Category: Farm Management

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

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