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  • Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action

    Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action

    Poultry growers may have started to receive settlement forms recently for a broiler grower class action lawsuit settlement.  Defendants involved in the lawsuit include Koch Poultry, Pilgrim’s Pride, Sanderson Farms, Tysons, and Perdue, and several co-conspirators, including Agri Stats, Foster Farms, Mountaire Farms, Wayne Farms, George’s, Inc., Peco Foods, Inc., House of Raeford Farms, Simmons Foods, Keystone Foods, Fieldale Farms Corp., O.K. Industries, Case Foods, Marshall Durbin Companies, Amick Farms, Inc., Mar-Jac Poultry, Inc., Harrison Poultry, Inc., and Claxton Poultry Farms.  At this point, Perdue and Tyson have not agreed to the settlement, but their growers are still included in the settlement process.  Growers might be surprised to receive this form in the mail and may have questions about the case and settlement.  There is a website designed to answer questions about the settlement process (https://www.broilergrowersantitrustsettlement.com/koch-settlement/), which includes many important deadlines for broiler growers.  Answers to many of the important questions growers may have, including how much money each grower will receive and whether additional integrators will, are currently unknown.  

                Originally filed in 2017 in the federal district court for the Eastern District of Oklahoma, the lawsuit alleges that several integrators colluded in the broiler market.  According to the court filings, the plaintiffs alleged that the integrators agreed not to poach growers.  In addition to the no-poaching agreement, the integrators also allegedly used Agri Stats to share detailed data about their operations.  Although this data shared through Agri Stats is anonymous, it is highly detailed, making it possible for companies to distinguish various operations.  This data is also non-public — private data only available to the integrators, according to the court filings.  By sharing this detailed data with Agri Stats, the integrators could collude to lower grower compensation.

                Growers for all these companies will receive settlement forms as potential class members impacted by the lower grower compensation amount due to the alleged collusion.  Growers receiving settlement forms will need to pay attention to certain dates.  The first important date is Sept. 23, 2022, for postmarking requests to be excluded from the settlement. A party always has the right to be excluded from a settlement.  When a party elects, they often have the right to sue for similar claims on their own or do nothing.  To have that opportunity, a grower must opt out by the September 23 deadline.  Second, all claims’ forms must be submitted online or be postmarked by February 6, 2023.  Please check the website at https://www.broilergrowersantitrustsettlement.com/koch-settlement/ for additional information to determine if a grower wants to be part of the settlement or if a grower notice mistakes on the settlement form.  

    Goeringer, Paul. “Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action“. Southern Ag Today 2(38.5). September 16, 2022. Permalink

  • Drought Related Livestock Sales and Tax Reporting Options

    Drought Related Livestock Sales and Tax Reporting Options

    Livestock producers are making hard decisions this summer and fall as widespread drought conditions limit pasture, hay, and, in some places, water availability across the southern and western states. Drought losses can result in additional costs for purchased hay (for those who can find a hay source), selling calves early, retaining fewer replacement heifers, or culling cows to reduce pressure on pasture and rangeland. Drought disaster programs are available to help offset some of the additional costs. For example, the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish (ELAP) program can help offset the added cost of transporting hay from greater distances this year. Forage management and supplementation can also stretch available grazing to reduce the need for winter hay feeding in some areas. However, in many cases, producers will be reducing herd sizes through additional cattle sales. 

    Drought related costs and losses will be reflected on 2022 tax returns for many producers across the country. Understanding how those losses must be reported come tax season and what documentation to retain will aid in properly reporting expenses and program payments. Drought related farm expenses and payments from drought disaster programs are fairly straightforward. For example, if a producer purchases hay in 2022 sourced from farms in states at a greater distance than previous years, they may be eligible for the ELAP transportation cost offset mentioned previously. The producer would report the cost of hay and hauling as farm expenses. The ELAP disaster payment for excess transportation cost would be reported as income. For more information on USDA disaster program documentation requirements, see factsheet: https://extension.okstate.edu/fact-sheets/usda-program-recordkeeping-requirements.html

    Cattle sales will also be reported on tax returns, but these decisions are a little more complicated. Gains from breeding, dairy or draft cattle sales in excess of normal due to drought may be deferred for up to two years, as long as the dollar value of the cattle are replaced within those two years. Record keeping is critical. The producer can only defer cattle sales that are above what would typically be sold under normal production conditions. Two tax provisions exist to avoid the adverse tax consequences of selling more animals than normal due to weather related conditions. One applies only to breeding, dairy and draft animals that will be replaced. The second applies to market animals where the income from the additional animals sold are reported in the year that they would have normally been marketed.

    Consider an example for breeding animals: Over the past 3 years, my cattle operation sold 30 calves weighing 650 pounds and 4 cull cows as an annual average. Due to drought in 2022, I sell 5 replacement heifers I would ordinarily have retained and 10 cows (6 more than the average) for $10,000. I can defer reporting the $10,000 of income from the excess animal sales (the 5 replacement heifers and the 6 cows) by electing to replace those sold by buying at least $10,000 of replacement breeding animals by December 31, 2024. If I do not spend at least $10,000 on replacement animals, I must amend the 2022 return and report the difference as income in that year. Should my county or a contiguous county be declared a federal disaster area, the replacement period is extended to 4 years and the animals will not have to be replaced until the end of 2026. The replacement animals must also be of the same type and purpose of the animals sold (dairy animals for dairy animals or breeding for breeding). This tax provision is under Internal Revenue Code Section 1033(e).

    Now consider an example for the sale of any livestock (other than poultry) due to weather related conditions, and this time the county I raise cattle in is declared a federal disaster area (which is a requirement for this provision). Using the same facts as the prior example, I sold 6 more cows and 5 replacement heifers plus 15 head of calves (that would have normally been sold in 2023) for $20,000. Combined, this is more livestock than what would have normally been sold had the drought conditions not existed. This tax law provision allows me to elect to report the $20,000 of income in 2023 instead bunching this excess income in 2022. This tax provision is under Internal Revenue Code Section 453(g). 

    Documentation is critical for all drought related losses. Specifically for your taxes keep the following in your tax records: 

    • Evidence of the weather-related conditions that forced the sale or exchange of animals.
    • Number and kind of livestock sold or exchanged.
    • Number of livestock of each kind that would have been sold or exchanged under normal business circumstances (generally, the average number of animals sold over the three preceding years).
    • The amount of gain realized on the sale or exchange.
    • The amount of income to be postponed

    It will be important to discuss the application of these tax provisions with your income tax advisor. Sources of drought information include the Drought Monitor Maps which indicate drought intensity by state and region. In addition, USDA reports which counties are currently considered drought disaster areas and are eligible to receive federal disaster programs, and disaster declarations generally are available from State and Federal government websites and stakeholder announcements. Tax season seems like it is far off on the horizon still, but better understanding how drought related losses will be reported may aid in documentation of losses today. 

    For more information see the Rural Tax Center factsheet http://ruraltax.org/files-ou/RTE_2021-05_Weather_Related_Sales_of_Livestock.pdf

    Hagerman, Amy, and JC Hobbs. “Drought Related Livestock Sales and Tax Reporting Options.” Southern Ag Today 2(38.4). September 15, 2022. Permalink

  • Economic vs. Tax Depreciation: Understanding Which to Use for Determining Farm Profitability

    Economic vs. Tax Depreciation: Understanding Which to Use for Determining Farm Profitability

    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)

    Source: Kentucky Farm Business Management Program’s Annual Summary Data:
    http://agecon.ca.uky.edu/KFBM-pubs

    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

  • Wholesale Beef Prices

    Wholesale Beef Prices

    On livestock market Tuesdays, the authors normally highlight events in livestock markets.  Today we are looking beyond the farmgate to examine wholesale beef prices (we’ll look at pork, poultry, and dairy products in future SATs).  The boxed beef cutout is the value of the primal cuts making up a carcass.  The cutout is below last year across all USDA quality grades.  Digging a little deeper into individual cut prices paints a pretty interesting picture of beef prices this year and provides some price evidence of changing consumers.

    We can think of the middle meats of a beef carcass as the expensive, high value cuts – the steaks from the loin and the rib.  The end meats are the chuck and round and are, generally, lower valued.  With consumers facing higher costs and budget pressures we might expect them to buy fewer steaks and more ground beef.  The wholesale price data tends to support that idea.

    Wholesale ribeye prices have been below last year’s prices since the end of January.  Last week ribeyes averaged $9.40 per pound compared to $14.51 per pound the same week last year.  Ribeyes, traditionally, tend to peak late in the year as a holiday item and have been increasing over the last several weeks.  It’s likely that they will continue to trend higher as an alternative to high priced turkeys.  

    Strip steaks normally peak in value during early grilling season.  That peak was a little later this year at $8.81 per pound back in July.  They have since dropped sharply to $6.48 last week, below last year’s $7.67 per pound in the same week.  Tenderloins last week were 26 percent lower than this point a year ago.  

    In contrast, 90 and 50 percent lean boneless beef prices have remained above a year ago until just recently.  Even in the face of large cow slaughter, lean beef prices have remained relatively high. 

    Wholesale beef price data certainly suggest consumers, through retailers, have likely shifted around a bit, buying fewer steaks and more ground beef.  It’s also likely that the overall demand for beef has remained quite good.  We continue to produce large amounts of beef and retail prices have not begun to decline.  All in all, this is not bad news for calf and cattle prices this fall.

    Anderson, David. “Wholesale Beef Prices“. Southern Ag Today 2(38.2). September 13, 2022. Permalink

  • On-Farm Grain Storage in Southern States

    On-Farm Grain Storage in Southern States

    On-farm grain storage can provide multiple benefits to producers. One of the major benefits is increased marketing flexibility. Grain storage allows producers to take advantage of the seasonal nature of grain prices. Typically, grain prices are at the lowest point shortly after harvest when supplies are the greatest, and then prices increase as supplies draw down throughout the rest of the marketing year. Figure 1 shows this seasonal change in grain prices in the Mid-South Delta for corn and soybeans. On average, from 2014-2021, corn prices were nearly 25% higher in the month of June compared to October, and soybean prices were nearly 15% higher in June compared to October. While the idea of seasonal grain prices holds, on average, each year is different. For example, in 2019, June corn prices were 19% lower than October, and June soybean prices were 3% lower. The next year, 2020, saw large returns to storage — corn prices increased by 79%, and soybean prices increased by 43% from October to June. Having the ability to include storage in a marketing plan provides the possibility for higher returns for most years.

    Figure 1. Monthly Delta Corn and Soybean Cash Price Indexes as a Percent of October Prices, 2014-2021 Average

    Source: Barchart, Delta Corn Price Index, Delta Soybean Price Index

    On-farm grain storage also provides greater flexibility where grain can be sold. Many southern states have large poultry, distilling, ethanol, and livestock industries that buy grain throughout the year but may not have substantial on-site storage. Having on-farm storage allows producers to take advantage of these on-demand markets. It is important for producers to know the on-demand markets in their area and be on contact lists for those purchasers. 

    Harvest can also be completed faster with the addition of on-farm storage. Given harvest risks, such as hurricanes in the Southeast, valuable time can be saved by not having to transport grain to an off-farm storage facility or wait in lines at elevators, barge points, or other end users. 

    While on-farm storage provides greater flexibility, it does come with some disadvantages. The biggest disadvantage is the size of the initial investment needed to build a storage facility. Additional considerations must be given to the cost of extra drying, shrinkage, quality deterioration, and increased handling costs.    

    Since 2000, southern states have added 28.5 million bushels of on-farm storage capacity. Figure 2 shows the on-farm storage capacity as of December 2021, and the average total corn, soybean, and wheat production from 2017-2021 for each southern state. Kentucky has the highest on-farm capacity with 240 million bushels, which is 66% of the state’s average corn, soybean, and wheat production. Georgia has the highest percentage of on-farm storage capacity as a percent of production at 87% followed by Arkansas at 81%, likely driven by historically well-established poultry industries in each state. On-farm storage capacity is not reported for Florida, Louisiana, and South Carolina. Overall, many southern states have room to expand on-farm storage opportunities given the current level of grain production. 

    Figure 2. 2021 On-Farm Storage Capacity and Average Total Corn, Soybean, and Wheat Production from 2017-2021 by State

    Source: USDA-NASS Quickstats: USDA/NASS QuickStats Ad-hoc Query Tool
    Note: On-Farm storage capacity not reported for Florida, Louisiana, and South Carolina.

    Maples, William E.. “On-Farm Grain Storage in Southern States“. Southern Ag Today 2(38.1). September 12, 2022. Permalink