ECONOMIC AND POLICY UPDATE January 30, 2014: Vol. 14 No. 1 http://www.ca.uky.edu/agecon/index.php?p=209
Editors: Will Snell and Kevin Heidemann In this issue: • Farm Bill Update – Will Snell • The Importance of Risk Management for Grain Farms in 2014 – Greg Halich • The Effect of Crop Insurance on Farm Profitability Jerry Pierce • Farm to School in Kentucky: The USDA Farm to School Census – Kevin Heidemann • Data You Can Use: Kentucky County Profiles Available Online – Sarah Bowker • UK’s Beginning Farmer Program “KyFarmStart” – Lee Meyer & Jennifer Hunter Farm Bill Update After several years of debate, extensions and much uncertainty a new farm bill moved much closer to reality this week as the U.S. House voted 251 to 166 to support The Agricultural Act of 2014. The U.S. Senate is taking up the bill very soon, with passage anticipated, and the President is expected to sign the 2014 farm bill into law within the next week or two. This action quickly follows intense negotiations on a host of challenging issues by House and Senate Ag Committee leadership during the past several weeks. During most of 2013, the largest debate centered around the level of cuts in the nutrition title; mainly the Supplemental Nutrition Assistance Program (SNAP), which is better known as the food stamp program. Last year the Senate farm bill called for nearly $4 billion of cuts in the nutrition title over the next ten years, compared to a reduction approaching $40 billion evolving from the U.S. House. Earlier this month, Senate and House farm bill negotiators eventually agreed to a compromise of reducing the nutrition title by $8 billion over the next decade. Following this significant development, several ag-related issues jeopardized future movement of the farm bill; including country of origin labeling (COOL), payment limitations, state’s rights to regulate agricultural production of products involved in interstate commerce, dairy policy reform, and defining the eligibility of farm bill recipients. According to the Congressional Budget Office (CBO), programs authorized within the 2014 farm bill will total
$956 billion over the 2014-2023 period, with nearly 80% ($756 billion) being nutrition programs. Crop insurance will take on increased importance in the 2014 farm bill, totaling $90 billion (9.4%) of expenditures over the next decade, followed by conservation $58 billion (6%), and commodity programs totaling $44 billion (only 4.6% of total spending). In total, the CBO estimates the 2014 farm bill will generate a net budget savings of $16.6 billion over the 2014-2023 period. In addition to the $8 billion reduction in nutrition spending, commodity programs are cut $14.3 billion, and conservation programs are lowered by nearly $4 billion during 20142023. Alternatively, crop insurance funding is boosted $5.7 billion in this farm bill. The net savings generated by the 2014 farm bill, combined with the recent farm program sequestration, results in a reduction of nearly $23 billion in farm bill programs over the next decade. Major highlights of the bill covering the 2014-2018 period include the following: • •
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Eliminates direct payments Replaces the current (countercyclical) price and revenue support (ACRE) programs with new programs called the Price Loss Coverage (PLC) and the Agricultural Risk Coverage (ARC) programs Requires farmers to make a one-time-choice of EITHER the PLC or ARC programs for individual program crops Allows producers to update base acres and yields Establishes fixed/higher price protection levels (now called reference prices vs target prices) under the PLC program – corn $3.70/bu, wheat $5.50/bu, and soybeans $8.40/bu Allows those who select the PLC program the option of purchasing additional subsidized insurance protection called Supplemental Coverage Option insurance For producers selecting the ARC option, actual revenues will be compared to a rolling 5 year average of either farm or county benchmark revenues (option selected by producer with high and low revenue years excluded) Annual payment limits capped at $125,000 per person or $250,000 per couple
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Authorizes colleges, universities, and state departments of agriculture to develop pilot research projects for industrial hemp in states that have passed legislation supporting hemp production. KY is one of nine states which have approved such legislation, with around a dozen more states with pending similar legislation Establishes a new dairy policy with an insurance product protecting dairy profit margins (based on the difference of milk prices and feed costs) Condenses the number of conservation programs from 23 to 13. Reduces the Conservation Reserve Program (CRP) maximum enrollment from 27.5 million acres in 2014 to 24 million acres in 2018 Reauthorizes a Beginning Farmer and Rancher Development Program Provides additional assistance for livestock disaster and specialty crop grants
The actual bill, along with a summary, can be accessed from the U.S. House Ag Committee website: http://agriculture.house.gov/farmbill. (Will Snell)
Currently, in late January, future’s prices for fall 2014 are around $4.50/bu for corn and $11.10/bu for soybeans. Cash prices for fall delivery near river ports in western Kentucky are around $4.25/bu for corn and $11.00/bu for soybeans. These cash prices will be used to estimate profit for the baseline scenario in this analysis. Table 1 shows estimated cost for the various fertilizers in 2014.
Table 1: Fertilizer Price Projections 2014 Fertilizer: Anhydrous (N) DAP (P2O5) Potash (K2O)
Grain farmers in Kentucky and throughout the nation have had a long run of highly profitable years, starting around 2006 and continuing into 2013. Even with the disastrous yields in 2012, most farmers with good revenue insurance policies made out well. During this time, risk management and forward contracting were probably looked at more from the standpoint of profit maximization or profit retention. However, the 2014 crop year looks to be the first year since 2006 where risk management and forward contracting could mean the difference between breaking even and going into the red. I did not realize the extent of the potential problems for grain farmers until early January, when I started updating my profit projections for the upcoming 2014 crop year. What follows is a brief overview of what I’ve been highlighting in presentations throughout the state in the last few weeks. For the sake of tractability, I needed to make an assumption on location. Since most of our grain is produced in western Kentucky, this is where the analysis is based. Central Kentucky farmers will typically have somewhat higher costs due to the use of urea rather than anhydrous, and longer trucking distances for grain (in some cases over 100 miles oneway). Therefore, the following estimates need to be adjusted for Central Kentucky grain farmers (it will look worse for them).
$/unit $0.40 $0.41 $0.38
Table 2 shows estimated costs for 150 bushel corn ground and 45.5 bushel soybean ground. P and K application rates are assumed to be at the rate of removal of the crop. Machinery/labor costs account for unpaid family labor and depreciation/overhead of equipment. A 15 mile one-way trucking distance was assumed for hauling grain.
Table 2: Projected 2014 Costs (per acre) Inputs:
Importance of Risk Management for Grain Farms in 2014
$/ton $650 $520 $450
Seed Nitrogen P, K, and Lime Pesticides Total Inputs Machinery & Labor Other: Drying Grain Crop Insurance Misc. Land Rent Operating Interest Total Other Total Costs
Corn 150 bu $90 $64 $55 $50 $259 $121 $17 $20 $20 Variable $8 $65 $445+Rent
Soybeans 45.5 bu $65 $0 $42 $40 $147 $85 $0 $20 $20 Variable $5 $45 $277+Rent
Note: 15 mile one-way trucking included in machinery & labor costs.
Using these costs, the gross return is estimated for corn and soybeans at various yield levels in Table 3. These are expected yields so they should be the long-term average for a particular farm. The “Gross Return Rotation” assumes a 50-50 rotation of corn and soybeans, so it is simply an average of the gross corn and soybean return. This gross return does not account for land rent. For example, the 150 bu corn and 45.5 bu soybean gross return for the rotation is $217/acre. If you had a $200/acre land rent on this farm, then you would be expecting to make $17/acre profit. If you had a $250/acre land rent you would be expecting to have a $33/acre loss on this farm. Thus in areas of western
Kentucky where land rents are relatively low (under $200/acre), we would expect small profits in 2014 at current commodity prices. Conversely, in areas of western Kentucky where land rents are relatively high (over $250/acre), we would expect small losses in 2014 at current commodity prices. On a cash flow basis (not accounting for family labor or depreciation/overhead), these farms in high rent areas would likely not get into trouble if the losses are small.
Table 3: Baseline Scenario 2014 (per acre) $11.00 Soybeans (elevator) $4.25 Corn (elevator) $.40-N; $.41-P; $.38-K
125 bu corn 39.0 bu soybeans 150 bu corn 45.5 bu soybeans 175 bu corn 51.5 bu soybeans
Gross Return Corn
Gross Return Soybeans
Gross Return Rotation
$114
$168
$141
$203
$233
$217
$290
$294
$292
Note: Subtract land rent to get Net Return.
There is of course a possibility that commodity prices could fall between now and fall 2014. Farmers need to be prepared for this and have risk management strategies to protect themselves. However, a basic crop insurance policy may not provide the protection needed by many grain farmers this year. Table 4 shows a 70% revenue guarantee policy in terms of the guaranteed minimum revenue, converted to a gross return per acre basis shown in Table 3. We don’t know what the price guarantees will be until the end of February, so I simply use the average futures prices that have been experienced so far in January. These are roughly $4.50/bu for corn and $11.15/bu for soybeans, using a $.25/bu basis to adjust to cash prices.
Table 4: 70% Crop Insurance Guarantee 2014 (per acre) $11.15 Soybean Guarantee (estimated) $4.50 Corn Guarantee ( estimated ) $.40-N; $.41-P; $.38-K
125 bu corn 39.0 bu soybeans 150 bu corn 45.5 bu soybeans 175 bu corn 51.5 bu soybeans
Gross Return Corn
Gross Return Soybeans
Gross Return Rotation
-$55
$34
$10
$0
$76
$38
$54
$117
$85
Note: Subtract land rent to get Net Return.
Thus if revenues dropped to or below these crop insurance guarantee levels, a grain farmer on 150 bu corn ground would have a gross return to rotation of about $40/acre. If they had a $250/acre land rent they would lose over $200/acre on this farm. There are some farmers, particularly beginning farmers, that might not survive such a scenario. Table 5 shows the guaranteed minimum revenue for an 80% revenue protection policy in conjunction with forward contracting 25% of the crop at $4.25/bu corn and $11.00/bu soybeans. As can be seen, this provides a substantial improvement in baseline protection.
Table 5: 80% Crop Insurance Guarantee and 25% Forward Contract 2014 (per acre) $11.15 Soybean Guarantee (estimated) $4.50 Corn Guarantee ( estimated ) $.40-N; $.41-P; $.38-K
125 bu corn 39.0 bu soybeans 150 bu corn 45.5 bu soybeans 175 bu corn 51.5 bu soybeans
Gross Return Corn
Gross Return Soybeans
Gross Return Rotation
$30
$99
$65
$102
$152
$127
$173
$203
$188
Note: Subtract land rent to get Net Return.
Whether this would provide enough protection will depend on the specific cash rents being paid and the risk tolerances of the individual farmer. Each farmer essentially needs to determine what that base protection needs to be and adjust their risk management plan accordingly. These are just two examples of combinations of crop insurance and forward contracting. There are many other possibilities that should be evaluated. This analysis has been simplified somewhat to make it tractable in this short space. There are of course tradeoffs with forward contracting in terms of reduced upside price opportunities if the market increases, and extremely high levels of forward contracting carry the risk of yields falling short of the contracted volume. These both need to be balanced with the increased downside protection in the context of a specific farmer in a specific risk tolerance situation. Contact the author at Greg.Halich@uky.edu or 859-257-8841 to help evaluate specific situations. (Greg Halich)
The Effect of Crop Insurance on Farm Profitability Federal crop insurance programs play an important part in today’s farm profitability. Gross proceeds from crop insurance for 2008-2012 averaged $137,133 per year, and ranged from 16% to 78% of Net Farm Income for all farms participating in the Kentucky Farm Business Management (KFBM) program. Gross proceeds are before costs. Net Farm Income (NFI) is a measure of farm profitability. It is the value of farm production less total operating expenses and interest, plus net gain or loss on capital sales. NFI averaged $357,679 during this period on 255 farms. KFBM is an Extension program that provides member farms with the basis for sound decision making and performance benchmarks for major farm enterprises. Former USDA Chief Economist, Keith Collins, says that “90% of planted cropland is being protected by crop insurance in 2013.” Many farmers use a “revenue protection” insurance product that combines protection from yield loss and price volatility. The Rain and Hail Insurance Society’s 2013 Crop Insurance Update indicates that revenue protection products accounted for 82% of all 2012 crop insurance products. Figure 1 compares gross crop insurance proceeds to NFI for KFBM farms. For 2008-2011, crop insurance proceeds averaged $86,678 per farm per year – about 26% of NFI. Proceeds spiked dramatically in 2012 to an average $338,955 per farm – 78% of NFI. Figure 1
$583,000 per farm – $148.6 million for Kentucky from 255 farms. Figure 2 $450,000 $400,000 $350,000 $300,000 $250,000 $200,000 $150,000
Net Farm Income Without Crop Insurance Proceeds
$100,000 $50,000 $0 2008
2009
2010
2011
2012
It appears that KFBM farm profitability is tied closely to the crop value of corn. Crop value is price times yield – similar to crop revenue protection. Figure 3 shows profitability with crop insurance removed. It is expressed as a percent of total NFI that is not crop insurance: (433,090-338,955)/433,090 = 22% for 2012. Figure 3 140%
120%
100%
80%
60%
40%
20%
% of Avg Corn Crop Value % of NFI Not From Crop Insurance
0% 2008
$500,000 $450,000
Net Farm Income
$400,000
Crop Insurance Proceeds
2009
2010
2011
2012
Crop value of corn is shown as a percent of average production. As the gross value of an acre of corn varies from the average, farm profitability varies, sometimes wildly. Crop insurance tends to smooth out the unpredictable variations. (Jerry Pierce)
$350,000 $300,000 $250,000 $200,000 $150,000
Farm to School in KY: The USDA Farm to School Census
$100,000 $50,000 $0 2008
2009
2010
2011
2012
Figure 2 shows NFI for each year without gross crop insurance for KFBM farms. NFI is lower in each year and there is more volatility between years without crop insurance. Profitability in 2012 would have been only $94,135. Drought cut corn production to 52% of the four-year average for KFBM farms. This would have significantly reduced equipment purchases, loan repayment, and family living. It would have also reduced income generated in local economies by about
The USDA, assisted in part by The National Farm to School Network, recently conducted a national Farm to School Census. This census asked public school districts about Farm to School activities throughout the 2011 to 2012 school year. In total, 133 out of 179 Kentucky public school districts completed the USDA Farm to School Census. In this article, I will discuss the data collected by the census in relation to Kentucky’s growing Farm to School initiatives. Kentucky school districts that bought local products from 2011 to 2012 spent about $1,296,005 on local
food during the school year, but they spent a total of $48,014,739 on school food. Therefore, Kentucky schools already spend a notable amount of money on purchasing local food. However, the potential for Farm to School is enormous, reaching above $48 million dollars. The census noted that 58 Kentucky school districts, which represent about 763 schools, have been participating in Farm to School. Overall, 44% of respondents indicated they are engaged in Farm to School activities, and another 19% plan to start in the future. Nearly half of our school districts in Kentucky already participate in Farm to School activities; and, in the near future, many more schools are likely to begin participating.
Last month CEDIK revised the economic profiles and posted them to the website. New to this version of the economic profile, is expanded information on jobs by economic sector, including two figures on each county’s top industries in regards to employment. This month, we released 120 county profiles focusing on the topic of Small Business. This profile characterizes small business by firm size, employment in top industries, business type, and startups. Accompanying the small business profile is a detailed description of the data and definitions to guide the user. Sample County Small Business Profile
Currently, schools have been purchasing primarily local fruits and vegetables; tomatoes, apples, watermelon, lettuce, and berries have been the most popular local food purchases in Kentucky. However, some schools have been sourcing milk, meat, eggs, and other products locally. The Farm to School Census data also indicates there is expected growth in the future purchases of local herbs, plant-based proteins, eggs, vegetables, and baked goods by Kentucky schools. In conclusion, Kentucky’s Farm to School market is large and it has enormous potential. More schools will continue to become involved in Farm to School, and many of those who are already participating in Farm to School plan to buy much more local food in the future. Currently, schools are primarily purchasing local fruits and vegetables, but local purchases made by schools are likely to diversify in the future. In the future, Farm to School markets will likely continue to grow in importance to Kentucky farmers. To learn more about the census, or to take a look at the data for yourself, follow this link: http://www.fns.usda.gov/farmtoschool/ census#/national . (Kevin Heidemann) Data You Can Use: KY 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; which focus on several issues including the economy and workforce, as well as the agricultural, healthcare, and retail industries.
An update to our Healthcare profiles will be available in early February. The positive feedback we have received on the County Data Profiles has inspired the development of additional profile topics. In 2014, CEDIK will be developing profiles on Education and Tourism. We welcome feedback on the profiles, as well as ideas on other useful topics. Contact CEDIK Research Director James Allen IV at 859218-4386, or james.allen4@uky.edu, to learn more. (Sarah Bowker) UK’s Beginning Farmer Program “KyFarmStart” About four years ago, UK was awarded a grant from the USDA’s Beginning Farmer and Rancher program for a beginning farmer program. Then, just over a year ago, the funding was renewed for an additional three years. Over the four plus years of this initiative, about 400 farmers from 42 counties have graduated from the
program. We have had an inaugural beginning farmer conference with over 150 participants, and we are launching a “farm basics” program for novice farmers. The program focuses on the business side of farming, while incorporating aspects of production and risk management. The program is hosted by groups of counties, usually for a group of 20 to 30 participants. There are typically 10 sessions – beginning with whole farm planning, mission and goals and enterprise selection. Every group also has a program on soils and nutrient management; an area of farming that all farmers need training in, regardless of them being row crop farmers, livestock producers or horticultural growers. The program then focuses on production agriculture, especially the enterprises of most interest to each group. Agents and specialists will present programs, but there will also be field trips, field days and similar practical and hands on events. Due to the diversity of Kentucky agriculture, targeted programs have been developed to reach specific groups. One example is a program targeting beginning dairy producers. Our model for this group includes study tours and an intense multi-day training. We also have partnered with KCARD, the Kentucky Center for Agricultural and Rural Development, on both whole farm planning and individual consulting for graduates who have a value-added enterprise in their farm plans.
Beginning farmers in the row crop area of Kentucky often come to the program with lots of practical farm experience, but lack management experience. They’ve been farming with dad, grandpa or a big brother, but have not been involved in the decision making side of the farm. This is a key group, and with the leadership of extension agents, we’ve helped this group learn about marketing, ag policy and the other skills needed to move into the management team on these larger operations. Does the program work? We think so, but really won’t know for several years until we can see if graduates are successful farmers. We do know that we are meeting the first steps towards success. Evaluations document that participants have increased their knowledge. Furthermore, about 92% reported a high level of satisfaction with the program. KyFarmStart will continue at least until September, 2015, when the current grant expires. We will continue to add groups where there is interest. Agents often are the key organizers, but beginning farmers often call agents and ask them to host the program in a local area. (Lee Meyer and Jennifer Hunter)
While anyone interested in farming is welcome, and we’ve had participants with all sizes of farms, our goal is to help farmers become commercially successful, not necessarily big, but large enough to generate the income needed to meet family goals. The average farm size in the first three years of the program was over 500 acres.
University of Kentucky Department of Agricultural Economics 400 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-5762 Fax: 859-323-1913 http://www.ca.uky.edu/agecon/index.php