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  • The U.S. Ethanol Industry and Unintended Consequences

    The U.S. Ethanol Industry and Unintended Consequences

    Often in agricultural policy we find that well intentioned policies designed to solve a problem often have unintended consequences.  A good example of this is the U.S. ethanol industry.

    Since the 1970s the U.S. government has implemented a variety of policies aimed at increasing the use of gasohol that later became known as ethanol.  There were a variety of tax credits offered to blenders in an attempt to increase the use of ethanol in motor fuels.  One of the major boosts to biofuels came in 1996 when California announced it was banning Methyl tertiary-butyl ether (MTBE) as an oxygenate in motor fuels by 2003.  This change brought to light the need for a replacement oxygenate that ethanol was touted as being able to fill.  However the most significant boost for the ethanol industry came from the Energy Policy Act of 2005 (EPA of 2005) and the Energy Independence and Security Act of 2007 (EISA of 2007) both aiming to increase U.S. energy independence.  The EPA of 2005 mandated increasing levels of biofuels (ethanol and biodiesel) that had to be blended into the nation’s fuel supply each year from 4 billion gallons in 2006 up to 7.5 billion gallons by 2012. Overnight this effectively created a demand for biofuels and therefore corn leading to a significant price increase (Figure 1).  The EISA of 2007 increased the mandate each year to 36 billion gallons by 2022 (15 billion gallons of corn ethanol and 21 billion gallons of other renewable fuels).  Corn prices continued an upward trend spiking during the midwest drought of 2012.  

    At the same time all of this was happening in the U.S., the rising corn prices were seen not just by producers in the U.S. but by producers around the world.  Spurred on by prices that were now profitable, producers increased their corn production.  This created an unintended consequence of incentivizing corn production and exports by several countries who had previously not been significant competitors – namely Brazil and Ukraine (Figure 2).  Prior to the 1990s, the U.S. was the unrivaled corn exporter in the world with only Argentina with significant corn exports.  Now, Argentina, Brazil and Ukraine (prior to being attacked by Russia) are all major exporters of corn who compete with U.S. producers.

    Figure 1.  U.S. Marketing Year Average Corn Price, 1980 to 2021

    Source: USDA-NASS.

    Figure 2. Corn Exports by Major Exporting Countries, 1980 to 2021

    Source: USDA.  Found at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home

    Outlaw, Joe, and David Anderson. “The U.S. Ethanol Industry and Unintended Consequences.” Southern Ag Today 2(16.4). April 14, 2022. Permalink

  • On-Farm Cost of Contracting High Path Avian Influenza in a Commercial Broiler Flock

    On-Farm Cost of Contracting High Path Avian Influenza in a Commercial Broiler Flock

    As high path avian influenza (HPAI) spreads rapidly across the U.S., the on-farm financial ramification of an infection in a commercial poultry flock can be catastrophic.  This article is a follow-up to the recent Southern Ag Today article posted on March 29th, 2022, titled “The Cost of Avian Influenza to the Southeastern Broiler Industry.”  That article highlights that as of March 21st, 2022, there were 11,901,888 commercial birds destroyed due to HPAI.  Fifteen days later, that number has nearly doubled (22,851,072 as of April 5th, 2022).  While the continued outbreaks of HPAI have been mainly in commercial turkey and layer flocks, commercial broiler flocks are not immune to outbreaks.  

    Understanding the financial implications of contracting HPAI in a commercial broiler flock is critical and will hopefully highlight the importance of strict adherence to biosecurity measures. While the federal government provides financial aid to a grower for depopulation, cleaning and disinfecting, indemnity payments are only for the birds infected with HPAI.  It is important to note that the contract grower is not guaranteed 100% of the indemnity payment, as a portion can be distributed to the owner/integrator.  There is also no financial assistance provided for future loss of production while the contaminated area is cleared of the virus.  This timeframe could last more than 120 days and has lasting financial implications.  For example, the HPAI outbreak in a 12-house broiler operation in Kentucky in early February 2022 is not expected to receive new placements until August 2022.  A +120-day loss of operation could mean the producer loses income associated with 2-3 broiler flocks but still has the expenses of maintaining the facilities and making any payments on debts related to the operation.  With the lack of financial support from the federal government for future losses and no private insurance options, the farm-level financial impact of contracting HPAI is significant.  

    We examined the financial impact of contracting HPAI in a standard four broiler house (43 ft. x 600 ft.) operation in Kentucky with 32,300 broilers per house, a 56-day grow-out period, and 17 days to clean between flocks.  The loss in net farm income from contracting HPAI was $46,512, $97,658, and $158,348 for the loss of one, two, and three flocks, respectively.  This loss in net farm income could also be interpreted as the on-farm equity required to self-insure the operation from HPAI.  Therefore, early adoption of biosecurity measures is imperative as a financial risk mitigation method for a disease outbreak like HPAI.  Producers should also consider how they would manage this type of risk, should they be forced to deal with it.  

    References:

    Brothers, Dennis. “The Cost of Avian Influenza to the Southeastern Broiler Industry”. Southern Ag Today. March 29, 2022. Available online: https://southernagtoday.uada.edu/the-cost-of-avian-influenza-to-the-southeastern-broiler-industry/

    USDA-APHIS. “The HPAI Indemnity and Compensation Process”. Available online: https://www.aphis.usda.gov/publications/animal_health/2016/hpai-indemnity.pdf

    Shockley, J.M., T. Mark, K. Burdine, and L. Russell.  “Financial Implications from Contracting Avian Influenza in a U.S. Broiler Operation”. Journal of Applied Farm Economics 3, no. 1 (Spring 2020). Available Online: https://docs.lib.purdue.edu/cgi/viewcontent.cgi?article=1034&context=jafe

    Shockley, Jordan. “On-Farm Cost of Contracting High Path Avian Influenza in a Commercial Broiler Flock“. Southern Ag Today 2(16.3). April 13, 2022. Permalink

  • Dairy Product Prices

    Dairy Product Prices

    Dairy industry participants have had several tough years over the past decade as it relates to milk and milk product prices. However, the end of 2021 and the beginning of 2022 have been positive from a price received standpoint. With the U.S. all milk price sitting close to $25 per hundredweight, this is the highest all milk price since September and October of 2014. The price support is not coming from any one product. Rather, it is being supported by most dairy products as butter, cheese, dry milk and whey are demonstrating strength in the current market. Class IV milk prices are setting records while Class III milk prices are only $2 below the record.

    Understanding that milk prices are not the only factor in profitability, the immediate concern in today’s dairy industry is feed price. The price of most feedstuffs has increased along with inputs for feed to be produced in 2022 including hay, silage, and grain. The national milk-to-feed price ratio sits just over $2 per hundredweight, which is considerably stronger than 2021 and represents a strong margin given the booming milk price. The same milk-to-feed ratio when milk is only $15 per hundredweight is not nearly as lucrative as the margins experienced when milk is hitting $25 per hundredweight. However, if the ratio shrinks with milk price remaining elevated then that results in a poor return on investment and increased financial risk. Dairy producers may find it advantageous to lock in milk and feed prices with this many dollars on the line.

    Source: Livestock Marketing Information Center

    Griffith, Andrew P. . “Dairy Product Prices“. Southern Ag Today 2(16.2). April 12, 2022. Permalink

  • Less Corn, More Soybeans, Cotton, and Wheat Projected to be Planted in 2022

    Less Corn, More Soybeans, Cotton, and Wheat Projected to be Planted in 2022

    Table 1. Projected Planted Area (‘000 of Acres) 

     202020212022
    Soybeans83,35487,19590,955
    Corn90,65293,35789,490
    Other67,26165,24365,095
    Wheat (all)44,45046,70347,351
    Cotton (all)12,09211,22012,234
    Sorghum5,8807,3056,205
    Rice (all)3,0362,5322,452
    Peanuts1,6631,5851,571
    Total310,407317,161317,375

    Data Source: USDA, Prospective Planting Report

    On Thursday March 31, USDA released the Prospective Plantings report. Nationally, principal crop acres planted were projected at 317.375 million, up 214,000 acres compared to last year. Corn acres were projected at 89.490 million, down 3.867 million compared to last year. Soybean acres were projected at 90.955 million acres, up 3.76 million acres compared to last year. Cotton acres were projected up 1.015 million acres at 12.234 million acres. All wheat acres were projected at 47.351 million acres, up 648,000 compared to last year. Compared to projections released in February at the USDA Outlook Forum, March projections were for 2.51 million fewer acres of corn, 466,000 fewer acres of cotton, 2.955 million more acres of soybeans, and 649,000 fewer acres of wheat. 

    The change in projected acres planted from February to March estimates were not surprising considering price trends in February and concerns over high fertilizer prices. On December 1st, the 2022 harvest soybean-to-corn futures price ratio was 2.21 — a price that would historically favor planting corn over soybeans. By February 15th, the ratio had moved to 2.45 – a price ratio that would normally be neutral to favoring soybeans. From a cost of production standpoint, higher fertilizer prices create an input cost disadvantage for planting corn, , thus a ratio of 2.45 would definitely favor planting soybeans.  

    Markets reacted to the Prospective Plantings report mostly as expected with harvest contracts for corn up 27 ¾ cents, soybeans down 49 ¾ cents, cotton down 1.16 cents, and Chicago wheat down 21 cents. Moving forward, many producers likely have a good idea regarding what they are going to plant.  Weather is the wild card that could shift acres. However, the price ratio moved in favor of corn after the Prospective Plantings report was released.  The soybean-to-corn harvest futures price ratio on April 5th was 2.06 — strongly favoring corn. Will we see an increase in corn acres planted? The next USDA acreage estimate will be the June 30 Acreage report.

    References and Resources:

    USDA – National Agricultural Statistics Service (NASS). Prospective Plantings report. Accessed at: https://usda.library.cornell.edu/concern/publications/x633f100h

    USDA – Office of the Chief Economist. Agricultural Outlook Forum. Accessed at: https://www.usda.gov/oce/ag-outlook-forum/2022-commodity-outlooks

    Barchart.com. Accessed at: https://www.barchart.com/futures/grains?viewName=main

    Smith, Aaron. “Less Corn, More Soybeans, Cotton, and Wheat Projected to be Planted in 2022″. Southern Ag Today 2(16.1). April 11, 2022. Premalink

  • What Are Right-to-Farm Laws?

    What Are Right-to-Farm Laws?

    Agricultural operations often cause dust and odors which could impact neighbors and bring nuisance claims.  All 50 states have a right-to-farm law on the books, providing a nuisance defense for agricultural operations.  This defense varies from state to state, but each state’s law operates to provide a defense in situations when a party is claiming the farm is a nuisance.

    What is a nuisance? A nuisance is a condition or situation impacting another person’s use and enjoyment of property. Let’s say, for example, that a grain producer applies nutrients to a field neighboring a residence. The neighbors might not be able to use their property immediately after the producer applies the nutrients due to the smell. This could be a potential nuisance because the neighbors have lost the use and enjoyment of their property.

    A right-to-farm law operates to provide a defense to the agricultural operation when facing nuisance lawsuits.  To use the defense, the agricultural operation must meet their state’s statutory requirements, which vary from state to state.  In several states, for example, the farming operation would need to either preexist the non-agricultural uses in the area or at least be in operation for a set period. In many states, the operation must also comply with other federal, state, or even local laws, such as environmental laws or local zoning ordinances.

    The right-to-farm law defense can be a powerful tool to protect a farming operation, but an operation needs to qualify for the defense.  The National Ag Law Center has compiled all of the state right-to-farm laws: https://nationalaglawcenter.org/state-compilations/right-to-farm/.

    Goeringer, Paul. “What Are Right-to-Farm Laws?”. Southern Ag Today 2(15.5). April 8, 2022. Permalink