Category: Farm Management

As we move further into fall, winter feeding will move into the forefront of cow-calf operators’ minds. Most cow-calf operations have already begun feeding hay or will do so very soon.  Winter feed costs are likely the largest cost for a cow-calf operation and are impacted by the number of days an operation feeds hay, the cost of the hay (or other feeds) that is fed, and the efficiency of the feeding program. 

The number of winter feeding days is largely a function of stocking rate and pasture conditions throughout the grazing season. At the national level, the percentage of pasture rated poor and very poor has been lower than last year, but higher than the average of the previous 5-year period. In the Southeast, pastures are generally in worse condition than last year and considerably worse than the 2017-2021 average. In my home state of Kentucky, a lot of cow-calf operations have been feeding hay for a while and will see a higher than normal number of feeding days this winter.

Hay values are not always easy to estimate because most operations produce their own hay. Much of the hay market consists of private transactions, so there is limited public data on market price. Hay is also unique in the sense that there can be wide ranges in quality, as well as, value across regions due to the high costs associated with moving hay from one area to another. For these reasons, producers really have to put a value on the hay they feed based on what it cost them to produce it or what they paid for it, if purchased.

Finally, feeding efficiency is sometimes the forgotten factor in winter feed costs because it can be hard to observe and quantify. There is always a loss associated with feeding as cattle don’t utilize 100% of the hay that is produced or purchased. This is typically a function of hay storage and feeding method and there is merit in looking for economical ways to limit losses at these two points.

I use the table below in Extension programs as a way to discuss the variation in winter feeding costs based on hay values and losses associated with storage and feeding. Costs are expressed on a daily basis with the assumption of a 1,300 lb cow consuming 2.25% of her body weight each day. The number of hay feeding days can be multiplied by the daily costs to estimate hay cost per cow through the winter. 

Over the last couple of years, hay values in my area have seemed to shift from the left half of the table to the right half and that has had a significant impact on the cost of wintering cows. For illustration, a $20 per ton increase in hay value leads to an increase of $0.34 per day at the 15% loss level and increases at higher loss levels. Similarly reducing storage and feeding losses from 30% to 15% results in a savings of $0.37 per cow per day when hay is valued at $100 per ton and increases as hay becomes more valuable. Having a feel for winter feeding costs can be a crucial first step in understanding cow-calf profitability and is definitely something that cow-calf operators should seek to manage.

Winter Hay Cost Per Cow Per Day

		Estimated Hay Cost Per Ton
		$60 per ton	$80 per ton	$100 per ton	$120 per ton
Storage and Feeding Losses	15%	$1.03	$1.38	$1.72	$2.06
	30%	$1.25	$1.67	$2.09	$2.51
	45%	$1.60	$2.13	$2.66	$3.19
Assumes 1300 lb cow consumes 2.25% BW per day

Burdine, Kenny. “Estimate and Manage Your Largest Cost as a Cow-calf Operator.” Southern Ag Today 3(45.3). November 8, 2023. Permalink

The South-wide average pine sawtimber stumpage price has held steady during the third quarter of 2023, showing no significant fluctuations when compared to the levels observed in the previous four quarters. Pine sawtimber prices in the region averaged $25.98/ton. ranging from approximately $20/ton in Virginia to $32/ton in Florida (TimberMart-South, 2023). The figure was roughly $2/ton lower than the recent high in early 2022 but remained $2/ton above the pre-pandemic level. South-wide average hardwood sawtimber price rebounded slightly to $32.39/ton after three consecutive quarters of decline. 

The recent decline in pine sawtimber prices can be attributed primarily to the softened demand for lumber. Pine sawtimber prices had a rally from mid-2020 to early 2022, primarily driven by robust demand for lumber. However, factors such as rising interest and mortgage rates, deteriorated housing affordability, and worries of an economic slowdown have cooled the general housing market since then. Single-family housing starts —a major driver for lumber and structural panel products— in September were at a seasonally adjusted annual rate of 963,000 units, falling below the long-term average of 1.1 million units.  

The South-wide average stumpage prices for both pine pulpwood and hardwood pulpwood fell sharply over the past four quarters. Pine pulpwood stumpage prices averaged $7.59/ton in the third quarter of 2023. This represented a significant 21% year-over-year decline and a substantial 31% drop from the recent high recorded in early 2022. The decrease in wood fiber prices can be attributed to several factors, including the product shift in the paper sector, a rise in the utilization of recycled fiber, and a surge in the supply of mill residues resulting from recent expansions in lumber mills. The decline was even more pronounced in certain timber regions (e.g., South Carolina and Western North Carolina) due to the recent closure of paper mills. 

The average delivered prices for sawtimber and pulpwood products fared relatively better than their stumpages prices, with only slight year-over-year declines in the range of 2% to 5%. Notably, the gap between delivered and stumpage prices for all timber products has significantly widened since 2020. The widening gap can be attributed to multiple factors, including inflation in fuel and material prices. Furthermore, the persistent decline in the logging crew of the region has played a significant role in the margin increase. Employment in the logging industry dropped 34% from 38,200 in 2000 to 25,300 in 2022 (U.S. Census Bureau, 2023). While improvements in productivity have helped mitigate some of the losses, this ongoing downward trend has left a lasting impact on the industry and the delivered prices.

Looking forward, pine sawtimber prices in the South are expected to continue its slow recovery from the 2008-2009 recession, driven by the anticipated growth in single-family housing starts and the expanding lumber production in the region. The historical low in existing housing inventory, coupled with homeowners maintaining their properties with low-rate financing, highlights the pressing need for the expansion of the new housing market in the foreseeable future. 

Softwood lumber production capacity in the South has increased 25% since 2017 and reached 26.9 billion board feet (bbf) in 2022 (Forisk, 2022a). Announced greenfield construction and existing mill expansion suggest that the capacity could reach 28.5 bbf by 2025 (TimberMart-South, 2023; Forisk, 2022b). However, the 10-year accumulation of underbuilding and the resulting oversupply of sawtimber will likely continue to put downward pressure on pine sawtimber prices. Pine pulpwood prices are likely to remain flat or trend lower as lumber production increases and the structure change in the paper sector continues. 

It is important to note that timber markets are largely local. Timber prices for a specific timber stand are influenced by various factors, including the timber species, quality and size of the trees, site accessibility, local timber inventory, mill types and capacities, logging capabilities, transportation capacity, and many other local considerations. 

References

Forisk. 2022a. Forisk North American forest industry capacity database.

Forisk. 2022b. Forisk Research Quarterly: Fourth Quarter 2022.

TimberMart-South. 2023. Market news quarterly. 

U.S. Census Bureau. 2023. QWI Explorer. 

Using crop insurance to guarantee debt obligation coverage is one of many ways insurance can be used as a risk management tool. Additionally, adequate crop insurance will often be a lender requirement on operating loans. Operating loans are typically revolving lines of credit that assist in covering pre-harvest expenses (e.g., seed cost, fertilizer, fuel, etc.). Table 1 below contains example revenue and pre-harvest expenses that might be incurred by a soybean and cotton producer in the southern region. Assume an example soybean producer in Crittenden County, Arkansas and a cotton producer in Lubbock County, Texas, where the farm-level soybean and cotton Actual Production History (APH) yields are equal to the state average of 50 bushels per acre and 1,196 pounds per acre, respectively. Furthermore, we assume the Projected Price for the 2024 growing season to be $12.60 per bushel for soybeans and $0.87 per pound for cotton. 

Table 1. Simplified Sample Budget for a Southern Soybean and Cotton Producer

Revenue			Soybean	Cotton
	APH Yield	Per Acre	50	1,196
	Projected Price (USDA-RMA)		$12.60/bu	$0.87/lb
	Expected Revenue (446 Acres)		$280,980.00	$464,072.00
Pre-Harvest Expenses
	Expected Pre-Harvest Expenses (446 Acres)		$144,058.00	$247,084.00

Consider a producer who finances an operating loan to cover their pre-harvest expenses (e.g., $145,000 based on a 446-acre soybean operation). Additionally, they elect to use Revenue Protection (RP) crop insurance to guarantee a level of revenue. For example, at a coverage level of 50%, a soybean producer would be guaranteed $140,490 based on an expected revenue of $280,980 ($280,980 * 0.50 = $140,490). The question becomes, at what level will the RP guarantee cover the entire operating loan obligation in the case of a complete loss? Additionally, we consider a producer taking Catastrophic Risk Protection Endorsement (CAT) coverage that triggers in the event of a yield loss of 50% or more. CAT coverage provides producers with low-cost coverage on 50% of APH yield and 55% of the RMA projected price (Biram and Coble, 2023). We assume total yield loss (e.g., 0 bushels per acre). Tables 2 and 3 below highlight realized returns to a soybean and cotton producer net of their operating loan obligation. Returns are compared over an interest rate range of 5% to 10% (.5% increments), and RP elected coverage levels from 50% to 65% (5% increments).

Table 2. Returns Above $145,000 Operating Loan (Soybean)

Table 3. Returns Above $250,000 Operating Loan (Cotton)

If the dollar value within Tables 2 and 3 is positive, then operating loan debt is covered with additional funds to pay other obligations. If the amount is negative, a producer would be unable to re-pay their entire operating loan only using RP or CAT indemnities. It’s important to note that pre-harvest expenses are only an estimate. We assume an annual interest rate with the producer paying the operating loan in one lump-sum at the end of harvest; that is, if the annual interest rate is 5% and payment is made at the end of harvest (assuming 9 months) with an operating loan of $145,000, the final payment will be $150,529 (principal plus $5,529 accrued interest).  

Crop type plays an important role in this decision since positive cash flow is heavily dependent on coverage levels and operating loan interest rates for a specific crop. Also, under no circumstance does CAT coverage ensure either producer can cover their operating loan debt at the representative loan, farm size, and crop type. Tables 2 and 3 show that operating debt coverage based on a 50% RP coverage level will be negative regardless of crop type. Increasing coverage to 60% would mean a soybean producer could guarantee covering their operating loan, while a cotton producer needs at least 65% coverage to guarantee operating debt repayment in the event of a catastrophic loss.  

References

Biram, H.D. & Coble, K. H. (2023). A Brief History of Crop Insurance. University of Arkansas System Division of Agriculture, Cooperative Extension Service Fact Sheet No. FSA70. (Link)

USDA-NASS. (2023, February). Farms and Land in Farms 2022 Summary. Retrieved October 12, 2023, from https://downloads.usda.library.cornell.edu/usda-esmis/files/5712m6524/bk129p580/2z10z2698/fnlo0223.pdf.

USDA-NASS. (2023, January 12). Arkansas Crop Production. Retrieved October 12, 2023, from https://www.nass.usda.gov/Statistics_by_State/Arkansas/Publications/Crop_Releases/Annual_Summary/2022/arannsum22.pdf.

USDA-RMA. (2023, October 1). RMA Price Discovery. Retrieved October 12, 2023, from https://prodwebnlb.rma.usda.gov/apps/PriceDiscovery/Reports/CurrentPeriods.

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Loy, Ryan, and Hunter Biram. “Crop Insurance as a Safety Net for Operating Loan Obligations.“ Southern Ag Today 3(43.3). October 25, 2023. Permalink

Based on H-2A utilization trends over the past two decades, the increase in its patronage has been more significant in farms that are more labor-intensive and with high demand for seasonal labor. Specifically, these sectors include fruit, tree nut, vegetable, melon, nursery, tobacco, and greenhouse farms. According to USDA’s Economic Research Service (ERS), H-2A employment statistics across farm enterprises indicate that crop farms accounted for 80 to 90 percent of H-2A workers hired since 2010, while livestock farms accounted for only 4 to 8 percent (Castillo et al., 2021).  Table 1 presents figures from more recent years that validate the ERS estimates.  Focusing solely on more explicit farm job titles declared in H-2A applications, workers in crop farms, nurseries, and greenhouses accounted for 84.7 to 88.2 percent of certified H-2A workers from 2020 to the 3^rd quarter of 2023.  The share of workers in livestock farms, ranches, and aquaculture/animal-based businesses ranges from 4.0 to 4.8 percent.

The geographic distribution and growth of employment of H-2A workers in the country has been quite uneven since its inception. Recently, the Southeast posted larger swings in H-2A patronage than other regions.  In 2007, about a third (34%) of H-2A workers were hired mainly in 5 states–California, Florida, Georgia, North Carolina, and Washington.  These states now account for more than half (52%) of all H-2A jobs.  

In Table 1, Southern states that rank among the Top Ten in H-2A employment account for 26.4 to 30.8 percent of all certified H-2A workers.  These states (especially Florida and Georgia) have large fruit, vegetable, nursery, and greenhouse sectors that account for the bulk of the demand for H-2A workers.  The composition of the usual Top Five H-2A state employers list and the regional trends (Table 1) only validate the program’s apparent crop sector bias.

The low H-2A employment in livestock farms can be attributed to these farms’ production cycle and unique labor needs.  Compared to specialty crop farms, livestock operations are generally less labor intensive. Furthermore, livestock operations that do have more intense labor requirements typically have year-round labor needs that cannot be filled by seasonal, temporary H-2A work contracts.  The current H-2A model clearly emphasizes its role as a mechanism for hiring seasonal and temporary workers to fill a need only during short time segments of the production or growing cycle. Existing H-2A regulations allow for initial employment or extension of employment for a maximum duration of one year.  Therefore, farmers face the challenge of recruiting and training (often at a significant cost) new workers every year instead of retaining their workforce from year to year. Among livestock farms, this lack of farm labor continuity causes uncertainty and inefficiencies in farm management, which affects the viability of employing H-2A workers in those operations.  

Table 1. Annual Industry and Regional Breakdown of H-2A Certified Workers, 2020 (3rd Quarter)

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Escalante, Cesar L. “Sectoral and Regional Concentration of H-2A Patronage.” Southern Ag Today 3(42.3). October 18, 2023. Permalink

Although it is early in the harvest season for many crops grown in the South, it is time to begin revising your annual enterprise budgets in preparation for the 2024 growing season. Enterprise budgets are forward-looking estimates of production costs on a per acre basis for a particular enterprise and production method (e.g, cotton on non-irrigated land).

When it comes to enterprise budgets, direct operating costs are straightforward. If a grower plans to use an input, they specify the amount they plan to use per acre and multiply that by the price per unit of that input. The product is an estimate of the operating cost per acre to charge to that enterprise.

Some overhead costs, also known as ownership costs, are more complex because they are noncash expenses. One may wonder why it is important to charge noncash expenses to an enterprise. There are two reasons for this. First, the use of owned equipment causes wear and tear over time. Eventually, owned equipment needs to be replaced. The loss in value overtime, or depreciation, should be charged to the enterprise for the use of that equipment. Second, the capital invested in the equipment could be invested elsewhere and earn a percentage return on that investment. This opportunity cost, or interest expense, should also be charged to the enterprise. 

One effective method of calculating these noncash overhead costs is using the capital recovery method. The capital recovery method enables growers to estimate an annual per acre cost in present day dollars based on the useful life of the equipment used by the enterprise. The following equation can be used to calculate annual capital recovery cost per acre.

-where n represents the useful life of the equipment and i represents the interest rate. The table below lists capital recovery factors (CRF) by year (n) and interest rate (i).

Some row crops are more capital-intensive than others because they require commodity-specific harvest equipment. This is certainly the case for cotton and peanuts in the South. Grain growers need one combine to harvest their grain, and different headers can be switched out to harvest corn, soybeans, and wheat/other small grains. Cotton farmers need a cotton picker or stripper to harvest cotton, and it cannot be used to harvest any other crop. Peanut farmers need a digger/inverter to dig and invert peanut vines and then use a peanut picker to pick the peanuts off the vines. Like cotton, peanut harvest equipment cannot be used to harvest any other crop. 

Figure 1 provides an example of annual capital recovery cost per acre at different interest rates for cotton, peanut, and grain harvesting equipment. The appropriate interest rate to select depends upon the grower, their risk tolerance, and desired rate of return on their investments. The average range is between 8-10%, with 9% highlighted on the chart.

The harvest equipment used in this example are based on typical equipment sizes used in Georgia (6-row equipment on 36-inch row spacing) and are assumed to be new. Capital recovery costs can also be calculated on used equipment based on the equation above. Table 1 lists the assumptions on purchase price, salvage value, useful life, and total annual harvest acres. Note, since the harvest equipment is only being evaluated in this article, the tractor has similar total acres to the sum of the peanut digging and picking quipment which are pulled by the tractor, with some allowance for turnaround at the end of the rows. The grains combine is assumed to harvest multiple crops like corn and soybeans.

Table 1 Title: Assumptions on purchase price, salvage value, useful life, and total annual harvest acres.

Figure 1 Title: Sensitivity Analysis of the Annual Capital Recovery Cost per Acre for Cotton, Peanut, and Grains Harvest Equipment.

It is evident that cotton and peanuts are more capital-intensive because of the specific harvest equipment and those enterprise budgets need to account for those higher costs per acre. Furthermore, interest rates matter. As interest rates increase, capital recovery costs do too.

While this is only an example for harvesting equipment, this method should be used for each machine used in producing a specific enterprise and added together to determine the total annual capital recovery cost. Table 2 lists a range of capital recovery factors by year and interest rate to aid growers in tabulating these costs on all of their equipment owned by the farm.

Table 2 Title: Capital Recovery Factors (CRF) by Year (n) and Interest Rate (i)

Useful Life(Years)	2.0%	3.0%	4.0%	5.0%	6.0%	7.0%	8.0%	9.0%	10.0%	11.0%	12.0%	13.0%	14.0%	15.0%
1	1.020	1.030	1.040	1.050	1.060	1.070	1.080	1.090	1.100	1.110	1.120	1.130	1.040	1.150
2	0.515	0.523	0.530	0.538	0.545	0.553	0.561	0.568	0.576	0.584	0.592	0.599	0.607	0.615
3	0.347	0.354	0.360	0.367	0.374	0.381	0.388	0.395	0.402	0.409	0.416	0.424	0.431	0.438
4	0.263	0.269	0.275	0.282	0.289	0.295	0.302	0.309	0.315	0.322	0.329	0.336	0.343	0.350
5	0.212	0.218	0.225	0.231	0.237	0.244	0.250	0.257	0.264	0.271	0.277	0.284	0.291	0.298
6	0.179	0.185	0.191	0.197	0.203	0.210	0.216	0.223	0.230	0.236	0.243	0.250	0.257	0.264
7	0.155	0.161	0.167	0.173	0.179	0.186	0.192	0.199	0.205	0.212	0.219	0.226	0.233	0.240
8	0.137	0.142	0.149	0.155	0.161	0.167	0.174	0.181	0.187	0.194	0.201	0.208	0.216	0.223
9	0.123	0.128	0.134	0.141	0.147	0.153	0.160	0.167	0.174	0.181	0.188	0.195	0.202	0.210
10	0.111	0.117	0.123	0.130	0.136	0.142	0.149	0.156	0.163	0.170	0.177	0.184	0.192	0.199
11	0.102	0.108	0.114	0.120	0.127	0.133	0.140	0.147	0.154	0.161	0.168	0.176	0.183	0.191
12	0.095	0.100	0.107	0.113	0.119	0.126	0.133	0.140	0.147	0.154	0.161	0.169	0.177	0.184
13	0.088	0.094	0.100	0.106	0.113	0.120	0.127	0.134	0.141	0.148	0.156	0.163	0.171	0.179
14	0.083	0.089	0.095	0.101	0.108	0.114	0.121	0.128	0.136	0.143	0.151	0.159	0.167	0.175
15	0.078	0.084	0.090	0.090	0.096	0.103	0.117	0.124	0.131	0.139	0.147	0.155	0.163	0.171
16	0.074	0.080	0.086	0.092	0.099	0.106	0.113	0.120	0.128	0.136	0.143	0.151	0.160	0.168
17	0.070	0.076	0.082	0.089	0.095	0.102	0.110	0.117	0.125	0.132	0.140	0.149	0.157	0.165
18	0.067	0.073	0.079	0.086	0.092	0.099	0.107	0.114	0.122	0.130	0.138	0.146	0.155	0.163
19	0.064	0.070	0.076	0.083	0.090	0.097	0.104	0.101	0.120	0.128	0.136	0.144	0.153	0.161
20	0.061	0.067	0.074	0.080	0.087	0.094	0.102	0.110	0.117	0.126	0.134	0.142	0.151	0.160

Smith, Amanda R. “Capital Recovery Costs: An Important Component of Enterprise Budgeting.” Southern Ag Today 3(41.3). October 11, 2023. Permalink