Category: Farm Management

Dairy Revenue Protection (Dairy-RP) is an insurance policy available to dairy producers to guarantee revenue every quarter. Dairy-RP was introduced in 2018 and is designed to help producers combat the volatile fluid milk market. Dairy-RP requires numerous choices by a producer when selecting a policy. When purchasing Dairy RP, the producer must first select which quarter (Jan-Mar, Apr-Jun, July-Sept, Oct-Dec) they would like to insure. Policies can be purchased five quarters in the future and are available up until the day before the quarter. Producers then select their pricing option of Class Pricing or Component Pricing^[1] and declare a total fluid milk weight for the quarter to insure, with the minimum being 2,000 pounds. Additionally, the producer will select their coverage levels (80%, 85%, 90%, 95%) and a protection factor (1-1.5), which play a role in calculating the liability and expected revenue. Producers can receive an indemnity payment if the actual revenue is less than the expected revenue. Since the introduction of Dairy-RP, there have been over 75,000 policies purchased.  The number of Class Pricing policies has increased from 5,000 in 2019 to 18,500 in 2022. Alternatively, Component Pricing policies have decreased from 2,800 policies in 2019 down to 2,400 in 2022. This publication covers the class pricing option.

The loss ratio is one method of measuring the performance of Dairy-RP. A Loss Ratio is the indemnity payment divided by the total premiums, thus representing a ratio of the total money paid back to the producers with respect to the total premiums paid (in total) for the policies. We often focus on a loss ratio of one, which means all money paid for the policy (insurance premiums) was distributed back to the producers in protection (indemnities).

We analyze the performance of Dairy-RP(class price option), by state, under the class pricing option. Figure 1 shows the weighted average loss ratio for Dairy-RP (class pricing option) by state (Southern Ag Today States are colored Red). Of the 40 states enrolling in Dairy-RP, the loss ratio in 21 states was less than 1.0, three of which are in the Southeast. Alternatively, 19 states participating in Dairy-RP had a loss ratio of one or greater. States like Arizona and Colorado have loss ratios greater than two, equating to more than double the premiums received were paid back to producers with revenues lower than expected. Organizing the states by share of declared milk, Wisconsin is the second largest and accounts for 14.8% of the total milk insured under Class Pricing option but had a weighted loss ratio of only 0.80. The largest share is California, representing 18.3% of the total milk declared under the Class Pricing option with a weighted loss ratio of 1.37. The largest in the Southeast is Kentucky with a weighted loss ratio of 1.77.  

Figure 1. Weighted Average Loss Ratio for Class Price 2019-2022

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^[1] Class pricing uses dollar values for class III and IV milk, where component pricing uses the dollar values for butterfat, protein, and other solids.

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Haley, Wyatt, Charley Martinez, and Chris Boyer. “Dairy Revenue Protection Historical Performance for Class Price.” Southern Ag Today 3(40.3). October 4, 2023. Permalink

Interest among producers in adopting cover crops to enhance soil fertility, mitigate erosion, and manage weeds has been growing. Legumes, which are cover crops capable of fixing nitrogen, are recognized for enhancing soil health. In the Southern United States, where crops like cotton play a central role in crop rotations, there exists a pronounced nitrogen demand and a heightened risk of soil erosion due to limited crop residue post-harvest. The use of single-species cereals such as wheat or rye as a soil cover is a common practice. Although adoption remains modest, legume cover crops have the potential to not only minimize soil erosion, but also reduce the need for nitrogen fertilizers, possibly increasing profits relative to single-species cover crops lacking legumes.

A 2-year on-farm trial was conducted in 2021 and 2022 in Terrell County, Georgia, to compare the use of various cover crop treatments in cotton production. The experiment consisted of 3 study treatments relative to a base treatment of a single species rye cover crop.   

Base:               a single-species rye cover crop (Rye)

Treatment 1:   a single-species crimson clover cover crop (Crimson Clover)

Treatment 2:   a combination of rye and hairy vetch cover crop (Rye + Hairy Vetch)

Treatment 3:   a 4-way mix of rye, vetch, triticale/oats, and crimson clover as cover crop (4-way)

The biomass of the cover crops from each plot was weighed, and the UGA Cover Crop Calculator was used to estimate the nitrogen credit, additional nitrogen released into the soil once the cover crop decays. Two separate subplots were designated: A) a standard fertilizer application determined by the farmer (Normal N), assuming no nitrogen credits, and B) a reduced nitrogen fertilizer application (Reduced N), which in 2021 was based on the anticipated nitrogen credit, and in 2022 was fixed at 40lbs./acre assuming farmer had a budget constraint. Since all treatments adopted cover crops, costs like irrigation, planting, and termination of cover crops were the same. The potential profit impact of each treatment relative to the base treatment is compared using a partial budget approach. 

Figures 1 and 2 illustrate, for 2021 and 2022, respectively, the cover crop biomass weighed, the nitrogen credit released into the soil after cover crop decay, and cotton yields for both Normal N and Reduced N subplots. The graphs show that in both years, all treatments produced almost as much, if not more, biomass than the rye treatment. Nitrogen credited to the soil was also found to be higher in all treatments across both years. The nitrogen credit observed for multi-species treatments exhibited a discernible decline between 2021 and 2022, primarily attributed to reduced legume establishment during the latter year, which was influenced by adverse weather conditions experienced in 2022. This gives credence to the nitrogen-fixing ability of legumes when they are adequately incorporated as cover. Cotton yields varied across time for the rye and hairy vetch treatment as they were as good or better than the base of rye in the year 2022 but not in 2021. But, the 4-way treatment, consistently, across years, produced yields as good as the base or even better. Figure 3 uses profits from the base treatment as a baseline against which profits from all other treatments were compared. The graph showed that the 4-way treatment provided higher profit per acre across 2021 and 2022. 

While only illustrating the experience of two seasons in a single location, the Terrell County, GA study provides insight into the potential to offset nitrogen expenses by using multi-species cover crops (including legumes) in cotton production. Single species clover and dual-species (rye/vetch) generally performed better than rye in 2022, but did not in 2021. These mixed results of the lower variety treatments might shed some light on producers’ tendency to stick with a single species rye cover. However, a high variety, 4-species mixed cover crop had an improved profit outcome relative to a simple rye cover crop in both 2021 and 2022 as well as across all nitrogen application strategies. Results will obviously vary by season, geography, and primary crop, but the high variety cover was the better performer in this instance.  

Figure 1. 2021 biomass weight, estimated nitrogen credit, and cotton yield from single and multi-species cover crop treatments.

Figure 2. 2022 biomass weight, estimated nitrogen credit, and cotton yield from single and multi-species cover crop treatments. 

Figure 3. Per acre profit differential for each cover crop treatment relative to the per acre profit of single species rye as cover crop (considering differences in yield, resulting revenue, cover crop seed costs, and nitrogen costs per acre) 

References

USDA-AMS (2023, February). North Carolina Production Cost Report: AMS_3159

https://mymarketnews.ams.usda.gov/viewReport/3159

USDA-AMS (2023, February). Alabama Production Cost Report: AMS_3051

https://mymarketnews.ams.usda.gov/viewReport/3051

USDA-AMS (2023, February). South Carolina Production Cost Report: AMS_2789/ CO_GR210

https://mymarketnews.ams.usda.gov/viewReport/2789

USDA-NASS (2022). Southeastern Upland Cotton Price Received in $/lb. Data.

https://www.nass.usda.gov/Statistics_by_Subject/index.php?sector=CROPS

Bobbie, Kelvin, Seth McAllister, Amanda R. Smith, and Yangxuan Liu. “Which is more profitable for producers, Single-Species or Multi-Species Cover Crops?” Southern Ag Today 3(39.3). September 27, 2023. Permalink

A goal of many pursuing the American dream is home ownership. Similarly, the goal of a farmer is often to become a landowner. Like buying a home, the financial decision to purchase farmland is clouded by emotional, social, and familial influences. How can a farmer clearly evaluate their financial position to purchase farmland when these influences are at play? The answer is, going back to the basics – analyzing the numbers. Most farmers will seek financing to complete a farmland purchase, and it’s important to have an idea of your purchasing position before you approach lenders. There are two important angles when it comes to considering cash requirements for a land purchase: 

• Cash needed immediately for a down payment (and/or land and building improvements)
• Recurring annual cash flow needed to make the farm loan payment.

Depending on the size of the farm, a high purchase price per acre will result in a substantial chunk of cash needed for a down payment. In some instances, buildings in disrepair, nutrient depleted soil, and/or a neglected water mitigation (or irrigation) system may create additional upfront cash requirements. Also remember to plan for soft costs like surveying, appraising, and bank fees that will increase either your down payment or your total loan amount.

Healthy working capital and a current ratio of 1.5 or greater are good indicators of cash availability (liquidity), and it is important to consider the status of your remaining liquidity after making a down payment. Many lenders will require a 15-20% down payment on quality farmland, and subpar land may require an even larger down payment. There are programs that exist for beginning farmers that require as low as a 5% down payment.

If you don’t have the cash available, you may consider accessing equity in other assets. Keep in mind, the smaller the down payment, the larger the loan payment each year. Many lenders may offer a lower interest rate for a larger down payment upfront.

As the source of the down payment is being solidified, a concurring step should be calculating the loan payment amount and how it will impact your future cash flow. This can be intimidating if you aren’t a numbers person, but it’s powerful information to know before you begin meeting with lenders. A simple Google search will yield multiple tools to calculate a loan payment. Specifically, limiting the search to a “farmland” loan calculator will result in a semi-annual or annual payment option, the most common payment structures for farmland loans. Understanding the payment options and financing structure will position the farmer to better negotiate terms, and plan for the impact on cash flow. 

Lenders want to see that the operation can pay back the money loaned to the farm. They will often use a ratio called a Debt Service Coverage Ratio (DSCR) as one tool to determine the repayment capacity of the farm. This ratio compares the Net Operating Income, or cash you have available to make your debt payments, to existing debt payments and the new loan payment. Learning how to calculate the DSCR yourself can be a great way to determine your purchase power. 

An example DSCR calculation is below: 

Net Operating Income	$390,000
Current Debt Payments	$185,000
New Farm Payment	$55,000
Total Debt Payments	$240,000
$390,000 / $240,000 = 1.67 DSCR

There isn’t a firm financial standard for DSCR. A DSCR of 2.0 or more is considered very strong, and a DSCR of less than 1.0 means there isn’t enough income to make debt payments. Many lenders set a threshold of 1.2 or 1.25 as a minimum requirement. This is one of the most basic calculations to determine repayment capacity, but it isn’t perfect. It can vary widely from year to year, as it starts with Net Farm Income – which we know is volatile! For a more thorough understanding, also calculate the five-year average of net operating income and debt payments. 

If you’re buying a farm that you are paying rent for, recognize that your net farm income will increase by that rent amount, and you’ll have it available to apply towards the debt payment. If the farm to be purchased is new ground, include a projection of crop or livestock revenue & expenses that the farm will generate in your calculation. There needs to be enough money left after your debt payments to fund any family living requirements and satisfy your tax liabilities, so don’t forget to include those figures – and be realistic about the family living number! 

Even if you aren’t actively looking to purchase a farm, understanding your debt capacity is important in managing your farming operation. This process can be applied to other purchases as well, like building grain bins or purchasing equipment. An unexpected death or life change in your area may present an opportunity to purchase land, equipment, or buildings. If you know your financial position, you can evaluate clearly whether the deal is a good one, outside of the emotions involved. Is the land good quality? Is the equipment in good shape? Is it truly a good financial decision for my farming operation? Knowing that you can afford a purchase creates room for you to consider the other details. As always, talking with trusted professionals like your accountant, financial advisor, tax preparer, and banker can help you understand your financial position.

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Brashears, Kayla. “Can I Afford to Buy a Farm?” Southern Ag Today 3(38.3). September 20, 2023. Permalink

In August 2023, the USDA National Agricultural Statistics Service published their annual report of state-level land values for farm real estate, which includes both cropland and pasture values. The results of the report indicate a strong market in the Southeast, with Georgia leading the region at a 9.8% increase in 2023 farmland values over 2022. The overall increase for the United States was 7.4%, and Kansas led the nation with a 16.3% increase in farm real estate values from 2022.

Over the last three years, farmland values have increased by record amounts, according to the USDA-NASS survey data. At the same time, the financial position of many farmers has been affected by higher input costs and increasing interest rates. Why don’t we see a one-for-one decrease in land values when interest rates increase and farm profitability moderates? Well, the most straightforward answer is that farmers are a mixed group, and their individual financial positions aren’t necessarily the same as their neighbor’s. This makes it hard to predict the movement of the land markets during times of transition.

When I read about the farmland market in articles from across the country, I am always struck by the variety of factors at play. First, crop yields are going to drive willingness to bid. Several years of good yields and prices will motivate both farmers and non-farm investors to participate in the land market. But there are always other factors including proximity to urban development or water availability/rights. It is important to remember that farmers are the majority owners of farmland, and their motivations to buy and sell land are big drivers in the market. This means when that rare piece of good farmland near your operation comes up for sale, you will likely be in the market regardless of where interest rates are today. You may also be looking to expand your operation and bring on another generation. When that is the case, buying land becomes a priority for your farm business, and your willingness to bid in a strong market is going to be robust. Each of these factors will contribute to support for the local land market that may keep these recent increases in interest rates and moderation of farm incomes from having a big impact on land values in your area. 

Taylor, Mykel R. “2023 Land Values and Buyer Motivations.” Southern Ag Today 3(37.3). September 13, 2023. Permalink

The year 2023 marks another unique year in terms of prolonged high inflation and high interest rates. The series of interest rate hikes raised concerns, especially when Silicon Valley Bank went defunct earlier this year, and other regional banks experienced liquidity problems. With these inflation rates and interest rate hikes affecting the broad economy, how does the agricultural lending condition look?

The most recent survey of commercial banks from the Kansas City Fed shows that the average agricultural operating loan interest rate exceeded 8 percent from the first quarter of 2023, and the farmland loan interest rate also nearly reached 8 percent. Loans issued from commercial banks closely follow the movement of the effective federal funds rate. As the federal funds rate increase slowed in the last two quarters, the increase in agricultural loan interest rates also slowed down. 

Loan interest rates from the Farm Service Agency (FSA) showed a unique pattern in the last few months. Throughout 2022, loan interest rates from the FSA increased with the increase in the federal funds rate.  However, FSA started to lower interest rates from the first quarter of 2023. In fact, as of August 2023, the FSA loan interest rates – both the operating loans and farmland loans – are lower than the federal funds rate. This rare occurrence is expected to go away eventually, but the FSA is indeed providing very favorable rates as of today.Of course, if the higher interest rates result in increased borrower default or general economic decline, the Fed will slow down the interest rate hikes. Currently, delinquency rates on commercial bank loans still remain at a historical low. Similar findings are shown for agricultural loan default rates. While there has been a slight uptick in default loans in the Farm Credit System, the default rate is still lower than the five- or ten-year average. Default rates from commercial banks also remain at a relatively low level.

It is expected that these interest rates will still increase in the second half of 2023. With the Fed aiming for a 2 percent inflation rate, the effective federal funds rate is expected to reach 5.4 percent to 5.6 percent. This will again have an impact on agricultural loan interest rates in the foreseeable future. High interest rates, combined with lower farm income forecasts in 2023 and 2024, will be the adverse factor for stagnant farmland value in 2023 and 2024.