Category: Farm Management

Updated February 8, 2024

Navigating crop insurance for upland cotton can be complex, with various options and critical timelines. Our previous Southern Ag Today article discusses crop insurance policies available for upland cotton (Chong, Liu, and Biram, 2023). This article highlights essential dates for upland cotton producers to track to ensure effective management and protection of their investments.

Securing federal crop insurance coverage relies on adhering to critical timelines and dates associated with these policies. Keeping track of these important dates can be challenging for producers since different crops have different decision deadlines. Among the crucial dates, producers must carefully track the sales closing date and the cancellation date for effective management. The Sales Closing Date is the last date to apply for or change crop insurance coverage from the previous year. Producers are expected to decide by this date on the type of policy and the level of protection. The Cancellation Date is the last date for producers to inform the insurance company if they do not want to renew their crop insurance for next year. Otherwise, their insurance policy will automatically renew for another year. 

For upland cotton, the U.S. Department of Agriculture Risk Management Agency (USDA RMA) has released important dates regarding the sales closing and cancellation dates for crop insurance. The sales closing date and cancelation and termination date are the same date for all counties for cotton, and they are also the same date among the different crop insurance policies available for upland cotton (see our previous Southern Ag Today article for a detailed discussion of the insurance policies available for upland cotton). Notably, these dates remain consistent annually but vary according to state and location, as detailed in Figure 1 and Table 1. Texas has been separated into three regions, each with a different date for sales closing dates and cancellation dates. For all the other states, the same dates apply to different counties in the state. 

Producers can find these specific dates in their county through the USDA RMA Actuarial Information Browser and contact a crop insurance agent (see Agent Locator Tool offered by the U.S. Department of Agriculture Risk Management Agency) for more information regarding specific questions. 

Figure 1. Regional Differences in Cotton Crop Insurance Policies’ Sales Closing Dates and Cancelation and Termination Dates 

Table 1. Cotton Crop Insurance Policies’ Sales Closing Dates and Cancellation and Termination Dates by State and County

State and County	Dates
Val Verde, Edwards, Kerr, Kendall, Bexar, Wilson, Karnes, Goliad, Victoria, and Jackson Counties, Texas, and all Texas counties lying south thereof.	Jan 31
Alabama; Arizona; Arkansas; California; Florida; Georgia; Louisiana; Mississippi; Nevada; North Carolina; South Carolina; El Paso, Hudspeth, Culberson, Reeves, Loving, Winkler, Ector, Upton, Reagan, Sterling, Coke, Tom Green, Concho, McCulloch, San Saba, Mills, Hamilton, Bosque, Johnson, Tarrant, Wise, and Cooke Counties, Texas, and all Texas counties lying south and east thereof to and including Terrell, Crocket, Sutton, Kimble, Gillespie, Blanco, Comal, Guadalupe, Gonzales, De Witt, Lavaca, Colorado, Wharton, and Matagorda Counties, Texas.	Feb 28
All other Texas counties and all other states.	Mar 15

Source: Summary of Changes for the Cotton Crop Provisions (17-0021), U.S. Department of Agriculture

References: 

Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink

U.S. Department of Agriculture, Summary of Changes for the Cotton Crop Provisions (17-0021), November 2016. https://legacy.rma.usda.gov/policies/2017/17-0021.pdf

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Liu, Yangxuan, Hunter Biram, and Fayu Chong. “Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates.” Southern Ag Today 4(3.3). January 17, 2024. Permalink

How can you recognize warning signs indicating financial distress on your farm? Although many farm proprietors and managers have a solid grasp of their farm business’s profit dynamics, they frequently overlook the critical aspect of assessing financial resilience. The financial resilience of a business can be gauged by examining liquidity and solvency ratios. In fact, a majority of agricultural lenders, including commercial banks and institutions within the farm credit system, actively consider these ratios as part of their evaluation during the farm loan approval process.

To compute these ratios, you should initially create financial statements, such as the balance sheet and income statement. While the manager and/or owner might not be the ones directly creating these statements, it’s crucial for them to comprehend the insights these statements offer regarding the business’s financial health and ways to enhance weak financial performance. Emphasizing the importance of maintaining accurate records and regularly producing these statements is strongly recommended, as they prove beneficial during tax filings, loan applications, and gaining insights into the current financial status of the business.

Liquidity

Liquidity metrics assess a debtor’s capability to settle existing debt commitments without seeking external funding. These metrics are primarily derived from components of the balance sheet’s current assets and current liabilities. Current assets comprise assets easily converted into cash, like cash, bank accounts, investments, and inventories. Current liabilities consist of obligations due within a year, such as accounts payable, production loans, and current portions of noncurrent debt. The most commonly employed liquidity metric is the current ratio, expressed as:

Current Ratio = Current Assets/Current Liabilities

A higher liquidity ratio indicates that the dollar value of current assets surpasses the value of short-term debt obligations, which is favorable.

Solvency

While liquidity ratios focus on the present timeframe, solvency ratios assess a farm business’s capacity to cover all liabilities with its total assets. Unlike liquidity ratios, it is necessary to consider the dollar values of both long-term and short-term assets and liabilities on the balance sheet. This includes the dollar value of farmland (a long-term asset) and farmland loans (a long-term liability), which often represent a significant portion of a farm’s balance sheet. The most widely utilized solvency metric is the debt-to-asset ratio, expressed as:

Debt to Asset Ratio = Total Liabilities/Total Assets

In contrast to the current ratio, one must divide the dollar value of total liabilities (financial obligations) by the dollar value of total assets. A high debt-to-asset ratio may indicate insolvency, signaling that the value of total liabilities surpasses total assets.

Compare Your Numbers with Benchmarks

The Farm Financial Standards Council (FFSC) establishes benchmarks for these ratios, which are periodically updated, although not significantly. According to the FFSC, it is considered favorable to have a current ratio exceeding 2 and a debt-to-asset ratio lower than 0.6. It is highly recommended that farmers and ranchers assess their liquidity and solvency measures against these benchmarks and take corrective measures if their figures fall short. These can be done through, but not limited to, selling of farm assets that are not in use, raising equity capital through ownership restructuring, and renegotiating on long-term debt. 

Additionally, it is wise to compare these numbers with national, regional, and specialty-specific averages, as some lenders may evaluate an applicant’s information in relation to other peer groups when deciding on approvals. Individuals can compare their figures with peers based on specialty, region, size, and age group using the USDA Economic Research Service’s report, accessible through the following link: https://my.data.ers.usda.gov/arms/tailored-reports

Also, it is a good idea to keep track of these ratios over time, to see whether the financial resiliency of one’s business is improving or deteriorating. 

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Kim, Kevin, and Brian E. Mills. “Financial Ratios to Consider for Measuring Financial Resiliency of Your Farm.” Southern Ag Today 4(2.3). January 10, 2024. Permalink

A common question asked each year by cattle producers is, “What should I do with my heifers? Should I raise them as replacements or sell them as weaned heifers?” This question is especially relevant in today’s market of high prices and the inevitability that expansion will have to start at some point. The answer involves penciling out the expenses and deciding which option best suits an operation in the current market. Costs of developing heifers include the current value of weaned heifers (opportunity cost), variable expenses, breeding costs, fixed expenses, and absorption costs. The Replacement Heifer Calculator discussed in this article aims to serve as a guide in organizing each of these costs and can be used as an estimation tool to calculate what it may cost to develop heifers on a specific operation and if it is economical to do so.  The calculator includes several key cost concepts, including:

1. The opportunity cost of selling weaned heifers must be recognized. “What revenue will be forfeited if I decide to raise these heifers rather than selling them now?” Understanding the opportunity costs allows for comparisons at the end of the estimation process to see which option is the most economical for an operation. 
2. Variable expenses (feed, medications, and pasture management) and fixed expenses (land rent, labor, and interest) are important for calculating what each heifer needs so that she will be 60-65% of her mature body weight at the time of breeding. A way to remember what costs will go into these sections is to ask: “What is needed for the health and nutrition of the heifer?” Variable expenses will vary across operations and from year to year due to fluctuating input costs. Fixed costs should remain roughly the same year to year but will vary across different operations. Interest is included to account for the time between the opportunity to sell them as weaned heifers until they are developed. 
3. Breeding costs are just that: “What is it going to cost to breed each heifer?” Whether you are using bulls or artificial insemination (AI), there are costs associated with both. Using natural service involves the costs of purchasing and maintaining the bull or bulls. Annual cost is determined using the following formula: ((purchase cost – useful years in the herd)/value at culling). A bull’s maintenance cost is his total variable costs, similar to a heifer’s variable cost: “What are the costs associated with maintaining the health of a bull?” The annual bull cost plus the maintenance cost divided by the number of heifers he will be expected to breed is his total cost. This total cost is then multiplied by the number of bulls needed, and then divided by total number of heifers to calculate the breeding cost of each heifer.
4. Absorption costs represent the cost of developing open heifers.  These costs are absorbed by the bred heifers that remain in the operation.  However, absorbed costs can be offset by the revenue from selling those developed, open heifers. The cost to develop all heifers is multiplied by the number of open heifers and then divided by the number of bred heifers to assign additional development cost to each bred heifer (cost absorbed). The revenue received by the sale of open heifers is then divided by the number of bred heifers to offset the additional development cost (revenue absorbed). All totals from each section can now be summed to estimate the cost of developing heifers. 

As an example, current prices for weaned heifers in Florida have been well above $2.00 per lb. since April 2023 and are continuing to rise. Prices for replacement cattle, open or bred, can be expected to follow the same trend in Florida as the demand for and value of replacement cattle increases when expansion begins to occur. Understanding the full cost to develop heifers allows you to compare that cost to selling heifers at weaning and buying bred replacements.  If the price of bred heifers is greater than the total cost to develop bred heifers, a potentially profitable investment has been made in your heifers. Of course, also important to the decision is your strategy for genetic development, which must be weighed against the value of weaned heifers, development costs, and the cost of purchased replacements. These decisions are all about the goals and risk management strategies of each operation. According to the example in Table 1, the total cost to develop 100 heifers is $172,250 or $1,722.5/hd.  However, after considering the revenue of selling 10 open culls, the net development cost is reduced to a total of $150,650 or $1,673.89/hd for each of the remaining 90 bred heifers. The current value of young, bred replacement cattle with an average weight of 1,100 pounds is $1.54 per lb. or roughly $1,700/hd in Florida. Using the results of the example, you would save approximately $27/hd or a total of $2,430 if you raised your replacements (90) rather than buying them. Even though the price you would have received for selling weaned heifers is higher than the cost of development, the long-term outcome in this scenario suggests that the cost of development was worth the investment. With the value of female cattle expected to rise in the coming months due to inevitable expansion, raising your own replacements to rebuild your herd may be a more economical decision. Expenses can be overwhelming when looked at as a short-term lump sum. So, it is important to look at them as long-term investments when possible. To download the Replacement Heifer Cost Estimation Tool click here. The file will be located under ‘calculators’. 

Table 1. Raising Replacement Heifers in Florida

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Baker, Hannah. “What Should I Do With My Heifers?” Southern Ag Today 4(1.3). January 3, 2024. Permalink

An important financial consideration for any business is the costs they incur during the year. Ultimately, it affects the amount of profit or loss that will be realized by the business. There are certain “costs of doing business” known as overhead. These are things that an organization will have to pay for but are not designated to any one activity. An example might be property taxes. The taxes are owed and necessary for the business to maintain its property and obligations but typically could not be solely attributable to one activity like raising livestock or producing a crop. Usually, the costs are known but sometimes take a backseat to direct input costs when it comes to evaluation. For a true look at profitability, overhead must be factored in. The good thing is it may present opportunities for the business to cut down on its overall spending. 

Overhead expenses occur once a year, several times a year, or even more sporadically. The first step is making sure they are logged in the books and records of the business. They can be reviewed to make sure they are necessary, reasonable, and have ultimately been paid. Common overhead expenses include insurance, taxes, depreciation, utilities, office expenses, and salaries. This list may not be all-encompassing, and it is important to mention that any personal expenditures for these items are not included in farm profitability.  Often, the business will have a bill or receipt that includes the amount. For others, it may be more of a calculation like depreciation or extracting the business use of utilities. The main goal is to account for all “costs of doing business”. 

Determining total overhead is the first step. Once that has been completed, a producer may want to allocate the overhead costs to their different enterprises. This is not necessarily a precise calculation but is up to the owner or business manager. Some may approach it from a revenue perspective. For instance, if cotton is 50% of total farm revenue, then 50% of overhead will be allocated to it. Another method may be according to labor hours. If the time spent on a particular crop is 50% of the total hours worked (by everyone on the farm), then 50% of the overhead will be allocated to that crop. Product mix and profit margins will be different on each farm, so it is up to them to determine what is most appropriate. 

In reviewing the information, a farm may realize that there are opportunities to cut costs. While not advocating for a farm to run without its necessary expenditures, overhead may be where some costs can be scrutinized. Checking insurance rates every couple of years can provide the same coverage at a lower cost from a different carrier. Computer software and other subscription services may have promotions or discounts for being a continued customer. Perhaps there are subscription services that are going unused and could be cut out completely. If computer equipment is upgraded every couple of years, extending that out an additional year or two can defer the expense. Often, farmers may attend trade shows or conferences to pick up new information. Sometimes, the conference host or other farm organizations will provide a cost share for travel or reimbursement for the conference. 

The above are only a few ideas of cutting overhead costs. Individually, the costs may not account for much, but an effort to manage overhead can provide significant combined savings in the long run. If a farm is operating fairly lean from an input perspective, overhead may provide other opportunities to affect profitability. At the end of the day, revenues minus expenses determines net returns. Which expenses are reduced does not matter for the overall equation.

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Burkett, Kevin. “Look Out Overhead.” Southern Ag Today 3(52.3). December 27, 2023. Permalink

The risk in crop production, encompassing yield fluctuations and market price volatility, presents uncertain conditions for agricultural producers. To address and alleviate these uncertainties, the use of crop insurance is a key risk management strategy. The different crop insurance policies available for cotton producers frequently results in uncertainty concerning the variety of policies accessible and the specific regions where these policies are applicable.

For upland cotton, a range of Federal crop insurance plans serves to mitigate the inherent risks associated with cotton production. The Federal Crop Insurance Program (FCIP) for upland cotton encompasses three insurance plans offering farm-level protection against deep losses, which include complete losses. Yield Protection (YP) offers protection against only farm-specific yield losses, while Revenue Protection (RP) is designed to counter revenue losses triggered by variations in futures prices and farm yield. Revenue Protection with Harvest Price Exclusion (RP-HPE) also guards against revenue decline based on futures prices and farm yield but without the benefit of an adjusted revenue guarantee when harvest prices are above projected prices. 

In addition to farm-level deep loss insurance, shallow loss programs such as the Supplemental Coverage Option (SCO), Enhanced Coverage Option (ECO), and Stacked Income Protection (STAX) complement the risk management landscape. These policies are called shallow loss programs because none of these policies offer protection for complete losses. SCO and ECO function as add-on insurance products, which require enrollment in an underlying individual or farm-level plan of crop insurance (YP, RP, or RP-HPE) for enrollment. Both of these policies provide area or county-level protection. SCO and ECO follow the coverage of the underlying policy. If a producer chooses Yield Protection, then SCO and ECO cover yield loss. If a producer chooses Revenue Protection, then SCO covers revenue loss. SCO is only available for farms not enrolling in the Agricultural Risk Coverage (ARC) Program. Stacked Income Protection (STAX) functions as an add-on or a standalone product, which can be enrolled with or without the individual or farm-level plan of crop insurance (YP, RP, or RP-HPE). STAX is exclusively accessible to cotton producers whose base acres are not enrolled in the ARC or Price Loss Coverage (PLC) programs. Importantly, STAX may not be purchased with ECO or SCO. 

Biram and Connor (2023) provide a comprehensive discussion regarding how to utilize crop insurance programs with an overlap between the deep loss and shallow loss insurance programs. Aside from the deep and shallow loss programs previously mentioned, cotton producers have access to two more crop insurance options: Area Risk Protection Insurance (ARPI, including Area Revenue Protection and Area Yield Protection) and Hurricane Insurance Protection – Wind Index (HIP-WI). ARPI offers coverage based on the overall performance of a designated area, usually a county. ARPI safeguards against revenue or yield loss within a county. Meanwhile, HIP-WI assists by covering a part of the deductible of the primary crop insurance policy when a county or a neighboring one faces sustained hurricane-force winds. HIP-WI’s coverage can be combined with SCO and STAX when the insured acreage is also covered by a companion policy (YP, RP, or RP-HPE). A summary of these insurance programs available for cotton is summarized in Table 1. 

Ask your crop insurance agent if these plans of insurance are available in the county in which you produce cotton (see Agent Locator Tool offered by the U.S. Department of Agriculture Risk Management Agency). While insurance policies serve as vital tools in mitigating risks associated with cotton production, their intricacies underline the importance of understanding all the options and developing a comprehensive plan for managing price and yield risks.

Table 1. Individual and area crop insurance products with associated indemnity triggers and status as a standalone product for upland cotton (updated 2/8/2024)

Product	Type	Trigger	Standalone
Deep Loss Programs
Yield Protection (YP)	Individual	Farm Yield	Yes
Revenue Protection (RP)	Individual	Farm Revenue	Yes
Revenue Protection, Harvest Price Exclusion (RP-HPE)	Individual	Farm Revenue	Yes
Shallow Loss Programs
Supplemental Coverage Option (SCO)	Area	County Yield or County Revenue	No
Enhanced Coverage Option (ECO)	Area	County Yield or County Revenue	No
Stacked Income Protection (STAX)	Area	County Revenue	Yes, and can be purchased as an add-on Policy
Stacked Income Protection, Harvest Price Exclusion (STAX-HPE)	Area	County Revenue	Yes, and can be purchased as an add-on Policy
Additional Programs
Area Risk Protection (ARP)	Area	County Yield or County Revenue	Yes
Hurricane Insurance Protection – Wind Index (HIP-WI)	Area	Hurricane or Tropical Storm Incidence and Wind Speed*	No

*Hurricane and Tropical Storm triggers: Hurricane is wind speed, and Tropical Storm is wind speed plus county average rainfall total.

Reference:

H. Biram and L. Connor. (2023). Types of Federal Crop Insurance: Individual and Area Products. University of Arkansas Division of Agriculture Fact Sheet, Publication No. FSA75.

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Chong, Fayu, Yangxuan Liu, and Hunter Biram. “Exploring Diverse Crop Insurance Options for Cotton Producers.” Southern Ag Today 3(51.3). December 20, 2023. Permalink