Category: Farm Management

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

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