Category: Farm Management

Crop insurance is a widely adopted risk management tool for producers. Depending on a producer’s insurance plan, crop insurance can protect against losses due to yield or revenue. For cotton producers, if they select a crop insurance policy to protect them against the losses for revenue, several insurance plans are available, including Area Revenue Protection, Revenue Protection, and Stacked Income Protection Plan. For each of these insurance plans, producers have the choice of selecting the plan with the harvest price exclusion (HPE) option. The default choices for these crop insurance options are without HPE, in which indemnity payment is determined by crop yield and the higher value among the projected price and the harvest price for the insured year. If producers choose the insurance options with HPE, indemnity payments are determined by crop yield and only the projected price. 

The projected price serves as the minimum guarantee for cotton prices when calculating the crop insurance indemnity. With the default plan, the guarantee will go up if the harvested price is higher than the projected price. Discovery periods for projected and harvest prices for cotton differ among states and locations. For example, in Georgia, the cotton projected price is based on the average price for the December futures contract from January 15 to February 14 each year, and the harvest price is based on the average price for the December futures contract during October each year. For the insurance plans with HPE, because the price to calculate indemnity is only based on the projected price, HPE policies usually have lower premium costs for producers. A commonly asked question by producers is which option to select, with or without HPE. 

Figure 1 illustrates the ratio of the projected price and harvest price for cotton from 2011 to 2022 in Georgia. Cotton harvest prices exceeded projected prices only in 4 years out of the past 12 years. A high price ratio between the harvest and projected prices was observed in 2021, largely due to high volatility in the cotton market that year. This figure can provide some information when deciding whether to select or not to select HPE. For 2023, farmers should consider the risk and consult with their insurance agents for insurance choices. When making the insurance choices to protect their revenue, producers should consider the chances of whether the harvest price would exceed the projected price and whether the additional costs of premium paying for the protection for harvest price fit their risk management goals. If producers anticipate higher harvest prices for this year’s cotton crop than the projected price and can bear the additional premium costs, purchasing the default plan without HPE would be an option. 

Figure 1. The ratio of harvest price (HP) to projected price (PP) for cotton insurance plans from 2011 to 2022 in Georgia. A higher than one ratio indicates harvest price is higher than the projected price. Source: U.S. Department of Agriculture, Risk Management Agency. 

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Chong, Fayu, and Yangxuan Liu. “Cotton Crop Insurance to Protect Against Revenue Losses: Select Harvest Price Exclusion or Not?” Southern Ag Today 3(3.3). January 18, 2023. Permalink

The beginning of the year marks the start of female and bull buying decisions for producers in the southern states. Whether a producer is selecting for Continental, British, American, or a combo of the three, this publication serves as a reminder of the foundation traits to manage for this buying season. Foundation Traits refer to Stayability, Fertility, Structural Soundness, Udder Quality, Disposition, Adaptability and Maintenance, and Index Selection. Selecting cattle based on these traits can increase the likelihood of the operation being profitable in the short and long term. Below is a description of three of these traits. 

Stayability: a cow’s ability to remain in the herd past its “break-even” point is determined by multiple traits. The all-encompassing phenotype that is recorded by many breed associations is called Stayability (STAY). Stayability measures the likelihood that a bull’s daughters will remain in the herd long enough (typically 6 years old) to recoup their development and maintenance costs if they breed on time.

Fertility: In concert with Stayability, maintaining fertile females and keeping daughters out of bulls that are fertile is critical to the herd’s profitability. Failing to rebreed is the most common reason cows are culled from herds. That said, a surprising number of cows
get a second chance when open. The extra feed and variable costs required to maintain that cow will hinder the profitability of the operation if it stays in the herd. When a cow misses a calf, it does not become profitable until year 7 or 8, depending upon calf prices. If a cow misses twice, it does not become profitable until year 11. Thus, while it is possible for cows that miss a calf to be profitable, it takes more years to realize that profit, which makes fertility a critical financial driver. 

Structural Soundness: Cattle must have good feet and leg structure to graze, travel, and breed, and the discomfort of poor feet and leg structure reduces the time they spend grazing or drinking. Besides directly impacting performance, it creates animal welfare issues. Hoof trimming and other management interventions may prolong an unsound cow’s productive life, but these are likely to incur costs and significant additional labor. Figure 1 displays scores for foot, claw, and side leg. 

Figure 1. Phenotype scoring scales for foot angle (top), claw set (middle), and side leg profile (bottom). A score of 5 is the most desirable for all three scores.

The impacts of foundation traits on cowherds reach far beyond making a producer’s life easier. Many of these traits have direct costs that impact the bottom line, while others add labor. This additional labor often is confused with convenience, but its actual financial cost is often undervalued or completely ignored. A producer’s time is worth something! Depending upon a producer’s breeding and calving seasons, the cost of spending additional time or incurring additional variable costs affects the operation’s profitability and efficiency. A more in-depth description of the foundation traits can be found here.

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Martinez, Charley, Troy Rowan, and Justin Rhinehart. “Managing for Foundation Traits in Beef Cows.” Southern Ag Today 3(2.3). January 11, 2023. Permalink

As we begin 2023, high path avian influenza (HPAI) continues to devastate the poultry industry across the U.S.  While many experts anticipated a summer lull in outbreaks and maybe even a disappearance like the 2014/15 HPAI outbreak, that was not the case. Since the first case back in February 2022, there has been at least one case of HPAI in a commercial poultry operation in each month in 2022. The total number of birds affected by HPAI in 2022 totaled 57.82 million, with 206 commercial flocks and 409 backyard flocks impacted. To put that into perspective, the HPAI outbreak of 2014/15 had 232 confirmed cases, with over 50 million birds affected. However, most of the 2014/15 outbreak was concentrated to egg layers and turkeys grown for meat in Iowa and Minnesota. The map below illustrates that in 2022, HPAI affected all but three states across the U.S. Most birds affected by HPAI in 2022 were commercial table egg layers, accounting for 75% of the total bird loss (43 million birds). While the southern region is known for broiler production, four of the top ten egg-producing states are in the southern region (Texas, Georgia, Arkansas, and North Carolina). For 2022, a total of 2.7 million birds were impacted by HPAI in the southern region, the largest case being a commercial table egg layer operation.  

It is anticipated that we will have continued cases of HPAI across the region. The most recent outbreak was in Tennessee on December 28^th in a commercial broiler breeder operation. Therefore, you must continue to enforce strict biosecurity measures to manage and protect your flocks. While the federal government provides financial assistance for depopulation, cleaning, and indemnity payments for the birds directly impacted, there are currently no insurance products or federal support from a loss of revenue due to delayed placements and loss of future flocks while houses are cleared of HPAI. Therefore, you should have a management plan in place in for an HPAI outbreak.  

Resources:

USDA-APHIS. “2022 Confirmations of High Pathogenic Avian Influenza in Commercial and Backyard Flocks”. Available online: https://www.aphis.usda.gov/aphis/ourfocus/animalhealth/animal-disease-information/avian/avian-influenza/hpai-2022/2022-hpai-commercial-backyard-flocks

Shockley, J.M., T. Mark, K. Burdine, and L. Russell.  “Financial Implications from Contracting Avian Influenza in a U.S. Broiler Operation”. Journal of Applied Farm Economics 3, no. 1 (Spring 2020). Available Online: https://docs.lib.purdue.edu/cgi/viewcontent.cgi?article=1034&context=jafe

Author: Jordan Shockley

Associate Extension Professor

jordan.shockley@uky.edu

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Shockley, Jordan. “Summary of High Pathogenic Avian Influenza in 2022.” Southern Ag Today 3(1.3). January 4, 2023. Permalink

In 1917, the United States was in the midst of World War I. The government wanted to increase revenues to fund the war, so Congress passed the War Revenue Act of 1917. It created several provisions, but one was the requirement that businesses start reporting payments made to other businesses. This reporting requirement created 1099s. It stated that if payments of $800 or more were made, it was to be reported to the Internal Revenue Service (IRS) ^[1,2]. In this article, we will review how this affects farm businesses.

Today the requirements are roughly the same, but the threshold is $600. The threshold is the total of all qualified business payments made.  So, two payments of $400 for rent ($800 total) to the same recipient would qualify. Further, $400 for rent and $200 for services ($600 total) to the same recipient would also qualify. It is important to note this is only on payments made from one business to another. Payments made for personal purposes do not have this reporting requirement. For example, contracting someone to paint your personal residence (not required) vs. contracting someone to paint the barn for your farm business (required). Most often in agriculture, payments for rent and services are what create 1099 filing requirements. Payments for physical goods and payments to corporations (C or S) are typically exempt from these reporting requirements (with a few exceptions). If the business had payments during the year exceeding the threshold, it is a good idea to investigate whether a 1099 needs to be filed. Oftentimes, recordkeeping software or your accountant can make you aware of these situations.

It is common that a farm operator may receive and issue 1099s. Receiving a 1099 indicates you were paid amounts during the year that required a 1099 to be issued. Ideally, this will coincide with what has already been recorded through the books and records of the business. For the operator or tax preparer, it is then a question of what the payment was for and how it should be reported for tax purposes. Receiving a 1099 does not necessarily mean that amount is taxable. It depends on the facts and circumstances relating to the payment. 

If a business is required to file 1099s, it is referred to as an informational return. The form itself does not remit any money to the recipient or the IRS; it is a summary of amounts that were paid during the year. Generally, there are going to be four copies of this form. (1) One sent to the recipient, (2) one sent to the IRS, (3) one sent to the state of the recipient*, and (4) one for your own business records. 

1099s must be sent to the recipient by either January 31^st or February 15^th, depending on the variation of the form. The IRS copy of the 1099-NEC must be sent by January 31^st, and all other 1099s must be sent by either February 28th (paper) or March 31st (electronic) ^[3]. Due dates for states vary, but January 31^st is common. Research individual states to find out their requirements and due dates. Penalties for late filing could be significant depending on the number of returns and the lateness of each.

Below are common (but not all) 1099 variants seen in agriculture:

* Sometimes states will not require a 1099 or it will already be sent to the state from filing the federal form. It is important to review the individual state’s requirements to remain compliant. 

** Form 1099-MISC must be issued to a veterinarian even if the veterinarian is incorporated.

[1] https://www.history.com/this-day-in-history/war-revenue-act-passed-in-u-s

[2] https://www.givemeliberty.org/docs/TaxResearchCD/TaxActs/IncomeTax1917.pdf

[3] https://www.irs.gov/pub/irs-pdf/i1099gi.pdf

[4] https://www.irs.gov/forms-pubs/about-form-1099-misc

[5] https://extension.usu.edu/ruraltax/tax-topics/form-1099-information-returns

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Burkett, Kevin, and Jerry Pierce. “What’s a 1099? Do I Need to File?” Southern Ag Today 2(53.3). December 28, 2022. Permalink

The acres of hemp production in the United States have been on the decline since its most recent peak production of over 200,000 acres in 2019. By 2021 the acreage had shrunk to 54,000 acres, and in 2022 the production is under 37,000 acres. However, there is some light at the end of the tunnel for this crop. Over the last two years, acreage has shifted from floral production to grain and fiber production. This trend is expected to continue into 2023 as processing capacity and markets begin to emerge. There is also some good news for the hemp floral production segment, with existing stocks of hemp crude oil and floral biomass having degraded to a point of minimal economic value. For hemp to maintain current acreages and potentially increase acres in 2023, there will need to be a continued investment in genetic improvement, infrastructure development, and market research. 

Awards through the most recent rounds of Climate Smart Agricultural funding will help to propel research and production of this crop. In addition to research investment, there continue to be significant announcements of additional fiber and grain processing facilities across the United States. In 2023, Farm Bill hearings will continue, providing the next major opportunity to further develop the regulatory framework for the hemp industry. This will be a pivotal point in the development of the hemp industry and will set the course for its continued growth. Lastly, we are watching 2023 for increasing demand and access to international markets which will be key for the industry’s development and long-term growth potential.

There are also some bright spots from a profitability standpoint for the grain and fiber sectors. With additional increases in grain and fiber demands and rising prices, these products are becoming more competitive with traditional commodities. However, producers considering the production of hemp in 2023 need to proceed with caution and carefully evaluate the profit potential for their individual operations. Enterprise budgets that can be used to assist in evaluating the profit potential can be found on the University of Kentucky Industrial Hemp Agronomic Research webpage. Additionally, make sure to involve a lawyer in the evaluation of the hemp production contract to ensure it provides the relevant risk management protections for your operations. A contract checklist can be found at the University of Maryland.

Author: Tyler Mark

Associate Professor

tyler.mark@uky.edu

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Mark, Tyler. “Will Hemp Production Fair Any Better in 2023?” Southern Ag Today 2(52.3). December 21, 2022. Permalink