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  • Building Equity

    Building Equity

    It may seem that barely covering expenses with little positive net farm income means a business is “treading water.” Ideally, a farm would generate revenues that exceed total expenses each year and have cash and other resources to reinvest into the business. However, agriculture can be highly variable from farm to farm and year to year. Reaching incremental financial goals can help producers hit economic targets and minimize risk. To think of financial well-being as a ladder, the bottom rung is financial loss, and the highest rung is maximum profitability. Each rung that is attained is a higher position and further away from financial harm. 

    It may not be flashy, but a farm that can generate revenues to break-even and pay down debts has indeed climbed several rungs on the financial ladder. It may not afford much extra cash or the ability to expand the operation, but the business is still making progress. To think of the equation total farm assets – total farm liabilities = farm equity, covering all variable and fixed expenses means the farms equity is continuing to grow. Over time, the owner(s) continues to own more of the business until an ownership change or business dissolution. Either way the owner has accrued increased net worth over time. 

    Of course, there are other items that impact total farm assets or total farm liabilities. Asset values can change from year to year. In some cases, they could be quite volatile depending on the valuation method. For discussion, we’ll assume an adjusted cost basis with no major adjustments. Fixed asset accounts can decrease because of depreciation, but we assume this expense is a fixed cost of the business. Liabilities are useful and, in some cases, necessary, but a farm taking on unnecessary liabilities can tip the scales away from the owner, allowing creditors to own more of the operation. Liabilities such as bank loans allow the business to leverage resources to increase production, profitability, efficiency, and other measures. If the farm incurs aliability but the increase in assets is greater than the liability + interest over time, then it will add to the farms’ equity. It’s not always possible to understand the impact of a decision right away, it may take several cycles before seeing the resulting change in farm equity. For an asset purchase with a loan, the initial impact on equity will likely be zero. $100,000 farm asset increase – $100,000 farm liability increase = $0 change in farm equity. However, the influx of cash resulting from the asset’s productivity, allowing the business to cover the depreciation of the item, interest, and debt payments, can have a positive impact on farm equity.

    It is important to consider context, too. A farm with successive losses but is now at break-even would seem to be making progress. A farm that has had big years but is now at break-even could signal a downward trend, or it could be merely a speedbump resulting in a short-term modest return.  In general, a business that is paying down debts is contributing positively to farm equity and adds financial resiliency to the business. Should the operation need to borrow again in the future, end up with a financial loss one year, or eventually sell out, the farm will be in better financial position because of the previous farm equity contributions made. 

    Burkett, Kevin. “Building Equity.” Southern Ag Today 4(23.3). June 5, 2024. Permalink.

  • Humanely Processed Chicken May Bring a Premium Price

    Humanely Processed Chicken May Bring a Premium Price

    In 2023, food scientists from Auburn University’s Poultry Science Department conducted a survey to ascertain the perception of poultry processing, specifically stunning processes, among American chicken consumers (“Consumer Perception Survey of Animal Welfare in Broiler Stunning.”, Linda Barahona; Sungeun Cho, Ph.D.) The full survey data are currently being evaluated, but some preliminary findings are especially intriguing on the economic front. 

    The following two survey questions were of specific economic interest: A. “Humanely processed (chicken) are animal derived products from animals that have been treated ethically. Are you willing to pay more for humanely processed(chicken)?” – to which respondents could answer Yes, No or Maybe. The next question related to the previous by asking: B. “If the answer to the previous question was ‘Yes’ or ‘Maybe’, how much more are you willing to pay?” Respondents had six choices for B: Less than 10%, 10-50%, 51-100%, 101-200%, 201-300% and Greater than 300%.

    Of the 986 respondents, 699 of them (71%) answered Yes (358) or Maybe (341). Of those 699 Yes/Maybe’s, almost 85% were in the first two categories and willing to pay at least 10% more, with half of those willing to go up to 50% more in price for humanely processed chicken. To put the choice ranges in perspective, at the time of this writing, the average regular pack of boneless/skinless breast in the Southeast U.S. was $3.21 (USDA National Retail Report – Chicken, May 17, 2024.) Using the upper end of the ranges above, the respective increased prices someone might be willing to pay chicken would be: $3.50 (<10%), $4.81 (10-50%), $6.42 (51-100%), $9.63 (101-200%), $12.84 (201-300%), or $14.45 (>300%, estimated at 350% increase). Applying these prices to the results would suggest only 15% of those willing to pay more would accept more than an additional $1.60 ($4.81 compared to $3.21) per package of humanely processedchicken breasts. 

    While this survey seems to suggest that consumers are indeed willing to pay for chicken that was processed in a perceived more humane fashion, several questions remain. The above prices in dollars were not shared in the survey, those are extrapolations of this author. Further work is planned to evaluate consumer choices with products visually before them with the dollar prices clearly marked, and with one package clearly labeled and understood as “Humanely Processed”. Would the breaking point remain at 50% price increase, or would consumers make different choices with more information? Some of the current survey data suggests increased knowledge of poultry production in general leads to willingness to pay more. Would a clearer understanding of a specific “humane process” in question also impact willingness to pay? All of these are questions being considered for further expanded study.

    The results of this work will be important for poultry companies as they consider implementing processes that might be considered more humane, like controlled atmospheric stunning, but can be costly to implement and have increased management requirements. If consumers are willing to pay enough, it might be possible for poultry companies to work with their wholesale and retail customers, like grocery and fast-food businesses, to pass the increased cost of production directly to end consumers. 

    Brothers, Dennis. “Building Equity.” Southern Ag Today 4(23.2). June 4, 2024. Permalink

  • Corn Yields and 2024 Projected Linear Trendline Yields in Southern States

    Corn Yields and 2024 Projected Linear Trendline Yields in Southern States

    Calculating trendline yields can be a useful tool for budgeting or developing a crop marketing plan. Using trendline yield estimates at the start of the production year can assist in determining potential profitability, at current market prices, and determine if additional sales or price risk management is warranted. Projected yields should be periodically revisited during the production year to make adjustments to management practices and marketing strategies to improve the likelihood of positive financial outcomes. This article examines differences in linear trendline yields for corn across Southern States.   

    There is tremendous variability in average USDA NASS corn yields across the Southern States (Figure 1).  Over the past five years (2019-2023), Arkansas had the highest average corn yield at 179.8 bu/ac followed by Kentucky (177.6 bu/ac) and Mississippi (176.2 bu/ac). The lowest five-year average yields occurred in Texas (121.2 bu/ac), North Carolina (129.2 bu/ac), and South Carolina (129.8 bu/ac). 

    Projected linear trendline yields in 2024 for corn, using USDA NASS data from 1980-2023, vary tremendously (Table 1). The slope coefficient, in Table 1, provides the annual average increase in yield for each state from 1980 to 2023. The constant in Table 1 is the initial yield at the start of the linear trend line. For example, on average from 1980-2023, corn yields in Mississippi increased 3.33 bu/ac per year from a starting trendline yield of 43.57 bu/ac. An easier way to think about this is that over a ten-year period, average yield in the state of Mississippi increased by 33.3 bu/ac. Increases can be a result of production practices (such as irrigation) or technology (genetic improvements). In the past ten years (2014-2023), the increase in annual yield improvement for most Southern states has slowed.  R2 is a measure of the proportion of variation in the dependent variable (yield) that can be explained by the independent variable (time). Across the Southern U.S., we see tremendous variation in the R2 for linear trendline yields, ranging from a high of 0.926 for Mississippi to a low of 0.285 for Texas. Low R2 values indicate that the independent variable (in this case time) does not explain the variation in yield, thus other variables need to be considered when projecting yield.  

    Ideally, projecting annual yield should be conducted at the farm or field level using producer data. Crop insurance records or yield monitor data can allow producers to analyze, and project, yield and production to guide management and marketing decisions.

    Figure 1. Corn Yields in Southern States, 1980-2023 

    References

    USDA NASS Quick Stats. Corn Yields, 1980-2023. Accessed at https://quickstats.nass.usda.gov/  

    Smith, Aaron. “Corn Yields and 2024 Projected Linear Trendline Yields in Southern States.” Southern Ag Today 4(23.1). June 3, 2024. Permalink

  • HPAI in Dairy Cattle:  Is Pasteurization Dairy’s Only Reliable Protection? 

    HPAI in Dairy Cattle:  Is Pasteurization Dairy’s Only Reliable Protection? 

    It has been approximately eight weeks since the U.S. dairy industry became immersed in efforts to monitor and potentially control the outbreak of Highly Pathogenic Avian Influenza in dairy cattle confirmed in 63 locations across 9 nine states as of May 28, 2024, from Idaho to North Carolina.  FDA maintains a wealth of on-line data which is updated regularly and appears to be a model of government transparency. 

    On March 25, 2024, the first joint USDA/FDA/CDC public confirmation of  a HPAI outbreak in dairy cattle in Texas and Kansas, along with communication by most federal and state animal health and food safety authorities has contained this by-now familiar public health advisory:

    “The FDA and USDA have indicated that based on the information currently available, our commercial milk supply is safe because of these two reasons:

    1) the pasteurization process and

    2) the diversion or destruction of milk from sick cows.”

    These statements are based upon the standardized dairy production practices and safeguards mandated in the U.S. Department of Health and Human Services, United States Public Health Services’ Grade “A” Pasteurized Milk Ordinance, 2019 Revision (PMO). In its earliest forms, the PMO dates back to 1924 and acts as the comprehensive and uniform national regulation of milk production for human consumption, its pasteurization, and sales in interstate commerce. It is enforced in all 50 states by a system of milk regulatory officials employed in federal and state government and by private industry through cooperative agreements in some jurisdictions. Pasteurization and the destruction of milk from sick cows is required by the PMO.  

    However, these public health statements contain buried and fundamental assumptions about regulatory and disease control processes that should be unpacked for a clearer understanding of why the impact and nature of these HPAI detections are qualitatively different than detections in poultry. Many distinguishing points exist.  

    • Milk production, processing and sale for the vast majority of human consumption nationwide mandates pasteurization, a “kill step” which has proven to be a relatively foolproof regulatory requirement for the prevention of disease transmission through milk. Perhaps no commodity is better situated to deal with the potential of HPAI in its supply chain. 
    • The biological circumstances of both the disease and the host animal—a large mammal of significant monetary value—do not indicate euthanasia as a disease control measure. Widespread cow-to-cow transmission has not materialized. Hopefully, that does not change in the future, or the consequences will be unprecedented and catastrophic. 
    • A dairy herd, its housing, and the land occupied for dairy production is much more difficult to “lock down” from a bio-security standpoint than the precedent established for controlling this disease in poultry.  Dairy production involves a complex daily routine of feeding, multiple milkings, milk storage, and truck transport for processing no less frequent than every 72 hours (a requirement of the PMO). Through this daily process, in order to achieve the immediate and effective disease transmission prevention aspired to in the poultry context would likely require immediate removal from the herd and culling of cows testing positive. Current conditions and pasteurization support a determination that the removal of objectively sick cows from the milking herd is sufficient. The removal and quarantine of sick cows on an individual basis from milk production if detected (or for example those treated with antibiotics) is a common occurrence and required by the PMO.
    • However, if sick cow numbers increase drastically, the logistics of withdrawing from the herd and retaining sick cows under quarantine conditions on-site for ultimate return to production simply may not be within the capabilities of many dairy operations. 

    All of these circumstances mean that quarantine processes, procedures, and movement restrictions on and off the farm are vastly different and comparatively reduced, as compared to poultry. Most important is that thus far, beyond interstate movement testing and restrictions, USDA APHIS federal quarantine orders have been used sparingly in comparison to poultry. Individual states’ animal health officials are presently filling in any void they feel necessary by imposing their own quarantine orders to serve their own perceived needs. However, this 50-state patchwork is not likely sustainable on a long-term basis should this outbreak in this species become more virulent or protracted.  

    Only time will tell if the current approach to disease control is effective in this species and with this commodity’s production methods. The ability to sustain these practices will depend entirely upon the number of HPAI detections.  

    However, one development has thrown a monkey wrench in the second statement in the two-pronged public health advisory noted above (“. . . diversion or destruction of milk from sick cows.”)  The assumption that such a measure is being reliably taken depends upon every individual dairy herd operator’s 100% accurate determination of which cows may be “sick” with HPAI. We have learned in recent weeks that HPAI in this species is not necessarily able to be routinely or accurately diagnosed.  

    We learned on May 10, 2024, that FDA has engaged in testing of 297 retail dairy products for HPAI virus detection, ostensibly to confirm that the pasteurization “kill step” was 100% effective. 

    “While the FDA collected the 297 samples at retail locations in 17 states, these retail samples represent products produced at 132 processing locations in 38 states.”

    Pasteurization scored a perfect 100% – no active HPAI virus.  However, 59 of the 297 samples tested showed evidence of “dead” HPAI virus components (essentially “killed” by pasteurization). That means 20% of the retail dairy products tested showed evidence that milk from one or more cows carrying HPAI was not diverted from the milk supply. This finding evidences the problems with routinely and accurately diagnosing infected dairy cattle. This result may be through absolutely no shortcoming of dairy operators’ diligence and more likely is caused by the inability to detect this disease’s presence in this species in any way that should be relied upon. The PMO requirement to exclude “sick” cows from the milking herd remains an essential regulatory policy. However, in a crisis of this magnitude, the observational tools of dairy operators for individual cow illness in the herd have proven at least 20% ineffective. Without pasteurization as the tried-and-true backstop, that would be wholly unacceptable and is misplaced if cited as the second most important reason the U.S. milk supply remains safe. 

    These findings illustrate the need for a more robust testing regime of dairy cattle and on-farm milk storage (“bulk tank units”) during this outbreak. Ideally, this should occur at a stage where further contamination can be stopped at the farm gate and before transport for processing as co-mingled milk from multiple premises.  

    Lastly, to boost public confidence, more focus should be on coupling pasteurization with a concentration on the evidence, or lack thereof, that milk can be a transmission medium of HPAI from cows to humans.[1]

    The perceived safety of consumer dairy products[2] is equally a matter of public health as well as economic survival of many in the dairy industry.    

    [1] In terms of disease transmission in mammals by consuming milk containing the live virus, there has been a late-breaking development. On May 24, 2024, the New England Journal of Medicine published a report from research primarily conducted at the University of Wisconsin-Madison concluding that the HPAI virus can infect mice through consumption of milk containing the live virus. At press time, further expert, USDA, or FDA input on the impact of this research was not available. 

     

    [2] As written, this article is strictly limited to the impact of HPAI as a pathogen in milk. However, transmission through the consumption of beef has also been the subject of another very recent development. To date in this outbreak, no HPAI has been confirmed in beef cattle but culled dairy cattle and beef from dairy cattle species increasingly contribute to the U.S. consumer beef supply. On May 1, 2024, USDA-APHIS reported that retail ground beef samples collected in the same states as confirmed HPAI-positive dairy cattle all tested negative for the presence of HPAI. However, on May 24, 2024, USDA’s Food Safety and Inspection Service (FSIS) announced that testing of beef tissue from 96 culled dairy cows sent to FSIS-inspected meat processing plants (but diverted by FSIS staff due to signs of illness) confirmed  the presence of HPAI “viral particles” in beef tissue from one cow. Further information may be forthcoming on the broader implications of this one finding.  Nevertheless, like pasteurization, cooking beef tissue appears to be the reliable “kill step.” On May 16, 2024, USDA’s Agricultural Research Service (ARS) published test results from cooking ground beef heavily inoculated with the HPAI virus.  No active virus was detectable after cooking temperatures of 140 – 160° F.

    Duer, Brook, and Paul Goeringer. “HPAI in Dairy Cattle: Is Pasteurization Dairy’s Only Reliable Protection?” Southern Ag Today 4(22.5). May 31, 2024. Permalink

  • U.S. Fresh Fruit and Vegetable Supply

    U.S. Fresh Fruit and Vegetable Supply

    In recent years, fresh fruit and vegetable production in the United States has been on the decline, U.S. production has decreased by 10 and 23.1 percent respectively since 2000. With declining domestic production, imports of fresh fruits and vegetables have grown substantially with some products only being available in the United States due to imports. Since 2020, a larger share of the total supply of fresh fruit in the United States was imported than grown domestically and has increased from 36.6 percent in 2000 to 54.8 percent in 2022 (Figure 1). Vegetable imports in 2022 were 29.3 percent of the total supply up from 9.5% in 2000. The value of imported fresh fruits and vegetables for 2022 was $18.23 billion. After including exports, the total volume of fresh fruits and vegetables available in the United States was 94.65 billion pounds, or 283.63 pounds per capita.

    The United States has gone from being a net exporter of fresh produce in 1980 with 3.25 billion pounds to a net importer starting in 1998 with 1.88 billion pounds (Figure 2). Net trade of fresh produce, excluding bananas, for the United States during 2022 totaled 24.4 billion pounds of trade deficit and has been over 10 billion pounds since 2013. The United States was a net exporter of fresh fruits, excluding bananas, from 1980 to 2002, since then the United States net imports have grown considerably. During 1980 the United States trade surplus of fresh fruits, excluding bananas, totaled 3.11 billion pounds of exports. In 2022, the trade deficit of fresh fruits, excluding bananas, totals 10.4 billion pounds of imports. As for fresh vegetables, the United States has not had exports exceed imports since 1992. During 2022, imports of fresh vegetables were 13.9 billion pounds higher than exports and continue to grow. 

    Young, Landyn, Luis Ribera. “U.S. Fresh Fruit and Vegetable Supply.” Southern Ag Today 4(22.4). May 30, 2024. Permalink