What is Better Financially for College Grads, Rural or Urban Living

Two articles came across my desk last week that made me think about where college grads might choose to live and work. There are several factors that make up that decision and we will look at the financial one.The first article was from USDA discussing which location, rural or urban, workers are paid higher wages and the other from Cornell discusses farm worker living costs and wages. So where is it better financially for young people to work?

I bring up finances because some times people forget that aspect of the decision to take a job. One person I worked with learned that lesson the hard way. He had a job and owned a house in LaCrosse WI which is on the Mississippi River. He was offered and accepted a job in his same field in Chicago with a good pay raise. But he forgot to check into living costs in Chicago first. He quickly found out that housing costs quickly ate up all and more of his housing cost living in Chicago and that he could not afford the same size and kind of house in Chicago as LaCrosse. He wound up worse off moving to the big city. Grout and Ifft found something similar. Grout and Ifft looked at several of the 48 states comparing average farm worker wage to cost of living. Crop worker wages rose in nearly all of the states studied from $1-2 per hour from 2012 to 2016. In California, wages rose by about $2 per hour but was below the rural cost of living all of 2012-2016. Washington state had the opposite situation in place where average wage was as much as about $4 per hour above the rural living cost in 2012. In Florida and Texas living costs and wages for farm workers were nearly equal for the same time period. For these states, crop workers would be better off financially moving to Washington state. In the analysis, other states that paid more than cost of living included Idaho, Utah, Wisconsin and Michigan. But the Grout and Ifft analysis only looked at farm workers and not ag professionals.

The USDA analysis showed 2015 median earnings for those without a high school diploma rural or urban employees earn nearly the same amount. Urban high school diploma holders earned $2088 more than rural workers and urban bachelor’s degree holders earned $10,534 more than rural workers. Urban graduate degree holders earned $18,150 more than rural counterparts.

Depending on where one lives in an urban area they might be better or worse off financially than rural people. One web site, Sperlings Best Places (http://www.bestplaces.net/) allows one to compare cost of living and salaries from one city to another. Using median bachelor’s degree salaries from the USDA study, $41030, comparing McCook to Lincoln, NE a person would need to earn $2955 more in Lincoln for the same living costs. Doing the same for Denver is much worse. A salary would have to be $19,729 more to have the same living standards in Denver. The biggest difference in both cases is the cost of housing. Transportation, food and health care costs are a little higher in McCook than Denver but housing is almost 3X higher in Denver.

Of course there are certain advantages to living in more urban areas, restaurants, museums, concerts skiing, mountains, but McCook is only 5 hours away from all of that.And there are advantages to living in McCook, a lot less traffic, family, free concerts, easy access to hunting areas, better schools often as wells as less crime. Those offered a job in an urban area should fully consider the costs and benefits of that job. If the urban job is chosen, negotiate for a salary high enough that it pays for the higher costs of living in urban locations.


Mare, Alexander, Urban Areas Offer higher Earnings for Workers With More Education, https://www.ers.usda.gov/amber-waves/2017/july/urban-areas-offer-higher-earnings-for-workers-with-more-education/ July 2017, accessed 7 August 2017.

Grout, T. and J. Ifft. “Higher Wages Don’t Always Mean a Higher Standard of Living: Rural Cost-of-Living and Farmworker Wages.” farmdoc daily (7):136, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 27, 2017.

Sperlings Best Places, Cost of Living, http://www.bestplaces.net/cost-of-living/, Accessed 7 Aug, 2017.

Farm Lending Conditions Update

Last week two Kansas City Federal Reserve economists published an update to current, Q2 2017, agricultural lending conditions for commercial banks. Although they discuss current conditions many of the charts included in their article have year over year comparisons for several factors in agricultural lending. This blog post will review some of those factors.

First half 2017 All Non-Real Estate farm loans were 7% lower than same time 2016. But that same category began to decline in 2014. All farm debt made year over year loan increases have been dropping for about 2 years. This pattern has been true for both real estate and non-real estate loans but the non-real estate loans dropped at a steeper rate. Non-real estate loans have a negative year over year change the last few quarters meaning borrowers are likely working to reduce their debt load. (Chart 7)



However delinquency rates started to rise in 2015 back to over 2%. The last time delinquency rates were above 2% was 2013. Still delinquency rates are not at the 11-year high of 4%. The rise in delinquency rates also fits with the lower repayment rate across six Federal Reserve districts. So although farmers have reduced debt yer over year they are still struggling to stay current. (Chart 10) Chart 10 also shows higher demand for loans giving additional evidence that farm financial conditions are tight.


Source: Kauffman and Clark, Farm Lending Steady, Risks Remain, 14 July 2017, https://www.kansascityfed.org/research/indicatorsdata/agfinancedatabook/articles/2017/07-14-2017/ag-finance-dbk-07-14-2017

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.

Farm Income Likely to Drop in 2016

USDA recently projected 2016 Net Farm Income (NFI) would be near $54.8 billion or 2.8% less than 2015. This would be the third consecutive year of income decline. this follows 2013’s record income following a year of widespread US drought. High livestock prices and hog and poultry disease problems have helped hold up NFI since 2013 but the production problems are easing. 2016 Farm Bill Price Loss Contract (PLC) payments are projected to increase 31% to $13.9 billion compared to 2015. That means just over 25% of the 2016 NFI will come from government payments. 2015 Farm Bill program payments accounted for 18.8% of NFI.

Agricultural economists at Texas A&M and the University of Missouri-Columbia have pointed to a couple of financial ratios that indicate very strong balance sheets for farms and ranches. There has been an uptick in the financial stress of farm and ranches but are still at very low rates. Factors pointing to prolonged risk though are commodity over-supplies in nearly every sector. Ethanol growth has ended unless a new blend mandate is approved and Chinese economic growth to just 4% or so, but that is nearly 3X the current US growth however. This lack of growth reduces prospects for increased consumption of agricultural commodities along with higher prices. So over the next few years, absent weather or world political problems, supplies of these commodities will likely decline to more nearly align with demand. Poultry and dairy are likely to make supply adjustments quickly. But grains, oilseeds and beef production are burdened by increased supplies during the next couple of years.

USDA did point out that expenses have declined and are likely to decline for the second consecutive year since 1986-7. “A drop in overall production expenses is forecast for 2016, cushioning the decline in cash receipts. Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock/poultry purchases, are expected down. Also, expenses for fuels and oils are forecast down by 14.5 percent in 2016.  If realized, the expenses across each of these three categories will have fallen for 3 straight years. In contrast, hired labor costs and interest expenses are forecast to increase by $1.5 billion (5 percent) and $1.3 billion (6.8 percent), respectively, over 2015.” Source: USDA

To Store or Not to Store

Post-harvest marketing plans can be influenced by many factors. One of these is the cost of storing grain until some future date. There are several reasons to store grain including:
• Storage allows marketing plan flexibility
• Capture strengthening basics
• Capture seasonal price increases
• Manage income tax liability

There are two cost components of grain storage: fixed and variable costs. For commercial storage, people storing grain will pay a price which will include both costs, but farmer owned storage will only bear variable as cash costs when grain is stored. The aspects of thee costs include:
• Storage facility ownership cost
• Interest (opportunity cost) on owned grain
• Extra grain shrink
• Additional grain quality deterioration
• Added drying cost for long term storage

Let’s talk about storage facility ownership costs first. If grain is stored at a commercial facility, it will charge for the ownership of bins etc. On farm grain storage owners will not explicitly pay a cost for ownership of storage. Farmer owned storage may have debt financing but that doesn’t influence the annual decision to store grain. These ownership costs include depreciation, interest, repairs, taxes, and insurance (DIRTI5). In the long run these costs should be recaptured by using those grain bins to enhance grain prices.

The next set of costs, variable, are the ones that must be captured through enhanced market prices in order to make storage pay. What are the variable costs? Any repairs due to usage, broken belts, augers, drying fuel, electricity, labor and management of the grain in storage. Grain held in long term storage might be dried down to 13% moisture which adds additional drying expense and the loss of bushels to sell. Long-term storage also means the grain will have to be conditioned, aeration, for storage during winter and then again during spring to keep it in shape for sale in summer. But the largest cost of storing grain is interest on the grain while in storage. This is an opportunity cost. The grain money from grain sold could pay debts, farm and personal, be invested in a money making activity or used for family living.

Calculating all of those costs takes time but has been made much easier with a spreadsheet (http://www.agmanager.info/marketing/decisions/On-farm%20storage.xls). This spreadsheet presents costs as fixed, variable and total. When analyzing the storage decision, the first costs to recapture are variable costs. If monthly variable storage costs are 3 cent per bushel but the market is only offering 2 cents, the market isn’t paying enough to store. There may be occasions where the market pays 4 cents per bushel until April for instance but 2 cent after. In the latter situation a grain owner might want to store till April to capture that added grain price.

Storing grain can enhance grain revenue but the costs of storing grain must be considered when making the storage decision. There will be situations when grain storage costs more than the grain market would pay to store. Knowing those costs will allow you to profitably decide when to store and for how long. Or when not to store.

Beef Expansion Likely to Slow

Chris Hurt, Purdue University Ag Economist, recently discussed his outlook for beef profits and prices, noting that the US beef herd expansion has been very rapid. Record high beef cattle prices during 2014 and the first half of 2015 encouraged beef herd owners to hold heifers back and build cow numbers. The January 1, 2016 USDA Cattle Report showed that beef cow numbers are up 4% and cow and calf numbers up 3% year over year. The report also showed that 3% more heifers were held back to calve leading to higher expected calvings, 6%, compared to one year ago.

Feeder cattle supplies are up 4% leading to larger slaughter cattle supplies in late 2016 and 2017, probably pushing beef prices and feeder calf prices down further. 2015 beef supplies were larger than anticipated at years beginning. USDA expected that cattle available for slaughter would be down 5% but beef was actually up 1%. Where did the added beef come from? Heavier calves and higher beef imports. Beef production worldwide is growing. Beef competitors, pork and poultry, are expanding also. This expansion leads to likely 2016 finished cattle prices averaging around $125 per cwt. Feeder calf prices are now near $195 per cwt. for 550 pound calves leaving little if any profits for beef cow owners. That means beef herd expansion is likely to slow soon. It also means there will be pressure for herd owners to reduce costs. Feed prices have declined in the last several months, but at least in some areas of Nebraska grazing costs are still high compared to calf prices.

Now is the time for 2016 predictions.

This is the time of year for prognosticating. Trying to see into the future is a common feature of business and human beings. Let’s look at a couple of 2016 agricultural industry outlooks.

Wells Fargo economist Michael Swanson forecasts US grain and livestock sectors will have a “challenging environment.” A strong US dollar(USD) is contributing to that challenge. A chart Swanson uses in his forecast shows that both China and the rest of the world have lower net trade balances with the US than 2011-2014. Russia and the Ukraine currency devaluations have grain importing nations sourcing their needs from them rather than the US. Swanson sees the US beef herd sector continuing its rebuilding but with lower 2016 prices. The strong USD will pressure the chicken and pork sectors who have foreign competitors and are much more reliant on foreign exports than beef. So far, about 11% of US dairy production went to exports during 2015 but that is down from 13% in 2014. European union and New Zealand dairy sector competition will pressure US dairy prices. the EU may also become a consistent competitor now that supply control has been eliminated.

Much lower crude oil prices have many positives and negatives. Lower expenses for crop producers should come from products that use oil and natural gas as precursors. But corn prices will follow low oil prices due to ethanol’s correlation to crude oil. Lower crude oil prices will have both positive and negative effects in the broader US economy as well. These will play out in the US ag sector in uncertain ways. If the positive effects increase US GDP, they will likely strengthen demand and US farm income.

All of the foregoing leads Rabobank forecasters to increase price variability in their most recent 2016 outlook. However Rabobank’s price outlook appears to be more favorable for hog, sugar, corn and beef than Wells Fargo’s outlook. Rabobank sees price pressure in the soybean complex and wheat. Rabobank writes about increased risk in all sectors which is related to reduced oil prices, stronger USD and greater weather risk in the US.