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Implications of Reverting to Dairy Policy in the 1948 Farm Bill

Title II of the Agricultural Adjustment Act of 1948 (herein referred to as “the act”), allowed the Secretary of Agriculture to, “Support the prices of whole milk, butterfat, and the products of such commodity… at a level not in excess of 90 per centum not less than 75 per centum of the parity prices.” To achieve this, the act gave the secretary the legal authority to support dairy prices, “Through loans on, or purchases of, the products of milk and butterfat.” To conduct the purchases or loans of dairy commodities, the Secretary of Agriculture was legally authorized to make the purchases of butter or cheese through the Commodity Credit Corporation (CCC). Under the legal framework in the Agricultural Adjustment Act of 1948, the dairy provisions are permanent law, although they have been regularly suspended by subsequent farm bills.

Parity prices are prices received by farmers for agricultural commodities that ensure a level of farm income to cover the costs of production and provide a living wage (7 U.S.C. §§ 608c-659, 1933). The idea behind parity prices originated in the Agricultural Adjustment Act of 1933 in response to the low commodity prices farmers experienced during the Great Depression. To calculate parity prices, the U.S. Department of Agriculture (USDA) used agricultural prices from 1910 to 1914, the Golden Age of Agriculture, since the industry generally regarded these prices as fair during this time. One of the commodities designed to receive a parity price was milk, which was spurred by the Wisconsin milk strike and subsequent cheese plant bombings. Parity prices reflect the purchasing power from 1909-1914 but in today’s prices.

Although the dairy parity price is no longer used in the current dairy pricing scheme in the U.S., it is still reported monthly in the USDA price report due to federal mandates in existing legislation (USDA-NASS, 2011). In September 2023, the USDA Agricultural Prices Report indicated an all-milk (across all classes) parity price of $67.40 per hundredweight (USDA-NASS, 2023). The actual price received by producers in September 2023 ($21.00 per cwt) was approximately 30% of parity. Milk prices by percent parity are shown in Table 1. Under the act, the secretary has the legal authority to set the parity price, which becomes the new price floor. The new price in turn is supported through dairy foods commodity purchases by the CCC.

Table 1. Parity milk price.
Pricing factor	Price ($)
Parity Price¹	67.40
90%	60.66
30%²	21.00
Income above market price	39.66
¹Reported by NASS ²Current market price

Policy Implication Discussion

If Congress fails to extend the farm bill between now and the end of the year, concerns will grow about a potential return to permanent law after the first of the year. Although many dairy farmers would be thrilled to receive an all-milk price of $60.66 cwt, there are a few long-term implications that need to be considered before celebrating a high milk price.

Undoubtedly, the price of milk paid by consumers would increase significantly. Historically, milk was considered an inelastic food product; therefore, even as the price of milk increased, there was little effect on the quantity consumers demanded (Schröck, 2012). However, some economists have observed that milk is no longer as inelastic as once believed. This begs the question: even if the lowest-priced milk in the grocery store went above $4.00 per gallon, how would consumers respond?

If milk consumption were to decline, there would subsequently be a ripple effect that would decrease the amount of milk processed into fluid milk and other dairy foods. Therefore, in a market where there is already an oversupply of milk, this could potentially increase this issue even further.

References

Schröck, R. (2012). The organic milk market in Germany is maturing: A demand system analysis of organic and conventional fresh milk segmented by consumer groups. Agribusiness, 28(3), 274-292.

USDA-National Agricultural Statistics Service. (2023, September 29). Agricultural Prices. Economics, Statistics, and Market Information Center. https://downloads.usda.library.cornell.edu/usda-esmis/files/c821gj76b/p5549b47m/6108ww46v/agpr0923.pdf

USDA-National Agricultural Statistics Service. (2011). Price Program. USDA-National Agricultural Statistics Service. https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Prices/Price_Program_Methodology_v11_03092015.pdf

Myers, Jack, and Hunter Biram. “Implications of Reverting to Dairy Policy in the 1948 Farm Bill.” Southern Ag Today 3(46.4). November 16, 2023. Permalink

November 16, 2023

The Economics of Artificial Insemination
Artificial Insemination (AI) is a useful tool that cattle producers can use to help their operation. It offers many advantages to natural service that may benefit even small producers. One major advantage of this technology is that it allows access to superior genetics at a reduced cost compared to natural service. A producer can get access to top-of-the-line genetics without having to spend thousands of dollars on a top-of-the-line bull. AI also allows for more selective breeding where a producer can select for increased calving ease, milk production, heavier weaning weights, etc. This technology has been shown to improve conception rates and shorten the calving interval (Anderson & Deaton 2003; Rodgers et al., 2012). This means that AI can be used to increase a producer’s cow herd genetics through replacement heifers. They can also increase herd uniformity, which could lead to better group marketing opportunities and higher prices received.

Despite these benefits, adoption of AI has been relatively low, with only 11.6% of beef cattle operations using this technology. However, like with many technologies, larger producers were more likely to use this technology, with 29.4% of operations with 200 or more head using AI compared to 8.7% of operations with only 1-49 head (USDA APHIS 2017). The major barrier to adopting AI is the increased management and labor requirements. An AI program is going to take significantly more work than natural service. It also has added costs of drugs, semen, and requires additional handling facilities. Furthermore, there are some knowledge barriers that producers need to overcome to use AI effectively.

The question then is, does AI pay? In typical economist fashion, the answer is: it depends. The factors that impact the profitability of AI are:
1. Herd Size
  1. Larger herds tend to see more profit benefit from AI.
2. Cow-to-bull ratio
  1. A lower cow-to-bull ratio will produce higher returns to switching to AI.
3. How are the calves marketed?
  1. The more premium for better genetics, performance, and uniformity you can capture, the better off you will be with AI.
4. How much is your time worth?
  1. The more valuable your time, the more expensive the increased management and labor costs become, and AI becomes less profitable.
  1. AI programs will vary in labor intensity.
As with any farm decision, the most economical choice is not going to be the same for everyone. It is important to evaluate your options to determine what is best for your farm. One way to do this is to construct a partial budget. A partial budget is a way of evaluating two different decisions to determine which will be more profitable. It does this by comparing the associated costs and revenues of a choice with the associated costs and revenues of another choice. It only looks at the difference between the two options. For example, it can be used to compare the returns and costs of AI to that of natural service, as seen in Table 1. In this example, a herd with 115 head would increase net returns by $9.87/exposed cow by switching to AI. This is dependent on several factors, including the price received for the cattle, the costs of the drugs, semen, technician, and labor, and the price of the cull bull maintenance and sale. For a more detailed explanation of the numbers and assumptions used in Table 1 please see: http://extension.msstate.edu/publications/economic-impact-artificial-insemination-vs-natural-mating-for-beef-cattle-herds. Also, it should be noted that improved herd genetics is going to have benefits over time. This means that the value of AI likely increases when considering more years. But it is important to do these comparisons yourself to determine if AI is right for you.

References

Anderson, L., & Deaton, P. (2003). Economics of estrus synchronization and artificial insemination. Proc., Beef Improvement Fed, 15-19.

Karisch, B. (2020). Economic Impact of Artificial Insemination vs. Natural Mating for Beef Cattle Herds. Mississippi State University Extension P2486. Available at: http://extension.msstate.edu/publications/economic-impact-artificial-insemination-vs-natural-mating-for-beef-cattle-herds

Rodgers, J. C., Bird, S. L., Larson, J. E., Dilorenzo, N., Dahlen, C. R., DiCostanzo, A., & Lamb, G.C. (2012). An economic evaluation of estrous synchronization and timed artificial insemination in suckled beef cows, Journal of Animal Science, Volume 90, Issue 11, 4055–4062, https://doi.org/10.2527/jas.2011-4836

USDA APHIS. (2017). Beef 2017. Available at: https://www.aphis.usda.gov/animal_health/nahms/beefcowcalf/downloads/beef2017/Beef2017_dr_PartI.pdf

Picture by Tara Winstead. TN
November 15, 2023
A Charlie Brown Christmas for Cattle Prices

Cattle markets finished October on a weak note with the CME Feeder Cattle Index around $237 per hundredweight. This price represents a $17 per hundredweight decline compared to the peak value, which occurred in September. However, the decline in prices is not the worst of it. The worst of it was that many cattle producers missed out on the opportunity to hedge cattle to be sold in the fourth quarter of 2023 and the first eight months of 2024 and will likely receive lower prices.

Traders and market participants clearly had high expectations for feeder cattle as can be seen in Figure 1 with most contracts finding their life of contract high in September. Most contracts are $20 to $30 off their contract high as of this writing with more weakness evident in the market. Despite a favorable opportunity to hedge the sale of cattle in September and early October, not all hope is lost. One could easily compare the Christmas tree in A Charlie Brown Christmas with cattle market prices, but most would look at it from the glass half empty perspective instead of the glass half full perspective. One could certainly sulk in the losses and the missed hedging opportunities, but one must remember that markets are still alive just like the Christmas tree Charlie Brown chose. This means there are opportunities for gains in the current market.

The first aspect to consider is that feeder cattle futures are still offering a favorable price to hedge the sale of feeder cattle through most of 2024. If a profitable price can be achieved with current futures prices, it could still be a wise move to secure those profits. If there is concern of missing out on larger profits if the market price strengthens, then there are strategies using put and call options to capitalize on a stronger market. The primary objective is to be an active marketer instead of passive.

Figure 1. Daily feeder cattle futures close price by contract month.

Griffith, Andrew P. “A Charlie Brown Christmas for Cattle Prices.” Southern Ag Today 3(46.2). November 14, 2023. Permalink

November 14, 2023
U.S. Cotton Cost Trends and Implications

It is important for farmers to have accurate knowledge of their costs of production.  Having a historical baseline of production costs gives producers a standard for managing their operation.  Accurate knowledge of production costs is also the basis for developing a marketing plan, i.e., identifying break-even price levels to target your price risk management or selling.

There are tools available to assist producers.  There are commercial software products that provide useful database management and financial calculations.  Some Extension agricultural economists provide support using standard accounting programs like Quickbooks.  Extension agricultural economists in major cotton producing states also publish planning budgets, often in spreadsheet formats, to guide producers in developing their own customized cost and returns estimates. Lastly, the USDA Economic Research Service (ERS) also conducts regular grower surveys of production costs, by region, and publishes research reports based on this information (Figure 1).

Figure 1 summarizes annual data on U.S. average annual cotton production costs.  The data depict two measures of historical profitability:  1) short run profitability, reflected as the value of cotton production less specified variable costs, and 2) long run profitability, calculated as the value of cotton production less specified variable and fixed costs.  The value of production shown does not include farm program payments or crop insurance indemnities.

On the face of it, these data reflect U.S. cotton as a marginal proposition.  While there appears to be an economic rationale to operate in the short run, and partially contribute to fixed costs, the long run profitability implications of U.S. cotton appear poor. The possible implications for long term viability of U.S. cotton include the following.  1) The cotton growing operations that will be left are likely of a scale that implies lower than average fixed costs, particularly machinery costs. This may involve beneficial leasing terms that are unavailable to smaller scale producers.  2)  The larger scale operations may also benefit from volume discounts on purchases of variable and capital inputs.  3) Some operations may generate above average value of production.  On the yield side, this perhaps is being achieved by the early adopters of yield enhancing technology and production systems.  On the price side this could involve better risk management and marketing that captures some of the upside price risk that is available in most years. Lastly, the picture implied by Figure 1 reinforces the need for the buffering effects of federal farm programs and crop insurance.

Figure 1. Cotton U.S. Net Return Cost Trend

References and Resources

Beginning Quick Books Online Training for Farmers and Ranchers. https://amarillo.tamu.edu/files/2023/08/QuickBooks-Online-Course-Flyer.pdf.

Texas A&M AgriLife Extension. Cotton Budgets. https://agecoext.tamu.edu/resources/crop-livestock-budgets/by-commodity/cotton/.

University of Georgia. Department of Agricultural and Applied Economics. Budgets. https://agecon.uga.edu/extension/budgets.html.

University of Arkansas Cooperative Extension Service. Crop Budgets for Arkansas. https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx.

USDA Economic Research Service. Commodity Costs and Returns. https://www.ers.usda.gov/data-products/commodity-costs-and-returns/.

Robinson, John. “U.S. Cotton Cost Trends and Implications.” Southern Ag Today 3(46.1). November 13, 2023. Permalink

November 13, 2023
Do We Have Enough DEA-Registered Labs to Implement Hemp Program?

As hemp growers finish harvesting the 2023 crop, they should plan for 2024. In 2024, the USDA will fully enforce the Domestic Hemp Production Program rules, requiring all hemp to be tested by DEA-registered facilities beginning January 1, 2024. Initially set for 2023, this rule was postponed due to a lack of testing capacity. The USDA’s Agricultural Marketing Service (AMS) has compiled a directory of DEA-registered testing facilities for controlled substances, including hemp testing. This directory aids growers in locating nearby DEA-registered facilities for compliance.  Labs fluctuate, but in general, the number of testing facilities has increased since the 2018 Farm Bill/inception of hemp production in America.

Federal regulations outline hemp testing requirements within state and tribal production plans. These rules necessitate samples taken by sampling agents within 30 days of expected harvest to test total delta-9 THC concentration, which should be below 0.3% on a dry weight basis. A 95% confidence level ensures that no more than 1% of plants exceed the permissible THC levels (greater than 0.3% delta-9 THC on a dry weight basis).

Thinking about this for the future, how does the current testing infrastructure track with reported planted acres?  Looking at the 2022 Farm Service Agency’s (FSA) reported acreage, there is no statistical relationship between the number of hemp acres and the proximity of a county to a DEA-registered testing facility on the AMS directory. However, with the new requirement for all hemp to be tested in registered facilities, we will likely see a shift in future county hemp production to correlate more closely with testing facility proximity.

Without a correlation between hemp acres and testing facility location at the county level, we turned to evaluate the relationship between reportage acreage and access to DEA-registered testing facilities by state.  The map highlights reported hemp acres planted in 2022 by state and the number of hemp testing sites by state. Those states with considerable hemp acreage and less testing infrastructure are shown as light green in color (Montana, South Dakota, Missouri, Oklahoma, Kansas), and states with adequate testing infrastructure for the state’s sizeable hemp acreage as dark sea green (Texas, Colorado, Kentucky, and North Carolina). As the industry begins to mature, we expect planted hemp acres to be more correlated to the location of registered testing facilities.

The numerical values on each state on the map are the calculated ratio of 2022 reported hemp acres planted /divided by the number of testing facilities in the state. For example, in Texas there are 133 acres of hemp planted per testing facility. Note that the states without a ratio label represent states that do not have any testing facilities despite having hemp acres planted in 2022.

This work is supported by the Agriculture and Food Research Initiative (AFRI) program, grant no. 2021-68006-33894/project accession no. 1025097, from the U.S. Department of Agriculture, National Institute of Food and Agriculture.  Any opinions, findings, conclusions, or recommendations expressed in this publication are those of the author(s) and should not be construed to represent any official USDA or U.S. Government determination or policy.

Goeringer, Paul and Elizabeth Thilmany. “Do We Have Enough DEA-Registered Labs to Implement Hemp Program?” Southern Ag Today 3(45.5). November 10, 2023. Permalink

November 10, 2023