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  • Forage Costs of Production and Breakeven Curves

    Forage Costs of Production and Breakeven Curves

    In forage production, whether that is establishing a forage system or simply maintaining it, it is important to understand what costs are involved and how these can impact your break-evens. A break-even is the price/yield needed in order to cover your total costs. Depending on the type of forage system you have, the costs can be relatively expensive. Developing an enterprise budget is one way of examining and comparing these costs.

    Figure 1 shows the costs per acre from forage enterprise budgets developed at Mississippi State for four different forage maintenance systems: 1) conventional alfalfa hay, 2) permanent summer pasture, 3) mixed grass hay, and 4) hybrid bermudagrass hay. The conventional alfalfa and the hybrid bermudagrass systems had the highest costs per acre at $957.63 and $954.22, respectively. Permanent summer pasture maintenance had the lowest costs per acre at $282.24/ac.  Fertilizer, herbicide, and machinery costs make up a large portion of the costs in each system. Machinery costs include fuel, repair and maintenance, and interest costs. 

    Figure 1. Costs per acre for forage maintenance production systems in Mississippi

    Figure 2 shows the break-even curves for each of the four forage production systems. Break-even curves show the price and yield needed to cover total specified expenses. Price/yield combinations below this curve would result in losing money, and any combination above the curve would generate a profit. The market price shown in the figure was the average hay price received by producers in Mississippi for 2022 at $126/ton. Hay prices and costs can vary significantly from state to state, so again, it is important to adjust for your situation. However, the basic idea is that production systems with higher costs need a higher price, yield, or both to be profitable. For example, at the Mississippi 2022 market price and assumed costs, a permanent summer pasture system would need to produce 2.2 tons/ac to break-even. A mixed grass hay system would need 4.9 tons/ac to break-even. A conventional alfalfa hay system and a hybrid bermudagrass hay system would each need to produce around 7.6 tons/ac given a price of $126/ton. As such, permanent summer pasture and mixed grass hay are two of the more popular forage systems in Mississippi.

    Figure 2. Forage maintenance break-even curves in Mississippi

    More information on these costs, as well as over 20 additional forage maintenance and establishment budgets for Mississippi, can be found at: https://www.agecon.msstate.edu/whatwedo/budgets.php. It is important to determine what your specific costs are, and these can vary significantly from state to state and by production system. Below are links to enterprise budgets developed by agricultural economists for each state in the Southern Region.

    Alabama: https://www.aces.edu/blog/tag/profiles-and-budgets/?c=farm-management&orderby=title

    Arkansas: https://www.uaex.uada.edu/farm-ranch/economics-marketing/farm-planning/budgets/crop-budgets.aspx

    Florida : https://fred.ifas.ufl.edu/extension/commodityenterprise-budgets/

    Georgia: https://agecon.uga.edu/extension/budgets.html

    Kentucky: https://agecon.ca.uky.edu/budgets

    Louisiana: https://www.lsuagcenter.com/portals/our_offices/departments/ag-economics-agribusiness/extension_outreach/budgets

    North Carolina: https://cals.ncsu.edu/are-extension/business-planning-and-operations/enterprise-budgets/

    Oklahoma: http://www.agecon.okstate.edu/budgets/

    South Carolina: https://www.clemson.edu/extension/agribusiness/enterprise-budget/index.html

    Texas: https://agecoext.tamu.edu/resources/crop-livestock-budgets/

    Tennessee: https://arec.tennessee.edu/extension/budgets/

  • Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy Margin Coverage Provides Some Help in Challenging Milk Market

    Dairy producers continue to struggle with decreasing farm level milk prices and high feed costs. For the first five months of 2023, the US All Milk price averaged $21.16 per hundredweight (cwt), which was more than $4 per cwt lower than the first five months of 2022. In fact, the US All Milk dropped below $20 per cwt in May for the first time since October 2021. Lower milk prices are never a welcome change, but they are especially problematic in the current feed price environment. While farm level milk prices were considerably lower for the January-May time period this year compared to last year, feed prices were actually higher. Using the Dairy Margin Coverage (DMC) feed ration as a proxy for feed cost to produce a cwt of milk, feed costs were almost $1 per cwt higher during the first five months of this year. Needless to say, this combination puts a serious squeeze on dairy producers. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014 and the recent convergence of the two lines is very obvious. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

    While I would prefer market conditions be different, times like this are good opportunities to discuss risk management strategies. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin (LGM) for Dairy, forward contracts, futures and options, etc. But the Dairy Margin Protection (DMC) program is a relatively inexpensive way to get some margin protection, especially on an operation’s first 5 million lbs of milk production history. Because it is readily available and inexpensive, I suggest to producers that DMC should be their first layer of risk protection. In fact, producers that enrolled in the DMC program at the highest level ($9.50 per cwt) have received a payment in each of the first five months of 2023. 

    The chart below tracks DMC margin back to January of 2014 and one can easily see decline in margins over the last several months. The last point on that chart is May of 2023 for which the DMC actual margin was $4.83. While it can’t be seen in the chart, one would have to go back to 2012 to find a lower DMC margin than that, had the program existed back then. In terms of the payment level for May 2023, participating producers received a payment of $4.67 for that month’s share (1/12) of the production history they chose to cover. While a dairy producer would be better off if prices were such that a DCM payment was not triggered, a payment of this magnitude absolutely makes a difference. 

    Many risk management tools today are market based. By that, I mean that available coverage levels and costs evolve with market conditions. Examples of this would include Livestock Risk Protection and Livestock Gross Margin Insurance, as well as crop insurance for which reference prices are determined by February futures. But DMC really is a countercyclical tool. The margin levels that can be purchased are available regardless of market conditions. In fact, producers may enroll in DMC at times when the likelihood of payouts is extremely high. There is considerable price and cost risk going forward this year.  Historically large corn acres planted, 94 million, combined with trend yields would produce a record large corn crop and lower prices.  But drought worries may cut into those yields, substantially boosting prices. Today’s futures market indicates some slightly higher Class III milk prices in the coming months.  Every operation should consider all available tools when putting together their risk management plan, but it’s hard to imagine that DMC-Dairy would not be one of the tools in their risk management toolbox.

  • Soybean Indemnity Payments for Wildlife Damage

    Soybean Indemnity Payments for Wildlife Damage

    Often, we think of crop loss being caused by weather, such as drought or excess moisture. However, a lesser quantified, but growing, cause of loss for crops in the southeast United States is wildlife damage. The most common causes of wildlife damage in soybeans are deer and hogs. Wildlife damage can be quantified when crop yield is damaged to a level that triggers an indemnity payment. Using the USDA RMA cause of loss data, Figure 1 shows the county map of soybean indemnity payments due to wildlife damage from 2011 to 2022; Figure 2 shows the percent of total soybean wildlife indemnities as a percent of total insured liability for soybeans by county. Mississippi received the most payments totaling $6.54 million, and Arkansas received the least number of payments, totaling $1.1 million. Tennessee was second with $5.65 million and Kentucky was third with $5.5 million. Missouri received $4.3 million, and Alabama received $2.4 million. 

    We also show the annual losses to wildlife damage for soybeans in the seven states combined (Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia) from 2011 to 2022 (Figure 3). Indemnity payments due to wildlife damage to soybeans in 2022 were approximately $4.8 million, which is a 487% increase from 2011. Between 2011 and 2022, in these seven southeastern states, a total of 250,818 soybean acres received an indemnity payment due to wildlife damage. Figure 3 also shows the percentage of total soybean indemnity payments caused by wildlife damage (orange line). These indemnities due to wildlife losses are a small percentage of the total soybean crop insurance losses but have increased since 2011. 

    It should be noted that the total indemnity payments received do not capture the total loss of wildlife damage in soybean fields. Before an indemnity payment is made, the actual revenue or yield must be below the crop insurance yield or revenue guarantee for the insured unit. Also, damage to uninsured acres would not be accounted for in the data. Further, some losses due to wildlife may be being attributed to another cause that also impacted the farm (e.g. drought or excess moisture). As such, indemnities paid due to wildlife losses in soybeans represent only a portion of actual producer losses. In the seven-state region, state average soybean crop insurance coverage levels for 2022 (2011-2022 average) were: Alabama 72.1% (71.6%), Arkansas 63% (62.2%), Georgia 67.6% (66.8%), Kentucky 76.1% (76.2%), Missouri 73.2% (73.0%), Mississippi 69% (69.2%), and Tennessee 72% (72.2%).

    We note that some states and counties allow for nuisance hunting permits out of season to control deer and hog damage to crops. It might be of interest to check with your local game warden to determine if this is an option for your farm.  

    Figure 1. Soybean Indemnity Payment Map for Wildlife Damage Cause of Loss for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia from 2011 to 2022

    Figure 2. Percent of Wildlife Damage Cause of Loss as a Percent of Total Insured Liability for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia from 2011 to 2022

    Figure 3. Soybean Wildlife Indemnity Payments for Missouri, Kentucky, Arkansas, Tennessee, Mississippi, Alabama, and Georgia and Percent of Total Soybean Indemnity Payments Caused by Wildlife Damage by Year from 2011 to 2022

    References

    U.S. Department of Agriculture – Risk Management Agency. Cause of Loss Historical Data Files 2011-2022. Accessed at https://www.rma.usda.gov/SummaryOfBusiness/CauseOfLoss

    Duncan, Hence, Chris Boyer, and Aaron Smith. “Soybean Indemnity Payments for Wildlife Damage.” Southern Ag Today 3(29.1). July 17, 2023. Permalink

  • Why is Our Cooperative Struggling?

    Why is Our Cooperative Struggling?

    It is widely recognized that agricultural cooperatives are founded on seven distinct principles.

    1. Voluntary and open membership
    2. Democratic member control
    3. Members’ economic participation
    4. Autonomy and independence
    5. Education, training, and information
    6. Cooperation among cooperatives
    7. Concern for community

    Although some cooperatives adjust the first two principles, in general, adherence to these principles allow agricultural producers to collectively own assets of production that they might not otherwise be able to access. Simply put, the cooperative business structure works, and it will always be needed by agricultural producers so long as they participate in markets with very large buyers and sellers or lack the ability to effectively transfer cost increases and risk downstream. 

    However, these principles add some complexity to successful management. Occasionally managers and directors feel their cooperative is not meeting their expectations. Their frustrations often originate with the challenges presented by cooperative principles and a misunderstanding of how those principles apply to successful cooperative leadership. Here are a few examples of complexities that might describe your cooperative.

    We struggle with member loyalty.

    Cooperatives are owned by their customers, so one would expect that cooperative members would naturally be loyal to the business they own. However, cooperative managers often complain that their members are only loyal to price. Cooperatives rely on their members economic participation for profitability, but most feature open and voluntary membership. Just like any other firm, cooperatives must offer their customers a reason to do business, but it must be more than just price. If cooperative members are choosing your competitors, they may need to be educated about the value of the cooperative’s services, the value of shared profits, or the value of the cooperative’s influence on market power.    

    We struggle with recruiting directors with the skills we need.

    Cooperative directors are elected from among the membership. Members, in turn, are users or customers of the business. The implication of democratic member control is that directors are selected from among a group of relatively similar people with similar skills and backgrounds from within a defined geographic region. Compared to other forms of corporations, a cooperative can’t always recruit directors from other industries or with specific professional backgrounds. On the other hand, a cooperative board has incredible customer insight. 

    We struggle with directors who want to control managerial decisions.

    Another implication of democratic member control is that cooperative directors are not only customers, but they themselves are managers of their own business ventures. Most likely, the directors of your cooperative are also very successful managers. However, the director role is very different in purpose and function from that of management. At times, cooperative directors might fall back on what they know best (operational management) if they aren’t familiar with the role of the director (setting policy and strategy). In addition, cooperative directors may need education about the industry or business model of their cooperative. For example, a director may be very familiar with cotton production, but not understand retail pricing and inventory control at their cooperative farm store. Or a director may be familiar with grain production, but not understand the economics of milling and bagging feed. 

    Education is a key method for helping a struggling cooperative. There are many professionals ready to assist a cooperative board with specific knowledge and education to help them overcome these struggles. Look for help from your local bank, accountant, lawyer, and cooperative extension service.

    Photo by Monstera: https://www.pexels.com/photo/cutout-paper-composition-with-graphic-and-hand-with-bills-5849592/

  • U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels

    U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels

    In 2022, China’s total food and agricultural imports reached a record $218 billion, compared to its agricultural exports of $70 billion making China the largest net importer of food and agricultural products by a considerable margin. China’s 2022 import levels follow on the footsteps of retaliatory tariff increases in 2018 and 2019, the Economic and Trade Agreement between the United States of America and the People’s Republic of China (Phase One that entered into force on February 14, 2020), and the Covid-19 pandemic. While the two-year Phase One agreement (2020-2021) fell short of the purchase commitments China agreed to, its agricultural imports from the U.S. soared to record levels in 2022, and the share of China’s agricultural imports sourced from the U.S. has recovered to levels at or near the pre-trade war era. 

    Figure 1 shows the value of China’s agricultural imports from its top nine export suppliers and an aggregate rest-of-world (ROW) region (left vertical axis, $ Billion, area graph). China’s imported a record $40.8 billion of food and agricultural products from the U.S. in 2022, up from $38 billion in 2021, and nearly twice the $22.6 billion China imported from the U.S. in 2017 prior to trade dispute and Phase One trade agreement. China’s food and agricultural imports from the U.S. are more than double its imports from the EU-27 but trail China’s record agricultural imports from Brazil valued at $52.5 billion in 2022. Together, Brazil and the United States supply 43% of China’s total food and agricultural imports. 

    However, comparing nominal trade values through time can lead to misleading conclusions, especially when commodity trade values are subject to considerable price inflation later in the sample period. Starting in mid-late 2021, commodity prices spiked following poor weather conditions in North and South America, the U.S. dollar appreciated, Central Banks began raising interest rates, and an overall inflationary environment took hold.  Commodity prices surged to new highs following Russia’s invasion of Ukraine on February 24, 2022, before returning to their pre-invasion levels more recently. For example, global wheat prices increased by over 60 percent from February 24 to June 1, 2022 compared to average wheat prices prior to the invasion. 

    If food price inflation is a global phenomenon (i.e. not specific to an individual country), then an alternative metric by which to judge China’s record import values is to compute the share of China’s imports from the U.S. in 2022 relative to the pre-trade war period. Given inflationary pressure in 2022 that impacted most food and agricultural products, market shares allow us to evaluate whether the U.S. has regained its market share standing following a turbulent five years of commodity trade. The dashed lines in the figure trace the share of China’s agricultural imports from the U.S. (black) and Brazil (green) and are illustrated on the secondary right vertical axis. While U.S. market share in China’s food and agricultural imports was on a downward trend since 2012, it fell precipitously in 2018 and 2019 to 12% and 10%, respectively. Brazil’s market share in China increased from 21% in 2017 to 27% in 2018 but has remained stable in the 22-24% range since then.  Conversely, U.S. market share has recovered significantly in 2021 and 2022 to 18% and 19% of China’s total agricultural imports and is about equal to its share in 2017, prior to the US-China trade dispute. Overall, the rapid surge in U.S. market share in China since 2019, and stable market shares of Brazil and other competing exporters suggests, relatively speaking, that China has been importing more from the U.S. in 2021 and 2022. 

    Figure 1. China’s Agricultural Import Values from its Top 10 Export Suppliers, and the Market Share of China’s Imports Sourced from the U.S. and Brazil

    Source: Authors calculations from Trade Data Monitor using China’s reported import statistics through December 2022.

    Figure Note: Source: Author Calculations from Trade Data Monitor. Left vertical axis are in $ Billion. Right vertical axis are percentage market shares. Data are from China’s reported imports throughout.

    Grant, Jason H. “U.S. Agricultural Exports to China Soar and Market Share Returns to Pre-Trade War Levels.” Southern Ag Today 3(28.4). July 13, 2023. Permalink