What’s the price of hay? An adage that I often hear is that all markets are local. This is especially true for the hay market. Numerous factors influence the local price of hay including but not limited to supply and demand, weather, quality, storage, age, variety, and delivery costs. In other words, the answer to what’s the price of hay is “it depends!”
Figure 1, Monthly Hay Price Received (excluding Alfalfa) from January 2021 through July of 2023 shows the average price of hay for selected states and the U.S. average. Hay prices for the states of Kentucky, Missouri, Oklahoma, and Texas are included. These are the states that have monthly hay prices reported by USDA NASS Quick Stats.
Keep in mind the adage that all markets are local, especially the hay market. Hay is trucked from where it is plentiful and cheaper to where it’s in short supply. Shipping and arbitrage makes hay prices move together. The Missouri and Oklahoma hay prices, on average, are 40% and 46% respectively, lower than the U.S. average hay price. The Kentucky and Texas prices trend very close to the U.S. average price. The effect of summer drought in Texas and the Southwestern areas of the U.S. is reflected by the increased hay prices across all the states and the U.S. at the beginning of the summer of 2022.
These monthly prices from USDA NASS can be useful in looking at season and/or long-term trends. For more timely prices check weekly hay prices at:
Dry weather has again caused the Mississippi River levels to fall to near-record lows. This is a problem for row crop producers and grain elevators in the Lower Mississippi River area, who rely on barges as the primary mode of transportation for grain. For example, during 2015-2019, approximately 53 percent of U.S. corn exports were moved by barge (Chang, Caffarelli, and Gastelle, 2021). When the Mississippi River is low, barge traffic slows, causing barge freight prices to increase (McKenzie, 2005; Biram et al., 2022). Crop basis, defined as the difference between local cash prices and futures prices, is impacted by local market fundamentals, including the cost of transportation. When barge rates increase, crop basis weakens (becomes more negative or less positive) at grain elevators near the Mississippi River. Figure 1 shows river barge freight rates for the 2022-23 marketing year compared to the three-year average. The three-year average indicates that we typically see small fluctuations in barge freight rates; thus, barge rates likely have a small effect on local commodity basis when river levels are sufficient. However, in 2022, the river level at Memphis hit a historic low of -10.81 feet, nearly stopping all barge traffic and sending barge freight rates to a record high of nearly $90/ton of grain. As of September 5th, the river level declines have caused barge rates to increase to $30/ton. Although data is not included in the graph, the September 18th river level at Memphis is -9.56 feet. Current weather forecasts look dry, and without sufficient rainfall, barge freight rates may increase similar to last year, causing another situation in which commodity basis drops.
Figure 1: Recent River Level height and Recent Barge Freight Rates compared to the Three-Year Average Freight Rate (September 2022-September 2023)
Figure 2 indicates the weakest corn basis in 2022 compared to the 5-year average for southern agricultural districts bordering the Mississippi River. As the river levels were lowest during harvest season, producers without storage were forced to deliver and could not avoid basis risk. Producers unlikely to avoid the risk included those taking the spot price, hedging through futures, or using hedge-to-arrive contracts where the basis is set near or at delivery. At the minimum basis, hedging producers in southern agricultural districts bordering the Mississippi River, excluding southern Mississippi, could have experienced realized prices of $0.40-$1.03/bushel under their expected price, which is estimated when the hedge is set.
Figure 2: Weakest 2022/23 Marketing Year Corn Basis relative to the 5-Year-Average in Southern Ag Districts Bordering the Mississippi River
Figure 3 indicates that as river levels continue to drop and barge freight prices increase, the 2023 basis has started to widen again in the districts bordering the Mississippi. The impacts vary drastically by region; however, as of September 12th, the average weekly basis is between 3 and 21 cents under the 5-year average which contains basis for marketing years 2017/2018 through 2021/2022. If heavy rainfall does not cause river levels to improve, southern producers could again face unexpected losses due to the effects of falling river levels on barge freight rates and, thus, basis. If the basis continues to drop, hedging producers will likely experience prices below their expected price, which could have huge implications on farm profitability and cash flow for Southern producers bordering the Mississippi River.
Figure 3: Current Corn Basis Relative to 5-Year Average in Southern Ag Districts Bordering the Mississippi River
Producers have limited options for managing basis risk. Hedging or HTA contracts are typically used to minimize futures price risks; however, they leave the producer susceptible to basis risk, which is usually more stable than commodity futures prices. However, last year and currently, lower river levels have caused unpredictable basis patterns. If we continue to experience dry summers and low river levels, Southern producers bordering the Mississippi may need to rely on forward contracts, which lock in price and basis pre-delivery, or basis contracts, which lock basis in before river levels can decline. Compared to hedging, a pitfall of these contracts is that they limit the flexibility of when and where grain is delivered. Entering into a forward pricing contract also exposes a producer to production risk which may result in a fee from the elevator if agreed-upon bushels are not delivered in the specified window. In the short term, if available, producers should consider utilizing on- or off-farm storage until basis improves.
References
Biram, H.D., J.D. Anderson, Scott Stiles, and Andrew McKenzie. “Low Water Levels in the Mississippi River Result in Abnormally Weak Soybean Basis“. Southern Ag Today 2(45.1). October 31, 2022. Permalink
McKenzie, A. M. (2005). The effects of barge shocks on soybean basis levels in Arkansas: A study of market integration. Agribusiness: An International Journal, 21(1), 37-52.
Gardner, Grant, Hunter Biram, and James Mitchell. “Low River Levels, Barge Freight, and Widening Basis.” Southern Ag Today 3(39.1). September 25, 2023. Permalink
During the 2023 legislative session, the issue of restricting foreign investments and ownership in U.S. land, especially agricultural land, emerged or reemerged in the majority of states. This reemerging interest in restricting foreign investments in U.S. land is partly due to the purchase of land near U.S. Air Force bases in Texas and North Dakota by two Chinese-owned companies.
Currently, there are approximately twenty-four states that specifically limit or restrict foreign individuals, foreign business entities, and/or foreign governments from acquiring or owning an interest in farmland within their state, which is up from fourteen states in 2022. During the 2023 legislative session, ten states enacted a new law restricting certain foreign investments in land located within their state, and two states—North Dakota and Oklahoma—amended their laws that prohibit certain foreign purchases of land. Although twenty-four states now have some type of restriction, state laws vary widely, and some states restrict only certain purchases. For example, the majority of foreign ownership laws enacted in 2023 seek to restrict investments from specific countries, particularly China, Iran, North Korea, and Russia.
Aside from state action, Congress is also considering several proposals that seek to establish a national restriction on certain foreign investments in U.S. land. Specifically, the Senate recently passed an amendment to its version of the bicameral National Defense Authorization Act (“NDAA”) which seeks to prevent certain investments in U.S. agricultural businesses and land by China, Iran, North Korea, and Russia. The Senate version of NDAA is currently being reconciled with the House version of the bill.
Trade is very important to production agriculture in the United States. Over the last 12 years, 2011 to 2022, agricultural exports have accounted for over one-third of US gross farm income, 33.9 percent (USDA ERS and FAS). US agricultural exports have experienced a 7-year expansion run from 2015 to 2022, going from $137.2 billion to $195.9 billion. This increase of US agricultural exports was accentuated during the Covid-19 pandemic years as total exports increased by 38.8 percent in value and 8.1 percent in volume between 2019 and 2022 (Tables 1 and 2). The rather large difference between value and volume increases shows that there was a price increase in most of the commodities which can be attributed partially to an increase in quantity demanded of US agricultural products, but also to inflation experienced worldwide as well as the Russia-Ukraine war. The largest increase in value of the top five US agricultural exports from 2019 to 2022 are oilseeds and products, grain and feeds, and dairy and products with 65.2, 64.5, and 61.4 percent increases, respectively. Moreover, in terms of volume, grains and feeds, poultry and products, and oilseeds and products have the largest increase with 12.7, 6.6, and 4.6 percent respectively.
Figure 1. Value of US Agricultural Exports, Billion Dollars
Table 1. Value of U.S. Agricultural Exports, Thousand Dollars
Table 2. Volume of U.S. Agricultural Exports, Metric Tons
The latest USDA Outlook for U.S. Agricultural Trade report (August 2023) forecasted exports for 2023 at $177.5 billion, down $3.5 billion from the May forecast largely due to decreases in corn, wheat and tree nuts exports. The year-over-year exports from January to July show an overall decrease of 11.5 percent in value and 17.7 percent decrease in volume (Tables 1 and 2). In both, value and volume, the largest decreases are in grains and feeds with 22.6 and 27.5 percent, respectively. The main reason for this decline is competition from Brazil, EU, and Russia. Moreover, forecasted exports for 2024 are expected to be $172 billion, $5.5 billion below 2023, and $23.9 billion below 2022 exports.
A goal of many pursuing the American dream is home ownership. Similarly, the goal of a farmer is often to become a landowner. Like buying a home, the financial decision to purchase farmland is clouded by emotional, social, and familial influences. How can a farmer clearly evaluate their financial position to purchase farmland when these influences are at play? The answer is, going back to the basics – analyzing the numbers. Most farmers will seek financing to complete a farmland purchase, and it’s important to have an idea of your purchasing position before you approach lenders. There are two important angles when it comes to considering cash requirements for a land purchase:
Cash needed immediately for a down payment (and/or land and building improvements)
Recurring annual cash flow needed to make the farm loan payment.
Depending on the size of the farm, a high purchase price per acre will result in a substantial chunk of cash needed for a down payment. In some instances, buildings in disrepair, nutrient depleted soil, and/or a neglected water mitigation (or irrigation) system may create additional upfront cash requirements. Also remember to plan for soft costs like surveying, appraising, and bank fees that will increase either your down payment or your total loan amount.
Healthy working capital and a current ratio of 1.5 or greater are good indicators of cash availability (liquidity), and it is important to consider the status of your remaining liquidity after making a down payment. Many lenders will require a 15-20% down payment on quality farmland, and subpar land may require an even larger down payment. There are programs that exist for beginning farmers that require as low as a 5% down payment.
If you don’t have the cash available, you may consider accessing equity in other assets. Keep in mind, the smaller the down payment, the larger the loan payment each year. Many lenders may offer a lower interest rate for a larger down payment upfront.
As the source of the down payment is being solidified, a concurring step should be calculating the loan payment amount and how it will impact your future cash flow. This can be intimidating if you aren’t a numbers person, but it’s powerful information to know before you begin meeting with lenders. A simple Google search will yield multiple tools to calculate a loan payment. Specifically, limiting the search to a “farmland” loan calculator will result in a semi-annual or annual payment option, the most common payment structures for farmland loans. Understanding the payment options and financing structure will position the farmer to better negotiate terms, and plan for the impact on cash flow.
Lenders want to see that the operation can pay back the money loaned to the farm. They will often use a ratio called a Debt Service Coverage Ratio (DSCR) as one tool to determine the repayment capacity of the farm. This ratio compares the Net Operating Income, or cash you have available to make your debt payments, to existing debt payments and the new loan payment. Learning how to calculate the DSCR yourself can be a great way to determine your purchase power.
An example DSCR calculation is below:
Net Operating Income
$390,000
Current Debt Payments
$185,000
New Farm Payment
$55,000
Total Debt Payments
$240,000
$390,000 / $240,000 = 1.67 DSCR
There isn’t a firm financial standard for DSCR. A DSCR of 2.0 or more is considered very strong, and a DSCR of less than 1.0 means there isn’t enough income to make debt payments. Many lenders set a threshold of 1.2 or 1.25 as a minimum requirement. This is one of the most basic calculations to determine repayment capacity, but it isn’t perfect. It can vary widely from year to year, as it starts with Net Farm Income – which we know is volatile! For a more thorough understanding, also calculate the five-year average of net operating income and debt payments.
If you’re buying a farm that you are paying rent for, recognize that your net farm income will increase by that rent amount, and you’ll have it available to apply towards the debt payment. If the farm to be purchased is new ground, include a projection of crop or livestock revenue & expenses that the farm will generate in your calculation. There needs to be enough money left after your debt payments to fund any family living requirements and satisfy your tax liabilities, so don’t forget to include those figures – and be realistic about the family living number!
Even if you aren’t actively looking to purchase a farm, understanding your debt capacity is important in managing your farming operation. This process can be applied to other purchases as well, like building grain bins or purchasing equipment. An unexpected death or life change in your area may present an opportunity to purchase land, equipment, or buildings. If you know your financial position, you can evaluate clearly whether the deal is a good one, outside of the emotions involved. Is the land good quality? Is the equipment in good shape? Is it truly a good financial decision for my farming operation? Knowing that you can afford a purchase creates room for you to consider the other details. As always, talking with trusted professionals like your accountant, financial advisor, tax preparer, and banker can help you understand your financial position.
