Category: Farm Management

Through 2022, the ag sector in the Southern Ag Today (SAT) states has sustained periods of drought, volatile prices in respective markets, and interest rate hikes. As mentioned in a previous article (Martinez and Ferguson 2022), it is crucial to know where agriculture debt is in our SAT states during these unusual times. This article covers the latest commercial bank reports from the U.S. commercial quarterly performance reports. As a refresher, these reports highlight agricultural loans and the loans’ status (on time or late). Figure 1 displays the total loan volume (yellow line) and total loan volume for all three late type volumes (30-89 days late, 90+ days late, Non-Accrual) for the last seven quarters. The totals are for all the Southern Ag Today States. 

Through the third quarter of 2022, non-accrual loans and 90+ days late have continued downward trends. Non-accrual loan volume continued to decrease and is down 65% from a year ago. While 90+ days late loans stayed relatively steady. A real positive sign is seen in the total debt volume for loans that are 30-89 days late. The total volume of debt in this category is down $4 billion compared to a year ago. These are positive signals that bad loan debt load hasn’t increased during this turbulent year. All three late and bad loan types continue to show signs of good debt health for the SAT states, and this is reinforced by the total loan volume being approximately unchanged from a year ago.   

As producers navigate through this environment, the current status of commercial ag debt appears healthy and even improving. In the coming months, it is essential that producers are mindful of their working capital, and they should continue the positive strategies that they have implemented thus far. 

References

Martinez, Charley, and Haylee Ferguson. “Current Non-Real Estate Farm Debt.” Southern Ag Today 2(30.3). July 20, 2022. Permalink

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Martinez, Charley, and Haylee Ferguson. “Current Non-Real Estate Farm Debt.” Southern Ag Today 2(49.3). November 30, 2022. Permalink

While some states across the southern region have strict environmental regulations on applying broiler litter to farmland, other states can apply year-round. Fall application of litter is a common practice by some producers due to wet soil conditions in the Spring, lack of time to spread litter near planting, and litter availability in the spring vs. the fall.  However, there are economic consequences to Fall application of broiler litter. Applying broiler litter in the fall, fallow ground will suffer from ammonium volatilization and leaching, resulting in little to no nitrogen come spring. Therefore, the economic value of spring application is higher compared to the fall application on fallow soils. Ammonium volatilization and leaching can be avoided in the fall if broiler litter is applied to cropland with a planted cover crop.  

Regardless of when broiler litter is applied, the nutrient content of litter varies depending on in-house management strategies and feed mix. In February, I wrote an article illustrating the range of broiler litter nutrient content sampled in Kentucky (article found here). The average “as received” nutrient content of broiler litter was 50 lbs of nitrogen (N), 56 lbs of phosphorous (P₂O₅), and 47 lbs of potassium (K₂O) per ton. Using this nutrient content (assuming your soil tests indicate the need for P₂O₅ and K₂O) and current fertilizer prices of $825/ton for urea ($0.90/lb N), $930/ton for DAP ($0.66/lb P₂O₅), $857/ton for potash ($0.71/lb K₂O), the economic value of broiler litter applied in the fall to fallow cropland is $65/ton. Given the variability in the nutrient content of broiler litter, Figure 1 illustrates the fall value of broiler litter applied to fallow cropland across 740 litter samples at current fertilizer prices. If broiler litter is applied to cover crops, the value increases to $88/ton. Both fall application values have increased compared to last year. Fall broiler litter values are up 20% compared to 2021 and have more than doubled since 2020.  

If litter availability in the spring is a concern, stockpiling litter purchased in the fall can be an option if local, state, and federal regulations allow. Producers can expect minimum nutrient loss for spring application with the correct storage techniques and a properly staked litter pile. If the same commercial fertilizer prices hold, the average broiler litter would have a value of $92/ton if properly stored and applied in the spring. As illustrated, broiler litter’s value varies based on application timing, nutrient content, soil test data, and commercial fertilizer prices. It is critical to measure boiler litter and understand the economic and environmental consequences of fall vs. spring management strategies.  

Figure 1. Variation in fall boiler litter value applied to fallow cropland given current commercial fertilizer prices and 0% N, 80%P2O5, and 100% K2O plant available nutrients (n=740)

Author: Jordan Shockley

Associate Extension Professor

jordan.shockley@uky.edu

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Shockley, Jordan. “Fall vs. Spring Application of Broiler Litter.” Southern Ag Today 2(48.3). November 23, 2022. Permalink

The deadline for Pasture, Rangeland, and Forage (PRF) signup on December 1^st is coming up quickly. Whether you’ve had plenty of rain this year or are in a severe drought, it’s worth visiting with your crop insurance agent to review your PRF coverage. You may know PRF by its other name, ‘rainfall insurance’, a good name for a product that insures you against lower precipitation. You can find details on PRF’s structure, coverage options, premiums, and more here.

A key component of PRF coverage is selecting the correct interval(s), two-month periods through the year for which you will establish coverage against lower-than-average rainfall. There are many ways to choose the appropriate intervals and the share of coverage you intend to allocate to each. One tool is the National Oceanic and Atmospheric Administration’s (NOAA’s) Seasonal Color Outlook Maps. 

These maps express expectations for precipitation in terms of the chance that precipitation is above or below historic normal for the period; they aren’t necessarily indications of how much more or less precipitation to expect. For example, the map below represents expectations for the January to March quarter of 2023. You can see that forecasts for all of Texas and Florida, along with portions of coastal states from Louisiana, up to North Carolina, suggest a 33-50% chance of precipitation being ‘Below Normal’ for these months. The same forecasts for parts of Kentucky, Arkansas, and Tennessee suggest a 33-40% chance of ‘Above Normal’ precipitation. Other maps detailing later 2023 forecast similar expectations through the April-May-June period, when La Nina conditions are forecast to break and ‘Normal’ precipitation conditions are expected to return to the south. 

Using these maps together across a year may be a good place to start picking intervals to allocate coverage. Though these maps can’t necessarily tell you what share of precipitation to insure, they can indicate the intervals more likely than others to see ‘Below Normal’ precipitation, precisely the metric indemnities from PRF are based. Consider southeastern Georgia. The map below suggests a 50% chance of ‘Below Normal’ precipitation from January to March. Corresponding maps on NOAA’s website show Equal Chances (corresponding to roughly ‘Normal’ precipitation) beginning in March and holding throughout the year. Keeping in mind that PRF indemnities are based on actual rainfall compared to historical averages, these maps suggest that a producer may consider weighting a greater share of their coverage to the first quarter of 2023 compared to the last three quarters of 2023. 

There are plenty of other considerations to make when allocating coverage. This is just one simple tool to consider when assessing your options. You can find the NOAA Seasonal Precipitation Outlook maps here, and if you have more questions on PRF coverage, visit your USDA certified crop insurance provider or your local Extension faculty about your options. 

Author: Justin Benavidez

Assistant Professor – Management Economist, District 1

justin.benavidez@ag.tamu.edu

Benavidez, Justin. “Using Seasonal Precipitation Outlook Maps in PRF Planning.” Southern Ag Today 2(47.3). November 16, 2022. Permalink

Rising input and labor costs have already created significant concerns for agricultural producers today. One of the major causes of rising costs is the high inflation rate which now stands at the highest level in the last four decades.

Among some of the options available for the Federal Reserve System (the Fed) for lowering the inflation rate, adjusting the federal funds rate tends to be one of the first options to consider. Indeed, the Federal Open Market Committee (FOMC), a committee within the Fed, raised the federal funds rate multiple times this year. These federal funds rate hikes already had a significant impact on consumer loan rates, including agricultural loan rates. How does this work, and what should we expect for the rest of 2022 and 2023?

First, the federal funds rate is the interest rate at which depository institutions trade federal funds (balances held at the Fed) overnight. The federal funds rate is important because it is the central interest rate in the U.S. financial market. It influences short- and long-term interest rates such as mortgages, loans, and savings. While it is certainly possible that these consumer loan rates may not react to the changes in the federal funds rate, they tend to move in the same direction. This means that when there is a federal funds rate hike, consumer loan interests are likely to increase.

At the beginning of 2022, the effective federal funds rate was at 0.08%, which was significantly lower than the 10-year average of 0.72%. The Fed has maintained a low level of the federal funds rate since the COVID-19 pandemic to ensure enough financial capital is circulating in the economy. Yet, prolonged low federal funds rate and interest rates contributed to the rapid increase in the inflation rate, and the Fed is now rapidly increasing the federal funds rate. From 0.08% in January, the effective federal funds rate now stands at 3.83%.

How have farm loan interest rates reacted to the federal funds rate hikes? USDA’s Farm Service Agency (FSA) provides farm loan interest rates which are updated monthly, and we can observe how farm loan interest rates have changed in the past few months. Operating loan interest rates, ownership loan interest rates, and emergency loan interest rates have all spiked in the past twelve months. One year ago, interest rates for operating, ownership, and emergency loans were at 1.75%, 2.875%, and 2.75%, respectively. Interest rates have more than doubled since then, reaching 4.5%, 4.375%, and 3.75% on November 2022. While the magnitudes have varied, we can see that the farm loan interest rates have moved in the same direction as the federal funds rate. Farm loan interest rates issued from commercial banks are not available on a monthly basis, but these rates also tend to move in the same direction.  

What should we expect for farm loan interest rates for the rest of the year and 2023? The consensus is that the Fed will increase the federal funds rate significantly for the rest of 2022 and 2023. The current forecast is that the FOMC will increase the federal funds rate to 4.4% by the end of this year and to 4.6% by the end of 2023. This will inevitably result in continued increases in farm loan interest rates as well. This means that cost of financing will increase for the next few quarters, especially for new loans and existing floating-rate loans that do not have fixed terms. We expect the federal funds rate to lower to 3.9% and 2.9% for 2024 and 2025, making it doubtful that we will return to the favorable loan terms from 2020 or 2021. 

Author: Kevin Kim

Assistant Professor

kevin.kim@msstate.edu

Most farmers right now are not thinking about taxes, let alone tax management. Many are still harvesting crops and beginning to think about the next season, but it is also time to start the office work and meet with your tax professional.  A November or early December appointment with your tax professional will give you more tax management options before year-end.

Update your accounting of transactions for the year, and arrive prepared with the necessary reports that detail the following: 

1. All revenue and sources of income.
2. All expenses with descriptions.
3. All capital asset sales and purchases (with details).
   • If an asset was traded, bring complete invoices and sales documents including information on the trade, the trade-in value, etc. 
   • Related inventory of breeding, milking, or draft livestock.
4. Bank loan payments detailing principal and interest portions.
5. An estimate of additional revenue expected, along with what might be deferred if necessary.
6. An estimate of upcoming expenses, and an idea of what expenses might be shifted (deferred or prepaid) across tax years.
7. Any health insurance premiums paid out of pocket, may be eligible for a self-employer credit/deduction.
8. All draws that have been taken.

Preparing the above reports will help your tax professional determine an approximate tax liability for this year and allow for a discussion of different tax management strategies. Remember that tax management is not about how to get out of paying taxes but should be about how to move as much income through the tax system as possible at the least expensive tax rate possible. 

Common tax management may include multiple tools or provisions. Work with your tax professional and ask about some of the following basic strategies:

1. Putting money into a retirement account with tax-preferred treatment such as a Traditional IRA or some 401k accounts.
2. Putting money into a Health Savings Account.
3. Making a commodity donation to a house of worship or other charitable organization may provide a greater tax benefit than a cash donation.
4. Utilizing prepays is a common way to lower the farm’s taxable income but check with your tax preparer about specific restrictions and requirements. 
5. Paying the accrued interest of any debt at the end of the year.
6. Utilizing any remaining Net Operating Loss (NOL) that can be carried over. It is important to remember that the NOL can only offset up to 80% of the taxable income for the farm.
7. Use depreciation strategies with caution. Section 179 and Bonus Depreciation allow a farm to rapidly depreciate an asset in a shorter period, up to a single year.  However, there are several limitations to these methods and subsequent tax consequences when the asset is sold.
8. Income Averaging is a method only available for farms and commercial fishing. It may help you avoid higher income tax brackets in one year if you have previous years with “unused” lower income tax brackets. 

Keeping up with accounting and production records throughout the year will make the end-of-year office work easier and less stressful. Having a tax professional that you can trust and is willing to work with you will help a farm meet their goals and reduce tax liability over the long term. Visit ruraltax.org for additional information and publications about taxes, including a 2022 Farm Tax Estimator tool and other information for farms, timberland owners, and landowners.

Dr. Adam J. Kantrovich,

Extension Specialist of Agribusiness and

Director of Clemson Tax School

akantro@clemson.edu

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Kantrovich, Adam. “Year-End Tax Preparation and Management“. Southern Ag Today 2(45.3). November 2, 2022. Permalink