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  • Crop Insurance the Key to Avoiding Another Farm Economy Downturn

    Crop Insurance the Key to Avoiding Another Farm Economy Downturn

    In 2017 Extension Economists from across the South worked on a major producer education effort that resulted in a book titled Surviving the Farm Economy Downturn[1].  The 1980s is second only to the Great Depression in terms of really bad financial outcomes for agricultural producers in the United States.  In the 1980s, the sustained decline in farm incomes and corresponding drop in land values triggered a large number of loan defaults leading to a significant number of farm bankruptcies.  The chapter I worked on was titled “Are We Headed Toward Another Farm Financial Crisis as Severe as the 1980s?”  The chapter evaluated six of the variables often cited as contributing in some way to the 1980s downturn such as high interest and exchange rates, collapsing land values, and rising debt to asset ratios.  At that time the conclusion was that while the late 2016-2017 period had a few caution signs, only the strong exchange rate was similar to the 1980s and that U.S. agriculture was not going into another major downturn.

    The Federal Reserve recently increased interest rates by one-half point with strong signals that more increases are on the way.  This triggered my thinking about what happens when our current near record crop prices decline to their new normal along with inputs prices that are sticky on the way down.  According to USDA survey data, U.S. agricultural producers, on average, have relatively low debt and many are in quite strong cash flow positions.  Low debt makes farmers much less vulnerable to a collapse in land values.  But, I think the biggest reason the U.S. won’t see a crisis like the 1980s again is the federal crop insurance program.  Crop insurance had very low participation during the 1980s with less than 50 million acres covered generally at low levels of buy-up on yield policies (Figure 1).  Over time, a lot of innovation has occurred in crop insurance policies.  Now, around 225 million acres are covered generally by revenue insurance policies bought up to at least the 70 percent coverage level.  With virtually all cropland covered by some type of policy, significant within year price declines will be covered by revenue insurance.  Due to this, there wouldn’t be the tremendous pressure on farm incomes contributing to lower land values and increased loan defaults.  What about a sustained price decline scenario?  That is where crop insurance coupled with price loss coverage provides significant protection.

    Figure 1.  Planted Acres for Major Crops in Crop Insurance, 1981-2021.

    Source:  National Crop Insurance Services, 2022.

    [1] https://www.afpc.tamu.edu/extension/resources/downturn-book/Surviving-the-Farm-Economy-Downturn.pdf

    Outlaw, Joe. “Crop Insurance the Key to Avoiding Another Farm Economy Downturn“. Southern Ag Today 2(20.4). May 12, 2022. Permalink

  • Prospects for Retained Ownership in a High Input Cost Environment

    Prospects for Retained Ownership in a High Input Cost Environment

    Retaining ownership of calves beyond weaning is a value-added process that provides cow-calf enterprises access to a greater share of the retail dollar. There are costs and benefits to selling at weaning as well as costs and benefits when retaining ownership, each of which must be evaluated on an annual basis. Estimating expected returns is challenging in a normal year, and has been complicated in 2022 by drought, widespread culling, high feed costs, and increasing calf prices. Below is an analysis of the retained ownership decision using today’s market expectations.   

    We can roughly estimate the expected revenue generated from the sale of a weaned calf today.  The average price of a 7-8 weight steer in Joplin, MO the last week of April ran $1.63 per pound, meaning a 750-pound steer calf brought $1,224.38.  So the question of retained ownership is how much additional revenue (value-added) over $1,224 can I expect from selling a fed calf, and what is the additional cost associated with the added value.

    If we assume a current calf weight of 750 pounds for a 2021 spring-born calf, and an average daily gain (ADG) of 3.5 pounds, we can assume a target harvest date of mid-October at approximately 1,350 pounds. The board price for an October delivery fed steer last week averaged approximately $1.43 per pound. If we locked that price in today, a 1,350-pound steer would generate $1,930.50 in revenue.  Compared to selling today at $1,224, retaining ownership would generate an additional $706/head.  Now let’s look at the cost of achieving that additional $706. 

    Cost of Gain (COG) is a function of days on feed, cost of feed, and pounds of feed per pound of gain. It is commonly estimated using corn price, so it is significantly higher this year than in recent years. The increased cost of corn has cost of gain in the neighborhood of $1.20 per pound to $1.50 per pound depending on the feeding location, including an approximate 33% markup for yardage fees, overhead, and miscellaneous expenses. Subtracting COG from the expected value-added ($706.12) leaves the bottom-line Expected Net Revenue change from making the retained ownership decision.  The table below shows the expected net revenue impact of retained ownership for various COG estimates ranging from $1.20 to $1.50 per pound of gain. 

    Given the current COG and relative calf values retaining ownership through the feed yard seems to be a relatively less profitable choice against selling a weaned calf.  The market appears to value an additional 600 pounds of gain at a little over $700/hd while the cost of that gain could range from $720 to $900.

    Benavidez, Justin. “Prospects for Retained Ownership in a High Input Cost Environment“. Southern Ag Today 2(20.3). May 11, 2022. Permalink

  • 2022 Range and Pasture Conditions

    2022 Range and Pasture Conditions

    Last week’s Crop Progress Report from USDA provided the first data point on 2022 pasture and range conditions. Like other crops, the Crop Progress Report shows the percent of pasture in very poor, poor, fair, good, and excellent condition. According to the report, 29% of pasture is in very poor condition. Combined, 56% of pasture is in very poor or poor condition. Last year, 47% of pasture was in very poor or poor condition. Clearly, on a national basis, pasture conditions are worse than a year ago.

    There is a high degree of variability in range and pasture conditions across states. In the Southeast, for example, conditions are comparable to the previous 5-year average, with 10% of pasture in poor or very poor condition (AL 4%; AR 13%; FL 22%; GA 13%; KY 6%; LA 8%; MS 8%; TN 7%). In the Southern Plains, conditions are noticeably worse, with 57% of pasture rated as poor or very poor (KS 41%; OK 39%; TX 74%), a 79% increase compared to last year. Compared to last year, conditions in the West have improved, with 39% of pasture rated as poor or very poor, down 24% compared to last year.

    Forage availability and forage production costs will be two of the most significant factors determining the trajectory of U.S. cattle inventories through 2023. So far, in 2022, we have already started to see the effects of deteriorating pasture conditions. Feedlot inventories continue to set records, partially a result of drought pressure. Beef cow slaughter is averaging 17% higher year over year. The next few months will be crucial to monitor.

    Mitchell, James. “2022 Range and Pasture Conditions“. Southern Ag Today 2(20.2). May 10, 2022. Permalink

  • Milestone Indicators of U.S. Cotton Supply and Demand

    Milestone Indicators of U.S. Cotton Supply and Demand

    It is generally the case that the U.S. cotton market is influenced by aggregate production uncertainty.  One reason for this is that a majority of the U.S. acreage is planted in Texas (Figure 1), with much of that under dryland conditions contributing to historical abandonment rates between 4% and 62% statewide.  In drought years like the current one, this production risk is only heightened.  The management of this risk is potentially helped by publicly available market information data.

    The first upcoming major information source is the May 12th USDA “World Agricultural Supply and Demand Estimates” (WASDE) report published by the USDA’s World Agricultural Outlook Board (https://www.usda.gov/oce/commodity/wasde ).  The May report is notable for publishing USDA’s first official, comprehensive projections of U.S. and world crop supply and demand variables.  Historically, the May WASDE report tends to be closely watched and is frequently associated with cotton market volatility.

    Like other crops, U.S. cotton is monitored by weekly crop condition reports and crop progress reports (on Mondays) from USDA’s National Agricultural Statistics Service (NASS, https://www.nass.usda.gov/).  Because cotton is a perennial bush in its native habitat, its growth and response to stress are different from annual grain crops.  Hence there is less correlation between weekly crop conditions and progress for cotton yield outcomes compared to grains.  Nevertheless, the news media and some market analysts pay attention to these weekly observations between the major report milestones.

    June 30th “Planted Acreage” is another closely watched major report that is conducted by USDA/NASS.  This report is sometimes associated with market volatility when it contradicts expectations based on the March 31st “Prospective Plantings report from USDA.  USDA’s Farm Services Agency (FSA) provides supplemental acreage information with periodic certified acres data through the summer (https://www.fsa.usda.gov/news-room/efoia/electronic-reading-room/frequently-requested-information/crop-acreage-data/index ). 

    For U.S. cotton, the September WASDE report represents the first extensive proven yield sampling for areas outside of South Texas, in addition to grower interviews.  This sample-based production estimate is refined in subsequent WASDE reports through December, as well as with data on cotton ginnings.  The uncertainty about cotton yield may be further exacerbated in 2022 from restricted input applications.  For example, anecdotal evidence of reduced quantities of nitrogen fertilizer applications (due to the higher cost) could contribute to lower-than-average yields.   The resulting yield effect from fewer inputs might not be realized until the ginnings data in November.  Hence, this season could involve extended price volatility beyond the normal resolution of weather market uncertainty.

    Robinson, John. “Milestone Indicators of U.S. Cotton Supply and Demand“. Southern Ag Today 2(20.1). May 9, 2022. Permalink

  • In Historic Town Centers Beauty is More than Skin Deep

    In Historic Town Centers Beauty is More than Skin Deep

    Amid widespread decline and disinvestment, numerous small towns and rural communities throughout the US have taken action to restore their downtown as the focal point for economic, social, and civic activity in the region.

    Downtown revitalization approaches—such as the widely adopted “Main Street Program”—typically operate from the principle of “if you build it, they will come,” requiring community leaders, business owners, and volunteers to invest their resources and efforts in a vision that is hoped for, but not guaranteed. This involves capital investment toward building rehabilitation and corridor beautification, as well as less tangible investments of time and coordination toward promoting downtown, organizing events, and managing limited resources. 

    But does it work? The continuing popularity of the Main Street Program—with 1,500+ participants and counting—would suggest that downtown revitalization programs are, to some degree, effective. For many policymakers, however, anecdotal data is not sufficient to justify the investment of time and resources required to engage in revitalizing downtown.

    In a pair of recent articles, I examined the quantitative effect of the Main Street Program. The first study focused on job growth, finding that small towns in Iowa gained new retail jobs and establishments in the years after adopting the program. In the other study, I focused instead on residential property values, finding that homebuyers placed a higher premium on homes located closer to downtown districts with an active Main Street Program. Together, the two studies provide evidence for the idea that revitalization efforts go a lot further than simply beautifying a town’s historic business district. Vibrant downtowns are building momentum as places where people increasingly desire to live and work, creating the conditions for strong rural economies to flourish.

    Van Leuven, Andrew J. . “In Historic Town Centers Beauty is More Than Skin Deep“. Southern Ag Today 2(19.5). May 6, 2022. Permalink