Category: Farm Management

This article is a companion to the article titled: The Long Term Economic Struggles of Southern Cotton Farmers published in Southern Ag Today on October 28, 2024.

Besides cotton, another primary row crop suitable to southern soils and the climate is peanuts. As a legume, peanuts are often used as a rotational crop with cotton and/or corn. Peanuts are grown primarily in the southeastern U.S. from Virginia down to Florida and over to Alabama, with some acreage as far west as New Mexico, Texas, and Oklahoma. In 2024, the U.S. is projected to produce 3.2 million farmer stock tons of peanuts (USDA ERS). Market year average prices are expected to be around $530 per ton (USDA FSA), and if realized, the projected total value of peanut production is expected to be $1.7 billion. Not only are peanuts an important rotational crop, but they also contribute significantly to the rural farm economies of the Southern region.

Peanuts are capital intensive particularly because of the specific harvest equipment that must be used to dig up the vines. Then after the vines dry, another machine picks the peanuts from the vines. Analysis of data from the USDA Economic Research Service illustrates the financial challenge of the rising costs of peanut farming. Figure 1 highlights the ongoing profitability challenges southern peanut farmers have faced over the last 29 years. These data account for actual production costs incurred during the production process by farm operators, landlords, and contractors and include expenses for labor, equipment, and other inputs. Revenues generated from peanut sales are also analyzed. The revenues do not include government payments and crop insurance indemnities received by producers. Potential government payments during this time period may include traditional farm bill programs for farmers with base acres, as well as ad-hoc disaster relief programs.

According to Figure 1, the average peanut farmer managed to earn a profit in only five of the last twenty-nine years. On average, peanut growers faced annual losses of $57 per acre. Referring back to the companion article linked above, cotton farmers also faced average annual losses of $94 per acre during this same time period. These long-run average losses per acre show the continued financial challenges incurred by southern farmers despite growing crops that are suitable for the regional climate and soils. As with cotton, long-term economic losses to peanut production put the sustainability of Southern agriculture at risk. A continuation of these trends could result in a prolonged decline in agricultural production, eroding the economic foundation of rural farming communities across the Southern region. It is evident that there continues to be a need for effective agricultural policies and support programs.

Figure 1. Peanut Production Total Costs, Revenue, and Returns for Producers in the United States (1995 – 2023).

References: 

Liu, Yangxuan. “The Long Term Economic Struggles of Southern Cotton Farmers.” Southern Ag Today 4(44.1). October 28, 2024. https://southernagtoday.org/2024/10/01/the-long-term-economic-struggles-of-southern-cotton-farmers/

U.S. Department of Agriculture (USDA) Economic Research Service (ERS), Commodity Costs and Returns for Peanut, Updated on May 1, 2024.

U.S. Department of Agriculture (USDA), Economic Research Service (ERS), Oil Crops Outlook: October 16, 2024. https://www.ers.usda.gov/webdocs/outlooks/110202/ocs-24j.pdf?v=2829.3

U.S. Department of Agriculture (USDA) Farm Service Agency (FSA), Projected 2024/25 Market Year Average Prices. Updated October 31, 2024. https://www.fsa.usda.gov/documents/2024-myapdf-1

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Liu, Yangxuan, amd Amanda R. Smith. “The Long Term Economic Struggles of Southern Peanut Farmers.“ Southern Ag Today 4(48.1). November 25, 2024. Permalink

On October 10^th, Joe Outlaw, Bart Fischer, and Natalie Graff’s SAT article of the day highlighted the need to understand USDA’s net farm income projection. They noted that while the overall projection for farms across the country is down slightly, that masks the commodity-specific variability, where most crop farmers are losing money, and many livestock producers are relatively better off. 
 
In a time of low commodity prices, we often look at economic indicators to help us pin down the extent of the problem. Another approach is to talk to farmers directly about the economic conditions and document their thoughts. This qualitative data gives a much richer description of the issues that underlie the downturn in economic conditions. In July and August of 2024, we held 11 focus groups in Alabama with 115 farmers, producers, growers, agribusiness owners and employees, agricultural processors and manufacturers, and agricultural lenders. The focus groups were intentionally representative of the agricultural commodities produced in the southeast. The goal of the focus groups was to gather their perspectives on agriculture and economic development in Alabama. In the process, we heard an earful about profitability overall and many of the driving factors that affect profitability in the state and region. 
 
One focus group participant stated, “I think the biggest thing is profitability is the leading factor in growing most anything. If it’s not worth doing, you know, why are you going to spend the resources and all your energy just to be at a breakeven point or just barely pay the bills? You know what I’m saying? I think that’s figuring out how to become more profitable, whether it be a niche market or something like that. But I think that’s the main driver.” This sentiment was echoed across all the focus groups. Participants’ central concern for the agricultural sector was profitability. They identified a myriad of factors that contribute to their concerns, and the most common are listed below:
 
Rising input costs and decreasing commodity prices
Participants noted that the high cost of production coupled with low commodity prices for row crops and lack of markets for catfish, fruit, and vegetables affects the overall profitability of agriculture. Livestock producers discussed the increase in input costs eating away at profits. The inverted relationship between input prices and commodity prices and the subsequent impact on profitability is a critical stressor for farmers.
 
 
Equipment costs are skyrocketing with inflation
Participants remarked that the high cost of specific, necessary equipment limits them from diversifying crops as their equipment purchases tie them to particular commodities. The inability to easily diversify crops causes significant stress when specific commodity prices plummet, and producers have to make decisions regarding equipment sunk costs and expected future profitability.
 
Increasing transportation costs and freight charges
This sentiment was shared by producers across commodities indifferent to the mode of transportation. The escalation in costs related to shipping commodities has had a negative impact on the profitability of producers already impacted by low commodity prices.
 
Rising farmland values and rental rates
Participants emphasized the growth in metro areas in the southeastern U.S. and the resulting increase in land values. This has caused the growing inability to find land to purchase or rent that is economically viable for a farming operation. While expenses related to land are existing concerns now for profitability, focus group participants expect land values to continue to increase and have an even greater impact on profitability in the future.
 
Labor availability and costs
Participants discussed the (un)availability and high cost of labor, particularly for labor-intensive operations such as poultry, fruit, vegetable, nursery, and greenhouse production. Regardless of commodity, though, all producers stated that labor issues directly impacted profitability.
 
These issues all affect profitability, and while some will improve with upswings in commodity prices, others are systematically affecting the profitability of the ag sector. Documentation of these issues is the first step in informing decision-makers of what is unique about agriculture and how those in the industry perceive the likelihood of continuing their operations with the next generation of producers.

References:
 
Outlaw, J., B. Fischer, and N. Graff. USDA Farm Income Projections… Misused and Abused. Thursday, October 10, 2024. Available at: https://southernagtoday.org/2024/10/10/usda-farm-income-projections-misused-and-abused/

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Russel, Kelli, and Mykel Taylor. “Profitability According to Farmers.” Southern Ag Today 4(47.1). November 18, 2024. Permalink

 

The most recent agriculture Census defines total farm production expenses as “expenses provided by producers, partners, landlords (excluding property taxes), and production contractors for the farm business” (USDA/NASS, 2024). Based on Census data from 2017 to 2022, all southern states experienced higher overall production expenses (Table 1 in descending order based on change from 2017 to 2022). For 2017 to 2022, the top three states with the highest increases in production expenses were Louisiana (44.4% increase), Alabama (39.5%), and North Carolina (38.5%). The lowest were Oklahoma (15.35 increase), Texas (21.7%), and Virginia (21.6%). For the twenty-year timeframe 2002 to 2022, Alabama, Arkansas, and South Carolina had the largest production expense increases (yellow highlight), whereas Florida, Oklahoma, and Texas had the lowest (blue highlight).

Total farm production expenses in the Census are comprised of the following categories 1) fertilizer, lime, and soil conditioners, 2) chemicals, 3) seed, plants, vines, & trees, 4) livestock & poultry, 5) feed, 6) gasoline, fuels, and oils, 7)utilities, 8) repairs, supplies, & maintenance costs, 9) hired farm labor, 10) contract labor, 11) custom work & custom hauling, 12) cash rent for land, buildings, & grazing fees, 13) rent & lease expenses for machinery, equipment, and farm share of vehicles, 14) interest expense, 15) property taxes, 16) medical supplies, veterinary, & custom services for livestock, and 17) all other production expenses (defined as storage and warehousing, marketing and ginning expenses, insurance, etc.).

For these categories, the top five production expense categories summed across all 14 southern states were feeds purchased (28.9% of the total $112.3 billion); livestock and poultry purchased or leased (15.2%); hired farm labor (8.5%), fertilizer, lime, and soil conditioners purchased (6.6%); and repairs, supplies, and maintenance costs (5.8%). The five lowest were property taxes paid (2.2%); custom work and custom hauling (2.1%); contract labor (1.9%); medical supplies, veterinary, and custom services for livestock (1.2%); and rent and lease expenses for machinery, equipment, and farm share of vehicles (0.6%).

Agriculture producers face many challenges. Combined with low commodity prices, the rising cost of production expenses highlighted here illustrate the financial squeeze to a farmer’s bottom line.  The resulting lean profits, diminished cashflows, and increased credit reliance threaten the financial viability of many Southern producers. That is why understanding your cost of production is imperative. Going into next year, identify your own high expense categories and manage appropriately. 

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Menard, R. Jamey. “Census of Agriculture Production Expenses for Southern States.” Southern Ag Today 4(46.1). November 11, 2024. Permalink

Whole Farm Revenue Protection (WFRP) is a crop insurance product administered by the USDA Risk Management Agency (RMA). WFRP provides protection against the risk of farm revenue generated by all crops falling below a level of guaranteed revenue.  Expected revenue is found by taking the most recently available five-year average of whole farm revenue reported on the Schedule F farm income tax form. For example, the expected revenue for 2024 is found by taking the average of revenue reported in 2018-2022. Subsequently, the expected revenue is multiplied by the producer-elected coverage level to determine the guaranteed revenue or WFRP liability.  The WFRP revenue guarantee is capped at $17 million.

Like other multi-peril crop insurance (MPCI) products, the WFRP premium is subsidized by rates determined through federal legislation. The subsidy, or portion of the actuarially fair premium rate paid by the government, decreases as the elected coverage level increases. The WFRP producer premium may be further reduced through the Diversity Factor, which is a percentage multiplied by the actuarially fair rate. As the number of qualifying commodities insured increases, the greater the discount in the actuarially fair premium rate. Lastly, the WFRP producer premium may be reduced for those producers who have Beginning Farmer or Rancher or Veteran Farmer Status. Combining all three of these producer premium reductions can result in up to a 90% reduction in the actuarially fair premium.

While the increasing trend in federal crop insurance participation since its inception can be largely attributed to increases in the premium subsidy rate, not all programs have experienced the same utilization (Yehouenou et al., 2018). Yehouenou et al. (2018) cite the reluctance of crop insurance agents to encourage purchasing STAX as one reason for the lack of participation despite the 80% premium subsidy rate attached to all coverage levels. Whole Farm Revenue Protection also faces a lag in participation and has experienced a decline in purchased liability since its inception in 2015.   Average purchased liability of about $2 billion per year (Figure 1), which is far less than yield protection (YP) and revenue protection (RP) purchased liability which averaged over $100 billion over the same period (Figure 2).

One issue driving the lack of federal crop insurance participation is a lack of understanding of crop insurance programs. In response to this knowledge gap, RMA set up a number of cooperative agreements to build relationships, enhance understanding, and strengthen the public-private partnership of federal crop insurance across the agriculture community. In 2022, the University of Arkansas partnered on a two-year pilot program with RMA, the Crop Insurance Navigator program. The Navigator project seeks to address “knowledge gaps” of RMA products with a focus on historically underserved producer communities. The partnership is funded by the USDA Risk Management Agency. This southern region focused pilot is primarily designed to address the knowledge gaps present in WFRP and Micro-Farm products on both the part of producers and crop insurance agents. The program uses a cohort of project specialists to engage farmers, ranchers, educators, community-based organizations, and agricultural stakeholders to enhance understanding of federal crop insurance products serving small and historically underserved producer groups. To learn more about the Crop Insurance Navigator program visit https://srmec.uada.edu/navigator.html.

In an aligned effort to enhance understanding of crop insurance, UA faculty led the development of a workbook covering the fundamentals of federal crop insurance to educate producers, crop insurance agents, and policymakers with chapters on products and opportunities for socially disadvantaged farmers and ranchers. To access the workbook follow this link:https://www.uaex.uada.edu/publications/pdf/MP576.pdf

Figure 1. Whole Farm Revenue Purchased Liability (1999-2023) 

Figure 2. Multi-Peril Crop Insurance Purchased Liability (1989-2023)

References

USDA-RMA. (2024). USDA-RMA Summary of Business. Retrieved February 20, 2024, from https://www.rma.usda.gov/SummaryOfBusiness

Yehouenou, L., Barnett, B. J., Harri, A., & Coble, K. H. (2018). STAX appeal?. Applied economic perspectives and policy, 40(4), 563-584.

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Biram, Hunter, and Ron Rainey. “Addressing the Gap in Participation Between Whole Farm Revenue Protection and Other MPCI Products.” Southern Ag Today 4(45.1). November 4, 2024. Permalink

Southern agriculture faces unique challenges, with limited crops that are both suitable and competitive in the region. Cotton, one of the major row crops in the Southern United States, has historically been favored for its drought resistance, making it well-suited to the region’s soil and weather conditions. Cotton is grown from Virginia to California across the southern U.S. In 2024, the U.S. is projected to produce 14.5 million bales of cotton.  While market prices are expected to be around $0.66 per pound (USDA WASDE), the value of cotton production is approximately $4.6 billion nationwide, underscoring its essential role in the Southern region.

Recent data from the USDA’s Economic Research Service highlights the complexities of cotton farming, showing that growers have faced financial challenges over the years. The data in Figure 1, covering the period from 1997 to 2023, highlight the ongoing profitability challenges Southern cotton farmers face. This data accounts for all costs incurred by participants in the production process, including farm operators, landlords, and contractors. The data reflects the actual production costs incurred by cotton farmers, including expenses for labor, equipment, and other inputs, as well as the revenue generated from cotton sales. However, these figures do not include government payments and crop insurance indemnities received by producers during this period. The government payments include traditional farm bill programs for farmers with base acres, as well as ad-hoc disaster relief programs. 

In competitive commodity markets, where agricultural goods compete under perfect competition, economic theory suggests that profits attract more producers. This increase in supply drives prices down, eventually reducing profitability. Over time, long-term economic profitability tends to stabilize around zero, which becomes the level needed for economic sustainability for the industry. Producers are compelled to become more efficient in their operations to achieve profitability above this threshold. However, over the 27-year period, cotton only managed to exceed total production costs in four years. On average, cotton growers faced annual losses of $94 per acre, highlighting the crop’s ongoing struggle to cover production costs. 

This consistent lack of profitability is unsustainable for cotton producers. Farmers’ inability to cover total costs, including fixed expenses like long-term asset depreciation for buildings and equipment, presents a serious risk to the agricultural future. Many farmers are increasingly relying on personal equity to keep their operations running, a practice that is financially unsustainable in the long term. As a result, many are turning to government support, including farm bill programs and disaster relief initiatives, which can provide a safety net during challenging times. 

With long-term economic loss for cotton production, the economic health of Southern agriculture and the livelihoods of its farmers are at risk. If this issue is not addressed, it could result in a prolonged decline in agricultural production, eroding the economic foundation of farming communities across the Southern region.

Figure 1. Cotton Production Total Costs, Revenue, and Returns for Producers in the United States (1997 – 2023).

References: 

U.S. Department of Agriculture (USDA) Economic Research Service (ERS), Commodity Costs and Returns for Cotton, Updated on 10/1/2024.

U.S. Department of Agriculture (USDA), World Agricultural Supply and Demand Estimates (WASDE), WASDE – 652, September 12, 2024. 

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Liu, Yangxuan. “The Long Term Economic Struggles of Southern Cotton Farmers.” Southern Ag Today 4(44.1). October 28, 2024. Permalink