Category: Farm Management

Buying and selling equipment is an important aspect of row crop production. Combine purchasing and resale represent one of the largest decisions row crop operators must make. These decisions can impact the overall profitability of an operation. Used combine prices continue to rise as ongoing supply chain issues ripple through the economy. While rising costs are not limited to the pandemic era, it’s clear the lack of new combines, parts delays for older combines, increasing crop prices, and increasing fuel costs continue to be factors that impact equipment prices. 

Pre-pandemic data suggested that the average price of a combine by age sold at auction has a wider dispersion for newer combines and 2018 prices were lower than 2017. Further breakdowns of the data found little variation in average prices of older combines while finding a larger spread as the machine became newer. These averages can be seen in the graph below. With the use of auction data from Machinery Pete, factors that impact these prices are examined and used to help farmers make more informed decisions about buying machinery. Some factors are common knowledge to most farmers, such as higher prices for certain manufacturers, locations, machinery conditions, and precision equipment. The data suggest a year in age on a combine would decrease its value by just under 10%, while 1000 hours would decrease the value by around 2%.  Interestingly, we also found that the statistical connection between age and value was stronger (more important) than that of hours and value.  Presumably meaning that the market is less consistent in terms of discounts/premiums for hours used, while the age of the combine was more critical in determining value. 

As for the post-pandemic market, farmers looking to buy or sell used machinery should consider the following suggestions. When buying a combine, farmers can expect lower sales prices through consignment sales. While farmers selling used machines should list their combines through either on-farm sales or online sales. For farmers only willing to purchase certain brands or models, their searches will need to be extended beyond their local region, but expect an even higher price than in previous years. For farmers looking for potential machinery savings, consider a combine that is older than 3 years of age and be careful not to overpay for low hours. 

Source: Machinery Pete Auction Data of Combines Sold in the US and Canada between 2015 and 2018.

Data Link: Machinery Pete Auction Data

Ellis, Robert, and Tyler Mark. “Examining the Used Combine Market.” Southern Ag Today 2(17.3). April 20, 2022. Permalink

As high path avian influenza (HPAI) spreads rapidly across the U.S., the on-farm financial ramification of an infection in a commercial poultry flock can be catastrophic.  This article is a follow-up to the recent Southern Ag Today article posted on March 29^th, 2022, titled “The Cost of Avian Influenza to the Southeastern Broiler Industry.”  That article highlights that as of March 21^st, 2022, there were 11,901,888 commercial birds destroyed due to HPAI.  Fifteen days later, that number has nearly doubled (22,851,072 as of April 5^th, 2022).  While the continued outbreaks of HPAI have been mainly in commercial turkey and layer flocks, commercial broiler flocks are not immune to outbreaks.  

Understanding the financial implications of contracting HPAI in a commercial broiler flock is critical and will hopefully highlight the importance of strict adherence to biosecurity measures. While the federal government provides financial aid to a grower for depopulation, cleaning and disinfecting, indemnity payments are only for the birds infected with HPAI.  It is important to note that the contract grower is not guaranteed 100% of the indemnity payment, as a portion can be distributed to the owner/integrator.  There is also no financial assistance provided for future loss of production while the contaminated area is cleared of the virus.  This timeframe could last more than 120 days and has lasting financial implications.  For example, the HPAI outbreak in a 12-house broiler operation in Kentucky in early February 2022 is not expected to receive new placements until August 2022.  A +120-day loss of operation could mean the producer loses income associated with 2-3 broiler flocks but still has the expenses of maintaining the facilities and making any payments on debts related to the operation.  With the lack of financial support from the federal government for future losses and no private insurance options, the farm-level financial impact of contracting HPAI is significant.  

We examined the financial impact of contracting HPAI in a standard four broiler house (43 ft. x 600 ft.) operation in Kentucky with 32,300 broilers per house, a 56-day grow-out period, and 17 days to clean between flocks.  The loss in net farm income from contracting HPAI was $46,512, $97,658, and $158,348 for the loss of one, two, and three flocks, respectively.  This loss in net farm income could also be interpreted as the on-farm equity required to self-insure the operation from HPAI.  Therefore, early adoption of biosecurity measures is imperative as a financial risk mitigation method for a disease outbreak like HPAI.  Producers should also consider how they would manage this type of risk, should they be forced to deal with it.  

References:

Brothers, Dennis. “The Cost of Avian Influenza to the Southeastern Broiler Industry”. Southern Ag Today. March 29, 2022. Available online: https://southernagtoday.uada.edu/the-cost-of-avian-influenza-to-the-southeastern-broiler-industry/

USDA-APHIS. “The HPAI Indemnity and Compensation Process”. Available online: https://www.aphis.usda.gov/publications/animal_health/2016/hpai-indemnity.pdf

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

Shockley, Jordan. “On-Farm Cost of Contracting High Path Avian Influenza in a Commercial Broiler Flock“. Southern Ag Today 2(16.3). April 13, 2022. Permalink

After years of stable and low inflation and an almost unprecedented stretch of steady economic growth, our economy is now experiencing the highest inflation we’ve seen in over 30 years.  No doubt you have seen Jerome Powell, Chair of the Federal Reserve System Board of Governors commenting on actions taken to curb inflation.  With recent inflation running in the neighborhood of 8% as measured by the Consumer Price Index (CPI), response by the Federal Reserve (Fed) will continue to be front page news and will be critical to economic conditions moving forward.  In that light, I thought a brief overview of the players, tools, and terms might be helpful. 

Inflation most simply defined is a general rise in prices of all things, including consumer goods, manufacturing goods, and labor.  The simple cause has been described as “too many dollars chasing too few goods.”  Right now, we have that problem from both sides.  Goods and labor are both in short supply, while there is an abundance of consumer demand and government spending (dollars eager to be spent).  Limited supplies of goods and labor push up prices and wages.  Higher prices and an abundance of dollars effectively lowers the value of each dollar.  Inflation is mostly problematic because it happens in “spits and spurts” with some prices rising faster than others creating winners and losers, instability, and economic uncertainty.  Uncertainty drags down consumer confidence, business investment confidence, and therefore economic growth.  The scary part about inflation is its ability to gain momentum as a vicious cycle or a self-fulfilling prophecy.  As people and businesses adjust to rising prices, they often do so by raising other prices to compensate for the increased expense.  People’s expectations also play a huge role.  If everyone expects inflation over the next year or two, their business negotiations and price setting choices will reflect their expectations and some portion of inflation can be blamed on the fact that people “thought” we would have inflation. 

The Federal Reserve System is our country’s central bank responsible for managing, among other things, our currency, or the money supply.  From the Fed website, their purpose is providing “…the nation with a safe, flexible, and stable monetary and financial system.”  They have a few tools in their belt to manage the money supply, influence the value of the dollar, and keep a check on inflation.  In a recession or slow-moving economy, a central bank may push monetary policies described as expansionary or accommodative.  In other words, they are doing things to stimulate activity such as business investment, employment, and consumer purchasing.  In our current situation, to fight inflation the Fed has started actions to tighten the money supply, or what is called contractionary policy.

By far, the tool you will hear the most about is what the Fed is doing with short term interest rates.  The Fed sets a target range for the Fed Funds Rate, which is the interest rate banks pay to borrow overnight funds.  As a benchmark, the Fed Funds Rate establishes the availability of money and influences other short term cash markets.  When inflation is driving down the value of the dollar, the Fed will increase interest rates to make borrowing more expensive, slowing down the supply of money to increase or support the value of the dollar.  Since the onset of the pandemic, the Fed Funds Rate sat on a range of 0.00% – 0.25%.  On March 17, 2022, the Fed bumped the range up a quarter of a percent to 0.25%-0.50%.  The have also announced their intention to continue increasing the rates steadily throughout the coming year.  They will often signal their future actions to avoid surprising financial markets, instill confidence, and dampen inflation expectations. 

Open market operations refer the Fed buying and selling of treasury securities.  The buying or selling of short-term securities are moves used to help achieve the targeted Fed Funds Rate.  The Fed may also buy and sell longer term assets, such as 10-year Treasury Notes.  In either case, Fed purchases pump money into the system and the Fed holds the security as an asset.  On the other hand, if the Fed is fighting inflation, they may sell securities and park the cash on their balance sheet to effectively reduce the supply of money floating around in the economy with the intent to make each dollar more valuable.    

On the surface the problem seems basic.  When there are too many dollars as we have now, you take some money out of the system.  In reality, the system is incredibly complex and drives much more like a barge than a sports car with the Fed nudging the money supply, interest rates, and the economy in one direction or another.

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Klose, Steven, and George Knapek. “Too many Dollars Chasing Too Few Goods.” Southern Ag Today 2(15.3). April 6, 2022. Permalink

The Russian invasion of Ukraine has already had a significant impact on the global economy.  In a recent article on this site, Dr. Aaron Smith explored the grain and oilseed market implications of the conflict.  As significant as these are, they are not the only market disruptions of concern to the agricultural sector.  Russia is a major producer of energy and fertilizer, key inputs across the entire agriculture industry.

According to data from the U.S. Department of Energy, Russia is the third largest energy producer in the world and a significant source of oil and petroleum products for the U.S.  In 2021 the U.S. imported a total of 2.23 billion barrels of crude oil.  Only about 3% (72.6 million barrels) of this came from Russia – still enough to make Russia our fourth largest source of foreign oil.   Russia’s share of imported refined products is considerably larger than its crude oil market share.  In 2021, the U.S. imported 860.9 million barrels of refined products.  Russia supplied 20% (172.6 million barrels) of those imports, making that country our second largest foreign source of refined products (behind Canada).  Given Russia’s status as a major petroleum provider, it is not surprising that the sudden isolation of that market in response to the conflict has affected fuel prices.  For the week ending March 14, the U.S. average retail gasoline price (all grades, all formulations) was a record (in nominal terms) $4.414 per gallon, eclipsing the previous high from the summer of 2008. 

Russia is also a global leader in fertilizer production and exports, as shown in Figure 1.  Russia dominates global exports of urea and ammonium nitrate.  According to World Bank data, in 2018 (most recent complete data) Russia accounted for 17% of all urea exports and 40% of all ammonium nitrate exports.  With respect to ammonium nitrate, the second largest exporter (the EU) accounted for just 7% of world exports.  In 2018, Russia was also the third leading exporter of potash, accounting for just over 17% of world exports (far behind Canada’s 43% export share).

To be fair, fuel and fertilizer prices were on the rise well before the onset of hostilities in Ukraine.  Retail gasoline prices have increased steadily since their pandemic-induced low in April 2020.  Fertilizer prices began a steady march upward beginning last summer, topping out late last year before retreating in the first quarter of 2022.  But the effects of the Russian invasion – extensive sanctions on Russian products, loss of access to the global financial system for Russian companies, and the disruption of Black Sea trade routes – have reinforced and accelerated the inflationary trend on fuel and fertilizer.

For farmers, the market impacts of the conflict in Ukraine will make a high-cost year even worse.  Farmers had already planned for expensive fertilizer, and fertilizer purchases for the new crop have likely already mostly been made.  Rising prices for nitrogen may yet be a problem for some producers, and it seems possible – given global reliance on Russians supplies of nitrogen – that availability of nitrogenous fertilizers may become limited if the conflict drags on.  Fuel prices are going to be far higher than most planning budgets assumed, cutting into expected margins, particularly in more energy-intensive production systems (e.g., irrigation-intensive crops like rice).  The commodity market reaction to the conflict has created an attractive pricing opportunity on some crops, but this early in the production cycle – with planting barely underway – the decision of how aggressively to forward price can be a difficult one.

Figure 1.  Major Exporters of Selected Fertilizer Products

References and Resources

U.S. Department of Energy, Energy Information Administration Petroleum market data: https://www.eia.gov/petroleum/

 World Bank, World Integrated Trade Solution On-line Database International trade data by harmonized system (HS) code:  https://wits.worldbank.org/country-indicator.aspx?lang=en

Anderson, John D. . “The Russia/Ukraine Conflict and Farm Input Markets“. Southern Ag Today 2(14.3). March 30, 2022. Permalink

Agriculture has experienced a significant amount of change in both crop prices and input prices in the last couple of months. These changes can make it difficult for producers to determine which crop is going to be the most profitable for their situation. When deciding between two different crops a producer should examine what the costs of production for those two systems would be, along with their respective yield potential and crop price. Yield can vary from year to year so evaluating over a range of yield outcomes can give a better idea of how optimal crop choice could change as well.

Figure 1 is an example output from the Net Returns Comparison Calculator developed at Mississippi State, showing the difference in net returns between an irrigated corn system and an irrigated soybean system across a range of yield outcomes. Returns were compared using costs of production from the Mississippi State Enterprise Budgets and prices of $6.00/bu for corn and $14.68/bu for soybeans. Corn is shown to have higher returns than soybeans at most of the yields examined. Soybeans have higher returns than corn when soybean yields are relatively high. In this situation the producer can see that corn will generally be the more profitable option, unless they have a field that historically produces high yielding soybeans and low yielding corn. These results will change as prices and input costs change. For example, a fertilizer price increase would negatively impact corn more than soybeans, making soybeans more competitive.

The results shown in Figure 1 are not going to be the same for every producer. Every producer has their own unique costs and yield potential. It is important for them to evaluate their crop choices given their own situation. The Excel tool used to create Figure 1 can be found at https://www.agecon.msstate.edu/whatwedo/budgets.php (select and download the Net Returns Comparison Calculator). Users can compare net returns between various crop production practices for corn, cotton, rice, and soybeans. This tool can even be used for enterprises outside of Mississippi as users can customize the budgets to reflect their own farm’s costs, yields, and prices received. The more information collected on costs of production the more accurate these comparisons will be and ultimately the more informed decision on which crop is going to be the most profitable. 

Figure 1. Comparison of Net Returns between a Corn and Soybean Production System with MSU Net Returns Comparison Tool

Difference in Returns Between Corn and Soybeans $/ac

Corn Yields bu/ac

	190	200	210	220	230	240	250
45	$       246	$       303	$       361	$       419	$       476	$       534	$       592
50	$       173	$       231	$       289	$       347	$       404	$       462	$       520
55	$       101	$       159	$       217	$       275	$       332	$       390	$       448
60	$         29	$         87	$       145	$       202	$       260	$       318	$       376
65	$        (43)	$         15	$         73	$       130	$       188	$       246	$       304
70	$     (115)	$        (57)	$           1	$         58	$       116	$       174	$       231
75	$     (187)	$     (129)	$        (71)	$        (14)	$         44	$       102	$       159

Note: Any value in white, corn has higher returns than soybeans. Any value in red, soybeans has higher returns than corn

Mills, Brian E. . “Crop Returns Comparison“. Southern Ag Today 2(13.3). March 23, 2022. Permalink