Category: Farm Management

Baling wheat straw following harvest is seen as a way of utilizing a bi-product, with the only cost being baling and removal from the field. The straw could then be sold as bedding for livestock, mulch, or other uses that provide value. However, the cost may be larger than you think.

The cost of fertilizer and increased focus on soil health makes it essential that we know what nutrients we are removing from the field when we take away the wheat straw. Research has shown that removing 6,000 pounds of wheat straw per acre removes valuable nutrients (6,000 pounds is the approximate amount of straw associated with an 80 bushel per acre wheat yield.) Removing this quantity of wheat straw removes 60 pounds of Nitrogen (N), 10 pounds of phosphorus (P2O5), and 135 pounds of Potash (K2O), per acre¹. This is in addition to the nutrients removed when the wheat grain is harvested.  Putting a monetary value to the pounds of N, P, and K taken away by baling the straw shows that the straw does have significant value. A price of $.86 per pound of nitrogen, $0.70 per pound of phosphorus, and $0.61 per pound of potash² were used to reflect the approximate cost of the nutrients. The table below shows the value of the N, P, and K removed on a per acre basis when the wheat straw is removed. The value of the wheat straw needs to be greater than $125.47 per acre or $25.09 per 1200-pound round bale. Adding the cost of baling (1200 lbs. round bale) of $14.50³ per bale and moving³ the bales out of the field at $4.35 per bale. The total of these costs is $43.94 per bale or $219.72 per acre. It should be noted that this is just the value of N, P, and K. There are some micronutrients as well as the organic matter that wasn’t considered in this analysis that have value if left in the field.

There are caveats. The amount of straw could be different depending on numerous factors, including limited yield, variety of wheat, the efficiency of the baler, and soil type. The value of N, P, and K will vary depending on your location as well. Check local resources in your area to estimate the value/cost of the removal of wheat straw. 

Information for the values included in this article can be found in the following resources.

1. https://www.aces.edu/wp-content/uploads/2019/01/ANR-0449.REV_.3.pdf
2. https://www.ams.usda.gov/market-news/production-cost
3. http://agecon.ca.uky.edu/files/custom_machinery_rates_applicable_to_kentucky_2022.pdf

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Runge, Max. “Wheat Straw Nutrient Removal.” Southern Ag Today 3(13.3). March 28, 2023. Permalink

Long-term loans are a valuable financial tool that producers can use to purchase large capital investments, including farm equipment, land, or housing. These types of loans are typically paid off over a period of time lasting longer than one year. Long-term loan payments are made up of principal and interest. The principal is the original amount of money borrowed. Interest is set by the terms of the loan and accrues over the lifetime of the loan based on the interest rate, the principal balance remaining, and the length of the loan. 

Loan amortization is the schedule for how payments will be made over the lifetime of the loan. The loan amortization schedule tells borrowers the beginning period loan balance, the regular payment, the amount of the payment that goes towards interest and the principal, and the remaining loan balance. A fixed payment schedule is the most common, where each payment is the same amount. 

When considering securing a long-term loan, it is important to consider not just the monthly payments but the overall amount you will be paying over the lifetime of the loan. Since interest accrues on the loan, the amount you pay will be more than the initial loan amount. Table 1 is an example of a loan amortization schedule for a 5-year, $30,000 loan, with a 5% interest rate and payments made annually. In that example, the initial loan was $30,000, but total payments equaled $34,646.22. The loan amount, interest rate, and length of the loan can all have large impacts on how much you end up paying in total. A lower interest rate will decrease the overall amount paid, so it is important to search for a lender that will charge you the lowest interest rate. But, most lenders will likely offer a similar interest rate. A more effective way to reduce the total payment amount is to take a loan with a shorter payment schedule. This will increase the payment made each pay period but will reduce the total amount paid over the lifetime of the loan. Lastly, putting down a larger down payment and reducing the loan amount will also decrease the total amount paid. Since interest accrues based on the principal, a reduction in the loan amount will result in less interest accruing, and the total amount paid on the loan will decrease.            

There are several tools available that can help you evaluate a loan and the total costs involved. Mississippi State University has a free loan amortization calculator Excel tool that can be found at: https://www.agecon.msstate.edu/whatwedo/budgets.php. The Farm Credit Services of America also has a free loan amortization calculator at: https://www.fcsamerica.com/products-services/digital-tools/loan-payment-calculator.Understanding how your loan payments are constructed and what factors impact total payments is essential in getting the right loan for your farm business. 

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Mills, Brian, and Kevin Kim. “Loan Amortization.” Southern Ag Today 3(12.3). March 22, 2023. Permalink

While the cost of many inputs have retreated from historic highs made earlier in 2022, fertilizer and farm diesel fuel remain elevated continuing to push total costs of production in 2023. Despite the fact that commodity prices remain relatively strong, margins will be stretched thin for many crops this year.  

Enterprise budgets can be a good farm management planning tool for growers to use when evaluating crop selection and budgeting returns (net or total specified with overhead) to land. In the 2023 enterprise budgets released by the LSU AgCenter, fertilizer prices for nitrogen, phosphate, and potash are estimated at $0.78, $0.90, and $0.67 per pound of active ingredient. This represents an increase of $0.02, $0.25, and $0.09 per pound of active ingredient, respectively from 2022. Another energy-related farm input, diesel fuel, is projected at $4.00 per gallon, an increase of $1.60 per gallon from the 2022 enterprice budget. 

The magnitude of the fertilizer cost impact will have on a grower’s bottom line will vary with crop selection, variety, and soil nutrient profile. Soil testing is crucial in times of elevated input prices. Knowing the nutrient profile can be a cost-saving measure for the grower. For fuel cost, the extent of field preparation activities and irrigation will significantly impact a grower’s fuel expenditure.

Over the past three years, the cost of production for corn, cotton, rice, and soybeans in Louisiana have increased in conjunction with the increase in fertilizer and fuel costs. Figure 1 illustrates the cost of production (C.O.P.) per unit using representative farm yields for the 2021 to 2023 crop years. 

 Figure 1. Breakeven cost of production estimates for selected Louisiana crops. 

Especially in times of dramatic price and cost changes, it is critical to have a handle your cost of production.  Estimating your own production costs is an important management exercise that helps with both understanding and controlling cost, as well as establishing price targets and marketing plans.  A pre-season breakeven price is calculated by estimating the total cost of production related to a specific crop and dividing it by the expected yield of that crop. Or simply put: how much money do you expect it will take to produce each bushel or pound of production?   Similarly, a breakeven yield is that same total cost of production divided by the expected price.     

In today’s agricultural production environment, given the volatility in both input and commodity prices, breakeven analysis can help farmers make better short-term operational decisions. Enterprise budgets can be a useful tool in performing breakeven analysis utilizing both their individualized farm’s crop yields and expectations regarding market prices for a given commodity that is uniquely tailored for their agricultural production space.

Crop enterprise budgeting resources are available for download for Southern states by clicking on the links below.

Alabama: https://www.aces.edu/blog/topics/farm-management/enterprise-budgets-for-row-crops/

Arkansas:  https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

Florida: https://fred.ifas.ufl.edu/extension/commodityenterprise-budgets/

Georgia: https://agecon.uga.edu/extension/budgets.html

Kentucky: https://agecon.ca.uky.edu/budgets

Louisiana: https://www.lsuagcenter.com/portals/our_offices/departments/ag-economics-agribusiness/extension_outreach/budgets

Mississippi: https://www.agecon.msstate.edu/whatwedo/budgets.php

North Carolina: https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets/

Oklahoma: http://www.agecon.okstate.edu/budgets/

South Carolina: https://www.clemson.edu/extension/agribusiness/resources/request-budget.html

Texas: https://agecoext.tamu.edu/resources/crop-livestock-budgets/

Tennessee: https://arec.tennessee.edu/extension/budgets/

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Delilberto, Michael. “Projecting Your Cost of Production and Combating Higher Costs in 2023.” Southern Ag Today 3(11.3). March 15, 2023. Permalink

The short answer is: It depends. The slightly longer answer is that it is determined by the classification of your timber holding, the way to sell the timber, and your modified adjusted gross income (MAGI) for the year. 

What is the Net Investment Income tax?

NIIT, also known as the Medicare surtax, is an additional tax applicable to high-income individuals, estates, and trusts with significant investment income. More specifically, it is a 3.8% tax on the lesser of: (1) net investment income or (2) the excess of MAGI over a threshold ($250,000 for married filing jointly and $200,000 for single taxpayers). The tax went into effect in 2013. 

Generally, net investment income includes: (1) interest, dividends, capital gains, annuities, royalties, and rents not derived in a trade or business; and (2) income from businesses that are passive activities to the taxpayer. Wages, unemployment compensation, operating income from a nonpassive business, Social Security benefits, tax-exempt interest, and self-employment income are not subject to the NIIT. 

Timber income and the NIIT

For federal income tax purposes, your timber activity generally can be classified into one of three categories: 1) for investment; 2) material participation in a trade or business; and 3) passive activity where your participation in a trade or business does not rise to the level of material participation. Due to the level of involvement, most non-industrial private forest landowners fall in the investor category. Farmers with occasional timber sales may treat their timber as property held for sale or use in a business. An example of passive activity is the limited partner in a partnership.  

For investors, income on the sale of standing timber is a capital gain. Depending on the holding period, it can be long-term or short-term, but it is usually included in the net investment income for NIIT. 

If the standing timber is held in a trade or business for more than one year and sold in a lump-sum or under a pay-as-cut contract, the income generally qualifies for the long-term capital gains tax treatment. Income from the sale of cut timber normally is ordinary unless a 631(a) election is in effect. Under the special election, the income from holding the standing timber is treated as a long-term capital gain, while the portion of the income from selling the cut timber is ordinary income. 

If you materially participate in a trade or business, your timber income from the business is not subject to the NIIT, even if it is treated as a long-term capital gain. However, it is subject to the NIIT if your timber activity in a trade or business is passive and your MAGI is over the threshold.

Strategies to manage the NIIT for timber owners

If you can substantiate your timber activity as material participation in your timber business, you can enjoy the long-term capital gains tax treatment of your timber income and won’t have to worry about owing the NIIT on it. However, your timber income may push your MAGI over the threshold and trigger the NIIT on non-timber investment income. Therefore, you may want to manage the timing of your other investment income when you expect to have a significant timber income. 

For more information about timber taxation, please see https://www.timbertax.org/publications/fs/taxtips/TaxTip2022.pdf

This publication is for informational and educational purposes, but is not intended as financial, tax, or legal advice.Please consult with your tax advisor concerning your particular tax situation.

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Li, Yanshu. “Do I need to pay the Net Investment Income Tax on my timber income?” Southern Ag Today 3(10.3). March 8, 2023. Permalink

In 2023, the adverse effect wage rate (AEWR), which is the reference minimum hiring rate for H-2A workers, increased by 2.66 to 15.47 percent in all U.S. states (except Alaska). Florida registered the highest annual increase, with incremental rates in six other states exceeding 10 percent (Table 1).  

There are two possible explanations for these 2023 AEWR growth differentials across states. First, sharp spikes in 2023 AEWRs may be associated with lower historical AEWR growth trends. From 2019 to 2022, AEWRs in states with the ten highest 2023 AEWR increases grew annually by only about 3 percent, while states with the ten smallest 2023 AEWR change registered an average growth of almost 6 percent. Figure 1 shows that these two trends are negatively correlated, thus supporting the contention that larger 2023 AEWR increases may have been designed to make up for lower annual AEWR growth rates from 2019 to 2022.

The other explanation revolves around gaps between AEWRs and livable wage levels in 2022. Livable wage, calculated by the World Population Review, measures the amount of income that can adequately cover basic family needs.  In this analysis, a gap exists when AEWR is less than the livable wage per hour (LWH), indicating that AEWR could not adequately satisfy all basic needs; a surplus exists when AEWR exceeds LWH.   Based on the summary in Table 1, all Top 10 states have AEWR-LWH gaps in 2022 as their ratios are below 100%.  In contrast, five of the bottom ten states registered AEWR-LWH surpluses in 2022.  Figure 2 plots the relationship between these two trends, where a no-gap demarcation line is drawn at the 100% level to distinguish surplus (above 100%) and gap (below 100%) situations. 

From a business standpoint, stark increases in 2023 AEWRs may cause potentially harmful economic effects on labor-intensive, H-2A-dependent segments of each state’s agricultural industry. These are serious concerns, especially for states where H-2A workers account for a larger proportion of their annual hired farm labor complement. Last year, H-2A workers in Georgia and Florida comprised 62.88 and 55.31 percent of their hired farm labor force.     Notably, Florida and Georgia had the two highest annual AEWR increases in 2023. 

From a social standpoint, there will always be pressure to correct gaps between actual and livable wages.  At the same time, it is important to understand the broader impacts of such corrective measures.  One-time (abrupt) sharp increases in AEWRs may fix one problem but create a challenge elsewhere.  Alternatively, corrective adjustments implemented in tranches, or gradually over time, could avoid the development of large living wage gaps while allowing farm businesses to make gradual strategic adjustments in preparation for additional costs.

Table 1. Relating 2023 AEWR Increases to Annual AEWR Growth and Livable Wage-AEWR Gaps Among States with Ten Highest and Ten lowest 2023 AEWR Growth Rates

STATE (RANK of 2023 AEWR Increase)	2022-2023 INCREASE	AEWR ANNUAL CHANGE (2019-2022)	LIVABLE WAGE GAP (AEWR/LWH)	2022 AEWR-LWH GAP RANK Worst (#1) to Best (#49)
Florida (1)	15.47%	3.36%	70.35%	6
Georgia (2)	14.01%	2.53%	68.63%	4
South Carolina (2)	14.01%	2.53%	54.52%	1
Alabama  (2)	14.01%	2.53%	54.80%	2
Minnesota (5)	12.82%	4.33%	89.15%	25
Wisconsin (5)	12.82%	4.33%	79.23%	13
Michigan (5)	12.82%	4.33%	69.90%	5
Louisiana (8)	9.80%	3.21%	78.25%	12
Mississippi (8)	9.80%	3.21%	60.53%	3
Arkansas (8)	9.80%	3.21%	77.09%	9
South Dakota  (40)	5.22%	4.63%	101.42%	43
Nevada (41)	4.88%	5.89%	95.64%	37
Utah (41)	4.88%	5.89%	93.86%	34
Colorado (41)	4.88%	5.89%	102.16%	44
Hawaii (44)	4.29%	3.96%	102.22%	45
Washington (45)	3.22%	5.03%	110.26%	48
Oregon (45)	3.22%	5.03%	106.29%	47
West Virginia (47)	2.66%	6.10%	93.54%	33
Tennessee (47)	2.66%	6.10%	90.37%	28
Kentucky (47)	2.66%	6.10%	88.98%	24

Figure 1.  2023 AEWR Increases and Average Annual AEWR Growth (2019-2022), All U.S. States

Figure 2.  2023 AEWR Increases and 2022 AEWR-Livable Wage Ratio, All U.S. States

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Escalante, Cesar L. “Social and Business Implications of the 2023 Increase in Adverse Effect Wage Rates.” Southern Ag Today 3(9.3). March 1, 2023. Permalink