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  • Higher Reference Prices Are Critical… But So Is Increasing Payment Limits

    Higher Reference Prices Are Critical… But So Is Increasing Payment Limits

    In a recent Southern Ag Today article we highlighted the overwhelming need to increase commodity reference prices in the next farm bill based on hearing testimony from the commodity groups.  While we continue to believe that this is the first and most important step in making meaningful changes to our country’s farm safety net, a very close second would be to increase the payment limit to account for the impact of inflation.  Actually, we would argue that payment limits should be eliminated completely because they are implemented for social engineering not economic reasons…but that is a discussion for another day.

    Why do we think payment limits should be increased?  Using data from the Agricultural and Food Policy Center’s (AFPC) database of representative farms—and illustrated for crop year 2025—the 3,400-acre Iowa corn/soybean farm is projected to be facing much lower commodity prices.  In 2025, market receipts are projected to be $2.5 million with corn and soybean prices at $4.30 and $10.46/bu.  Costs in 2025 are projected to be lower at $2.7 million, resulting in a $200,000 loss without government assistance (of course, the loss could also be much larger if prices fall more than expected).  Assuming ARC and/or PLC are improved to the point that they would trigger assistance in 2025, the support would be limited to $125,000, leaving the farm with a loss of $75,000.  Even though Congress will have spent hundreds of hours conducting hearings and debating how to help farmers stay in business… payment limits will reduce the effectiveness of the improved safety net.  Said another way, the producer puts $2.7 million at risk through borrowing or self-financing, and if there is a price or production problem, the Federal government will help with up to $125,000, or 4.6% of what the producer has at risk in this example. 

    How much payment limits should be raised tends to be almost as contentious as whether we should have them.  As a frame of reference, modern-day payment limits trace their roots to the 1970 Farm Bill with a $55,000 payment limit for each of the annual programs for wheat, feed grains, and cotton in crop years 1971, 1972, and 1973.  The figure below illustrates the magnitude of that payment limit ($55,000 for a single program/crop) were it in place today and indexed for inflation. That $55,000 payment limit would have been $413,247 in 2023, more than three times larger than the current combined payment limit of $125,000 applying to all covered commodities eligible for ARC and PLC.  If the limits from the 1970 Farm Bill were combined for a producer growing all three crops (i.e., $165,000), the payment limit today would be just over $1.2 million. Again, this doesn’t mean a producer is entitled to a payment of $1.2 million; it simply means that any losses up to $1.2 million could be covered. Instead, under current law, any losses beyond $125,000 are borne entirely by the producer.

    Figure 1. Initial 1970 Farm Bill Limit ($55,000) Indexed for Inflation.

    Outlaw, Joe, and Bart L. Fischer. “Higher Reference Prices Are Critical… But So Is Increasing Payment Limits.” Southern Ag Today 4(13.4). March 28, 2024. Permalink

  • Census Reveals Tobacco Farms Disappearing from Southern Agriculture

    Census Reveals Tobacco Farms Disappearing from Southern Agriculture

    The southern region in the United States has been well known for several unique crops, including cotton, rice, peanuts, and tobacco.  However, the latest Census data reveal that farms growing tobacco are disappearing from the landscape of southern agriculture. 

    Tobacco has had a storied history in the formation of this nation as it quickly became the most important cash crop in Colonial America, serving as the leading export commodity and a form of currency for the emerging nation.  Over the years, tobacco remained a valuable crop for several Southern states, which enabled many small family farms to survive. 

    A federal tobacco program emerged as part of the New Deal in the 1930s to further protect small tobacco farms consisting of supply controls and eventually price supports.  Increased global competition from lower-cost producers in South America and Africa ultimately led to the demise of the program over time and eventually the 2004 passage of The Fair and Equitable Tobacco Reform Act, or more commonly known as the “tobacco buyout.”

    This act provided nearly $10 billion to purchase tobacco quotas and provide compensation to growers to transition to a market-based economy.  The landmark legislation was expected to result in a significant concentration of tobacco farms, a geographic shift in production to the lowest cost regions, and larger farms to benefit from economies of scale.

    This historic policy action, followed by two decades of increasing cost of labor, heightened government regulation, and declining consumer demand for tobacco products has led to depressed exports, growing imports, and arguably the most significant structural change in the history of U.S. agriculture.

    According to the Ag Census, the number of U.S. farms growing tobacco has declined from 56,977 farms in 2002 to 2,987 farms in 2022 – a loss of more than 95% since the passage of the tobacco buyout twenty years ago.

    While there was speculation that the elimination of tobacco quotas would lead to U.S. tobacco production moving out of the southern region to other areas, nearly 80% of U.S. farms growing tobacco today remain in southern states.

    Kentucky has historically been the state with the largest number of tobacco farms, with nearly 60,000 (of its 90,000) farms growing tobacco in the early 1990s compared to roughly half that number in 2002 and only 984 recorded in the 2022 Ag Census. However, Kentucky’s share has declined from 42% of U.S. tobacco farms in 2017 to 33% in 2022. North Carolina remains number two in tobacco farms, with 822 farms, followed by Pennsylvania (377), Tennessee (241), and Virginia (173). 

    As anticipated, acres of tobacco production per farm following the tobacco buyout has increased significantly – increasing from an average of 7.5 acres in 2002 to 69.5 acres in 2022, with the largest tobacco farms remaining in the flue-cured tobacco regions of North Carolina, Georgia, Virginia and South Carolina where production averages more than 100 tobacco acres per farm.

    The relative importance of tobacco in southern agriculture has declined considerably.  Today, tobacco accounts for less than 3% of Kentucky’s annual ag cash receipts compared to averaging 25% during the 1990s.  For North Carolina, the nation’s second largest tobacco producing state, tobacco has fallen from 15% of ag cash receipts in the 1990s to only 3% today.  

    Table 1. Changes in the Number of Tobacco Farms and Average Size (2022 vs 2002)

    Tobacco Farms% Change Average Size (acres)
    20022022  20022022
    Alabama80-100% 24.9 –
    Florida11514-88% 33.5114.6
    Georgia82244-95% 30.5138.0
    Kentucky29,237984-97% 3.844.9
    Louisiana61-83% 50.2 –
    Mississippi70-100% 22.6 –
    North Carolina7,850822-90% 21.4141.4
    South Carolina87348-95% 34.6119.4
    Tennessee8,206241-97% 4.451.4
    Virginia4,184173-96% 7.273.0
           
    Total Southern States51,3082,327-95% 7.985.6
           
    Other U.S. States5,669660-88% 4.213.0
           
    U.S. Total56,9772,987-95% 7.569.5
    Source:  Ag Census/USDA

    Snell, Will . “Census Reveals Tobacco Farms Disappearing from Southern Agriculture.” Southern Ag Today 4(13.3). March 27, 2024. Permalink

  • Incentives Help Solar Battle Electricity Cost Increases on Commercial Poultry Farms

    Incentives Help Solar Battle Electricity Cost Increases on Commercial Poultry Farms

    As commercial poultry growers have improved housing insulation and tightened up old leaky houses, heating efficiency has improved, and fuel costs have declined. However, as overall bird size has increased across the U.S., keeping larger birds properly ventilated and cool with exhaust fans has driven electricity costs up. The short-term forecast for electricity may be positive, but the overall trend is increasing prices. Small scale solar has also increased across the country and is one of the ways poultry growers have explored to lower their power bill by offsetting utility grid power usage. Currently there are significant federal incentive programs that make solar on poultry farms more attractive. Some solar components have decreased in price as well. However, as with many things, buyers should do their research. 

    Current solar incentives have the potential to pay for a large percentage of a solar project. The most impactful incentive is the USDA’s current Rural Energy for America Program, commonly known as a REAP grant. Currently, the REAP program offers up to 50% of the installation cost of a qualifying project to be covered by the grant. It is important to understand that these grants are competitive, and the funding is limited. They are also not funded up-front but are reimbursement grants. Go to https://www.rd.usda.gov/programs-services/energy-programs/rural-energy-america-program-renewable-energy-systems-energy-efficiency-improvement-guaranteed-loans for more information. The REAP grant is by far the most available opportunity for poultry growers to obtain assistance for their solar project. It is advised that a grower obtain the services of an experienced grant writer or technical service provider (TSP) to help complete the grant application. Oftentimes a solar installation company will have secured the services of a grant writer or have someone skilled to do so on staff. These services usually carry a fee that is often not charged unless a grant is secured.

    Next to consider is the Federal Income Tax Credit (FITC) available for qualifying solar energy projects. Currently the FITC is set for 30% of the installation cost taken off owed taxes. The tax liability can be taken forward 22 years and look back 3 years. There are additional discounts added if certain system criteria are met. There is an additional 10% tax credit applied based on the use of qualifying U.S. made materials. If the system is being installed in a historically “low income” area, an additional 10% credit is applied. The problem for many poultry growers is that they typically do not have high tax liability until later in the farm’s life after depreciation is used up. Then this usually coincides with the need for equipment replacement and heavy maintenance requirements, which often require refinancing or additional loans. This is one reason the FITC incentive portion of the solar option may be more fitting for farms that have paid off their houses and are expecting to incur increasing tax liabilities. However, there is now an opportunity for growers to sell the unused tax credits at a reduced cash value as part of the Clean Energy Tax Credit program passed under The Inflation Reduction Act of 2022 (IRA) (Pub. L. 117-169, 136 Stat. 1818 (2022)).

    The final thing to discuss here, but the most important to consider with the solar option, is what kind of solar deal a grower has with their current utility company. If you have anything less than one to one net metering, then it is most likely that a system that offsets less than 100% of your total power usage will be best suited to a poultry farm. Due to the irregular usage patterns of poultry houses, large systems have the potential to put a lot of power back into the grid for low prices buy-back to the grower. In most situations examined where there is something less than full net metering, poultry farms optimally achieve 60% or less power offset, depending on the cost of the electricity and the price given to the grower for excess power. Therefore, growers should not think of the incentives as a way to offset more power by installing larger systems but use the incentives to pay off an optimized system sooner rather than later. 

  • Peanut Yield Trends

    Peanut Yield Trends

    The USDA released 2023 production estimates in January showing U.S. peanut yields down 7% from 2022 at 3,740 lbs. per acre. As shown in figure 1, the majority of states’ peanut yields declined in 2023, relative to the previous year. The major peanut producing states of Alabama and Florida both saw 17% decreases in their yields. Georgia – the leading state – had a 3% decline to 4,070 lbs. per acre. Yields were down in 2023 largely due to the drought that persisted in the South throughout the latter part of the peanut growing season. Arkansas led the way with its record-high yield of 5,800 lbs. per acre, in part due to most of the state’s peanuts being irrigated.

    Figure 1: 2023 Peanut Yield by State and Percent Change from 2022

    Data source: USDA NASS. Crop Production Annual Summary. January 12, 2024.

    Putting into context where this year’s yield falls historically, let’s look at peanut yield trends since 1970 (figure 2). The 2023 yield is the lowest since 2016. Over the entire 1970-2023 period, peanut yields increased by 36 lbs. per acre annually, on average, but with considerable variation. From 1970 to 2000, peanut yields increased by an average of 7 lbs. per year. Then in 2001, peanut yields reached 3,000 lbs. per acre for the first time, and over the subsequent decade, peanut yields would increase by 57 lbs. per year on average. This substantial increase from 2001-2012 is likely driven by the introduction of the Georgia-06G high yielding runner-type peanut cultivar that was released in 2006 and soon gained a significant market share in the southeast. In 2012, peanut yield surpassed 4,000 lbs. per acre for the first time. However, over the past 12 years, peanut yields have been flat and averaged 3,948 lbs. per acre. In fact, the 2012 mark has yet to be topped. 

    Figure 2: US Peanut Yield Trends

    Data source: USDA NASS. Crop Production Annual Summary. January 12, 2024.

    Peanut yields are an even more critical aspect for profitability due to increased input prices. Production costs are expected to remain elevated in 2024 at $598 per ton, assuming yields equal the five-year average. This means that even with peanut prices expected to reach a decade-high $550/ton, producers would still likely operate at a loss. Strong yields would help lower these breakeven prices, but the recent yield volatility raises concerns that this might not occur.

    References

    Rabinowitz, A. “Peanut Cost of Production, the Farm Bill, and Need for Risk Management.” Southern Ag Today. January 8, 2024. Available at https://southernagtoday.org/2024/01/08/peanut-cost-of-production-the-farm-bill-and-need-for-risk-management/

    USDA-NASS. Crop Production Annual Summary. January 12, 2024.

    Sawadgo, Wendiam. “Peanut Yield Trends.” Southern Ag Today 4(13.1). March 25, 2024. Permalink

  • Foreign Ownership Law Violates the U.S. Constitution???

    Foreign Ownership Law Violates the U.S. Constitution???

    On February 1, 2024, the U.S. Court of Appeals for the Eleventh Circuit granted a partial injunction in favor of two individuals challenging a Florida law that restricts certain foreign investments in real property. In May 2023, a group of Chinese citizens living in Florida and a real estate brokerage firm filed a lawsuit (Shen v. Simpson, No. 4:23-cv-208 (N.D. Fla. 2023)) against the state of Florida alleging that the state’s newly enacted foreign ownership law violates the United States Constitution. Florida’s law restricts certain foreign investments in real property located within the boundaries of the state, particularly investments by individuals and entities “domiciled” in China. After the district court denied the plaintiff’s motion to prevent the state from implementing and enforcing their foreign ownership law, the plaintiffs appealed to the Eleventh Circuit which granted a partial preliminary injunction.

    Although the Shen plaintiffs claim that the Florida law is unconstitutional for several reasons, the court’s order granting the partial injunction rests solely on the plaintiffs’ preemption argument. The plaintiffs argue Florida’s foreign ownership law violates the Supremacy Clause of the U.S. Constitution by conflicting with the federal government’s system of regulating land purchases by foreign investors. 

    According to the Eleventh Circuit’s order, two of the Shen plaintiffs have shown a substantial likelihood that the federal government’s role in monitoring certain foreign acquisitions of real property located within the U.S. preempts Florida’s foreign ownership law. As a result, the state is currently restrained from prohibiting these two individual plaintiffs from completing their real property transactions within the state of Florida.

    Importantly, this is merely a decision on the preliminary injunction.  The court did not rule on the merits of the case. Oral arguments for the Shen case are expected to be set for April 2024, at which time the appellate court will hear arguments on the merits of the case.

    Brown, Micah. “Foreign Ownership Law violates the U.S. Constitution???” Southern Ag Today 4(12.5). March 22, 2024. Permalink