Organic crop demand has continued to increase over the last two decades. Some crop producers have transitioned at least part of their land to organic production. Those crop producers have reported higher net returns. (Table 2) One of the issues though is the transition period that organic growers must go through. This transition period leads to lower net returns than either organic or conventional production due to the lower yields during the transition period which are sold at conventional prices. Long run organic returns are important to recoup reduced returns during the transition period.
Recent articles using real farm data were published at the University of IL Farmdoc DAILY web site. The data comes from the University of Minnesota’s Center for Farm Financial Management (CFFM) FINBIN web site. FINBIN is an aggregation of several state’s farm financial data, which is searchable and sortable based on the needs of the analysis. The authors of the recent articles compared corn/soybean and corn/soybean/wheat rotations of conventional, transition and fully certified organic crop production. Enterprise budgets were produced for all three crops and all three production methodologies. Transition yields would have to be about 17% lower for the transition and organic years to breakeven with conventional cropping. Organic prices would need to be 17.8% lower for the conventional cropping system to be equal in net returns. (Table 3) But organic crop producers show a much wider range of net returns, in the FINBIN data, than do conventional producers. Likely this wider range is due to management that conventional producers don’t experience. (See Figures 1 and 2 below)
Organic corn producers in all cases had higher net returns than One aspect of the variation of conventional versus organic soybeans is that the lowest 20% of organic soybeans do not perform better than conventional soybean production. (Figure 3) Some 70% of conventional soybean producers have positive net returns while 80% of organic producers have positive net returns.
USDA’s Economic Research Service (ERS) is forecasting 2020 net farm income to rise by $19 billion from 2019. Net farm cash income is projected to rise by $4.9 billion. If these projections are accurate, this would put both measures above their 2000-2019 averages by small amounts.
Sector cash receipts projections were also released by ERS. All of the sector cash receipts are projected to decline from 2019 except fruits and vegetables.
So, if cash receipts are declining where did the higher incomes come from? Farm Program and ad hoc payments to farmers will rise from 2019 by near 100%. The red section of the chart below became the largest portion of farm program payments in 2020 which includes Payments from the Corona Food Assistance Program and the Paycheck Protection Program.
Another part of net income is expense. ERS projects the change of expenses by category. The categories projected to increase account for 69% of farm and ranch expenses while 31% of farm and ranch expenses are projected to decline. The net result is that 2020 farm and ranch expenses are projected to decline by 1.3% or $4.6 billion.
COVID-19 has continued to pressure financially farmers and ranchers across the 10th Federal Reserve District. Nebraska is part of the 10th District with its office in Kansas City.
Weak market conditions early in 2020 led to declining farm income and liquidity during Q2 of 2020. 10th District farm income expectations declined at the fastest rate since 2016. Note in Chart 1 that farm income expectations for 2020 are lowest in Nebraska.
Chart 2 indicates that lenders in Nebraska expect slight improvement in borrower liquidity, current ratios. That is only because lenders do not expect the ratios will not go as low as earlier anticipated. All of the states served by the 10th District show erosion in liquidity.
Farm loan repayment rates are expected to decline further. Drought in much of the 10th District may be behind some of the decline, Chart 6.
Farmland values continued to rise slightly which supports the solvency of 10th District farms and ranches but most lenders expect those values to decline.
On average, 10th District lenders expect cash rent rates to decline. But Oklahoma expects them to rise and the Mountain States, CO, WY and northern NM, to remain the same.
A topic that has been on many crop farmers minds is the derecho that took place in much of Iowa on 10 August. Steve Johnson, Iowa State University Farm Management Field Specialist, recently reviewed what is known and unknown about the damage done by the derecho. Initial reports indicated 10 million acres damaged in 57 Iowa counties. USDA’s Risk Management Agency estimated 8.2 million acres of corn and 5.6 million acres of soybeans were damaged. Later satellite imagery used by the Iowa Department of Agriculture estimated that 36 counties had serious damage on 3.57 million acres of corn and 2.5 million acres of soybeans. Initial estimates indicate a possible 150 million bushel corn production decline. Heat and drought in part of the area have added to the probable crop reduction.
Farmers now have more price uncertainty than we thought likely 3 weeks ago. Some of the damaged acres will produce some crop but no one knows how much. Some of the pictures of the Iowa derecho damage lead one to suspect some cornfields will only be able to be harvested in one direction. Some die back is evident from the satellite images released. Moreover, there is a question about whether soybeans will be more or less resilient to the derecho damage that occurred. Another issue though is the loss of millions of bushels of crop storage. Iowa coops estimate replacement will cost $300 million.
One piece of information we do have is corn crop ratings. These are lower in Iowa, Chart 1, than any year since 2012. But that isn’t the full story as Chart 2 shows. US corn crop ratings are still above 2017 and 2019. It may be possible that much of the Iowa damage will be offset by very good yields in Il, NE and MN.
Chart 1: Iowa Corn Crop Ratings.
Chart 2: US Corn Crop Ratings
Additional information will come to the market slowly. Producers should watch for solid information to plan post-harvest sales, which could put Nebraska farmers in a better financial place than we thought at the beginning of August.
One component of commodity prices for corn and soybeans during the growing season is planted acreage. Both NASS and FSA report planted acres. The data for these reports comes from two different sources. NASS surveys all corn and soybean growers in a statically designed procedure. FSA, since 2011, requires all growers enrolled in farm programs to report planted acres of program crops by July 15 of each year. Later planted acre reporting by farmers is done with a late fee. FSA reports planted acres monthly beginning in August. Due to COVID-19 the 2020 late fee has been waived for 30 days. This waiver might influence the 2020 FSA data series reliability until later in the summer. January of each year FSA publishes a final report of planted acres for the commodity program crops administered by the agency.
These different data sets and acreage reports, NASS and FSA, allows for analysis and comparison. U of IL Farmdoc Daily recently published such an analysis from Irwin and Hubbs. Not all crop acres are enrolled in USDA farm commodity programs but their analysis shows that the FSA reports from 2011-2019 account for just over 98% of the NASS final planted acres report. The Irwin and Hubbs analysis for 2020, indicates NASS probably have overestimated total planted acres while FSA reporting has been slow and probably under-reported due to COVID19. This leaves a lot of uncertainty, combined with the Iowa derecho, about total crop production for 2020.
Over time, negative cash flows will put farm and ranch businesses, and the lifestyle of the owners, at serious risk. The following suggestions for additions to cash flow are adapted from Iowa State Extension AgDecsionmaker C3-58, Farm Financial Management: 16 Ways to Stretch Cash Flow, https://www.extension.iastate.edu/agdm/wholefarm/html/c3-58.html, written by William Edwards, retired extension ag economist.
Cancel or re-negotiate leases that are unprofitable. Not all cropland is worth the same as other land. Rental rates should fit the productivity of the land. Flexible cash rents or a crop-share lease can be proposed in place of fixed cash rent.
Use financial reserves. These may include savings, liquid financial assets such as stocks or bonds. However consider the taxes that may accompany selling investments. Review current market prices and your basis to determine capital gains tax owed.
Sell current assets. Current assets include stored crops and market livestock. But don’t simply sell off market livestock that might be discounted as they are not yet finished since the discount could be too steep,
Use credit reserves or unused borrowing capacity. Analyze the decision to use more debt first and have a realistic plan to repay that borrowing.
Refinance debt by sing equity; lengthen repayment terms or refinancing loans with balloon payments. Here again look at the ability, if needed, to refinance the balloon payment
Defer capital asset purchases. Sometimes making a purchase or leasing could reduce costs by lowering repairs that use more cash than the lease or purchase payment. Analyze carefully which strategy best reduces cash flow.
Utilize FSA Guaranteed loans.
Utilize FSA low interest marketing loans. Placing grain under loan can be used to pay off high interest rate loans.
Increase non-farm earnings. Even if one member of the farm family is already working off the farm now, all may need to at least for a time.
Decrease non-farm and family living expenditures. Set and use a family living budget. The budget needs to prioritize expenditures to those necessary such as utilities, food and health insurance. Defer expenditures such as vehicle purchases, vacations, recreation expenses and discretionary expenses.
Sell assets that aren’t earning their keep. Farmland that is consistently unprofitable, machinery that costs more than custom work or assets that no longer have a use on the farm or ranch meet this definition. Consider selling them to raise cash. Funds gained from the sale can be used in more productive manner such as paying down existing debt, or investing into an asset that will provide returns. Capital gains tax will be owned on any business property that is sold for more than its reported basis. For assets sold that were held longer than one year that capital gains tax rate can be 0%, 15%, or 20% depending on your taxable income and filing status.
Joint machinery ownership. This can work but communication and periodic compromise may be necessary for success. Spending time in the beginning creating a written agreement can avoid unnecessary fallouts later on, and periodic reviews of the agreement insure that it remains relevant.
Seek outside investors or lenders such as family. Think through lending to or borrowing from family. It can be a difficult situation for all involved.
Let’s state the obvious, this isn’t a typical year and we all know it. For farmers, it is a survival year. Why and what might be done to make it through to the other side of the COVID-19 pandemic? This article will discuss how to build a marketing strategy to assure that the farm continues to the next crop year.
The prominent factors that are influencing our agricultural economy are also affecting the broader economy, COVID-19 and oil prices. COVID-19 has caused world oil usage to decline starting in late 2019. (Figure 1) The U.S. Energy Information Agency (EIA) projects a decline of over 25% worldwide. World production and consumption of oil stayed mostly in balance until Q4 of 2019 when COVID-19 presented and spread worldwide causing oil consumption to decline. (Figure 2) Many countries prohibited non-essential land travel and air travel dropped to very low levels. This much reduced transportation fuels usage has unbalanced supply and demand and so far, oil production levels have not dropped to reflect reductions in demand. Oil prices likely will not recover until oil stockpiles begin to decline. Since corn usage is approximately 40% to ethanol, transportation and oil are linked to corn demand and price. When the situation will change is unpredictable.
Figure 1. World Oil Usage and Forecast
Figure 2. World Oil Product vs Use
This year’s corn and soybean planting is underway in the Midwest with excellent planting weather across most of the region. Planting for most should be completed on time with minimal interruptions. That leads to the possibility of a good to excellent crop if weather after planting cooperates. If most of the nation meets or exceeds their actual production history (APH), this could place greater downward pressure on grain prices. You may be able to survive an average to high yield year, even with low prices. But what if you have a yield shortfall, and grain prices do not recover? With survival in mind, let’s discuss steps in marketing planning
First, review your input expenses. Cash flow planning earlier this year probably did not consider COVID-19 impacts. Reassess that cash flow and adjust as appropriate. There are two sides to the cash flow expenses and income. Analyze each input expense to ensure you are achieving optimum, not maximum, yields based on current prices and input costs. Be certain to include cash expenses such as property taxes, lease payments, and family living.
After reassessing your input expenses, r review the potential income sources for your farm. The first source of income should be grain sales. Calculate a minimum cash price for each crop for a range of expected yields. These cash flow price should be the lowest price you need to obtain in order to pay for your input expenses. If these cash flow prices are above current or expected market prices, review costs again and make additional cuts without dramatically sacrificing yield.
Another source of income may be off-farm income. The final source of income for your farm may be U.S. government programs. However, payment each farm or ranch may receive is unknown right now. Some of these programs include the Paycheck Protection Program, the Pandemic Unemployment Assistance program and cash payments from the U.S. Department of Agriculture. Farm Bill programs, and crop insurance may also provide additional income if markets remain low.
If no further costs can be reduced or off-farm income can be earned, make an appointment to meet with your lender to discuss what to do if higher pricing opportunities don’t seem likely. In this environment, loan consolidation, especially at low interest rates, can be an appropriate action. Shorter-term loans might be collateralized with real estate to stretch loan payments and improve cash flow.
Next, develop a written plan that includes prices at or above your cash flow price per bushel and date triggers to help you sell throughout the year. Keep yourself accountable by sharing your plan with grain buyers, family and farm partners. The minimum prices and bushels planned to be sold need to bring in as much cash as you will need for the year. Crop producers should not ignore making sales at higher prices when available, but are trying to make sure they recapture all of their cash expenses first.
Finally, implement the marketing plan and do not let emotions derail the plan. Most years prices will follow a pattern where prices peak in June or July and later prices will trend down into harvest. In this economic environment, crop producers will want to maximize income. Trying to guess when the market peaks is difficult and likely to be incorrect, and may have already done so.
This year is shaping up to be a survival year for crop producers. Crop producers need to know at what crop price they will recapture all of the cash they will spend this year. Implementing a marketing plan to ensure that takes place is a survival strategy that can keep the farm business intact with no additional debt for a better year next year.
Generally, unemployment insurance is managed by the several states of the United States (US). With each, rules are different with oversight by the US Department of Labor (DOL). The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act made changes to the unemployment coverage for workers and appropriated funds for the changes. The act tasks the US Department of Labor (DOL) with writing rules for the changes. With that, the DOL has issued an Unemployment Insurance Letter, UL No. 16-20, that begins the rulemaking process. This guidance will then be used by Nebraska to implement the CARES Act. This article reviews what is known now with future rules to clarify eligibility.
Changes to Unemployment Insurance
Several changes were made to unemployment insurance including eligibility, length of coverage and benefits. These include:
An additional $600 weekly in benefits from federal appropriations until no later than 31 July 2020
Increased the length of unemployment benefits to 39 weeks.
Created new temporary program, Pandemic Unemployment Assistance (PUA), which expanded eligibility. Eligible persons include self-employed, those seeking part-time employment and those with insufficient work history for benefits.
The US DOL currently has a permanent Disaster Unemployment Assistance (DUA) program. DUA makes unemployment payments during a disaster to self-employed persons. DUA includes farmers and ranchers in the definition of self-employed. DOL says PUA will be administered like DUA. So, one can expect that farmers will be eligible for PUA.
PUA Rules for Unemployment Assistance
Eligibility for PUA comes when an individual is ineligible or has exhausted regular unemployment benefits. The individual may also have to exhaust the CARES Act’s new Pandemic Emergency Unemployment Compensation (PEUC) program. The Person must be unemployed, fully or partially, unavailable or unable to work due to COVID-19. The US DOL has provided a list of situations where PUA would apply, although the list is not exhaustive. When the CARES Act created PUA, it also created a general category that leaves room for DOL to add situations not yet considered. Criteria that give someone PUA eligibility are:
Individual has COVID-19
Household member has COVID-19
Primary caregiver of household member unable to go to a school or facility closed due to COVID-19
Unable to work due to quarantine
Unable to go to work due to self-quarantine
Became sole income source if household head died due to COVID-19
Place of employment closed due to COVID-19
Quit job due to COVID-19. This criterion means that the individual has or had COVID-19
Scheduled for work but could not reach the work site.
Additional criteria. DOL has authority to create criteria not envisioned above.
The Nebraska Department of Labor (NE DOL) web site (https://dol.nebraska.gov/UIBenefits) has resources explaining unemployment insurance and explains how to apply for it. The web site also explains when to expect benefits to start after application which is usually no more than 21 days but may take longer due a large volume of applications. The NE DOL has received guidance on 2 of the 3 CARES benefits and is creating the programs with the guidance received. Once an individual applies for unemployment insurance, they need not apply for the $600 added benefit since it will automatically be paid. The $600 benefit will be retroactively paid to 29 March 2020. Regular unemployment benefits are not paid for weeks prior to filing, so filing as soon as possible is necessary. Self-employed, presumably farmers and ranchers, will have their applications reviewed for eligibility.
The US beef herd size periodically cycles through expansion and contraction with about a10 year cycle. this cycle is largely which take time to build due to the biology of cattle. The low point of the current beef cycle was 2014, following droughts in 2011 and 2012 along with high feed prices in 2013, led to large cattle herd reductions.
USDA recently released the 1 January Cattle Inventory report which confirmed the 1 July 19 preliminary cattle report. The 1 January report showed a small reduction in the US cattle inventory, down 400,000 head, but replacement numbers indicate this trend will continue. Beef replacements were 2% lower and dairy replacements were 1% lower than last year. USDA also revised downward the 1 July 19 calf crop estimate to follow the lower cow numbers.
These indicators will eventually mean fewer feedlot placements but that is not yet the case. USDA shows on 1 January that cattle on feed were 2% more than 1 year ago. In December 2019 feedlots placed 3% more cattle than 1 year ago and marketed 5 % more animals than 1 year earlier. Total cattle on feed is up 2% but the heifers on feed increased by 4%. This is another indicator that calf numbers will continue to decline and eventually rise. However one analyst suggests that 2020 prices are likely to remain close to 2019’s.
An interesting article recently published by Fabio Mattos, UNL Grain Economist, discussed changes that have happened and are likely to continue in the world’s corn export market as Brazil further develops its corn production. Mattos points out that Brazil now exports 20 million metric tons of maize up from almost no exports 20 years ago. At the same time, Brazil has increased its maize production 4X. A large part of that maize expansion has been in its safrinha or winter crop.
The safrinha crop enters the world export market at the same
time that the US corn crop is exported. This pressures US corn prices and is
pushing the main corn export period to February-April. Brazilian corn is
produced in the country’s center-west and is impacted by poor transportation
infrastructure. Mattos calculated Brazilian landed corn costs to Japan as about
15% more than US corn for 2008-2012. Soybean costs to Japan for the same period
were nearly equal for Brazil and the US soybeans. Brazilian transportation cost
were much higher than US, $41 per metric ton higher. Brazilian transport cost
will likely decline as their infrastructure further develops. Mattos also shows
that Argentina’s export policies makes its soybeans equal in cost to US
soybeans for Japanese importers. If Argentina changes these policy costs, their
exports would cost less and possibly undercut US soybeans.
Mattos discusses a recent soybean production area, Matopiba,
increases in yield and tillable land and possible new competitive pressures on
US grain exports. Matopiba is a region in Northeast Brazil, covering parts of
four states, with much closer access to ocean transport thus lower transport
cost to Asian Markets.
Take some time to read Fabio Mattos article and think about the implications to US corn and soybean export competitiveness if Brazilian yields increase and transport cost decline. Also think about our own transportation infrastructure, the Mississippi River locks and dams, and how it could effect US grain exports, prices and US farm profitability.