Woody biomass now accounts for a major share of renewable energy in the European Union (EU) and United Kingdom (UK) due to recent climate and renewable energy policies. Imports of wood pellets – often used in converted coal fueled power plants – in the EU and UK have reached record levels, with imports mostly coming from the southeastern region of the U.S. Consequently, wood pellets are now the leading forest-product export for the U.S., surpassing oak lumber, pine lumber, and other major exports (USDA, 2023). This article is not about the efficacy of European climate policy or the use of woody biomass in reducing carbon emissions. The overall goal of this article is to simply document the phenomenal rise in U.S. wood pellets exports over the last decade, mostly due to demand in the UK and EU, and the potential for increased exports in the future.
Since 2012, U.S. wood pellet exports have increased from $258 million to $1.5 billion, which is an increase of 498%. According to USDA (2023), Louisiana, Georgia, North Carolina, Virginia, and Florida have been leading states. Figure 1 shows U.S. wood pellet exports (in million metric tons [MT]) from 2012-2022 by destination (UK, EU, and Rest of World). Note that the UK has accounted for the major share of the overall rise in exports since 2012, while the EU has accounted for the major share of growth in more recent years (2021 and 2022). Since 2012, U.S. wood pellets exports have increased from 1.9 million MT (35% shipped to the UK and 57% shipped to the EU) to nearly 9.0 million MT by 2022 (59% shipped to the UK and 31% shipped to the EU). During this period, the UK accounted for as much as 90% of total U.S. exports (see 2016). The demand for wood pellets in Europe has significantly outpaced domestic production over the past ten years. This has resulted in increased imports from mainly the U.S., Russia, Belarus, and Ukraine. With the Russian invasion of Ukraine, wood pellet imports from Russia, Belarus, and Ukraine have been significantly impacted (Flach and Bolla, 2022), which likely explains the recent increase in U.S. exports to the EU and the increase in export prices from an average of $124/MT (2012-2020) to well over $150/MT in 2021 and 2022 (USDA, 2023).
Figure 1. U.S. wood pellet exports by destination: 2012-2022
Source: U.S. Department of Agriculture, Global Agricultural Trade System
The short answer is: It depends. The slightly longer answer is that it is determined by the classification of your timber holding, the way to sell the timber, and your modified adjusted gross income (MAGI) for the year.
NIIT, also known as the Medicare surtax, is an additional tax applicable to high-income individuals, estates, and trusts with significant investment income. More specifically, it is a 3.8% tax on the lesser of: (1) net investment income or (2) the excess of MAGI over a threshold ($250,000 for married filing jointly and $200,000 for single taxpayers). The tax went into effect in 2013.
Generally, net investment income includes: (1) interest, dividends, capital gains, annuities, royalties, and rents not derived in a trade or business; and (2) income from businesses that are passive activities to the taxpayer. Wages, unemployment compensation, operating income from a nonpassive business, Social Security benefits, tax-exempt interest, and self-employment income are not subject to the NIIT.
Timber income and the NIIT
For federal income tax purposes, your timber activity generally can be classified into one of three categories: 1) for investment; 2) material participation in a trade or business; and 3) passive activity where your participation in a trade or business does not rise to the level of material participation. Due to the level of involvement, most non-industrial private forest landowners fall in the investor category. Farmers with occasional timber sales may treat their timber as property held for sale or use in a business. An example of passive activity is the limited partner in a partnership.
For investors, income on the sale of standing timber is a capital gain. Depending on the holding period, it can be long-term or short-term, but it is usually included in the net investment income for NIIT.
If the standing timber is held in a trade or business for more than one year and sold in a lump-sum or under a pay-as-cut contract, the income generally qualifies for the long-term capital gains tax treatment. Income from the sale of cut timber normally is ordinary unless a 631(a) election is in effect. Under the special election, the income from holding the standing timber is treated as a long-term capital gain, while the portion of the income from selling the cut timber is ordinary income.
If you materially participate in a trade or business, your timber income from the business is not subject to the NIIT, even if it is treated as a long-term capital gain. However, it is subject to the NIIT if your timber activity in a trade or business is passive and your MAGI is over the threshold.
Strategies to manage the NIIT for timber owners
If you can substantiate your timber activity as material participation in your timber business, you can enjoy the long-term capital gains tax treatment of your timber income and won’t have to worry about owing the NIIT on it. However, your timber income may push your MAGI over the threshold and trigger the NIIT on non-timber investment income. Therefore, you may want to manage the timing of your other investment income when you expect to have a significant timber income.
This publication is for informational and educational purposes, but is not intended as financial, tax, or legal advice.Please consult with your tax advisor concerning your particular tax situation.
When US cattle slaughter facilities temporarily shut down during COVID-19, the live cattle to wholesale boxed beef price spread, which is the difference between the value of live cattle price and wholesale boxed beef value, reached record highs. The processing disruptions caused the fed cattle price to decline and beef price to increase. The price spread had a similar, but less extreme, reaction when beef processing capacity was temporarily shut down after the Tyson beef-packing plant fire in August 2019. These events led to questions regarding the interaction of the number of cattle slaughtered nationally each week and the price spread. Now that cattle numbers are declining and packing capacity is increasing questions about capacity utilization and the price spread remain.
In a recent article, my co-authors and I investigate the dynamic relationship between industry-level weekly (Monday through Friday) and Saturday operational slaughter capacity utilization with the live cattle to box beef price spread. Below are the highlights of the journal publication and our estimates of weekly and Saturday slaughter capacity utilization.
Key results from our study:
We find bidirectional causality between weekly slaughter capacity utilization, Saturday slaughter capacity utilization, and the live cattle to box beef price spread over the entire study period (2010-2021). In plain English, this means that the number of cattle processed on Saturdays affects the price spread and vice versa. However, additional analysis indicates these causal relationships don’t always occur.
An increase in the price spread in the previous week positively impacts the number of cattle processed nationally on Saturday in most weeks. That result makes a lot of intuitive economic sense because the larger spread implies more profits which is the market signal to produce more beef. This might suggest Saturday slaughter is more than a “catch up” day of processing but could also be a strategy to increase slaughter when the price spread is increasing.
This study does not find statistical evidence to support the notion that weekly, or Saturday slaughter capacity utilization is used by the beef packers to control the price spread.
Figure 1. Weekly (Monday through Friday) and Saturday Operational Cattle Slaughter Capacity Utilization from 2010 to 2021 in the United States
Paper Citation
Martinez, C., Li, P., Boyer, C. N., Yu, T. E., & Maples, J. G. (2023). Beef price spread relationship with processing capacity utilization. Journal of the Agricultural and Applied Economics Association.https://onlinelibrary.wiley.com/doi/full/10.1002/jaa2.48
Each year, USDA’s Office of the Chief Economist holds the Agricultural Outlook Forum. The event discusses important agricultural topics and provides supply and demand projections for the upcoming year. This article examines the 2023 Agricultural Outlook Forum projections and compares historical Agricultural Outlook Forum projections and final USDA estimates for corn, soybeans, and wheat for the 2010 to 2022 crop years.
Historical Projections compared to Final USDA Estimates
From 2010-2022, USDA’s February projected production for corn, soybeans, and wheat averaged 655 million bushels higher, 518 million bushels lower, and 15 million bushels higher than final estimates, respectively (Figure 1; production). The difference between February production projections and final estimates can be partially explained by yield or acreage changes, due primarily to weather events. For example, in 2019, floods in the Midwest dramatically reduced planted and harvested acres (Figure 1; acres planted and harvested); and in 2012, severe drought caused final corn yields to be 40.9 bu/acre below the February projection (Figure 1; national average yield). Considering the tremendous amount of uncertainty this time of year (February), USDA has been reasonably accurate with initial projections. On average, the difference (overestimated or underestimated) between projected and final production estimates has been 6.8% for corn, 5.7% for soybeans, and 6.4% for wheat.
Domestic consumption projections have also been accurate with an average discrepancy of 2.8% for corn, 2.6% for soybeans, and 6.0% for wheat. Exports have been more challenging to project, primarily due to the relationships between domestic production, foreign production, substitution, and global demand. On average, USDA has missed export projections by 23.4%, 11.7%, and 12.6% for corn, soybeans, and wheat, respectively. For corn, from 2010-2022, on average, the USDA February total use projection was 290.4 million bushels higher than the final estimate. Total projected wheat use was 31.4 million bushels higher, and soybean use was 11.4 million bushels lower than the final estimate, on average (Figure 2; exports and domestic use).
USDA has had challenges with projecting ending stocks and prices. Projected ending corn stock estimates have ranged from 1.4 billion bushels more to 316 million bushels less than the final USDA estimate, with an average projection of 342 million bushels higher than the final estimate (Figure 2; ending stocks). Soybean ending stocks have, on average, been projected 51 million bushels higher in February than final estimates, with a range of 320 million bushels higher to 449 million bushels lower than the February projection. Wheat ending stocks have, on average, been projected 47 million bushels lower in February than the final estimate, with a range of 239 million bushels higher to 213 million bushels lower than the February projection.
On average, USDA missed corn, soybean, and wheat marketing year average (MYA) prices by 17.4%, 12.7%, and 13.5%, respectively. In 8 out of 13 years, the February MYA price projection has been lower than the final MYA price for corn, soybeans, and wheat (Figure 2; marketing year average price). For corn, projected prices were under final prices by over 30% in 4 out of 13 years (2010, 2012, 2021, and 2022). The largest projected miss, among years where the February projected MYA price was higher than the final MYA price, was 7.1% in 2013.
2023 Projections
Initial expectations from the 2023 Agricultural Outlook Forum point to a 3% projected increase in planted crop acres for corn, soybeans, and wheat relative to 2022 plantings. Corn acreage is projected to increase from 88.6 million acres in 2022 to 91.0 million acres in 2023. In 2022, planted corn acreage was affected by weather delays, which prevented plantings in various regions of the United States. Soybean acreage is projected to stay the same as 2022 at 87.5 million acres. Soybean acreage projections are driven by strong demand for domestic crush and growth in biofuel production capacity. Of the three crops, wheat acreage is projected to incur the largest increase in planted acreage, up to 49.5 million acres in 2023 from 45.7 million planted acres in 2022. Increases in projected wheat plantings are driven by tight U.S. stocks and continued high global prices, caused in part by the war in Ukraine.
Prices for all three crops are projected to be lower in 2023 than 2022 but are projected to remain above their respective 10-year historical averages. Season average per-bushel prices for corn, soybeans, and wheat are projected to fall from $6.70, $14.30, and $9.00 in 2022 to $5.60, $12.90, and $8.50 in 2023. The price projections are driven by low beginning stocks and growth in projected acreage and yield, which will facilitate higher projected exports and ending stocks for the 2023/24 crop year. The decline in 2023 projected prices is driven by record expected soybean and corn crops in South America, which will increase competition in export markets. Additionally, estimates of the impact of increased biodiesel production capacity on soybean prices have been uncertain due to the United States’ ability to adapt planted acres to meet increased feedstock demand.
There remains a tremendous amount of uncertainty in production, use, stocks, and prices for the 2023 corn, soybean, and wheat crops. However, the current USDA projections have prices softening, compared to last year for all three commodities. As such, producers may want to consider using marketing strategies that protect against downside price movements while maintaining flexibility (such as options). This will allow producers to evaluate and modify pricing decisions when additional information is known about the 2023 crop. USDA will revise projections throughout the year with the next key report being the Prospective Plantings report at the end of March.
Figure 1. USDA – February Outlook Conference Projections Less Final USDA Estimates (Supply), 2010-2022*
*2022 final estimates are USDA WASDE estimates for February
Figure 2. USDA – February Outlook Conference Projections Less Final USDA Estimates (demand, stocks, and price), 2010-2022*
*2022 final estimates are USDA WASDE estimates for February
Southeastern U.S. farms growing perishable and seasonal food continue to achieve gains due to economies of scale and scope, largely dependent on management decisions made based on market information. Many produce farms have a corporate structure and grow vegetables nearly year-round on farms located throughout the US & abroad. Such operations have farms strategically located and follow the progression of seasons from south Florida to northern states to provide a year-round supply of produce as demanded by retail and foodservice buyers. Medium size farm operators are finding ways to collaborate to meet buyer needs, and technology-driven tools offer savings in time and resources needed to gather market information. Given that market access and market share drive profitability, exciting new technologies are emerging that reduce the cost of KNOWING and empower the individuals making informed decisions.
One such market-driven database is AgTools, an online platform that provides data for the specialty crop supply chain. A subscription-based service specific to each fruit or vegetable and informed by experienced producers and retail buyers, the AgTools engineers find and organize regularly updated relevant data current and historical. With over 76 variables and 29 years of records, AgTools offers key information to growers to use in daily production and harvest decisions, including price data, import data and trends, fuel and labor costs over time, current and optimal weather, measures of sustainability (food miles), up to the minute news specific to commodity, and a brand-new feature allowing buyers to see real-time growth stages of each crop and any reported disease issues unique to the production region (Figures 1 and 2).
Figure 1. Snapshot of AgTools Procurement Quality Analyzer query for blueberries, 22 February 2023, for Peru, Chile, and Florida, showing reported disease type and prevalence by stage of growth (eleven stages indicated from germination to harvest) specific to each growing region.
Figure 2. Snapshot of AgTools Operations Freight Cost query for strawberries grown in Central and South Florida and shipped to six destinations (Philadelphia, New York, Chicago, Boston, Baltimore, Atlanta) over the time period 23 November 2022 through 22 February 2023 (Note: Highlighted 4 February 2023 data point for cost comparison).
