 

Another important requirement is that companies must provide average grower revenue numbers per square foot by housing type, low to high by quintile, and across time. These could be used as a basis of income for financial determinations. It could be argued that, except for house type and quintile breakdown, this is the same as the overall average gross returns that integrators have been providing in pro forma documents before the ruling. The biggest difference is that this would give potential growers a snapshot of what pay could be, both high and low, and how it can vary rather than a single-point average. The problem is that under typical competitive pay programs now, grower income is subject to change for every flock. Therefore, a farm could and likely will fall within each of the quintiles at some point in time. Therefore, if a grower was wanting to estimate revenue based on the least risk, he would be forced to only consider the lowest quintile pay as his basis for a decision. This conservative evaluation may project an artificially negative outlook on starting a poultry farm both for growers and financial institutions.  

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Brothers, Dennis. “New Poultry Contracting Regulation’s Potential Effects on Broiler Growers.” Southern Ag Today 4(19.3). May 8, 2024. Permalink