How Much is Standing Hay Worth?

Very soon this question will pop up and will ask about selling a full year of production or a specific cutting. Getting a handle on how much either is worth is often just guess work. There is a better way.

First we need to set a price for hay after harvest and then subtract the cost of harvest to get the value of hay standing in the field. At this point someone asks “where do I get those prices and costs?” Let’s get the hay price first. USDA regularly reports hay prices by location, type and quality. For instance, the Nebraska 11 May 17 hay report shows Supreme quality alfalfa, large square bales, sold for $150-155 per ton. Prices for other hay types and qualities are listed in the report. Some reports will include cane hay and cornstalks. All of the quality parameters for alfalfa and grass hay are listed in the report. The web site is: https://www.ams.usda.gov/market-news/hay-reports.

The USDA prices are for harvested hay so we need to subtract harvest costs from the reported hay prices. If a farmer or rancher has calculated their own hay harvest costs, that cost would be subtracted from the USDA hay price. If the farmer or rancher wants to calculate their cost of hay harvest, an available spreadsheet from KSU, https://www.agmanager.info/ksu-machinery-costs, can be used to calculate a large number of machinery costs including hay harvest. Custom rates can be used as a proxy for hay harvest costs as well. Nebraska custom rates are published at: http://agecon.unl.edu/cornhusker-economics/2016/custom-rates. Other states publish custom rates as well.

So now we know what to pay for a ton of standing alfalfa (hay price-harvest cost). But we don’t know how many tons are going to be harvested and payed for. The best way would be to weigh the hay harvested. Sometimes that isn’t possible so a sample of the hay harvested can be weighed and then the total calculated. Another way that has been investigated is to count stems per square foot. A recent study in North Dakota showed that system has a 0.33 to 0.97 correlation to measured yield. Two of the locations had a high correlation and a third had a very low correlation. Thus stem counts may work sometimes. A third way is to scissor cut several random 1 square foot areas to get an average yield and then multiply by 43,560 to get a yield per acre. Don’t forget to correct for moisture though. And cut at the same height as mowing occurs.

Another question sometimes asked regards “how much should I pay for a specific cutting?” If weight is used for payment of the standing hay, then a buyer can pay only for what they harvest. Another way might be to use a percentage of a cash rental rate to pay for a hay cutting. In a 3-cut system for alfalfa the first cutting yields 40% of total annual yield and the subsequent are 30% each. A 4-cut system has 35% of the annual yield in the first cut, 25% in the second cut and 20% for the next cuttings. Thus if a buyer wants just the first cutting of a 3-cut alfalfa field then multiplying a cash rental rate by .4 is way to calculate a price.

Of course the amounts calculated above are starting points in a negotiation. A fair price is the one that two parties agree upon.

Care of Storm Damaged Trees

Recent storms have left some trees damaged and others that require maintenance to survive. This column will provide guidelines on how to care for these trees.
Evaluation of the damage is the first step in care of trees after storm damage. Do not try to take care of tree limbs on or around power line. Large branches that are partially attached and overhanging buildings or areas humans use should be removed first. Clean up debris on the ground before tree repair starts so that personnel safety is increased. Look for hidden damage so that safety hazards are considered before repair work starts.
Remove damaged branches back to the first undamaged branch. Prune back to the branch collar; do not flush cut to the trunk or another branch. In addition, make a pruning cut that produces a smaller wound. When pruning lager branches, use a three-cut method to safely cut the branch. When using chainsaws, use all the proper safety equipment. There is no need to use tree wound dressings or some type of wound paint. These dressings can actually reduce the natural defense and repair methods of a tree. Wound paints may actually be food sources for microorganisms.
All trees that have had major structural damage will need to be removed. This damage does several things that reduce the viability of the tree. It can reduce leaf area needed for photosynthesis; provide entry points for disease and pests. Do not top trees to remove damage. A flush of branches will sprout creating a “witches broom” that is weak structurally. Trees that have had 30% or more of their bark removed during limb breakage probably will not survive. The root connection has been severed due to this bark damage. These trees also should be removed. However, pruning out damaged bark areas will help trees heal. Prune to shape the bark removal area as an elongated football. Portions of a tree with bark damage may die back however.
For the first year or so after storm damage, a tree may produce many unbalanced branches. Remove the weaker or undesirable limbs as they appear. The storm damage and pruning can cause a severe “shock” to the tree. Proper fertilization and tree watering will help counteract the shock. Continued pruning and fertilization will help maintain balance, improve the tree’s health, and help restore its beauty.
When replacing trees, consider what types can be more susceptible to storm damage. Some species less susceptible include Bur oak, Kentucky coffeetree, Little leaf linden and black walnut. Trees that tend to be more susceptible to damage include elms, Silver maple, Honeylocust and Marshall’s green ash. Wait to do developmental pruning of newly planted trees until two to three years after planting. Unless there are multiple leaders and basal sprouts.

Do You Know Your Costs

Farm and Ranch income continues to be a concern for many involved in agriculture. Some indicators I have observed include recently closed machinery dealer locations, landowner concerns for rental rates and land taxes as well as 2017 crop production costs projections. The last, estimated crop production costs, are not your costs. The same is true of cow-calf costs as well. To improve cost control, farmers and ranchers must know what it costs to produce calves or grains. Another very important use of cost of production calculation is to manage crop and livestock marketing. UNL has both crop and beef production budgets which users can download. These are located at:

http://cropwatch.unl.edu/budgets

http://agecon.unl.edu/publications/cattle-budgets

One way to use these budgets is to calculate two cost of production, full and cash flow. A cash flow cost of production (COP) is useful when planning or marketing crops. For instance, what if a local grain buyer offered a minimum price contract for corn at $2.99 per bushel. Is that a price a farmer can live with? If the cash Flow COP is calculated to be $2.45/bushel, the producer knows that with the $2.99 minimum price he or she will be able to pay the bills and then some. But if the cash flow COP is $3.07/bushel some costs need to be cut or higher yields obtained at the same total cost. Or maybe both. A cash flow COP production includes all of the out of pocket production costs, the portion of family living the farm or ranch must pay, scheduled debt payments and all taxes.

Full cost of production is also an important cost to know. In the long run, say more than 5 years, all costs must be recaptured to stay in business. These costs include all cash costs plus investment in machinery, land, breeding livestock and unpaid labor. The UNL crop and beef systems budgets calculate both of these costs. Use these budgets to manage your own operation.

Federal Reserve Releases Ag Economy Observations

18 January the Federal reserve released its January 2017 Beige Book which included commentary on current US agricultural industry conditions. Each Federal Reserve district included comments about their district’s ag industry. Some of those comments are below.

Conditions were reported as somewhat variable in the Richmond district depending on whether hurricane Matthew hit farming areas. Conditions across the southeastern US were difficult in many areas due to a growing season drought. Poor pasture conditions caused stress for livestock producers. Some were feeding corn that might otherwise be sold. Rains did occur that brought relief late last year for the southeastern US. The Chicago district reported very good yields and some modest decline in input costs. The livestock sector saw increased prices. Much the same was reported in the Kansas City district as well as Minneapolis. These districts reported “weaker loan repayment rates than in prior years”. Cash flow is reported to be tighter and income lower is compared to prior years. Winter wheat plantings were reported to be 95% complete but little snow was present as of 1 Jan 17 for insulation of the crop. Record yields were reported in the Dallas district. Cotton yields were very good which pushed prices below or near breakeven. But cotton economics are better than wheat economics. In the San Francisco district, dairy economics have improved but investment in dairy is weak due to CA milk prices versus the Midwest milk prices.

More comments can be read from the news report below.

https://farmpolicynews.illinois.edu/2017/01/federal-reserve-observations-ag-economy-january-17/

Cash Flow Planning for 2017

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Planning is a common activity for farm and ranch managers and operators. It includes crop rotations, when to wean, when to sell crops or calves and when to take an LDP. All of those activities inevitably lead to cash and income. “Cash Flow Statements”can be used to plan an agricultural business’ need for borrowing, when to make payments for various expenses or when to make crop and calf sales.

A statement of cash flows summarizes cash inflows and outflows for a specific time period. It can be used to project, pro forma, future cash flows or to summarize past cash flows. Cash inflows include product sales or sales of capital items but also borrowing and investing. Cash outflows include loan payments, supplier payments, machinery lease payments, land rent payments, taxes and family living draw. The size of all these matter but so do the timing of the cash flows. A proforma cash flow statement allows the farm and ranch manager to set up lines of credit, plan crop sales, plan vacations, project tax payments and even which crops to plant. The statement of cash flows is usually done either quarterly or monthly.

Proforma cash flows can be prepared either by:

  1. use last years actual cash flows to project the coming year’s cash flows.
  2. project the coming year’s cash flows from each farm enterprise with details about probable prices, yields, expenses, family living draw, property taxes, income and social security taxes.

The first method is quicker but unless it is adjusted for crop price and yield variation, changes in input costs, changes to debt servicing, likely changes to tax liability and changes to family living it may be too far off the mark. Many farmers already calculate costs and returns for their crops or calves. These are called enterprise budgets and can be used to build a cash flow using the second method. This second method also allows the user to mix enterprises as needed to increase profitability and increase positive cash flow.

Many tools are available to help with cash flow development. Nebraska Extension will soon publish the “2017 Crop Budgets” at http://cropwatch.unl.edu/budgets. Right now the 2016 budgets are up. Iowa State University Extension has an article further explaining cash flow budgeting and two Excel spreadsheets to help with the process at http://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html. Oklahoma State University has a paper form for cash flow budgeting, http://agecon.okstate.edu/annie/files/F-751%20Cash%20Flow.pdf. The University of Minnesota has an online workshop about cash flow at http://ifsam.cffm.umn.edu/StatementCashFlows/Default.aspx?SectionID=5 to help you further understand cash flow planning. Nebraska Extension also has a web video that helps explain Cash Flow Planning at https://vimeo.com/188871642.

 

Communicating with Lenders: Suggestions for Farmers & Ranchers

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The last few years have been tough for many farmers, feeders and ranchers due to a cost-price squeeze. I reviewed the 2015 Nebraska Farm Business INC financial standards measures. Average 2015 Net Farm Income was $51,293 which doesn’t sound terrible until you get deeper into the numbers. The farms are broken into 10 equal groups, deciles, ranked by Net Farm Income. The bottom four deciles of farms were unprofitable with the lowest decile averaging -$109,508 net farm income. At the beginning of 2016, the bottom three deciles had negative working capital with the lowest decile averaging -$244,880. The numbers above and the current cost-price squeeze will probably worsen the financial position of additional farms and ranches. Fortunately equity has increased for many farms and ranches and that can be used to shore up current lending needs. Communicating with lenders  will be an important activity over the next months. Here are suggestions for that conversation’s success.

  • Always be upfront about the exact situation, sooner rather than later. Be frank about what your financials are but don’t talk with the lender constantly.
  • Make sure that all your financial documents are accurate. Include all machinery leases or outside lending listed on the correct financial documents. Consider producing a farm and personal balance sheet including credit cards on the balance sheet.
  • Do your own cash flow projections for 2017 now. A cash flow projections allows you to discuss your needs with your lender. The process of making a cash flow projection can be very illuminating to operators. The cash flow projection can guide marketing plans as well. Update the cash flow periodically during the growing season and share the update with your lender.
  • Explore marketing plans, write one and implement it. Again marketing plans should be flexible as new information comes forward. Again share your marketing plan with your lender.

The foregoing suggestions show a borrower that is proactive and forward-looking which is a very positive asset that lenders want to see. Be proactive!

October Crop Production Report

The October 12 Crop Production report had a negative reaction in the grains market just after its release but the markets have rebounded since. Let’s take a deeper look at the numbers that what was covered in the initial news reports.

Planted corn acreage was updated in 10 objective yield states (IL, IA, KS, MN, NE, OH, SD, WI). The changes increased acreage by 0.3% from the previous report and +7.5% from last year. Corn yield was lowered by 1 bu/acre nationally or -0.6%. Total productions was lowered 0.2% from the previous report, however corn production is still projected at +10.7% from last year. total production is projected at 15.1 billion bushels which would be 900 million bushels higher than the largest corn crop in 2014. Seven new record yields are projected, including Iowa and Illinois where about half of the US corn crop is produced. The US yield, 173.4 bu/ acre would be a record as well Nebraska’s corn yield is projected to be  181 bu/acre which is 3 bu lower than the previous report.

Soybean acreage was updated as well in the October WASDE report but the change was less than +0.1% compared to September’s report. The expected soybean acreage is 1.6% higher than last year. The big change was in projected yield, 1.6% higher than the previous report and 7.1% more than last year. The 2016 US soybean yield is projected at 51.4bu/acre and would be a record. The higher yield comes from much better pod set than in other years.All of this yields to a record high total soybean production of 4.27 billion bu, 314 million bu more than the highest production.Eleven states are expected to have record yields including Nebraska, 61, bu/acre.