Category: Farm Management

  • Foreign Investment in U.S. Agricultural Land: Leasing vs. Owning

    Foreign Investment in U.S. Agricultural Land: Leasing vs. Owning

    We have written previously about foreign investment in U.S. ag land (found here). That article stated that there is currently no federal law that prohibits the ownership of private agricultural land by foreign persons or entities. The federal government’s only involvement is monitoring land acquisitions and recording information on those purchases through the passage of the Agricultural Foreign Investment Disclosure Act of 1978 (AFIDA). Under AFIDA, qualifying foreign entities who buy or sell an interest in agricultural land are required to report the transaction within 90 days of acquiring the land or face a monetary penalty.

    Foreign ownership or leasing of U.S. agricultural land increased by 2.4 million acres in 2020 (USDA- FSA 2021). However, that acreage represents a relatively small proportion of the overall base of U.S. farmland and timberland. The total amount of U.S. cropland, pasture, and forest with foreign ownership or leasing interest in 2020 was 37.6 million acres, which represents about 2.9% of all privately held U.S. agricultural land. It is worth noting that AFIDA requires reporting of ownership and partial ownership in U.S.agricultural land by a foreign investor, as well as leaseholds of 10 years or more. In other words, foreign investments in U.S. land covered by AFIDA include both foreign ownership and leasing. Current AFIDA regulations exempt foreign investors from the reporting requirement if their lease of agricultural land is less than 10 years. As of 2020, over half of the transactions by foreign buyers holding U.S. agricultural land are via long-term leases, covering more than 30% of acres held by foreign entities and reported under AFIDA. For the past decade (2011 to 2020), that trend has shifted and long-term leases are even more important, as they account for 60% of the growth in foreign controlled acres and more than 70% of all transactions reported under AFIDA.

    In 2020, 62% of foreign land investments in acres reported under AFIDA, which includes cropland, pasture, and forest, fell into the category of ownership, while 32% fell into the long-term lease category. The remaining 6% of land investments include the land categories of life estates, trust beneficiary, partially owned, and purchase contracts. This growth in leasing relative to ownership over the past 10 years manifests in the cropland category more than in the pasture, forest, or other agricultural land classifications. Figure 1a shows that foreign-owned agricultural land represents the majority of all foreign-held U.S. agricultural land. However, figure 1b, which measures only the cropland category of land, shows the percentage of cropland owned versus leased. The balance of owned versus leased prior to 2013 was majority owned, but after 2013 the majority of foreign interest in U.S. cropland was leased. By 2020, ownership accounted for 26% of foreign land holdings of U.S. cropland, while 71% fell under long-term (greater than 10 years) leases. In other words, most additional foreign acquisitions of U.S. cropland in recent years have been through long-term leases, which more than tripled from 2010 to 2020. Foreign-held forestland, on the other hand, does not follow this pattern—ownership accounts for 89% of foreign holdings, and long-term leases account for 4% of all forestland held by foreign entities, with the residual percentage falling in the other categories mentioned previously. 

    The overall trend in cropland acquisition by foreign entities using long-term leases rather than ownership suggests possible different motivations for cropland relative to pasture or forestland. Buyer or lessor intentions, however, are not included in the data collected by AFIDA.

    Figure 1. Cumulative foreign interest in U.S. agricultural land and cropland, 2000–2020.

    For more information on this topic please see:

    Mykel R. Taylor, Wendong Zhang, and Festus Attah. 2023. “Foreign Interests in U.S. Agricultural Lands: The Missing Conversations about Leasing.” Forthcoming at Choices Magazine. Available at https://www.card.iastate.edu/products/publications/pdf/23pb40.pdf


    Taylor, Mykel, Wending Zhang, and Festus Attah. “Foreign Investment in U.S. Agricultural Land: Leasing vs. Owning.Southern Ag Today 4(5.3). January 31, 2024. Permalink

  • Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices

    Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices

    Updated February 8, 2024

    Crop insurance is a tool that helps farmers manage the risks linked to lower yields or revenue in agriculture. The prices used in determining crop insurance indemnities are established in the projected and/or harvest price discovery periods each year. The projected price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in early spring, when crop planting would normally occur, for a given crop’s harvest month contract. Similarly, the harvest price is determined for each crop by taking an average of the daily closing futures prices across a 30-day window in the fall, when harvest would normally occur for a given crop’s harvest month contract.

    These price discovery periods vary across states and locations due to the timing of planting for each location. Projected and harvest prices for upland cotton hinge on the average daily settlement price of the Inter Continental Exchange (ICE) December futures contract for cotton during the price discovery periods. Commodity Exchange Price Provisions (CEPP) list the variance in price discovery periods across states and locations, aligned with distinct sales closing dates for each specific area, as Table 1 illustrates. Our recent article on Southern Ag Today delved into the regional variations surrounding the Sales Closing Date. Texas, being a sizable state, notably features three distinct Sales Closing Dates. The projected and harvest prices are published by the U.S. Department of Agriculture Risk Management Agency no later than three business days following the end of the price discovery period.

    Projected prices are used when determining the indemnity for yield policies for upland cotton, while both projected and harvest prices are used in determining indemnity for revenue policies. For a comprehensive breakdown of yield protection versus revenue protection policies for upland cotton, refer to Table 1 in Chong, Liu, and Biram (2023). Producers opting for revenue protection policies can choose between the default plan or the harvest price exclusion (HPE) option (Chong and Liu, 2023). Both the default plan and HPE use the projected price to calculate the value of the production guarantee at the beginning of the season. Similarly, both the default plan and HPE use the harvest price to determine the value of the crop actually produced at the end of the season. The difference between the two plans is that the default plan recalculates the value of the production guarantee at the end of the season if the harvest price is higher than the projected price (but no additional premium is owed), while HPE does not recalculate the guarantee.

    In insurance plans featuring HPE, since indemnity calculations rely solely on the projected price, these policies typically come with lower premium costs for producers. One frequent query from producers revolves around choosing between the options—with or without HPE. Figure 1 illustrates the ratio between the harvest price and projected price for upland cotton, from 2011 to 2023, across various projected price and harvest price discovery periods. When the ratio is higher than one, it signifies that the harvest price exceeds the projected price. For example, according to Figure 1.A, cotton harvest prices exceeded projected prices in 6 years out of 13 years. These graphs serve as a tool for producers to make informed decisions regarding their insurance, helping them weigh between the default option and the HPE option.

    Table 1. Projected Price and Harvest Price Discovery Periods for Upland Cotton among Different Regions Based on the Sales Closing Date

       
     Projected Price Discovery PeriodHarvest Price Discovery Period
    StateBeginning DateEnding DateBeginning DateEnding Date
         
    January 31 Sales Closing Date
    TexasDec 15Jan 14Sep 1Sep 30
         
    February 28 Sales Closing Date
    AlabamaJan 15Feb 14Oct 1Oct 31
    ArizonaJan 15Feb 14Oct 1Oct 31
    ArkansasJan 15Feb 14Oct 1Oct 31
    CaliforniaJan 15Feb 14Oct 1Oct 31
    FloridaJan 15Feb 14Oct 1Oct 31
    GeorgiaJan 15Feb 14Oct 1Oct 31
    LouisianaJan 15Feb 14Oct 1Oct 31
    MississippiJan 15Feb 14Oct 1Oct 31
    North CarolinaJan 15Feb 14Oct 1Oct 31
    South CarolinaJan 15Feb 14Oct 1Oct 31
    TexasJan 15Feb 14Oct 1Oct 31
         
    March 15 Sales Closing Date
    KansasFeb 1Feb 28Nov 1Nov 30
    MissouriFeb 1Feb 28Oct 1Oct 31
    New MexicoFeb 1Feb 28Nov 1Nov 30
    OklahomaFeb 1Feb 28Nov 1Nov 30
    TennesseeFeb 1Feb 28Oct 1Oct 31
    TexasFeb 1Feb 28Oct 1Oct 31
    VirginiaFeb 1Feb 28Oct 1Oct 31
    *February 28 Ending Date is extended to February 29 in leap years. 

    Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance policies across various price discovery periods from 2011 to 2023.

    Data Source: U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery

    Reference:
    Chong, Fayu, and Yangxuan Liu. “Cotton Crop Insurance to Protect Against Revenue Losses: Select Harvest Price Exclusion or Not?” Southern Ag Today 3(3.3). January 18, 2023. 

    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

    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

    USDA Federal Crop Insurance Corporation, Commodity Exchange Price Provisions, Section II – Cotton. 24-CEPP-0021, Released June 2023. 

    https://rma.usda.gov/-/media/RMA/Policies/CEPP/2024/Commodity-Exchange-Price-Provisions—Cotton-24-CEPP.ashx

    U.S. Department of Agriculture. Price Discovery Reporting Tool. https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery


    Liu, Yangxuan, Fayu Chong, and Hunter Biram. “Cotton Crop Insurance: Unveiling Regional Differences in Projected and Harvest Prices.Southern Ag Today 4(4.3). January 24, 2024. Permalink

  • Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates

    Cotton Crop Insurance: Regional Differences in Sales Closing Dates and Cancellation Dates

    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 CountyDates
    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


    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

  • Financial Ratios to Consider for Measuring Financial Resiliency of Your Farm

    Financial Ratios to Consider for Measuring Financial Resiliency of Your Farm

    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. 


    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

  • What Should I Do With My Heifers?

    What Should I Do With My Heifers?

    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


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