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  • What’s in the Farm Bill for Livestock Producers?

    What’s in the Farm Bill for Livestock Producers?

    Livestock producers tend to be an independent lot.  We can identify – we both have livestock backgrounds.  It’s not uncommon for us to hear that there’s really nothing in the farm bill – or in farm policy in general – for livestock producers.  In fact, livestock producers often wear it as a badge of honor, arguing they get nothing from the federal government and would prefer the federal government just stay out of their way in return.  The problem: that’s not really the case…at least not anymore.

    While it’s true that the farm safety net historically has been focused on row crops – with dairy being a very notable exception – there has been a significant shift over the past 25 years. Below, we highlight four of the major changes.

    • Environmental Quality Incentives Program (EQIP).  The 1996 Farm Bill initiated the EQIP program to provide cost share assistance to crop and livestock producers.  Fifty percent of the funding available for technical assistance, cost-share payments, incentive payments, and education under EQIP was targeted at practices relating to livestock production.
    • Livestock Disaster Programs.  The 2008 Farm Bill was the first to authorize the livestock disaster programs, including the Livestock Forage Program (LFP), the Livestock Indemnity Program (LIP), and the Emergency Assistance for Livestock, Honey Bees, and Farm-raised Fish Program (ELAP).  Unfortunately, the 2008 Farm Bill authorization was short-lived, and all three programs expired in 2011.  The 2014 Farm Bill resurrected all three programs, providing permanent baseline funding going forward.  As of February 2023, the Congressional Budget Office (CBO) estimates that those 3 programs will provide $5.6 billion in assistance to livestock producers over the next 10 years.
    • Disaster Preparedness.  The 2018 Farm Bill maintained the livestock disaster programs and provided $300 million over 10 years for animal disease prevention and management programs in addition to authorizing supplemental funding through the appropriations process.  The bill established a vaccine bank to respond to the accidental or intentional introduction of animal diseases like foot‐and‐mouth disease (FMD) and established the National Animal Disease Preparedness and Response Program to leverage local, state, and national resources to prevent and respond to animal disease threats.
    • Federal Crop Insurance.  Historically, USDA’s Risk Management Agency (RMA) was limited to spending $20 million per fiscal year on livestock insurance policies.  The Bipartisan Budget Act of 2018 eliminated the restriction.  Since then, the liability insured by livestock policies has increased from just over $500 million in 2018 to more than $21 billion in 2022 – a 4,000% increase in just 5 years (Figure 1).  There are also new insurance policies on the horizon, including one that would provide revenue coverage for weaned calves for cow-calf producers.

    Bottom line: livestock producers have a vested interest in the farm bill.  With that said, despite the rapid growth in liability insured by livestock policies, it still represents a small share of the value of livestock production in the United States and there are significant opportunities for expansion going forward.  For policymakers, it’s likely worth exploring if the current infrastructure – including things like RMA’s Livestock Price Reinsurance Agreement (LPRA) – are up to the task.

    Figure 1.  Liability Insured by Livestock Policy Type and Year

    Source:  Authors’ calculations of USDA-RMA Summary of Business data.

    Fischer, Bart L., and Joe Outlaw. “What’s in the Farm Bill for Livestock Producers?” Southern Ag Today 3(11.4). March 16, 2023. Permalink

  • Projecting Your Cost of Production and Combating Higher Costs in 2023

    Projecting Your Cost of Production and Combating Higher Costs in 2023

    While the cost of many inputs have retreated from historic highs made earlier in 2022, fertilizer and farm diesel fuel remain elevated continuing to push total costs of production in 2023. Despite the fact that commodity prices remain relatively strong, margins will be stretched thin for many crops this year.  

    Enterprise budgets can be a good farm management planning tool for growers to use when evaluating crop selection and budgeting returns (net or total specified with overhead) to land. In the 2023 enterprise budgets released by the LSU AgCenter, fertilizer prices for nitrogen, phosphate, and potash are estimated at $0.78, $0.90, and $0.67 per pound of active ingredient. This represents an increase of $0.02, $0.25, and $0.09 per pound of active ingredient, respectively from 2022. Another energy-related farm input, diesel fuel, is projected at $4.00 per gallon, an increase of $1.60 per gallon from the 2022 enterprice budget. 

    The magnitude of the fertilizer cost impact will have on a grower’s bottom line will vary with crop selection, variety, and soil nutrient profile. Soil testing is crucial in times of elevated input prices. Knowing the nutrient profile can be a cost-saving measure for the grower. For fuel cost, the extent of field preparation activities and irrigation will significantly impact a grower’s fuel expenditure.

    Over the past three years, the cost of production for corn, cotton, rice, and soybeans in Louisiana have increased in conjunction with the increase in fertilizer and fuel costs. Figure 1 illustrates the cost of production (C.O.P.) per unit using representative farm yields for the 2021 to 2023 crop years. 

     Figure 1. Breakeven cost of production estimates for selected Louisiana crops. 

    Farm yields used in analysis are 180 bu/ac for corn, 1,200 lbs/ac for cotton, 65 cwt/ac for conventional (Conv) rice, 80 cwt/ac for hybrid (Hyb) rice, 55 bu/ac for soybeans in northern Louisiana, and 40 bus/ac for soybeans in southern Louisiana. 

    Especially in times of dramatic price and cost changes, it is critical to have a handle your cost of production.  Estimating your own production costs is an important management exercise that helps with both understanding and controlling cost, as well as establishing price targets and marketing plans.  A pre-season breakeven price is calculated by estimating the total cost of production related to a specific crop and dividing it by the expected yield of that crop. Or simply put: how much money do you expect it will take to produce each bushel or pound of production?   Similarly, a breakeven yield is that same total cost of production divided by the expected price.     

    In today’s agricultural production environment, given the volatility in both input and commodity prices, breakeven analysis can help farmers make better short-term operational decisions. Enterprise budgets can be a useful tool in performing breakeven analysis utilizing both their individualized farm’s crop yields and expectations regarding market prices for a given commodity that is uniquely tailored for their agricultural production space.

    Crop enterprise budgeting resources are available for download for Southern states by clicking on the links below.

    Alabama: https://www.aces.edu/blog/topics/farm-management/enterprise-budgets-for-row-crops/

    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

    Mississippi: https://www.agecon.msstate.edu/whatwedo/budgets.php

    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/resources/request-budget.html

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

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

    Delilberto, Michael. “Projecting Your Cost of Production and Combating Higher Costs in 2023.” Southern Ag Today 3(11.3). March 15, 2023. Permalink

  • Dairy Margin Coverage Program Begins 2023 with Payment

    Dairy Margin Coverage Program Begins 2023 with Payment

    Last summer, I wrote a Southern Ag Today article about the strength of dairy prices. After a great deal of volatility during 2020 and 2021, prices for cheese, butter, and nonfat dry milk pushed farm level milk prices beyond what was seen in 2014. The US All Milk price actually exceeded $27 per cwt last April and May and just missed that level in June. Increases in feed cost definitely bit into those price levels, but margins were as attractive as they had been in several years. Since that time, milk price has fallen by about $4 per cwt. Feed costs have also decreased, but not by as much proportionally. The figure below shows both US All Milk Price and Dairy Margin Coverage (DMC) feed costs since January of 2014. (Note: Dairy-DMC did not exist for this entire time period, but the chart was intended to give historical perspective).

    US All Milk Price and DMC Feed Cost

    January 2014 to January 2023, $ per cwt

    Source: USDA-NASS, USDA-FSA

    The last data point in the chart above is for January of 2023 and that is where I want to focus this discussion. Dairy margins have shifted in recent months such that the DMC margin for January of this year was $7.94, so payments will be made at the $9.50 coverage level. This is the highest level of coverage available to producers covering up to 5 million pounds of annual milk production history. This means that a payment of $1.56 will be made on one-twelfth of the year’s covered production. The January payment alone will cover over 80% of the total premium cost for 2023 and coverage is still in place for the remaining 11 months for which margins are not yet known.

    The figure below shows the DMC Margin from January 2014 to January 2023. This is just the difference in the two series shown in the previous graph and tells the story very well. One can see the $2.96 decrease in margin from November of 2022 to January 2023 as well as the overall volatility in milk price over DMC feed costs had the program been in existence since 2014. Had DMC been around in 2009 and 2012, the margin would have been below $4 at times.

    DMC is similar to many other risk management tools in that producers are typically better off if they don’t receive payments from it. Ideally, market conditions are such that the difference between milk price and feed costs allow for acceptable returns. But in times when that is not the case, DMC can provide solid risk protection. Dairy producers should consider all risk management opportunities available to them including Dairy Revenue Protection, Livestock Gross Margin for Dairy, forward contracts, futures and options. But because DMC is a relatively inexpensive form of margin protection on coverage up to 5 million lbs of production history, I typically view it as the first layer of risk protection in a dairy farm’s risk management plan.

    DMC Margin – US All Milk Price Minus DMC Feed Cost

    January 2014 to January 2023, $ per cwt

    Source: USDA-NASS, USDA-FSA, author calculations

    Burdine, Kenny. “Dairy Margin Coverage Program Begins 2023 with Payment.” Southern Ag Today 3(11.2). March 14, 2023. Permalink

  • The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions

    The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions

    A key factor in the development of a new crop price forecast is how many acres farmers plant of each crop.  USDA surveys farmers each year and reports early season acreage intentions in the Prospective Plantings report, released at the end of March. Then at the end of June, the Acreage report from USDA details the area of each major crop planted.  Since 2006, U.S. farmers have planted about 244 million acres to corn, soybeans, wheat, cotton, sorghum, and rice.  Corn and soybeans account for the largest crop areas planted, reaching 181 million acres combined in 2021 (Figure 1).   

    Figure 1. U.S. Planted Acres

    USDA, Acerage, June 30, 2022

    From an economic standpoint, relative crop profitability is an important driver of planting decisions. One indicator of that profitability is the relative price of one 3.11commodity to another.[1] Given the large area impacted and the typical rotation between these two crops, the soybean-to-corn price ratio is widely watched as providing insight into what farmers ultimately plant each spring. 

    An aspect of how the price relationship between soybeans and corn impacts planting decisions can be seen in the relationship of the soybean-to-corn price ratio and the number of corn acres planted in excess of soybeans each year.  In general, when the price ratio of Risk Management Agency (RMA) soybean-to-corn projected prices, calculated each February[2] is relatively low, corn acres increase at the expense of soybeans. At high ratios, soybean acres increase relative to corn (Figure 2).    

    Figure 2. Corn Acres Minus Soybean Acres and RMA’s Soybean-to-Corn Projected Price Ratio

    Updated 2/16/2023, USDA, RMS

    The average price ratio from 2006 to 2022 is 2.36 and the average number of corn acres over soybean acres is 10 million.  At the extreme, in 2007 the soybean-to-corn projected price ratio was 1.99 and farmers planted 93.5 million acres of corn and 64.7 million acres of soybeans, a difference of 28.8 million acres (Figure 2). When the price ratio has been at its highest, 2.57 to 2.59, we have seen plantings of corn and soybeans about equal (2017 and 2018). But the price ratio at this level is also associated with 6 million more acres of corn than soybeans in 2021.  Corn acres relative to soybean acres were much smaller than expected in 2022, a difference of only 1.1 million acres despite a price ratio of 2.43.  It is likely that risks associated with high fertilizer prices and product availability had an impact on farmers’ planting decisions last year given higher fertilizer requirements for corn compared to soybeans. 

    The RMA soybean to corn base price ratio for 2023 is 2.33 ($13.76 soybeans, $5.91 corn). If the total planted area remains constant, that suggests an increase in corn acres and a decrease in soybean acres in 2023 compared to 2022.  In other years when the price ratio rounded to 2.3 (2010, 2013, 2015, and 2016), the range of corn acres over soybeans were 5.3 million to 15.6 million.  If corn and soybean acres again total about 180 million, the low estimate of corn acres for 2023 would be 92.7 million acres and the high estimate of soybean acres 87.4 million acres.  

    Of course, other factors besides relative prices matter when farmers make their planting decisions. Among these are crop rotations that boost productivity and input efficiency, input costs, and of course, weather. And in the South, cotton is a major non-grain competing crop enterprise whose price and profitability are not part of this analysis.   But, the price ratio between major crops may provide a key piece of information in forming expectations of what upcoming acreage reports may reveal. 

    [1] For more on relative price relationships between commodities, see Rabinowitz, Adam. “The Peanut-Cotton Price Relationship.” Southern Ag Today 3(2.1). January 9, 2023.

    [2] RMA Price Discovery, base prices for 2023, conventional practices with a March 15 sales closing date, RMA Price Discovery – Home (usda.gov).

    Welch, Mark. “The Soybean to Corn Price Ratio as a Guide to Farmers’ Planting Decisions.” Southern Ag Today 3(11.1). March 13, 2023. Permalink

  • The Economic Value of Agricultural Cooperatives

    The Economic Value of Agricultural Cooperatives

    Agricultural cooperatives are an important part of the U.S. agricultural industry. In 2020, the USDA counted 1,744 farmer owned cooperatives with 9,500 locations, $200B in sales, $8.4B in net income and 1.8M members (USDA, 2021).  Earlier USDA studies indicated that agricultural supply and marketing cooperatives contributed to slightly over 38% of total farm output, (USDA 2004, 2006).  Despite their prevalence, many producers do not understand the cooperative business model.  That is unfortunate because it may prevent them from understanding the economic value of existing cooperatives or considering the formation of new cooperatives to improve their farm profitability. 

    Cooperatives can add value at the farm level as well as at the cooperative level.  That is a result of the cooperative having transactions with and providing service to its member-owners.  In some cases, the existence of the cooperative allows producers to grow a more profitable crop.  For example, in the cotton producing regions of Oklahoma, OSU crop enterprise budgets have consistently shown a $100/acre profit advantage for cotton relative to alternative crops (Kenkel, 2021).  This would not be possible without a cotton gin. Further, a producer-owned cooperative may maintain locations that investor-owned agribusinesses might abandon, or offer services or product lines that would otherwise not be available.  Cooperatives can also create farm level benefit through favorable prices.  The common thread of all these benefits is that they are not reflected on the cooperative’s financial statements and the portion of farm profits attributable to the cooperative is not readily observable.  

    However, some benefits of a cooperative are more easily observable.  Most agricultural cooperatives distribute profits to members in a combination of cash and equity (that is still redeemed for cash at a later date).  A classic assessment of the return on investment in a cooperative compares the discounted value of member cash flows to value of the member equity (Reynolds, 2013).  Bear in mind that an individual member’s return on equity is unique in that both the cash return and the equity holdings were a result of the amount of business they did with the cooperative. Thus, there was no out of pocket investment.

    The revolving equity in a cooperative is, in essence, profits that are distributed to the member but temporarily lent back to the cooperative to fund investment.  Revolving equity creates value by funding infrastructure investments that can enhance existing activities or create new value through market access, risk reduction or new services. In this way, revolving cooperative equity benefits existing members by enhancing future profits, and supports future generations of producers by ensuring the perpetuation of the business.

    Perhaps most importantly, cooperatives play a role in keeping markets competitive.  Many U.S. agricultural cooperatives were formed in the New Deal era to offset the market power of monopolists who threatened farmer welfare (Hogeland, 2006).  The existence of these cooperatives kept other firms “honest” or realistic in prices and services.  This aspect of the cooperative value package has often been termed “the invisible benefit of cooperatives”.  Because it is unobservable, the value of a cooperative’s existence is often only appreciated when it is dissolved or exits a market area.

    While a common feature in agricultural industries, the cooperative value equation is quite complex.  Cooperative members can benefit at the farm level and from cooperative level patronage distributions.  Cash patronage distributions provide an immediate benefit while equity patronage distributions allow members to build ownership with no out-of-pocket investment.  In turn, that equity funds infrastructure thereby creating future value. By its very existence, the cooperative is likely improving market access and maintaining competitive market prices.  

    When should a producer patronize a cooperative?  When it makes economic sense!  In making that assessment it is important to realize that some of the economic benefits are subtle and long-term.  Like any business, we should not assume that cooperatives will be there if we do not support them.

    References

    Hogeland, J. (2006) “The Economic Culture of U.S. Agricultural Cooperative” Culture and Change, Vol. 28 No.2 Fall 2006.

    Kenkel, P 2021. “Economic Impact of Oklahoma’s Cotton Cooperatives” Oklahoma State University Department of Agricultural Economics Staff Paper AE#2021-1 July 2021

    Reynolds, A. (2013) “Determining the Value of the Cooperative Business Model: An Introduction” white paper, CHS Center for Cooperative Growth

    USDA, (2004), “Farmer Cooperative Statistics 2002” Service Report 592, Rural Business-Cooperative Service, Washington, D.C.: Rural Development, USDA. United States Department of Agriculture 

    USDA. (2006). “2002 Census of Agriculture”. Washington, D.C.: National Agricultural Statistics Service (NASS). United States Department of Agriculture (USDA). 

    USDA, (2021) ”Agricultural Cooperative Statistics Summary, 2020” USDA Rural Developmet, Rural Business-Cooperative services,  

    https://content.govdelivery.com/accounts/USDARD/bulletins/300bab5

    Kenkel, Phil. “The Economic Value of Agricultural Cooperatives.” Southern Ag Today 3(10.5). March 10, 2023.

    Photo by Jonathan Borba: https://www.pexels.com/photo/girl-and-elderly-man-picking-strawberries-15672380/