University of Kentucky Department of Agricultural Economics
Economic & Policy Update Featured Articles: KY Burley Production Opportunities for 2014 –Will Snell Profitability Up for 2013 Grain Farms -Jerry Pierce Community Health Needs Assessment -Sarah Bowker Beginning Farmers: Where to go for Resources –Lee Meyer Balance Sheets –Tarrah Dunaway
Volume 14, Issue 4
Edited by: Kevin Heidemann, Steve Isaacs, & Will Snell
April 30, 2014
KY Burley Production Opportunities for 2014 Burley, like most of our agricultural enterprises, is produced in a global marketplace. Higher global grain prices in recent years have not only encouraged Kentucky and U.S. farmers to raise more grain, but also corn and soybean producers around the globe. As a result of increasing global supplies, grain prices have predictably declined from the record levels we experienced in 2012.
in 2014. This may not be the case for all companies or all growers, as there is room to eliminate some “fictitious” contract volume that was never going to materialize in recent years. Preliminary signals that 2014 burley production opportunities may be reduced for some growers is certainly disappointing and somewhat surprising; given how aggressive the buying interest has been in recent years in attempting to find more U.S. burley production.
The global burley market has a similar story. World burley production fell to a very low level in 2012, generating higher burley prices around the globe in 2012 and 2013; and, not surprisingly, generated increases in global burley supplies. According to the Universal Leaf Tobacco Company, world burley production has expanded by almost one-third since 2012. But most of this growth has occurred in Africa, where burley output has almost doubled since 2012.
Evidently, lower cost/lower quality burley is finding its way back into cigarette blends in increasing amounts in the midst of overall declining global and domestic burley consumption. Prior to the buyout, U.S. burley exports had swelled to more than 200 million pounds. Despite a period of favorable exchange rates and overall competitive prices during most of the post-buyout period, U.S. burley exports have been cut in half. Ample supplies of lower Africa is primarily a filler (low quality) leaf market, quality/less expensive burley from competing there was a short 2013 U.S. burley crop, and there nations, coupled with lower world burley needs, have was fairly constant South American burley more than offset competitive U.S. burley prices in production. Due to this, expectations were that U.S. global markets since 2004. On a positive note, U.S. burley growers might continue to observe expansion burley exports have remained relatively stable over opportunities in 2014. However, it appears that in the past four years, ranging from 108 to 114 million the midst of overall growing world burley supplies, pounds. However, burley imports into the United coupled with very sluggish domestic demand, some States have been increasing in recent years despite companies have reduced U.S. burley contract volume slumping domestic cigarette production. Since 2010, University of Kentucky Department of Agricultural Economics: Economic & Policy Update View all issues online at http://www2.ca.uky.edu/agecon/index.php?p=209
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U.S. burley imports have averaged 120 million pounds, resulting in a negative U.S. burley trade surplus (on a volume basis). Growing foreign burley supplies, an increasing U.S. dollar relative to the Brazilian real, and constraints on U.S. burley production will likely challenge growth in U.S. burley exports in the near future.
Domestically, cigarette consumption continues to decline (3 to 4% annually) at a rate above historical levels due to higher prices, bans, health issues, and a rapidly emerging issue – the growth of electronic cigarettes, which likely contain limited, if any, nicotine extracted from U.S. leaf.
What does this market environment mean for 2014? While a deteriorating supply/demand balance for burley is a concern, demand for high quality contracted U.S. burley should continue to do well in this environment with prices exceeding $2.00/lb. Lower quality contracted burley will be closely scrutinized and likely graded lower than it has in recent years, prompting lower prices. Tobacco produced outside of a contract remains very vulnerable in this type of marketing environment, unless the current supply/demand balance unexpectedly improves in the coming months. ~ Will Snell
Profitability Up For 2013 Grain Farms Profitability increased while Management Returns decreased for 2013 Kentucky grain farms compared to the average in 2012. Based on preliminary data from 164 grain farms participating in the Kentucky Farm Business Management (KFBM) program, average Net Farm Income (NFI) increased for grain farms to $529,689. If preliminary indications of NFI hold, 2013 will be the highest year on record for KFBM grain farms. Net Farm Income is the value of farm production less total operating expenses and total interest expense, plus net gain or loss on machinery and buildings sold. It is the primary indicator of farm profitability. Costs and returns are reported on the accrual basis; so crop insurance receipts, fast depreciation, and prepaid expenses are assigned to the actual year of production. Preliminary reports indicate that 2013 NFI is $19,056 higher than the 2012 final KFBM average, and $6,742 higher than the previous record set in 2011. Table 1 shows the difference in costs and returns between 2012 KFBM grain farms and preliminary figures for 2013 farms. Gross farm return was up about 4% from 2012 and nearly all of it was due to increased crop returns. Total cost was up about
7% overall. The single largest increase was in land cost, which was up $28.88 per acre, or 18%, over 2012. Land cost includes cash rent, taxes, leasing cost on share rent acres, and an interest charge of 3.75% of the value of fixed assets. Total power and equipment increased $10.08 per acre, which is a 6% increase. This included increases in repairs, machinery hire, and depreciation. Drying increased 185% over the 2012 drought year, adding $5.25 per acre to total cost. Bottom line profitability (NFI) averaged $258.12 per acre, which equals a 5% increase over the 2012 average. Table 1
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Management Returns dropped 11% from $336,913 in 2012 to $299,381 for 2013. Management Returns is the residual of profit less charges for the operator’s unpaid labor and interest on farm capital. It represents the reward to risk and decision making on the operator’s part. Management Returns dropped to an average $146.17 per acre for 2013 compared to $185.12 per acre for 2012. The agronomic data in Table 2 and Table 3 reveal the most obvious differences between the 2013 preliminary grain farms and the 2012 average grain farm corn yields and prices. Corn yields averaged 78 bushels per acre in 2012 with corn prices averaging $6.50 per bushel. Preliminary average corn yield in 2013 is 189 bushels and price is $4.81 per bushel. Yields increased 3 times while prices fell only 26%. Gross value of an acre of corn increased over $400 to $909.09. Gross value per acre also increased for soybeans and wheat due to increased yields. Among tobacco types, gross value per acre fell for all but dark fired tobacco.
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The average 2013 preliminary KFBM grain farm consisted of 2,259 tillable acres; including 1,008 cash rent acres, 602 share lease acres, and 650 owned acres. The 2013 average farm had 911 acres planted to corn, 525 acres to full season soybeans, 658 to double crop beans, and 621 to wheat. The average farm also had 48 acres of burley tobacco, 14 acres of dark air tobacco, and 41 acres of dark fired tobacco. Dark Fired tobacco acres planted increased eight acres over 2012 while other tobacco acres remained about the same. Table 3
Table 2 SELECT AGRONOMIC DATA for AVERAGE FARM 2012 Acres New Crop Gross CROP Planted Yield/Ac Price Value/Ac Corn 1101 78 6.5 507.00 Soybeans 560 45 13.85 623.25 D/C Soybeans 828 44 13.85 609.40 Wheat 780 66 7.35 485.10 Burley Tobacco 50 2297 1.97 4525 Dark Air Tobacco 15 2779 2.22 6169 Dk Fired Tobacco 33 3112 2.35 7313
Higher yields in 2013 seemed to push gross values of grains higher than 2011 as well, resulting in a higher average NFI. The average KFBM grain farm produced 145 bushels of corn per acre in 2011 at an average of $5.63 per bushel.
By contrast, the 206 grain farms included in the 2012 KFBM summary averaged 2,289 tillable acres. The average farm owned 2% fewer acres and cash rented 4% more acres than the average 2013 preliminary farm. The 2012 farm devoted 235 more acres to corn, beans, and wheat than the average 2013 preliminary farm. The Kentucky Farm Business Management program provides member farmers with the basis for sound decision making, and it gives other farmers and Ag professionals performance benchmarks for major farm enterprises. Go to http:// www.uky.edu/Ag/KFBM/ for the full analysis. ~ Jerry Pierce
Community Health Needs Assessment The Community and Economic Development Initiative of Kentucky (CEDIK) recently assisted 33 hospitals within Kentucky, Ohio, and West Virginia in completing a new Affordable Care Act mandate called the Community Health Needs Assessment (CHNA). The CHNA process was designed to highlight how hospitals were fulfilling their not for profit tax status (providing public and community benefits) by addressing the health needs of the community. The process requires that the hospital reaches out to the low-income and medically needy residents to better understand the health priorities in the community. Hospitals must complete this process every three years and report on their progress from the previous CHNA. The CHNA is a public document and must be accessible to anyone for the entire 3 year period. While a formal analysis of all the Kentucky CHNAs has not been completed yet, a brief review suggests that the following health issues were consistently identified around rural communities.
A) Reduce obesity levels and improve physical activity B) Reduce diabetes and improve diagnosis of early stage diabetes C) Improve access to fresh and healthy foods D) Increase access to mental health services E) Reduce substance abuse including prescription pill abuse and illegal narcotics F) Decrease tobacco use Each hospital was required to prioritize health needs and then identify strategies that the hospital alone, or with partners within the community, can employ to address these health needs. There were literally hundreds of strategies listed across all of the CHNAs. As an example, four strategies are listed below. 1. Operate farmers markets in parking lots of hospitals. Hospital nutritionists and physicians encouraging patients to visit.
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2. Community health coalitions working with downtown businesses to promote their safe walking areas in communities that don't have limited access to walking paths. 3. Collaboration with local health coalition and the hospital to address diabetes through educational programming.
primary care doctor, thus reducing the costs for the hospital and introducing preventive and primary care for patients. Are you interested in what strategies your hospital picked? Look on the hospital’s website and a copy of the most recently adopted CHNA should be posted. ~ Sarah Bowker
4. Employ a patient navigator within the hospital to meet with patients that don't have a medical home and use the ER for nonemergency issues. This navigator can refer these patients to a
Beginning Farmers – Where to go for resources Beginning farmers come in all styles. The common image of a beginning farmer is an early 20s young man who had grown up on a farm and may or may not have gone to college. If we look at the participants in the UK beginning farmer program, KyFarmStart (funded as part of the USDA’s Beginning Farmer and Rancher program) we see a much more diverse group. The beginning farmers who have participated in the program came from more than half of Kentucky’s 120 counties. There are many female participants, and the ages range almost evenly from the twenties to the sixties. While most have some farm background, not all of them do. While almost all KyFarmStart participants have land, this is likely due to a selection bias of who signs up for KyFarmStart. There are many beginning farmers, especially in the youngest demographic categories, which do not have land. Therefore, land access is a big issue for this group. We have found that beginning farmers are interested in all types of agricultural enterprises. Many are focusing on traditional Kentucky enterprises like beef cattle. Others are exploring horticulture enterprises, which require more time and effort in regards to marketing. However, row crop operations are somewhat unique because the capital (land and machinery) needed to start a cash grain operation is so great that these enterprises are virtually inaccessible to novice farmers. There are beginning farmers in these operations, but they commonly grew up on the farm, picking up many skills from their dads and grandparents. A better term for them may be “early career” farmers because, even though they may be quite experienced in the technical aspects of growing crops, they are novices in management skills such as marketing and financial decision making. Resources available for beginning farmers are as diverse as the farmers’ needs are. There are three categories: training/education, grants, and loans. A brief overview of these resources can be found below. Training and education: This category is huge and it can be overwhelming. In terms of formal programs, we have UK’s KyFarmStart program; which uses a 10 session curriculum format, while focusing on whole farm management. KyFarmStart includes technical aspects of farming as well; such as soils, cattle management, and nutrient management. The program is adjusted to
fit the needs of each unique group. Of course, core extension programs exist, many of which are enterprise specific. For example, extension offers the UK Grain Crop Academy and Master Cattleman program. In this age of the internet, everyone knows that many more resources are readily available. Grants: There are not grants (i.e. “gifts”) available to pay farmers to start farming. However, grants are available to do on -farm research (see www.SouthernSARE.org). To diversify, try researching new enterprises. Check out http:// growkentuckyag.com/, the Agribusiness Grant facilitation program, for several enterprise resources targeted to the needs of Kentucky. The Kentucky Center for Ag and Rural Development (www.KCARD.info) provides information about many grant opportunities and assists farmers in completing the proposal process.
Loans: While grants to buy land are not available, there are loan programs targeted to beginning farmers. Kentucky has a beginning farmer loan program, managed through the KY Ag. Finance Corporation. Information on this and other loan programs is available at: http://agpolicy.ky.gov/finance/Pages/ loan-programs.aspx. The USDA Farm Services Agency (FSA) also has a beginning farmer loan program, https:// www.fsa.usda.gov/FSA/webapp? area=home&subject=fmlp&topic=bfl, including a micro-loan program with a simplified application process. Finally, many private sector lenders have programs and/or partner with both Kentucky and federal loan programs. ~ Lee Meyer
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Balance Sheets When farmers start thinking about needing operating loans for the new planting season or buying a new piece of equipment, their lender is going to want important financial information from the farmer. One document will be a balance sheet, a statement that shows a person’s or company’s financial standing at a point in time. From this document, financial institutions can see all assets (what the farmer owns) and liabilities (what the farmers owes) along with their net worth (assets minus liabilities). For this document to be accurate, recording keeping is very important! Since a balance sheet shows all assets and liabilities, it is essential for a farmer to keep track of all assets; such as grain/livestock inventories, prepays, machinery and buildings, and retained patronage at a cooperative of which they are a member. Leaving any or all off could mislead a lender, or could make it more difficult for a farmer to receive loan approvals. Liabilities are just as important to list as assets.
last interest payment made on a loan. Some year-end statements will already display accrued interest figures calculated for each loan. Otherwise, the lender can easily calculate it so the sum can be included on the balance sheet. One of the biggest difficulties in completing a balance sheet is making sure all information is included. That is why good record keeping is key throughout the entire year, not just when a lender asks for financial documents. Having an accurate balance sheet, along with other financial documents, makes it easier for farmers to renew operating loans, to apply for new loans, and it can speed up the process of applying for loans. Some lending institutions will help farmers complete a balance sheet. However, the farmer is responsible for providing accurate information in a timely manner. One of the services provided by Kentucky Farm Business Management (KFBM) is completing an accurate balance sheet for farmers in the program. ~ Tarrah Dunaway
One common liability that that can be difficult to keep track of are loan balances. Year-end statements from financial institutions help. However, farmers need to make sure their records match the year-end statements they receive. The balance sheet will show two pieces of information for each loan: how much principle is due in the next 12 months (the current portion of the liability) and the principle due beyond 12 months (the non-current portion of the liability). Another liability often overlooked on balance sheets is accrued interest. Accrued interest is the interest that has accumulated since the
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