Category: Farm Management

As more aggressive action has been taken to confront the climate crisis under the Biden Administration, environmental sustainability issues have become more relevant. Interest in the value of cover crops as a means to preserve and improve cropland has continually increased. Cover crop use has once again been on the rise (2017 Census of Agriculture) as our producers continually seek a balance between environmental and financial sustainability. Among the challenges reported by producers, cover crop seed availability is an issue. Many producers have also said cover crop seed costs are too high and that the additional cost of planting and managing a cover crop stymies cover crop adoption.

The University of Georgia Cooperative Extension Service conducted a cover crop survey with cotton, corn, and peanut producers throughout Georgia, Alabama, and Florida, from January 28, 2021, to March 31, 2021. Figure 1 illustrates the cost of cover crop seed based on the number of species in the cover crop blend. The average seed cost of single specie cover crops was $23.53 per acre, and for multi-species cover crops, it was $25.88 per acre. Most producers using cover crop monoculture indicate their seed cost ranges from $10 to $19 per acre. For mixed cover crops, there is more of a spread in the responses, with the $20-$29 range being the most common.  

To solve the challenge of the availability of cover crop seed, some producers reported that they harvested their cover crop seed to either sell it or plant it the following year. However, most farmers were not harvesting their cover crop seed. A few possible explanations for not harvesting and selling seed could be machinery related, time, seed germination, or understanding the value of the seed if they were to sell. Another possibility for not keeping seed is that they have chosen either not to plant a cover crop the following year or to plant a different type. One last explanation could be that farmers participating in a cost-share program could not harvest the cover crop. Most conservation cost-share programs won’t allow producers to harvest seed to sell or save for seed. 

A cover crop is relatively expensive to plant. Most farmers who responded to our survey in these three states do not currently graze or harvest their cover crop, which would help to offset some of that expense. It is important for farmers to find and adopt the most beneficial cropping practices, which may include cover crops. As more producers become interested in planting cover crops, emerging local business opportunities may materialize for specialized seed companies to identify and stock the cover crop seed mixes that are of interest.   

Figure 1. Number of producers reporting specified ranges of cover crop seed cost per acre for single specie cover crops and multi-species cover crops for cotton, peanut, and corn producers in Georgia, Alabama, and Florida. Total respondents are 40. 

References and Resources:

USDA National Agricultural Statistics Service, 2017 Census of Agriculture. Complete data available at www.nass.usda.gov/AgCensus.

---

Harkins, Madison, Yangxuan Liu, Alejandro Plastina, Guy Handcock, and Amanda Smith. “Cover Crop Seed Availability Hinders Cover Crop Adoption by Agricultural Producers.” Southern Ag Today 2(39.3). September 21, 2022. Permalink

Economic depreciation is often overlooked when it comes to the profitability of a farming operation since it is a non-cash expense. One reason is when farmers hear depreciation, they think of tax depreciation. Tax depreciation is an essential tool to lower before-tax income (Tax depreciation and guidelines can be found through the IRS, and application of tax depreciation methods should be discussed with a tax professional). However, the tax depreciation value does not accurately reflect the “real” annual value loss of an asset. For this reason, using tax depreciation to assess profitability will lead to inaccurate calculations. Instead, economic depreciation should be used for farm financial statements. 

Economic depreciation differs from tax depreciation by estimating the actual reduction in the value of an asset over time. The value lost depends on use, wear and tear, age, and technical obsolescence. Annual economic depreciation will also vary based on purchase price, the estimated value when sold, and the length of ownership for each asset.  

An example of the difference between tax and economic depreciation is when looking at an operation’s purchase of a new grain truck. For tax purposes, the farmer can use Additional First-Year Depreciation (Section 179), which will allow them to deduct the entire cost of the truck within the year of purchase. However, if the farmer wanted to sell that truck after one year, it would still have considerable value. The difference between the purchase and resale prices is the value lost for that one year of use. This difference is the economic depreciation and should be used in farm financial statements to more accurately determine profitability.  Figure 1 illustrates how economic depreciation on farm machinery has increased over time for grain farms in Kentucky.  On average, machinery depreciation represents eight percent of the total cost of production (variable and fixed costs) for Kentucky grain farms.

A more in-depth discussion of tax depreciation vs. economic depreciation, and comparing depreciation for new or used machinery with guided examples can be found here.

Figure 1. Average annual machinery depreciation for Kentucky grain farms by size ($/ac)

---

Ellis, Robert, and Jordan Shockley. “Economic vs Tax Depreciation: Understanding Which to Use for Determining Farm Profitability.” Southern Ag Today 2(38.3). September 14, 2022. Permalink

Farmers and ranchers have been leasing land as a strategy to expand their operations for generations. Today, approximately 39% of farmland operated in the United States is leased, with most farmers operating a mixture of leased and owned land (Bigelow 2016). Leasing farmland is also an affordable way for young and beginning farmers to get started and gain economies of scale in a capital-intensive business where they may not have enough money to buy farmland early in their careers (Katchova and Ahearn, 2016).

While advantageous from a financial standpoint, the actual process of getting in touch with landowners and developing relationships with them can be a daunting task. Many young farmers develop a relationship with a landowner through parents and grandparents, who facilitate “handing down the farm” from one generation to another within the leasing relationship. Other young and beginning farmers contact potential landowners directly and propose to build a business relationship that starts from scratch.

The most common claim that young and beginning farmers make about entering the land leasing market is that it is all about being price competitive. In other words, you have to have the highest bid to win over a landowner. But that turns out to be only part of the picture. Information gathered from talking to landowners in focus groups about their preferences for leasing their land suggests that many are interested in helping the next generation of farmers and are just looking for the right fit. 

As a complementary strategy to being competitive with their lease bids, farmers must consider marketing themselves as a quality tenant to landowners. One way to do that is by building a resume with your farming credentials presented in a professional way (see example). Resumes should include personal and business references, farming experience, and your farming philosophy (e.g., conservation practices you want to employ, and improvements you could contribute to the land). Presenting a resume to the landowner as part of your negotiation strategy could be the effort that makes the leasing relationship happen.

References:

Bigelow, D., A. Borshers, and T. Hubbs. (2016) U.S. Farmland Ownership, Tenure, and Transfer. Economic Research Service, Bulletin Number 161.

Katchova, A. L, & Ahearn, M.C. (2016). Dynamics of Farmland Ownership and Leasing: Implications for Young and Beginning Farmers. Applied Economic Perspectives and Policy, 38(2), 334-350.

---

Arnold, Chelsea J., and Mykel R. Taylor. “Farmland Leasing for Young and Beginning Operators.” Southern Ag Today 2(37.3). September 7, 2022. Permalink

Low feed resources during winter are the primary driver of culling, but the widespread drought that is slowly expanding into the deep South is also driving historic beef cow liquidation. As we approach prime culling season (September through December) and continue to cull to manage through drought conditions, it is important to be strategic, and to keep the economics of culling in mind rather than heading to the sale with whatever was easy to load that day. 

Remember that profit per head is simply; 

Profit per head = Total Revenue per head minus Total Cost per head

Any traits or performance issues that make a cow cost more or generate less revenue should be factored into keeping or culling her. Knowing the details of a cow’s performance when culling is a prime example of the need for good, cow level records. It’s also important to remember that culling can serve as an opportunity; if done strategically, culling can reshape the genetic profile of your herd and increase its profitability over time. 

What are the factors influencing a cow’s revenue generation? The number one factor is her ability to wean a live calf. If she has ever failed to wean a live calf, she is already behind in terms of paying for herself and statistically is more likely than the remainder of the herd to fail to wean a live calf again. These cows should be near, if not at the top of the list for culling. Beyond raising a live calf to weaning weight, matching the appropriate calving season, stage in productive life, and progeny traits like low weaning weight can all influence revenue and should be considered when culling. 

Cull cows can also generate revenue through their own sale. Cull cow values are at historic highs. Combined with the expectation of high feed costs through the upcoming winter, some marginal cows may even be worth consideration for ‘another career,’ as my animal science colleague likes to say. 

Finally, don’t forget to factor in individual cow’s costs. Cows that need assistance during calving, cows that have structural or confirmation issues that might impact their ability to breed, and cows with temperament problems should all warrant consideration come time to go to town. 

Benavidez, Justin. “Economic Culling Criteria“. Southern Ag Today 2(36.3). August 31, 2022. Permalink

Incorporating a price risk management plan into our operation has been difficult for many ranch businesses, even considering larger sized operations. Ranchers face many risks associated with cattle pricing, as we have seen these last years after disruptions in supply chains. Past events emphasize the importance of incorporating a price risk management plan as one of our management strategies to minimize economic losses, lock margins, or reduce the risk of business failure.  

The USDA Livestock Risk Protection Feeder Cattle (LRP) program is an important tool to reduce price risk in our operations by setting a floor price for our cattle. An analysis made with the last ten years of data for stocker prices shows that this tool provides floor prices and, in many cases, above the October market value (Premium purchased in May, 30 weeks endorsement, at a 98% price level coverage). Producers can choose between different price coverage levels and buy the insurance up to 52 weeks before selling their cattle.  

During the summer of 2019 and winter of 2021, the USDA made a few changes to the program. These modifications reduced the premium paid by producers, delayed the premium payment to the end of the endorsement period, and made it available in all states and counties. Payments due at the end of the period are a cash-flow advantage compared to buying a Put Option in the futures market.

The LRP program is available for most ranchers since it does not require a minimum number of cattle to be insured. Small ranchers with even one cow could make use of it. Most importantly, both cow-calf and stockers operations can benefit from this program. 

Producers from the southern region have significantly increased the use of LRP as a price risk management tool compared to 2020, as shown in Table 1. In 2022, producers will have insured 1.4 million head through the LRP program. For more information on LRP, please check the USDA Fact Sheet (Livestock Risk Protection Fed Cattle | RMA (usda.gov)). If you are interested in buying the insurance, the USDA website lists approved livestock agents and insurance companies. 

Table 1. LRP – Quantity of Cattle Insured in the Southern States (Heads). Source: USDA – RMA

Abello, Francisco “Pancho”. “Producers have Significantly Increased the use of LRP“. Southern Ag Today 2(35.3). August 24, 2022. Permalink