University of Kentucky Department of Agricultural Economics
Economic & Policy Update Volume 15, Issue 06
Edited by: Will Snell & Phyllis Mattox
June 26, 2015
Budgets are Tight – Watch Expenses!
Featured Articles: Budgets are Tight - Watch Expenses! --- Tarrah Hardin
The Effect of Commodity Price Volatility on Food Prices --- Will Snell
MPP - Dairy Enrollment is Fast Approaching --- Kenny Burdine
Kentucky County Profiles Available Online --- Simona Balazs
With grain markets trending down and livestock markets flat, making budgets and watching cash flow carefully is going to be critical. There are a few ways to help both the budget and cash flow from being tight, watch expenses, plan major purchases, and protect cash. Expenses seem to come from everywhere
and can be very difficult to control. For example, repairs can be costly and can come at the least favorable time. One simple way to help lower repair cost is to maximize resources that might be around the farm or shop rather than running to get new parts every time something breaks or needs maintenance. Even though this suggestion might require some additional time to look for the parts rather than buying from a parts store, the money saved will be beneficial and can add up to be significant over time. Money can also be saved on fuel that would be used to run to different parts stores to buy parts, rather than looking for the part on the farm. These seem like very simple and common knowledge steps on how to lower repair cost, yet these can be very difficult to follow through during planting and harvesting seasons because of time constraints. While some repair costs can be unexpected and are difficult to budget, planning major purchases or major equipment overhauls that need to happen within the next year can be put into your budget. With net farm income projected to decrease further in 2015, if major expenses can be pushed later into 2015 or even 2016 that would help with the cash flow issues. Equipment dealers are
providing some very attractive purchase deals and especially leases. Remember that even when you lease equipment instead of purchasing it, an annual payment is still due. Make sure these additional payments and cash requirements will fit into your budget for upcoming crop years, especially if crop prices remain at the current depressed levels or continue to decline. Another way to help the tight budget is to protect cash through financing. There are currently opportunities to lock in financing with little to no interest, if any major purchases or overhauls are needed. Taking advantage of these deals helps to protect working capital & allows for cash to be on hand in case of an emergency. Financing large purchases & spreading the cost over time also helps the farmer to increase their working capital. Remember that financing any purchase still requires a payment at some point within the next year. Creating and reviewing budgets throughout the year will help in trying to stay on track toward your profit goals. Ways to help stay within the budget are watching repair expenses, plan major purchases, and protect your cash through financing. Each farming operation is different and could have more unique ways to help decrease expenses and watch the budget for 2015 and beyond. To help establish and analyze budgets contact your Area Farm Management Specialists with the Ky. Farm Business Management Program as well as your county Extension Agent for Ag and Natural Resources. Tarrah Hardin, tarrah.hardin@uky.edu
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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The Effect of Commodity Price Volatility on Food Prices Agriculture has experienced a considerably amount of commodity price volatility in recent years in response to significant changes in crop/ livestock supplies, exchange rates, weather events, and input costs. How does commodity price volatility impact the level and volatility of food prices? The ERS/USDA chart below illustrates that field crop price volatility (blue line) has historically been much greater than changes in food prices (red line). This occurs primarily due to the farm value of our food only averaging aroung 15 to 17 cents out of every dollar we spend on food. Marketing cost (e.g.., labor, transportation, processing, packaging, advertising, etc.) collectively of moving the product from the farm to the consumer account for most of the costs associated with U.S. food sales. Plus U.S. food price volatility is tempered by access to global supplies as Americans continue to import a record volume of agricultural/food imports.
Although relatively high prices for foods such as beef, eggs, and some fruits/veggies have made national news, USDA projects food price inflation will remain in check for 2015. According to their latest release (June 25, 2015), food price inflation is expected to average between 2% and 3% in 2015, which is very similar to the 2.6% average over the past twenty years. As expected, beef prices have the largest price increase with pork prices falling as the industry rebuilds supplies following last year’s PED virus.
Percentage Change in Selected U.S. Food Prices
Item
All Food Beef Pork Poultry Eggs Dairy Products Fresh Fruits Fresh Vegetables This observation doesn’t imply that changes in commodity prices don’t have a noticeable price impact at the grocery check-out counter. The very tight supplies of beef have caused beef prices at the meat counter to escalate to record levels over the past year and we are currently observing the short-term effects of the recent outbreak of bird flu on egg prices. In addition the on-going California drought will continue to impact certain fruit, vegetable, and nut prices for the foreseeable future.
20 Year Avg
2014 Annual
Forecast 2015
2.6 4.1 2.8 2.6 4.3 2.8 3.0 3.2
2.4 9.2 9.1 2.0 8.4 3.6 4.8 -1.3
2.0 to 3.0 5.5 to 6.5 -4.0 to -3.0 2.5 to 3.5 3.0 to 4.0 1.5 to 2.5 2.5 to 3.5 2.0 to 3.0
Source: ERS/USDA, June 2015 U.S. Food Price Outlook
http://www.ers.usda.gov/dataproducts/food-price-outlook.aspx
The Kentucky Farm Bureau’s Marketbasket Survey (tracking the cost of forty typical items purchased at the grocery) showed food prices for Kentuckians actually declined in the first quarter of 2015 vs the last quarter of 2014, with prices being 4.6% higher over a 12 month period.
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What about global food prices? The Food and Agriculture Organization of the United Nations (FAO) tracks global changes in a basket of food commodities. The chart below indicates that global food prices have been trended downward in 2015 with the May 2015 index level at its lowest level since 2009. According to this index, global food prices have declined by nearly 30 percent since their peak in 2011. These significantly lower levels observed in 2014 and 2015 in global food prices are reflective of a global diet that is more dependent on grains/cereals relative to meat compared to the U.S. diet. This recent downtrend follows a 43% run-up in global food prices from 2009 to 2011. Global food prices tend to be much more dependent on commodity price changes than what we observe in the United States since less significantly less processing, packaging, transportation costs and other marketing expenses occur as the product moves from the farm to the consumer. For more details check out the FAO global food price index website at: http://www.fao.org/worldfoodsituation/ foodpricesindex/en/
Will Snell, wsnell@uky.edu
U.S. beef production is historically low, but expected to increase in 2016 From ERS/USDA Charts-of-Note, June 24, 2015 http://www.ers.usda.gov/data-products/charts-of-note.aspx
Historically small U.S. cattle inventory continues to support high beef prices in 2015, but at least in the short term, increasing imports of processing beef (especially from Australia) and heavy carcass weights have helped moderate some of the price pressures. Fed cattle live and dressed weights have remained significantly heavier than last year due in part to improvements in pasture conditions and extra time on feed as a result of reduced steer and heifer slaughter. One uncertainty is the extent to which feeding cattle to heavier weights will offset the decrease in slaughter numbers in 2015, and the ultimate effect this will have on total commercial beef production. Despite heavier cattle, U.S. commercial beef production is currently expected to fall to a multi-decade low of 24 billion pounds in 2015. U.S. beef production is expected to increase in 2016 due to a rising cattle inventory and continued heavier carcass weights. This chart is from USDA’s Livestock, Dairy, and Poultry Outlook: June 2015.
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MPP - Dairy Enrollment is Fast Approaching Dairy markets change quickly and the last 8 months
have been a vivid illustration of this concept. The US All Milk price for September 2014 was $25.70. As I write this article, the most recent US All Milk price (April 2015) was $16.50. Figure 1 below show US All Milk price from January 2009 to April 2015. Note the 35% decrease in milk price from last fall to this spring was one of the most dramatic that we have seen in recent years. US All Milk Price (2009-2015)
Data Source: Understanding Dairy Markets Website: http://future.aae.wisc.edu/
Margins have been increasingly important given the recent changes in dairy policy. Last fall brought the first round of signups for the new Margin Protection Program for Dairy (MPP-Dairy) established in the 2014 Farm Bill. Producers signed up for coverage for the last four months of 2014 and the calendar year 2015. Producers were given the opportunity to enroll in the program, which protected an estimated margin, milk price minus feed costs, based on monthly prices for US All Milk, Corn, Soybean Meal, and Alfalfa Hay. The chart below shows the calculated MPP-Dairy margin since January 2009. While the program did not exist until fall 2014, the chart is intended to provide some historical perspective on what this margin has looked like over time.
MPP-Dairy Margin (2009-2015)
Data Source: Understanding Dairy Markets Website:
http://future.aae.wisc.edu/
Much of the decrease in milk prices can be attributed to the usual suspects. Both cheese and butter prices dropped considerably from fall into winter, although both have seemed to find some support since the first of the year. Whey prices reached a peak in late summer of 2014 and have steadily declined since then. The non-fat dry milk price has really been dropping since early in 2014 and is down roughly 50% from where it was one year ago. On the cost side, decreasing feed prices are offsetting some of the impact from lower milk prices. USDA’s current projections are for milk production to increase in 2015, with most of the increase coming in the second half of the year. Both USDA forecasts and CMEŠ Milk Futures suggest slightly stronger milk prices in the third and fourth quarter. The combination of slightly higher milk and lower feed prices should work to improve margins over the next few months.
2016. Data Source: Understanding Dairy Markets
Website: http://future.aae.wisc.edu/
I think it is important to put the current
market in perspective as we think about the next signup period. During initial signup last year, margins were well above the $8 level. However, they quickly dropped throughout the fall and winter as US All Milk prices fell. It is very likely that the MPP-Dairy margin during the upcoming signup period will be much lower than what was seen during the first signup period. MPP-Dairy margin for the March / April 2015 couplet was $7.50, meaning payments will be received by those
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who chose the $8 coverage level. So, producers who chose not to enroll last year may want to give the MPP-Dairy program another look. This will be especially true for those who chose to use LGM-Dairy, rather than MPP-Dairy last year, as the available margins through LGM-Dairy will be lower given the current market. At the same time, producers who did enroll in MPP-Dairy last year may determine that they would like to select a higher level of coverage than they chose the first time.
Additional details on the MPP-Dairy program can be found in the publication AEC 2014-15, “The Margin Protection Program for Dairy in the 2014 Farm Bill” available at: www.uky.edu/ag/agecon/pubs/ ext2014-15.pdf.
Kenny Burdine, kburdine@uky.edu
Kentucky County Profiles Available Online The purpose of the Community and Economic Development Initiative of Kentucky’s (CEDIK) County Data Profiles is to provide reliable, readable and applicable data that characterize the economy at the county level. The profiles are available at: http://cedik.ca.uky.edu/ CountyDataProfiles. Profiles have been created for each of Kentucky’s 120 counties on several issues including the economy and workforce, as well as the agricultural, healthcare, and retail industries. This month we released 120 county profiles on Kentucky education outcomes and industry data. The profiles consist of an overview of selected education indicators, such as, school enrollment and educational attainment, percent of kids ready for kindergarten and high school GPA. The profiles also examine
the education industry (e.g., jobs by type of educational institution or by type of educational occupations). Each profile includes two pages of detailed description of the data and definitions to guide the user.The positive feedback we have received on the County Data Profiles has inspired the development of additional profile topics. Forthcoming in 2016 will be profiles on Tourism and Family and Youth. Additionally, CEDIK is in the process of transferring the profiles to a dashboard format. We welcome feedback on the profiles, as well as ideas on other useful topics; contact CEDIK Research Director James Allen IV at 859-218-4386 or james.allen4@uky.edu. Please see a sample of a County Data Profile on the next page.
Simona Balazs, simona.balazs@uky.edu
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