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  • Livestock Feed Price Implications for Fall

    Livestock Feed Price Implications for Fall

    As we move into fall, we have a pretty good feel for the size of the 2022 corn crop. Acreage is down significantly from last year and yield estimates were reduced recently to 172.5 per acre. Barring a major shock on the demand side, feed prices are going to be a challenge for cattle operations this winter.

    Perhaps the most important thing to remember is that cost of gain and value of gain are correlated. Feedlots prefer to place heavier feeder cattle when feed prices are high, so the price discount on higher weights gets smaller. This narrowing of price slides increases the value of additional pounds when feeder cattle are sold. Opportunities can still exist in high feed price markets depending on cattle price dynamics. Producers may find that opportunities to grow feeders still exist, especially if they can efficiently make use of alternative feeds. Along those same lines, producers need to make sure they distinguish between cost of feed and cost of gain. Cost per ton of feed really does not tell me much unless I know something about that feed’s ability to put weight on cattle. 

    Finally, there are also implications for fall grazing. A quick glance at the drought monitor reveals how much variation exists across the country. While grazing costs have increased recently as well, they have not increased as much as purchased feed. So fall pasture is likely the most attractive feed that can utilize to add pounds. The current market also increases incentives to incorporate rotational grazing or strip grazing to increase the utilization of those forages.

    Burdine, Kenny. “Livestock Feed Price Implications for Fall“. Southern Ag Today 2(39.2). September 20, 2022. Permalink

  • U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era

    U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era

    Feed and residual use has long been the largest consumption category in the USDA supply and demand tables for U.S. corn (Figure 1)[1]. That began to change with the passage of the Renewable Fuel Standard Program in 2005[2]. Corn for fuel increased over the next several years, from under two billion bushels in the 2005/2006 marketing year to over five billion bushels in 2011/2012 when it overtook corn for feed as the number one use category.  Since then, fuel and feed have competed for the top spot for corn consumption.   

    Additionally, the price of corn has been increasing in the biofuel era. From the increased planting flexibility in the Freedom to Farm Act in 1996 to the passage of the Renewable Fuel Standard in 2005, prices averaged $2.15 per bushel with a low of $1.82 in 1999 and a high of $2.71 in 1996. From 2006 to 2021, the average price more than doubled to $4.33 per bushel with a low of $3.04 in 2006 and high of $6.89 in 2012. Currently, the price estimate for the 2022 corn crop is $6.65, reflective of a 54% increase in one year alone.

    The peak in corn for feed consumption came in the 2004/2005 marketing year at just over six billion bushels. After the passage of the Renewable Fuel Standard in 2005, feed use began to fall, and the price of corn began to increase (Figure 2). From 2013 to 2019, the price of corn appears to be associated with an increase in feed use. Since 2020, feed use has fallen with increases in corn price.

    There is more to the corn story than the inverse relationship between feed input demand and prices, and the implications of relatively higher corn prices are always looming. In spite of the fall in corn for feed use in 2006 associated with the RFS, an ethanol fuel co-product became available known as distiller’s dried grains with solubles (DDGS).  Each bushel of corn (56 pounds) used for fuel produces about 16 pounds of DDGS which adds to feed grain production, providing some price relief to cattle, pork, and poultry producers.  In addition, the size of the livestock and poultry industries, measured by grain consuming animal units (GCAUs), has grown from about 75 million in the 1980s to 101.7 million GCAUs in 2019 (Figure 3). Another trend in the feed use category we can draw from GCAUs is the inverse relationship between corn prices and feed use. There was a rebound in use as prices fell from their record highs in 2012 with a peak in 2014. Even with relatively low and stable prices, energy feed plus DDGS per GCAU has been on a downward trend. That points to an increasingly efficient meat sector producing more pounds of protein on fewer pounds of feed.  

    What does this mean for corn prices moving forward? From the demand side of the balance sheet, the feed use category near term looks to be limited by lower overall GCAUs and declining feed use per GCAU. As livestock and poultry numbers increase and as grain prices go down, we may not return to previous levels of use. Improved feeding efficiencies may dampen the feed use response in future supply and demand balance sheets.   

    Figure 1. U.S. Corn Use

    Figure 2. U.S. Corn Feed and Residual Use and Season Average Farm Price

    Figure 3. Grain Consuming Animal Units (GCAU) and Energy Feed per GCAU

    Welch, J. Mark. “U.S. Feed and Residual Use: Consumption Trends in the Biofuel Era“. Southern Ag Today 2(39.1). September 19, 2022. Permalink

    [1] For an explanation of the feed and residual use category used by USDA in their supply and demand tables, see “Implications of an Early Corn Crop Harvest for Feed and Residual Use Estimates”, FDS-12f-01, Economic Research Service/USDA July 2012.

    [2] Details of the Renewable Fuel Standard Program authorized under the Energy Policy Act of 2005 and expanded under the Energy Independence and Security Act of 2007 can be found at https://www.epa.gov/renewable-fuel-standard-program.

  • Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action

    Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action

    Poultry growers may have started to receive settlement forms recently for a broiler grower class action lawsuit settlement.  Defendants involved in the lawsuit include Koch Poultry, Pilgrim’s Pride, Sanderson Farms, Tysons, and Perdue, and several co-conspirators, including Agri Stats, Foster Farms, Mountaire Farms, Wayne Farms, George’s, Inc., Peco Foods, Inc., House of Raeford Farms, Simmons Foods, Keystone Foods, Fieldale Farms Corp., O.K. Industries, Case Foods, Marshall Durbin Companies, Amick Farms, Inc., Mar-Jac Poultry, Inc., Harrison Poultry, Inc., and Claxton Poultry Farms.  At this point, Perdue and Tyson have not agreed to the settlement, but their growers are still included in the settlement process.  Growers might be surprised to receive this form in the mail and may have questions about the case and settlement.  There is a website designed to answer questions about the settlement process (https://www.broilergrowersantitrustsettlement.com/koch-settlement/), which includes many important deadlines for broiler growers.  Answers to many of the important questions growers may have, including how much money each grower will receive and whether additional integrators will, are currently unknown.  

                Originally filed in 2017 in the federal district court for the Eastern District of Oklahoma, the lawsuit alleges that several integrators colluded in the broiler market.  According to the court filings, the plaintiffs alleged that the integrators agreed not to poach growers.  In addition to the no-poaching agreement, the integrators also allegedly used Agri Stats to share detailed data about their operations.  Although this data shared through Agri Stats is anonymous, it is highly detailed, making it possible for companies to distinguish various operations.  This data is also non-public — private data only available to the integrators, according to the court filings.  By sharing this detailed data with Agri Stats, the integrators could collude to lower grower compensation.

                Growers for all these companies will receive settlement forms as potential class members impacted by the lower grower compensation amount due to the alleged collusion.  Growers receiving settlement forms will need to pay attention to certain dates.  The first important date is Sept. 23, 2022, for postmarking requests to be excluded from the settlement. A party always has the right to be excluded from a settlement.  When a party elects, they often have the right to sue for similar claims on their own or do nothing.  To have that opportunity, a grower must opt out by the September 23 deadline.  Second, all claims’ forms must be submitted online or be postmarked by February 6, 2023.  Please check the website at https://www.broilergrowersantitrustsettlement.com/koch-settlement/ for additional information to determine if a grower wants to be part of the settlement or if a grower notice mistakes on the settlement form.  

    Goeringer, Paul. “Broiler Grower Settlement Forms Arriving to Growers: Background on the Class Action“. Southern Ag Today 2(38.5). September 16, 2022. Permalink

  • Drought Related Livestock Sales and Tax Reporting Options

    Drought Related Livestock Sales and Tax Reporting Options

    Livestock producers are making hard decisions this summer and fall as widespread drought conditions limit pasture, hay, and, in some places, water availability across the southern and western states. Drought losses can result in additional costs for purchased hay (for those who can find a hay source), selling calves early, retaining fewer replacement heifers, or culling cows to reduce pressure on pasture and rangeland. Drought disaster programs are available to help offset some of the additional costs. For example, the Emergency Assistance for Livestock, Honey Bees and Farm-Raised Fish (ELAP) program can help offset the added cost of transporting hay from greater distances this year. Forage management and supplementation can also stretch available grazing to reduce the need for winter hay feeding in some areas. However, in many cases, producers will be reducing herd sizes through additional cattle sales. 

    Drought related costs and losses will be reflected on 2022 tax returns for many producers across the country. Understanding how those losses must be reported come tax season and what documentation to retain will aid in properly reporting expenses and program payments. Drought related farm expenses and payments from drought disaster programs are fairly straightforward. For example, if a producer purchases hay in 2022 sourced from farms in states at a greater distance than previous years, they may be eligible for the ELAP transportation cost offset mentioned previously. The producer would report the cost of hay and hauling as farm expenses. The ELAP disaster payment for excess transportation cost would be reported as income. For more information on USDA disaster program documentation requirements, see factsheet: https://extension.okstate.edu/fact-sheets/usda-program-recordkeeping-requirements.html

    Cattle sales will also be reported on tax returns, but these decisions are a little more complicated. Gains from breeding, dairy or draft cattle sales in excess of normal due to drought may be deferred for up to two years, as long as the dollar value of the cattle are replaced within those two years. Record keeping is critical. The producer can only defer cattle sales that are above what would typically be sold under normal production conditions. Two tax provisions exist to avoid the adverse tax consequences of selling more animals than normal due to weather related conditions. One applies only to breeding, dairy and draft animals that will be replaced. The second applies to market animals where the income from the additional animals sold are reported in the year that they would have normally been marketed.

    Consider an example for breeding animals: Over the past 3 years, my cattle operation sold 30 calves weighing 650 pounds and 4 cull cows as an annual average. Due to drought in 2022, I sell 5 replacement heifers I would ordinarily have retained and 10 cows (6 more than the average) for $10,000. I can defer reporting the $10,000 of income from the excess animal sales (the 5 replacement heifers and the 6 cows) by electing to replace those sold by buying at least $10,000 of replacement breeding animals by December 31, 2024. If I do not spend at least $10,000 on replacement animals, I must amend the 2022 return and report the difference as income in that year. Should my county or a contiguous county be declared a federal disaster area, the replacement period is extended to 4 years and the animals will not have to be replaced until the end of 2026. The replacement animals must also be of the same type and purpose of the animals sold (dairy animals for dairy animals or breeding for breeding). This tax provision is under Internal Revenue Code Section 1033(e).

    Now consider an example for the sale of any livestock (other than poultry) due to weather related conditions, and this time the county I raise cattle in is declared a federal disaster area (which is a requirement for this provision). Using the same facts as the prior example, I sold 6 more cows and 5 replacement heifers plus 15 head of calves (that would have normally been sold in 2023) for $20,000. Combined, this is more livestock than what would have normally been sold had the drought conditions not existed. This tax law provision allows me to elect to report the $20,000 of income in 2023 instead bunching this excess income in 2022. This tax provision is under Internal Revenue Code Section 453(g). 

    Documentation is critical for all drought related losses. Specifically for your taxes keep the following in your tax records: 

    • Evidence of the weather-related conditions that forced the sale or exchange of animals.
    • Number and kind of livestock sold or exchanged.
    • Number of livestock of each kind that would have been sold or exchanged under normal business circumstances (generally, the average number of animals sold over the three preceding years).
    • The amount of gain realized on the sale or exchange.
    • The amount of income to be postponed

    It will be important to discuss the application of these tax provisions with your income tax advisor. Sources of drought information include the Drought Monitor Maps which indicate drought intensity by state and region. In addition, USDA reports which counties are currently considered drought disaster areas and are eligible to receive federal disaster programs, and disaster declarations generally are available from State and Federal government websites and stakeholder announcements. Tax season seems like it is far off on the horizon still, but better understanding how drought related losses will be reported may aid in documentation of losses today. 

    For more information see the Rural Tax Center factsheet http://ruraltax.org/files-ou/RTE_2021-05_Weather_Related_Sales_of_Livestock.pdf

    Hagerman, Amy, and JC Hobbs. “Drought Related Livestock Sales and Tax Reporting Options.” Southern Ag Today 2(38.4). September 15, 2022. Permalink

  • Economic vs. Tax Depreciation: Understanding Which to Use for Determining Farm Profitability

    Economic vs. Tax Depreciation: Understanding Which to Use for Determining Farm Profitability

    Economic depreciation is often overlooked when it comes to the profitability of a farming operation since it is a non-cash expense. One reason is when farmers hear depreciation, they think of tax depreciation. Tax depreciation is an essential tool to lower before-tax income (Tax depreciation and guidelines can be found through the IRS, and application of tax depreciation methods should be discussed with a tax professional). However, the tax depreciation value does not accurately reflect the “real” annual value loss of an asset. For this reason, using tax depreciation to assess profitability will lead to inaccurate calculations. Instead, economic depreciation should be used for farm financial statements. 

    Economic depreciation differs from tax depreciation by estimating the actual reduction in the value of an asset over time. The value lost depends on use, wear and tear, age, and technical obsolescence. Annual economic depreciation will also vary based on purchase price, the estimated value when sold, and the length of ownership for each asset.  

    An example of the difference between tax and economic depreciation is when looking at an operation’s purchase of a new grain truck. For tax purposes, the farmer can use Additional First-Year Depreciation (Section 179), which will allow them to deduct the entire cost of the truck within the year of purchase. However, if the farmer wanted to sell that truck after one year, it would still have considerable value. The difference between the purchase and resale prices is the value lost for that one year of use. This difference is the economic depreciation and should be used in farm financial statements to more accurately determine profitability.  Figure 1 illustrates how economic depreciation on farm machinery has increased over time for grain farms in Kentucky.  On average, machinery depreciation represents eight percent of the total cost of production (variable and fixed costs) for Kentucky grain farms.

    A more in-depth discussion of tax depreciation vs. economic depreciation, and comparing depreciation for new or used machinery with guided examples can be found here.

    Figure 1. Average annual machinery depreciation for Kentucky grain farms by size ($/ac)

    Source: Kentucky Farm Business Management Program’s Annual Summary Data:
    http://agecon.ca.uky.edu/KFBM-pubs

    Ellis, Robert, and Jordan Shockley. “Economic vs Tax Depreciation: Understanding Which to Use for Determining Farm Profitability.” Southern Ag Today 2(38.3). September 14, 2022. Permalink