In recent years, drought has been a common occurrence in many Southern states, including Texas, Oklahoma, Louisiana, Arkansas, Mississippi, Alabama, Florida, Georgia, South Carolina, North Carolina, Virginia, Maryland, Tennessee, and Kentucky. The U.S. Drought Monitor reported that approximately 65% of this area was experiencing some level of drought as of September 24, 2024 (Fig 1). Producers are increasingly adopting the USDA’s Pasture, Rangeland, and Forage Insurance (PRF), recognizing its crucial role in supporting ranchers during these challenging times.
Figure 1. U.S. Drought Monitor, Southern Region 9-24-24
The PRF program was established in 2007 to help livestock and forage producers mitigate the risks associated with forage loss due to lower precipitation. The program is available in 48 states and covers over 247 million acres. The severity of droughts and the effectiveness of PRF have led to an increasing adoption of this risk management tool each year. According to the latest data, the average indemnity payment since 2011 from the region was similar to total premiums paid. During the droughts of 2021, 2022, and 2023, the indemnities paid were 14%, 69%, and 17% higher than the total premium paid, totaling $2.372 billion in indemnities versus $1.776 billion in total premiums during those three years. (Fig 2)
In the Southern Region, the adoption of this program has more than doubled since its inception, with enrolled acres increasing from 20.8 million in the first year to approximately 49.8 million in 2024. With its vast area of open rangeland, Texas dominates PRF acreage enrollment, followed by Oklahoma and Florida. These three states have seen significant increases in the adoption of PRF insurance, with Texas enrolling 42.8 million acres in 2024 (a 191% increase from 2011), Oklahoma enrolling around 4 million acres (a 1,491% increase from 2011), and Florida insuring 2.4 million acres in 2024 (a 344% increase from 2011). The other Southern Region states have also seen substantial increases in insured acres, indicating the growing recognition of the program’s benefits (739% increase from 2011). (Fig 3). For more information on PRF, consult the USDA Fact Sheet. If you’re considering purchasing this insurance, you can find a list of approved agents and insurance companies on the USDA website.
Figure 2. PRF Premiums Paid by Farmers vs Indemnities Received in the Southern States (*2024 Partial Results)
Figure 3. PRF Enrolled Acres in the Southern Region
The Poultry Grower Payment Systems and Capital Improvement Systems rule proposal is the latest effort by the Agricultural Marketing Service to address perceived inequities within the typical commercial broiler grower’s contract arrangements with poultry companies like Tyson, Pilgrims, and others. This is in addition to the recently passed Transparency in Poultry Grower Contracting and Tournaments rule, which became active on February 12, 2024. The proposed new rule would also modify the Packers and Stockyard Act. If implemented, the new rule would affect poultry growers in two substantial ways: 1. It would change the primary way most contract broiler growers are paid by modifying or replacing the traditional “tournament pay ranking system” (only applies to companies using such a ranking system) and 2. it would establish documentation requirements for any additional capital improvements recommended or required by the company. The comment period for this rule closed on August 9, 2024. The final results of this proposed rule may be impacted by the recent SCOTUS decision in Loper Bright on federal agencies’ rulemaking power to implement such rulings.
The traditional tournament pay system allows for the grower’s pay per pound to be adjusted up or down, or “ranked”, from a stated base pay rate according to the cost of growing the company’s birds on individual contract farms. Broiler growers are typically subject to “pluses and minuses” above or below a stated base pay per pound. (see fig 1) This ranked pay system has been in place for most contract growers in some form for several decades. The most often noted concern is that it can cause growers to receive a lower pay rate based on factors not fully in their control. Many companies recognize this potential and have contingency plans that offer growers relief from such situations, though not all agree on how those are handled or when they are appropriate. From a practical perspective, sometimes the exact cause of a high-cost flock of chickens is difficult to identify. Even so, growers often feel they are at the mercy of a system not designed with their best interests in mind. The proposed rule would attempt to remedy this situation by requiring all contracted growers to receive a minimum pay rate for every flock, regardless of a flock’s cost to the company. The rule does not specify whether this pay must be per pound, per square foot of growing space, or any other specific method. It does specify that any pay system must be a “fair comparison among growers.” The rule would allow positive pay incentives to be utilized, but only if all stipulations for receiving incentives meet the “fair comparison among growers” standard and are clearly documented.
Simply put, under the new rule, there could be competition for extra pay, but everyone gets the minimum pay first. Any grower who experiences a non-competitive situation out of their control would be required to be paid outside of any competition. It is suggested that a multiple flock average payment be employed in such cases. (Many poultry companies use a multi-flock average in such situations now.) The rule also stipulates that the minimum pay cannot be set arbitrarily low but must be sufficient to cover the average costs of growing birds in an area.
Whether or not a new pay system would increase the cost of growing birds for a company would depend on the system and rates chosen. However, if there is a minimum pay guarantee, it is plausible that minimum standards for raising the birds will be increased. It is also plausible that the highest pay rates a grower could earn might be decreased to cover company live-cost increases from a new system of pay.
The second part of the rule concerns capital assets on the farm. Often, companies recommend or require growers to make significant capital investments in equipment upgrades or structural improvements. Sometimes, these are simply “good maintenance” related, but often, they concern efficiency or cost-saving improvements that benefit the company as much as the grower. They could be the result of customer’s demands or animal welfare guidelines. Under the new rule, companies that recommend or require additional capital improvements of $12,000 or more must provide documentation to the grower of why such expenditures are to be made, expected costs, potential benefits to the grower or the birds, the research or data that supports it, and what the grower should expect for financial return, if any. The rule does not eliminate the potential of a grower suffering a negative impact if a specific required capital improvement is not implemented. Nor does it require that all capital expenditures be financially beneficial to growers. It simply requires the documentation above with some financial explanation for any additional capital improvement coming from the company.
In addressing the overall purpose of this proposed rule, the following statement was made in summary by the AMS:
“The benefits that will accrue to growers from the proposed changes will result from increased clarity as growers will be informed of minimum compensation outcomes that can occur under the broiler grower arrangement. There is no expectation that aggregate payments to growers will increase.”
Fig. 1: In a traditional tournament pay system, there could be a range of +/- 10% or more from base pay per pound delivered. A grower’s pay could vary anywhere in this range based on their flock’s cost. This doesn’t sound like much variation, but when multiplied over the total pounds of a modern farm, the resulting gross revenue differential is substantial. In the examples below, if base pay is $0.070 / lb., top pay is $0.077 and bottom pay is $0.063 per pound under a traditional tournament system, the resulting pay variation a grower might experience flock to flock could be $8,650, or $50,178 total annually. Under the proposed rule, the base pay would now be the minimum per pound guaranteed to the grower. It is plausible that the resulting top pay might be lowered to +5% to help the company cover the potential increase in live-cost, resulting in lower potential top pay for growers. However, the potential variation might decrease to $14,337 annually under a “new” system, lessening the income risk of the grower by 60%.
Even in the year 2024, farming tends to be a family affair. The late nights and subsequent long hours can mean the most promising way to spend family time is by spending it together in the field or on the ranch. Predictably, the kids of generational farm parents can morph quickly into farm hands – driving grain carts, loading hay, working cattle, and, in general, proving themselves to be reliable help.
Farm families and family labor are multi-layered. The roles of manager and parent, employee and child begin to overlap, blend, and mesh over time. The slow, steady drip of ever-increasing labor from the kid often means there’s never a set hire date. Then, suddenly, your brand-new teenager has put in a 40-hour week on her summer break, completely unpaid. The farmer parent may make the valid point that they allow their child to work “for free” on the farm under the guise of building character or as an exchange for a future allowance like a car or college. While I’m never one to argue with character building, this route is not the best approach from a financial and tax perspective.
If your farm kid was hard at work in the wheat field or hay field this summer break, consider putting them on the payroll. In 2024, the standard deduction is $14,600. This means one could earn up to $14,600 and not owe any federal tax. Further, if a parent pays their child through a sole proprietorship, and the child is also under the age of 18, the child is also exempt from Social Security and Medicare taxes. The child can also be exempt from Social Security and Medicare taxes when working for a partnership as long as both partners are the child’s parents.
The wage paid to an employee who happens to be your child is a fully deductible expense to the payer, and if the amount falls under the threshold mentioned above, the child will not be subject to federal tax. In some instances, state and local taxes may apply, but those amounts are often nominal. This scenario is a win-win for the child and for the parents.
There are considerations to be made when adding your children to the payroll.
The wage and the work must be reasonable. One can’t suddenly decide their child is worth $100 per stacked straw bale or $14,000 for a day’s worth of work.
There’s paperwork. It’s important to treat your child like a proper employee. Keep and maintain payroll records and be sure to file the necessary forms throughout the year and at year-end, including issuing them a W2.
Tax allowances are not labor and safety laws. Ensure you are following all laws in regard to children in agricultural settings.
Every farming situation is unique. It’s best to speak with your local tax preparer to discuss your situation and ensure you follow the rules.
If you want to further set your children up for success, consider helping them invest their wages into a tax-free savings vehicle. A college investment account or a retirement account for those not college bound are a great option. Investing those wages while mom and dad are footing the bill for living expenses will really help to secure a person’s future.
Paying your kids to work on the family farm is a great way to instill the value of hard work, perseverance, and determination. Done the right way, adding your child to the payroll can be a beneficial situation for all parties involved.
A “triple threat” of low commodity prices, high input costs, and high interest rates creates a challenging financial environment for many producers. This is especially true for producers with little working capital and who rely on operating loans to finance their business activities. The good news is that one part of this “triple threat” may soon begin to ease.
The Federal Reserve began raising the federal funds rate in the first quarter of 2022 in response to rising inflation (see Figure 1). This started a series of rate increases that ended in August 2023. Since, then, the federal funds rate has held steady at 5.33%. As the federal funds rate increased, interest rates charged on agricultural loans went up from about 5% to around 9% (Figure 1).
However, in a speech on August 23, 2024, Federal Reserve Chair Jerome Powell indicated that the Federal Open Market Committee (FOMC) would begin to lower the federal funds rate, perhaps as early as their September meeting. As the FOMC lowers the federal funds rate, other interest rates will begin to fall as well. This will be a welcome reprieve for producers as the cost of borrowing to finance operations decreases. It also provides producers with opportunities to manage the debt they have incurred over the last few years at high interest rates. Two strategies that producers might use as interest rates fall are debt refinancing and debt consolidation.
When debt is refinanced, an existing loan is replaced by a new loan with different terms and conditions for repayment. The new loan pays off the remaining principal plus any accrued interest that is still owed on the old loan. The amount that is paid off becomes the principal owed on the new loan. Payments are then made on this new loan, ideally with lower periodic payments. Debt consolidation is a form of refinancing in which multiple debts are combined into a single loan. The new loan pays off the remaining principal and any accrued interest on all the old loans, and the amount that is paid off becomes the principal owed on the new loan.
The primary benefit of refinancing or consolidating debt is smaller monthly or periodic payments, which occurs for two reasons. First, refinancing or consolidating debt often involves extending the debt’s repayment period. The amount owed is paid back over a longer period than the original loan(s) terms allowed for, so payments in each month are less. Second, refinancing or consolidating debt as interest rates decrease means the new loan should charge less in interest monthly than was charged on the old loan(s). The potential results of this benefit include improved monthly cash flow and an easier time making regular payments on debt.
Before a producer considers either of these strategies to help manage their debt, it is important to consider the potential pitfalls of refinancing or consolidation. First, extending the loan payment period may incur higher total interest costs. Although the amount owed in any single period is less, the fact that the loan principal is paid back over a longer time means interest accrues for longer as well. Therefore, there may be a tradeoff between lower periodic payments and higher overall costs for the loan. A second pitfall to consider is the closing costs and fees the producer must pay to initiate the new loan. Producers should consider whether they can pay these costs, and whether incurring these costs are worth any benefits of refinancing or consolidation, before initiating either process with their lender. Ultimately, producers will need to consult with their lenders to determine what refinancing or consolidations options are available to them and whether these options will be beneficial in the long run.
Figure 1. Changes in the Inflation rate, the Federal Funds Rate, and the Unemployment Rate, January 2018-February 2024
References
Board of Governors of the Federal Reserve System (US), Federal Funds Effective Rate [FEDFUNDS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS, April 1, 2024.
Board of Governors of the Federal Reserve System (US), Agricultural Survey, retrieved from the Federal Reserve Bank of Dallas; https://www.dallasfed.org/research/surveys/agsurvey/2024/ag2401#tab-report.
Irrigation water is a significant resource for row crop agriculture in the Mid-South (Eastern Arkansas, Northeastern Louisiana, Northwestern Mississippi, and Southeastern Missouri). The primary crops grown in the region are rice, soybeans, cotton, and corn. All rice acres and most soybean, corn, and cotton acres in the region are irrigated. The region’s primary irrigation source is groundwater pumped from the Mississippi River Valley alluvial aquifer (MRVAA) (Massey et al., 2017). Pumping costs vary greatly throughout the region depending on the crop grown, the mode of power used to pump the water, and the pumping depth of water. This article looks more closely at the range of pumping costs for the Mid-South.
Table 1 presents the estimated costs per acre of pumping irrigation water for the four major crops grown in the Mid-South by energy source (diesel, electric) and by total dynamic head (TDH) (depth to water plus drawdown and discharge pressure). Crop irrigation amounts (acre-inches) represent average amounts reported for each crop in enterprise budgets from both the University of Arkansas and Mississippi State University. A diesel price of $3.54/gallon is used to calculate diesel pumping costs, while an electric price of $0.138/kWh is used to calculate electric pumping costs. The amount of diesel and electric energy used to pump irrigation water for a given TDH is based on irrigation energy consumption data for alluvial wells from McDougal (2015).
Diesel power is currently more expensive than electric power. Farmers in the region have switched many of their diesel irrigation motors to electric motors because of the lower cost of electricity, but diesel is still prevalent due to the expense of running electricity to fields located far from electric utility lines. The proportion of diesel to electric pumps can vary greatly by farm in the region.
Pumping costs can vary greatly depending on geographic location and groundwater availability. To demonstrate this, Figures 1 and 2 present estimated average pumping costs per acre for rice and soybeans by county in Eastern Arkansas. Estimated average pumping costs in these figures assume half diesel and half electric power and are calculated using depth-to-water data from the Arkansas Groundwater Protection and Management Report for 2023 (Arkansas Department of Agriculture, NRD, 2024). Average depth-to-water values for each county are adjusted upward to TDH by adding 28 feet to account for drawdown and discharge pressure (Chris Henry, University of Arkansas Water Management Engineer, personal communication). Counties with a darker shade of red in both figures have the highest average pumping costs. Groundwater is more limiting for these counties relative to counties where water is more plentiful (counties with a lighter shade of red). Less groundwater translates into deeper pumping depths, making irrigation water more expensive in locations where water is more limiting.
McDougall, W. M. (2015). A Pump Monitoring Approach to Irrigation Pumping Plant Performance Testing. Graduate Theses and Dissertations Retrieved from https://scholarworks.uark.edu/etd/1146
Massey, J.H., C.M. Stiles, J.W. Epting, R.S. Powers, D.B. Kelley, T.H. Bowling, C.L. Janes, and D.A. Pennington (2017). Long-Term Measurements of Agronomic Crop Irrigation Made in the Mississippi Delta Portion of the Lower Mississippi River Valley. Irrigation Science. 35:297-313.
