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MINNEAPOLIS/ST. PAUL (April 14, 2014)--A series of fact sheets on the Agricultural Act of 2014 - the farm bill - is available to help the agricultural community prepare for changes introduced by the recently passed federal legislation.

University of Minnesota Extension economist Kent Olson prepared the six-part series, which emphasizes changes in programs and rules affecting crop commodities.

"Passage of the farm bill removes uncertainty about what farm programs will be for the next five years," Olson said. "Farmers will have to make choices, but the rules are different compared to the old farm bill."

Gone are the Average Crop Revenue (ACRE) and Counter-Cyclical Program (CCP). In their place, farmers must decide between new programs: the Price Loss Coverage (PLC) or the county- or individual-based Agriculture Revenue Coverage (ARC).

The fact sheets are on Extension's web site at www.extension.umn.edu/agriculture/business/farm-bill/. They cover details on the new crops programs, including comparative information designed to help farmers choose their best option. Other information focuses on updating payment yields and reallocating base acres.

"There is also an important warning: Farmers have to act. If farmers and landowners fail to make a unanimous election of the program in which they enroll, the bill says that no payments can be made to the farm for the 2014 farm year and the farm will be deemed to have elected PLC for the 2014 through 2018 crop years," Olson notes.

The farm bill information sheets are offered through Extension's Agricultural Business Management program. Olson and his colleagues connect farmers and other industry professionals with University research-based information on farm management and marketing. More information is available at www.extension.umn.edu/agriculture/business/.

For more news from U of M Extension, visit www.extension.umn.edu/news or contact Extension Communications at extnews@umn.edu. University of Minnesota Extension is an equal opportunity educator and employer.

Hedging in Times of Production Uncertainty

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Bret Oelke, Regional Extension Educator, Agricultural Business Management

With the recent concern in the swine industry about Porcine Epidemic Diarrhea Virus (PEDV) and record high futures prices for lean hogs at the Chicago Mercantile Exchange (CME), discussions have occurred about how farmers can take advantage of high prices while protecting themselves in case hogs are not be available to market. This issue is not unique to the swine industry; crop producers face the same type of scenario in a drought year. While revenue based crop insurance provides some protection in the case of crop production, livestock producers don't have the luxury of a product exactly like the crop insurance products. There are however, exchange based tools that can be used to provide price risk management without obligating delivery of live hogs as a packers' forward contract would require.

If a hog producer is interested in locking in a future price on a portion of his production he would traditionally either sell a futures contract near the anticipated deliver month or enter into a forward cash contract with a packer. In the current environment, with the risk of disease causing abnormally high mortality for a period of weeks, the producer may not be able to deliver hogs to the packer under the forward contract which in most cases is delivery obligated. Growers need to be aware of the non-delivery penalties that are written into the contract if spelled out. In some cases, the grower would be responsible for acquiring enough hogs from another source and delivering them against his contract, regardless of what has happened to the price since the contract was written. If supplies continue to be tight due to the production problems associated with disease, and the price has increased, a significant market loss would take place.

In the case where the producers used a CME futures contract to manage price risk, delivery is not obligated. Under normal circumstances the grower would sell (or go short) a futures contract and hold that contract until delivery into normal marketing channels were to take place and a cash price for the hogs was offered. At that time, the futures contract would be bought back. If the price had dropped, the grower would realize a gain in the futures market which would be added to the cash price to the marketed hogs. If the price had gone up, the grower would realize a loss in the futures market, but would have realized a higher price in the cash market which would offset the loss in the futures contract. If the hogs were not able to be delivered due to a disease outbreak, the grower could buy back the futures contract and realize a gain if the futures price for lean hogs had dropped. If, however, the futures price had increased, a potentially large loss on the futures contract would result with no offsetting gain from sales of lean hogs.

The potential for large market losses in addition to the already potentially devastating disease losses associated with a PEDV outbreak might cause many hog producers to decide not to hedge future production at record or near record futures prices for lean hogs. There is a strategy that growers can use to manage price risk with limits on the potential market price loss in the event of continued increasing prices if delivery were unable to occur. The grower could purchase put options, which are contracts that give the buyer the right, but not the obligation to sell lean hog futures at the selected strike price. The grower then has the right to sell hogs at the strike price or can allow the put option contract to expire if the price has gone up. This strategy doesn't come without a cost however. Recently July 2014 CME lean hog futures traded at $124.00 per hundred weight. An at the money put option (strike price $124.00) had a premium cost of $5.10 per hundred weight, resulting in an equivalent futures price of $118.90 per hundred weight. This is relatively expensive and may not appeal to many producers. There is another strategy that may work better for hog growers, that is to buy put options as a floor on price and holding them until the pigs have reached a stage of growth where a disease outbreak would not impact them as it would when they were younger. At this point the put options could be bought back, hopefully with a minimal loss, and a futures contract could be sold to hedge the price of the hogs to be marketed later. A packer forward cash contract could also be entered into at this time and the futures contract would be unnecessary.

In times of production uncertainty, farmers and ranchers shouldn't ignore price risk management when we have tools that allow them to manage price risk without obligating delivery in case of production losses.

Minnesota farm incomes drop dramatically in 2013

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MINNEAPOLIS/ST. PAUL (March 27, 2014)--As corn prices declined in the fall of 2013, so did farm incomes for a majority of Minnesota farms, according to a joint analysis conducted by Minnesota State Colleges and Universities (MnSCU) and University of Minnesota Extension.

Overall, net farm income was $41,899 for the median farm. That compares to $189,679 in 2012, a 78 percent decrease. While crop farm incomes plummeted due to declining commodity prices, livestock farms did not fare much better as incomes for dairy, hog and beef farms also declined.

The analysis used data from 2,063 participants in MnSCU farm business management education programs, 111 members of the Southwest Minnesota Farm Business Management Association and 41 participants working with private consultants.

"A decline from 2012 levels should not come as a big surprise. We have to remember where we came from," said Dale Nordquist, Extension economist in the University of Minnesota Center for Farm Financial Management. "2012 was a very profitable year for Minnesota farms. Land rental rates have been catching up with the increased profitability of crop production. Most crop producers were in pretty good shape to handle a down year. The question is how long will these reduced profits last?"

Dramatic drops in crop prices

Corn and soybean prices dropped dramatically. Net return per acre of corn dropped from $377 in 2012 to minus $24 in 2013. Soybeans went from $216 net return per acre in 2012 to $85 in 2013. The price of sugar beets dropped from $65 a ton to $35. Sugar beet producers lost an average of $300 per acre in the Red River Valley and west central Minnesota.

Price was not the only factor that led to reduced profits for crop producers. Yields were down due to a cold, wet spring followed by developing drought conditions in parts of the state. The statewide average yield for corn was 160 bushels per acre compared to 171 in 2012, below the ten-year average of 167 bushels. Soybean yields were down from 46 to 42 bushels per acre. Meanwhile, the cost to grow an acre of corn increased by 10 percent. Land rental rates increased by 15 percent for corn production.

"The full extent of this has not been felt by crop producers yet," said Ron Dvergsten, Farm Business Management (FBM) instructor/FBM program coordinator at Northland Community & Technical College in Thief River Falls. "Cash flow was not a problem through much of the year as producers sold 2012 crop at high prices. Most of the decrease shows up in the reduced value of inventories at the end of the year. That means cash flows for 2014 are really tight. At current prices, many producers will lose money on cash rented land in the coming year."

Feed factors reduce livestock profits
Livestock farms faced high feed costs for much of the year; feed prices did not decline substantially until harvest. While the price of milk, pork and beef were all up from the previous year, the combination of high feed costs and lower values of feed inventories reduced livestock farm profits. Milk sold for $20.34 per hundredweight compared to $19.63 in 2012. With a cost of production of $19.92, dairy farmers made 42 cents on every hundred pounds produced or about 5 cents per gallon on average. Market hog prices increased from $63 per hundred pounds in 2012 to $66 in 2013. Market beef prices increased from $122 per hundredweight in 2012 to $125 in 2013.

Prospects for livestock producers are better for the coming year. After several years of high feed costs that benefited crop producers, the tables will likely be turned in 2014.

"Prices are projected to be strong for all major livestock sectors this year," Nordquist said. "And feed costs will be much lower so livestock producers should have a very good year."

The one wildcard for pork producers is the spread of porcine epidemic diarrhea virus (PEDV). While the virus is not transferred to humans, it can be devastating to pig herds and cause severe financial consequences.

2014: Tighter margins ahead
Crop producers will see much tighter margins in 2014.

"The good thing is that most crop producers come in to the year with very strong working capital positions," Dvergsten said. "Another plus is that fertilizer prices are down. But other costs, including land rent, are projected to increase. It is likely that many crop producers will have to use some of their working capital to cover losses in the coming year."

The statewide results are compiled by the Center for Farm Financial Management into the FINBIN database which can be queried at www.finbin.umn.edu. 2013 regional reports and reports from previous years can be found on the MnSCU Farm Business Management website at www.fbm.mnscu.edu.

# # #

About this report: In farm business management programs, producers learn how to maintain, interpret and use quality business records to develop business plans, make key decisions and execute marketing plans throughout the year. The producer's personalized annual whole business and enterprise analyses, which become the "textbooks" used for making business decisions throughout the year, provided the source data for the analysis.

University of Minnesota Extension is a partnership between the university and federal, state and county governments to provide scientific knowledge and expertise to the public in food and agriculture, communities, environment, youth and families.

Minnesota State Colleges and Universities system includes 24 two-year community and technical colleges and seven state universities serving more than 430,000 students. It is the fifth-largest higher education system of its kind in the United States.

The Minnesota State Colleges and Universities system and the University of Minnesota are Equal Opportunity employers and educators. This document can be made available in alternative formats upon request.

Outlook for 2014 and beyond

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By David Bau, Extension Educator
University of Minnesota Extension Service

Each year I complete an Operator's Cash Rent Worksheet. This examines what a farm operator can afford to pay the landlord for rent after covering the production costs and labor. For the 2014 crop, examples on the worksheet indicate production costs of $656 per acre of corn and $353 for soybeans. Compared with corn yields of 175 bushels of corn priced at $4.50 per bushel and 46 bushels of soybeans at $11.50 per bushel, a farmer would have $154 left to pay toward land costs in a 50-50 corn soybean crop rotation. Currently the 2014 new crop cash corn prices are at $4.19 for corn and $11.14 for soybeans in Worthington, applying these prices in worksheet, the rent would calculate at $118 per acre.

For farmers to pay rents above $200 per acre as is happening across much of Southern Minnesota, they will need the corresponding yields and price remain at these high levels. There are much higher rents being paid for 2014 and higher rents will necessitate commodity prices increasing to 2013 prices. Cash fall prices offered for the 2014 crop are over $2.00 lower in soybeans when you compare nearby cash prices for the 2013 beans. For corn nearby cash prices and the forward contract price offered for 2014 corn are almost the same. On top of this, Southwestern Minnesota is considered in a moderate drought. We were dry at this time last year before heavy spring rains restored subsoil moisture, so spring rains will be necessary again to produce normal yields in 2014.

Farmers in the three marketing groups I work with are challenged to implement their 2014 pre-harvest marketing plans with prices available below their breakeven prices. Historically pre-harvest marketing would be a good decision, and last year it would have work out well, but prices fell throughout the year after the revenue insurance prices were set at the end of February. The prices for November 2014 soybeans and December 2014 corn have not been at profitable price levels that would cover projected expenses since the 2013 harvest. Current prices offered are well below the breakeven prices necessary to make pre-harvest sales. If they would market their crops at current price they would be locking in a loss. The short crop in 2012 produced a long downward tail as the record 2013 corn crop came to market. Soybeans supplies are still relatively tight so 2013 soybeans prices have not fallen as dramatically and the March 2014 bean contract is close to the high price. But the November 2014 prices have steadily declined.

One year ago cash prices were above $7.00 corn and $14.50 for soybeans while the fall 2013 cash forward prices, were close to $5.00 for corn and $12.00 for soybeans. So it was hard for farmers to sell any of the 2013 crop at prices lower by $2.00 or more per bushel. At the same time 2014 corn was 10 to 15 cents lower and soybeans were 40 to 50 cents lower. With the long tail, marketing at these much lower prices would have been a good decision in hindsight.

Current prices are below prices necessary to cover 2014 input costs for corn and soybeans. The average for three marketing groups is $5.05 for corn and $12.36 for soybeans. The weather over the next few months will have a dramatic impact on prices, if we stay dry and get a smaller crop prices should go up significantly, but we receive rain and have a normal crop, prices will remain at these lower unprofitable levels.

Another worksheet I complete each year is the Landowner's Cash Rent Worksheet. For 2014, I used a value of the farmland of $7,000 and included a return of 3 percent on this value and added the cost of property taxes and liability insurance and divided by the tillable acres to determine a value of $241 per acre rent. I complete a survey of bare farmland sales for 14 southwestern Minnesota counties and in the first six months of 2013 average sales prices were $8,466. The highest sales listed were over $15,000 per acre. I utilized the Land Economics website which lists the average sales price for all agricultural land sold in 33 Southern Minnesota counties was $4,274 in 2010, $4,826 in 2011 and $5,825 in 2012. Interest rates are near all-time lows and land values are at all time highs so that is why I used a 3% rate of return.

Utilizing both of these worksheets will help determine what fair land rental rates are. Average actual cash rents reported in 14 Southern Minnesota Counties increased from $149 in 2009 to $160 in 2010 and $177 in 2011 and $209 in 2012 an increase of 18 percent from 2011 to 2012. So what will happen in 2014? Farmland rents across Minnesota increased by 18% from 2012 to 2013 in a survey completed by Minnesota Agricultural Statistic Service. For the last five years rents in Minnesota have been increasing at a rate of 10.8% each year and in Southwest Minnesota farmland rental rates increased at 12.1% per year in the FINBIN database. If you applied a 12.1% increase to 2012 Southwest average of $209, the 2013 rent would be $234. If you applied 12.1% again for 2014, the average rent would increase to $263 in 2014. The lowest average 2014 projected rent is $211 per acre in Lincoln County with the highest average of $319 in Martin County.

If a farmer wants to try to share some of risk with the landlord and not pay a large cash rent rate, a flexible agreement may be appropriate. There are many ways to determine a flexible rental agreement. The 2014 crop year has yet to be planted, but negotiations take place through the year in Minnesota and are needed to determine a fair cropland rental rate. The trend in commodity prices is that corn futures prices are below $5.00 through 2017 and decline each year for soybeans reaching a low of $10.69. For rents to continue to increase, future year commodity prices will have to increase, yields will have to increase or input costs will have to go down or some combination of these variables.

The 2014 Farm Resource Guide is available for a fee, it includes flexible rental agreement information and the worksheets referenced in this article. If you would like a copy please e-mail me at bauxx003@umn.edu or give me a call at 507-372-3900 Ext. 3906 and let me know what format (paper, cd or email) you would like to receive the Farm Resource Guide in.

By Don Nitchie, University of Minnesota Extension Educator, Ag.and Business Management, March 2014.

It is important to continually evaluate production costs for crop and livestock production. With recent lower crop prices than we have seen in several years and historically high input costs, this will be much more important than ever. If you have available data to benchmark your major input costs to your peer farms, you will realize there are significant opportunities to improve your profit margin based on the variability of primary input costs from farm to farm.

Three major direct costs that have grown to make up major portions of current corn production budgets should be scrutinized if crop profit margins remain slim or negative in the next few years. There is enough variability among producers and field to field, that there are opportunities to be capitalized on. Yes, there may be a few cases were the cost data is skewed by some unique arrangement for sharing costs or not all paid for in cash but, major trends and significant variability are apparent. To illustrate this point 2012 data from FINBIN for the SW Minnesota Farm Business Management Association (SWMFBMA) is utilized. The 2013 data will be available in March, 2014.

Seed. While there are many new seed technologies and trait advantages on the market, there was significant variation from the low profit farms to the high profit farms in the SWMFBMA in 2012. These new technologies are impressive and probably some are yet to be fully proven in a production environment. Seed costs ranged from 17% over the median (middle) field for low profit farms to 24% under the median for higher profit farms representing a range of $46.00/acre. If greater seed expenses resulted in much greater cost savings, i.e. chemicals, or yield gains-then the cost difference was worth it. Under less generous profit margins, the return for each added dollar in seed cost deserves examination to see if it produces more than one dollar in added returns.

Fertilizer. There are several producers with access to ready supplies of hog manure who have reduced their commercial fertilizer costs--although we also see some producers paying for the fertilizer value of hog, dairy or beef feedlot manure. So, in some cases this may not be readily apparent in FINBIN data but, this will continue to be refined over time. Regardless, during 2012 fertilizer expenditures attributed to corn varied from a high of 49% over the median for low profit farms to 43% under the median farm, for higher profit farms. This represented a range of expenditures of $139.00/acre. Certainly fertilizer pricing opportunities vary which can greatly impact final costs per acre. In 2008-09 this was definitely the case. If ever there was a time to; soil test and only apply agronomic rates as well as consider using variable rates based on soil productivities and precision placement -the time is probably here. Again, the benefits of a practice or fertilizer technology need to outweigh the costs.

Cash Rents. Much is always written, studied and talked about on this input cost. We all have heard the stories about extremes beyond the recorded data. It is a continual challenge to achieve or maintain an adequate or expanded land base for a desired size of operation. Despite the emotions and feelings often attached to land, we do have to sometimes look hard at the cost as if it as just another input cost. In that sense, we can compare one acre to another but, to us individually at our specific location, not all acres are the same. First they vary tremendously by soil productivities, drainage, location and field efficiencies or size and shape for machine operations. With recent increases in land prices and rents, all of these productivity factors deserve a hard look on a farm by farm basis when profit margins are tight. It is understood, that some family farms will be farmed for a long time, regardless of current rental rates. However, in 2012 Rents paid varied from 73% greater than the median for low profit farms to 66% less than the median for high profit farms. This represented a range of $275.00/acre. Certainly, there are issues besides price and soil productivity often included in certain rent negotiations over several years. Hopefully, relationships do and should matter. However, economically for your cost of production and profitability situation; cash rent levels, soil productivity, drainage and location make a huge difference. For a cash rent level to remain viable it has to produce profits for the tenant and landlord over the long haul. If not and rent levels do not adjust, there will probably be a frequent turnover in tenants and maybe even owners.

Seed, Fertilizer and Rent are three major annual direct costs of corn production which vary significantly from farm to farm. This variability represents management opportunity from benchmarking comparisons. Re-visit and scrutinize your production systems, practices and the efficacy of products available and sold to you. Work hard to make each dollar spent earn more than one dollar in return. Often, it is not just scoring a "homerun" in a single big cost item or a high selling price that makes a producer successful over the long run. It is usually doing a little better in numerous cost, selling, yield and management categories. So, while you are at it, review benchmarks even beyond the big 3-5 direct input costs. You may discover several that could add up to numerous savings with no loss in production. Compare your data using FINBIN data at the Center for Farm Financial Management at the University of Minnesota.

The "Agricultural Act of 2014," commonly called the farm bill, changes many programs and rules for farmers. Farmers need to make a crucial one-time, irrevocable election under the crop commodity programs. Farmers also have an opportunity to update their base acres and their base yields.

In the sections below, I summarize the new programs and the impending decisions for Minnesota farmers based on my reading of the bill in February. However, please note that the final rules and interpretations will come from the USDA, and these may differ from my current interpretation.

What's gone!

Several previous programs are dropped in the new farm bill. Direct payments are gone (except for a declining amount for cotton growers). The ACRE and DCP programs are repealed. While the new programs may look similar to these, the rules are different: simpler in some ways, more complicated in other ways.

Choices for crop commodity programs

Under the new farm bill, crop farmers need to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program. If a farmer elects the ARC program, they will need to choose between county coverage and individual farm coverage. Farmers can make the PLC and ARC-county decision crop by crop, and coverage is by individual crop. But, for the ARC individual farm coverage, all covered commodities on all the farmer's farms need to be enrolled, and coverage is for losses over all covered commodities not crop by crop.

And here's a warning. If all the producers on a farm fail to make a unanimous election of which program to enroll in, the bill says the Secretary of Agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.

Price Loss Coverage (PLC)

The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. For corn the reference price is $3.70 per bushel; for soybeans, $8.40; for wheat, $5.50. (Marketing years are October thru September for corn, September thru August for soybeans, and July thru June for wheat.) Under PLC, payments to farmers are made on the basis of the difference between the national average marketing year price and the reference price, the farmer's payment yield, and the farmer's payment acres. Farmers have a one-time opportunity to update payment yields from 93.5% of their 1998-2001 average yields to 90% of their 2009-2012 yields. If the 2009-2012 yield is 3.9% higher (0.935/0.9) than the 1998-2001 average, the best choice is probably to update. Payment acres will be 85% of either their current base acres (typically the average of their 1998-2001 acreages) or farmers can choose to reallocate their current base acre total according to their mix of crops in 2009-2012.

Agriculture Risk Coverage (ARC) - county coverage

In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.

In the county coverage option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill. (The loan rate is $1.95 per bushel for corn, $5.00 for soybeans, and $2.94 for wheat.) The guarantee under the ARC-county coverage is 86% of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year price. (The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.) Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85% of the farm's base acres for that commodity.

Agriculture Risk Coverage (ARC) - individual farm coverage

Within the ARC program, a farmer can choose individual farm coverage instead of county coverage (as described above). The ARC-farm coverage is based on all the covered commodities on the farm, not crop by crop.

Under ARC-farm coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-farm guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. The ARC-farm guarantee is 86% of the ARC-farm benchmark revenue. The ARC-farm benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-farm payment rate per acre is the difference between the ARC-farm guarantee and the ARC-farm actual revenue, but the payment rate cannot exceed 10% of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-farm payment rate for that farm times 65% of the farm's total base acres (compared to 85% for the county based coverage).

Payment and adjusted gross income (AGI) limits

The total amount of payments received, directly or indirectly, by a person or legal entity (except a joint venture or general partnership) for any crop year under the PLC and ARC programs and as marketing loan gains of loan deficiency payments (other than for peanuts) may not exceed $125,000.

A person or legal entity with a 3-year average adjusted gross income (AGI) over $900,000 is not eligible to receive any benefit from PLC and ARC programs, supplemental agricultural disaster assistance programs (for livestock and trees), marketing loan gains, loan deficiency payments, conservation programs (starting in 2015), and some other payments (from previous bills). AGI includes both farm and nonfarm income.

An early, initial assessment

The requirement to make a one-time, irrevocable election between PLC and ARC is a 5-year decision full of many uncertainties. An initial analysis for a few example farms in Minnesota shows that the ARC county coverage option is the best option for the 2014 crop year given current information. (This quick analysis does not include the option of adding SCO and other new crop insurance options starting in 2015.)

The reference prices under PLC ($3.70 for corn, $8.40 for soybeans, and $5.50 for wheat) are low compared to recent prices especially prices received in 2011 and 2012. For 2014, the markets seem to indicate a very low chance of a PLC payment for corn, a bit higher chance for soybeans, and perhaps a higher chance for wheat (but, in early February, less than 40%). The marketing years for 2015-2018 are full of more uncertainty. Unless market developments show an increase in worldwide production and thus decay in prices in the future in the weeks leading up to the as yet unannounced election deadline, the PLC option does not look like a viable option for Minnesota farmers.

The ARC individual coverage option appears less desirable due to the revenue loss being determined over all covered commodities and the payment calculated using 65% of base acres (versus 85% for the county option). A farmer will need to consider how variability in weather affects each of his or her crops differently. If the yields for different crops move together and are more variable than the county, then individual coverage may be the best choice. If crop yields do not move together and the farm's yield pattern seem to match the county yield variation pattern, then the county based ARC may be the best choice.

With so much uncertainty regarding the next 5 years (which is normal for any 5 years into the future), let's take a general view on the choice. PLC covers price drops and not yield losses. ARC covers revenue losses, that is, both price and yield changes. So, ARC is a more comprehensive program. If prices drop in a future year, this is likely due to higher total production so revenue will probably not drop as much as prices. If yields drop across a wide swath of the production area, prices will likely rise, so revenue won't drop as much as overall yields drop. If my farm and my county were to suffer a yield loss but most of the country does not suffer a yield loss, prices would likely not drop as much as my yield drops, so my revenue will drop. In this case, PLC would not make a payment, but ARC likely would make a payment. So for Minnesota, should a farmer bet on price changes or aim to protect revenue?

As the USDA finalizes the rules and with more time to fine tune these estimates and include more years as well as the SCO option starting in 2015, this initial assessment may need to be altered. But this is my view at this early date.

Searching for a Fair Rent for 2014

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After the recent years of high crop prices and low interest rates, land prices and rents have risen to new heights. But now, with the recent drop in crop prices and the stickiness of land rents not falling as quickly as crop prices, many farmers are feeling the squeeze once again between revenue, costs, and rent. This is painting an unhappy, perhaps tense picture for both tenants and landowners as rents are discussed and negotiated for 2014.

As a first step in rent negotiation, let's look at what each side sees from their viewpoint.

As a base, we'll start with the projected returns and costs for growing corn in 2014 in west central Minnesota (Table 1). This projection is based on the 2012 production records for west central Minnesota, recent NASS data on prices paid by farmers for inputs, and CBOT futures prices. (Details are in the footnote for the table.)

Based on this projection, an owner-operator is projected to face a loss of $180 per acre. This may be a "paper" loss. The owner-operator does not necessarily face financial trouble immediately, but they would not receive their desired returns for labor, management, and equity in land.

To understand what a tenant and a landowner face individually, we split the owner-operator revenue and costs into two columns: one for the tenant and one for the owner.

In a traditional cash rent lease, tenants receive all the revenue and pay for all direct expenses of growing the crop, their overhead costs, and rent to the landowner - plus they have an expectation of receiving some income for unpaid labor and management ($70 per acre in this example). In the tenant's column for cash rent, the tenant's share of revenue and expenses is projected to provide a net return of $108 per acre before any land rent is paid. Thus, these cost and revenue projections indicate the maximum cash rent the tenant can pay (and still pay all other expenses plus their expectation for labor and management) is $108 per acre.

The astute reader who knows the current land rent market can already see a problem coming.

Landowners do not receive any revenue from production in a traditional cash lease and do not pay for any production costs. Landowners do have overhead expenses such as real estate taxes and insurance plus they have an expectation of a return to the value of the land from production ($240 per acre in this example). In the owner's column for cash rent, the landowner is projected to have expenses of $288 per acre before receiving any rent revenue. Thus, these projections indicate the minimum cash rent the landowner wants is $288 per acre in order to pay all expenses plus their expectation of a return to their land.

There is a large difference between the tenant's negotiating position and the landowner's negotiating position in this projection. The tenant has a maximum of $108 per acre for land rent, and the landowner wants at least $288 per acre for land rent. This does not create an easy negotiation situation--perhaps a mild statement.

Current land rents are much closer to what the landowner wants and not near what the tenant is projected to be able to pay. Even if the tenant was willing to receive no income for his or her labor and management (instead of $70), the tenant's maximum cash rent would be $178. So what do the tenant and landowner do?

One quick answer is for this landowner to look for a tenant willing to pay $288 or more. Given the financial position of many farms, some tenants may be willing to pay a rent this high or higher in 2014. I hear some have. This projection says they will be losing money in 2014 on this rented land. But this loss may not create financial devastation for the farm if they have sufficient cash reserves. Perhaps their long run view says this loss is necessary in 2014 in order to increase the farm size for future years. Perhaps these farms have already priced their crops at prices higher than current future prices indicate.

But crop price projections do not indicate a foreseeable return to levels to the levels of recent years. So, how long can (or should) a tenant continue to pay a cash rent higher than the tenant is able to sustain into the future?

The current tenant may not want to lose acreage so signs the owner's lease agreement for the high rent even though they know they are losing money ($180 per acre in this projection). Again, how long can this be sustained? When should the tenant decide to pursue other income alternatives because the expected returns to labor, management, and equity are greater in those alternatives?

Another answer (for 2014 or a subsequent year) is for the tenant and landowner to accept that crop price levels have changed and both the land market and land rental market are likely to change or have changed. Then the two parties can negotiate over what their expectations are.

The tenant will have to change their expectation for returns to labor and management to less than $70. The landowner will have to adjust their estimated land value and expected rate of return to less than $240 per acre. These are the residual returns after other expenses are paid. The amount of adjustment each party has to make will depend on the competitiveness of the rental market and which party has more bargaining power.

The negotiation centers on these two expectations because they are the "softer" numbers in the budget compared to the "harder" estimates of what the cost of the fertilizer will be, for example. The tenant and landowner will likely not talk openly between them about these expectations, but they are what they will be adjusting as they negotiate.

We could say the tenant should adjust production practices (and thus costs) or increase yield to be more economical. But farmers know their land and are choosing cropping practices that are economically optimal or close to that. Some lax management may have crept in during the recent years of high prices, but it's not the $180 difference in this projection. I don't know any farmers who do recreational tillage or recreational fertilizer applications.

Another answer to this current situation may be to change the form of lease.

Instead of a cash lease, the landowner and tenant could choose to sign a share lease or some form of flexible cash lease. In a share lease, if the production and the direct production costs (including drying) were shared 50-50, the tenant paid all machinery costs, and both parties paid their overhead costs, the projection in shows the tenant paying 48% of the total costs and the landowner paying 52%. So, a 50-50 share lease is probably fair given the uncertainty of prices and yields.

However, if these projections became the actual numbers in 2014, both parties would have losses under a share lease. The tenant would not receive any return to labor and management and lose another $6. The landowner would not obtain the desired return to the value of land.

Moving to a share lease or other form of flexible lease may be needed to provide both parties the ability to survive this period of adjustment to new market conditions.

Join University of Minnesota Extension for this workshop designed to assist land owners, farmers, and agri-business professionals with farm financial issues related to farmland rental rates, ownership, management, leasing agreements, and other matters.

Meetings will be held throughout southern and central Minnesota at no cost. View meeting dates and locations for central Minnesota and southern Minnesota.

MEETING DETAILS
The meetings are sponsored by the University of Minnesota Extension and will last approximately two hours.

Presenter: Dave Bau, Ag Business Management, Extension Educator

MEETING AGENDA


  • Farmland rental rate trends

  • Land values

  • Increasing input costs

  • Landlord worksheet

  • Tenant worksheet

  • A rental rate that works, Excel spreadsheet

  • Flexible leases

  • Rental lease examples

  • What is a fair rental agreement?

Who should attend:


  • Landlords and farm land owners

  • Farmers and tenants

  • Agri-businesses

  • Ag professionals

Make plans now to attend one of these free informative meetings.

In case of inclement weather, please contact the Farm Information Line at 1-800-232-9077.

For more information, please contact Dave Bau at 507-360-0664 or bauxx003@umn.edu.

View meeting dates and locations on our calendar.

Minnesota gift tax effective July 1, 2013

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Gary Hachfeld

MANKATO, Minn. (10/22/2013) - As a result of the 2013 Minnesota legislative session, Minnesota now has a state gift tax effective July 1, 2013. The rules follow many of the federal gift tax rules with a few differences. The gift tax also has implications regarding the state estate laws and tax.

The Minnesota gift tax allows for an annual gift exclusion of $14,000 per person per individual per year to any number of persons without any tax. Couples can combine their gifts for a total of $28,000 per recipient if the spouses own the asset together, write separate checks for $14,000 each or file an IRS 709 and Minnesota gift tax form. In addition, each individual is allowed a lifetime gift exclusion of $1,000,000 which represents a lifetime gift tax credit of $100,000. Couples can combine their lifetime exclusions as well. Gifts in excess of the annual exclusion amounts will require the donor to file an IRS 709 and Minnesota gift tax form. Gifts in excess of the lifetime exclusion amount will also have to file the gift tax forms and the gift will be taxed at a flat rate of 10 percent.

The value of gifts exceeding the annual exclusion amount made within 3 years of a decedent's death will be added back into the decedent's adjusted taxable estate to determine if Minnesota estate tax is due. This provision is retroactive applying to estates of decedents dying after Dec. 31, 2012. The good news here is the amount of estate tax due is reduced by the amount of gift tax paid on any gift added back into the decedent's adjusted taxable estate.

The Minnesota gift tax only applies to the transfer of property located in Minnesota. It applies to Minnesota residents but also to gifts of real estate and tangible personal property located in Minnesota but owned by any non-resident. Minnesota residents who gift real or tangible personal property located outside the state are not subject to the Minnesota gift tax.

Any gift tax due is the responsibility of the donor. However, if the gift tax is not paid when due, that recipient of the gift is responsible to pay the tax. The tax is due by April 15 after the close of the calendar year in which the gift was made. There are some exceptions if the donor dies.

The Minnesota lifetime gift tax exclusion amount of $1,000,000 per person is in addition to the Minnesota estate tax exclusion of $1,000,000. Keep in mind there is also a Minnesota Qualified Small Business Property and Qualified Farm Property Exclusion for estates that qualify. It is important to check with your accountant and attorney for information about these issues specific to your situation. Professional assistance is crucial to effective gift and estate planning.

Gary Hachfeld

MANKATO, Minn. (10/22/2013) - During the 2011 Minnesota legislative session, state lawmakers initiated a Qualified Small Business Property & Qualified Farm Property Exclusion. This $4 million dollar Minnesota estate tax exclusion for qualified small business and qualified farm property was signed into law July 2011 for decedents dying after June 30, 2011. Legislative law tied qualifying for the farm property exclusion to maintaining homestead classification on the farm land. If homestead classification is lost before the decedent's death, the estate will not qualify for the additional exclusion.

Many folks feel qualifying is not going to be a problem and is a panacea for eliminating Minnesota estate tax upon their death. However, without planning there could be major issues. There are several scenarios where the decedent could lose homestead classification and therefore not qualify for the exclusion. Those scenarios include: 1) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent rents the land to a tenant unrelated to them, 2) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent crop-share rents the farm land, 3) Decedent has retired from farming and lives in town within 4 contiguous townships of the farm land, none of their children live on the farm and none of their children farm the land, the decedent custom farms the land and 4) landowner either lives on the farm land or in town within 4 contiguous townships of the farm land, has placed the farm land in an entity and rents the land to a son or daughter who is not a member of the entity. These scenarios will render the estate ineligible for the $4 million exclusion.

If the decedent lived on the farm and farmed the land, rented the land to a farming child or rented the land to an unrelated party, they will have maintained homestead classification. If the decedent moved to town but remained within 4 contiguous townships of the farm land and they had a farming child farm the land, whether the child lives on the farm or not, they will have also maintained homestead classification. Maintaining homestead classification would qualify the estate for the additional estate tax exclusion.

This is an area that can cause huge and unnecessary estate tax issues if done incorrectly. When doing estate and business transition planning, seek the assistance of a competent attorney. Farm families today have a lot at risk. Seeking professional help will secure the future of their business and personal assets.

Should I have a Will, a trust or both?

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Gary Hachfeld

MANKATO, Minn. (10/22/2013) -- Personal estate planning is a critical part of life, especially when transferring a farm business to the next generation. However, recent survey data from four states shows that over 69 percent of farm family members do not have an up-to-date personal estate plan. Part of the reason is confusion around the differences between a Will and a revocable living trust.

A Will and a revocable living trust are instruments that will direct your assets to the individuals, a business entity, organizations, or charities upon your death. You do not need both. One or the other will suffice. The choice of which instrument to use should be based upon your estate planning goals. Each instrument has specific traits.

A Will triggers the probate process. The parameters vary by state but in Minnesota, probate occurs when the decedent owns $50,000 or more of assets or any real estate. Probate is a court supervised process. In Minnesota it takes 12-18 months on average to complete. Court and attorney fees cost, on average, 2-3 percent of the estate value. The process is also open to the public in that anyone can obtain a copy of the decedent's probate records by requesting copies from the decedent's county of residence. These records list the decedent's assets and their value on the date of death. Within the Will, an individual can list how they want their assets distributed upon their death. They can also list a guardian and conservator if they have minor children. Upon death, the decedent's assets receive an increase in basis to fair market value. A Will does not allow for protection of assets from lawsuits and other adverse actions nor does it allow an individual to do disability planning.

Assets in a revocable living trust do not go through the probate process and therefore are closed to the public. The trust must go through an administrative phase to distribute assets but this process takes much less time and generally costs much less than probate. Think of a revocable living trust as a bucket. You place all your farm and non-farm assets into this bucket. You still own the assets so you can add assets to the trust or take assets out and sell or trade them. There is no change in your tax status. Upon your death, the assets receive an increase in basis and pass to your heirs as directed in the trust document. A revocable living trust also allows you to pass assets to an heir via a "protected trust" which shelters the assets from lawsuits and other adverse actions. The trust also enables an individual to do disability planning, a process whereby you outline how you want to be cared for in the event of a disability or incapacitation. A key step in establishing a trust is "funding" the trust. That is, titling all assets with a title into the name of the trust. If this is not done, the assets are required to pass through the probate process. The revocable living trust can allow for much more flexibility in your personal estate planning than does a Will.

In addition to a Will or revocable living trust there are three additional documents required to complete the estate planning process. The first is durable power-of-attorney. Durable means the power continues if you become disabled and cannot make your own decisions. Second is the health care directive where you list how you want to be cared for if you become disabled or death is eminent. Third is listing your Health Insurance Portability and Accountability Act (HIPAA) authorized individuals. These are people you grant access to your medical records and documents. If you are unable to convey your own medical information, the medical care facility will not share this information with anyone unless you have granted them HIPAA authority.

Personal estate planning is an important process. Whether you chose a Will or a trust is less important than getting the process done correctly. Laws are changing constantly so seek qualified legal assistance when completing and implementing your personal estate plan.

Trends in farmland rental rates for 2014

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By David Bau, Extension Educator
University of Minnesota Extension

What are the trends in farmland rental rates and where are they going in 2014? There are many places to find relevant information. The "Cropland Rental Rates for Minnesota Counties" publication prepared by Gary Hachfeld, William Lazarus, Dale Nordquist, and Rann Loppnow utilizes the FINBIN data base with historic information from an adult farm management data base. You can find the publication at two different websites: the Center for Farm Financial Management website under publications, and the Southwest Research and Outreach Center website under research and outreach.

The Minnesota Agricultural Statistic Service cropland rental information is included in the annual bulletin. It can be found online (once the federal government shutdown ends). Another annual publication by the Minnesota Agricultural Statistic Service on cash rent (167 K PDF) is released in September each year.

Iowa completes a statewide survey of farmers and landlords that can be found at the Iowa State University Extension website.

In the "Cropland Rental Rates for Minnesota Counties" publication, the average annual change in rental rates by region from 2011 to 2012 from FINBIN data indicated a 8.9% increase in Northwestern Minnesota, 18.4% increase in West Central, 13.4% increase in Central, 18.0% increase in Southwest, 19.9% increase in South Central and 18.6% increase in Southeast Minnesota. Combining the regions, it would be a 17.8% increase in farmland rental rates across Minnesota from 2011 to 2012, up from the 13.1% increase the previous year.

The Minnesota Agricultural Statistic Service indicated an 11.1% increase across Minnesota from 2011 to 2012 and an 18.0% increase from 2012 to 2013. The Iowa survey data indicated in 2013 the average Iowa farmland rent increased to $270 up from the $252 average in 2012 and from $214 per acre in 2011, with all 9 districts recording an increase in average rental rates.

Cropland rental rates can vary significantly due to many factors including crop returns based on current grain prices and projected yields, land quality, tile and drainage on the farmland, the federal farm program, previous crops, herbicides and fertility, use of facilities, length of contract and other factors. In the "Cropland Rental Rates for Minnesota Counties" publication, you can also see the average rents for the bottom 10 percent and the top 10 percent to give you a range of rents paid in the county along with the median rent for each county. This publication is a helpful tool to use when determining rental rates.

The continued high prices in the grain markets continue to put pressure on rental rates to increase for 2013 but the current prices for 2013 and 2014 corn are much lower than one year ago. On October 11, 2012 Lamberton, MN cash bid for 2012 corn was $7.38 and for 2013 corn $5.79 as of October 9, 2013 the cash bid for 2013 corn was $4.18 and for 2014 corn $4.35. Assuming 175 bushels of corn produced in each year, with all crop sold out of field, the gross revenue would be $1,291.50 for 2012, $731.50 for 2013 and $761.25 for 2014.

Southern Minnesota actual yields were lower than 175 in 2012 and maybe higher in 2013, but yet to be determined for 2014. The total expense, including direct and overhead expenses, to produce an acre of corn in 2012 for over 1000 southern Minnesota farmers was $778.63 per acre paying $200 per acre rent. If a farmer achieves 200 bushels in 2013, gross revenue per acre would be $836, if expenses stayed constant, the farmer would make $57.37 profit. But for the last 10 years input costs have increased 9 percent per year, so the $778.63 expense for 2012 would increase to $848.71 in 2013, below the total revenue projection. If you apply the 9 percent again for 2014 total expenses would be $925.09 with total revenue projected at $761.25 for 2014. This would indicate a loss of $163.86 per acre.

Soybeans expenses in 2012 were $472.23 with rents at $192 per acre. Using a 7 percent increase in input costs, the average increase for past 10 years for soybeans, 2013 expenses project to $505.28 in 2013 and $540.66 in 2014. Lamberton, MN soybean prices on October 11, 2012 were $14.72 for 2012 soybeans and $12.68 for 2013 beans, while on October 9, 2013 prices were $12.43 for 2013 and $11.06 for 2014. Using these prices with assumed yield of 48 bushels per acre, gross revenue would be $706.56 in 2012, $596.64 in 2013 and $530.88 in 2014. So beans make a profit in 2012, 2013 but have a loss of $9.78 for 2014.

The average rents for the fourteen counties in Southwest Minnesota were $160 in 2010, $177 in 2011 and $209 in 2012. For the previous five years, rents in Southwest Minnesota have increased an average of 12.1 percent each year. If you apply a 12.1% increase for 2013 the average goes up to $234 and for 2014 using 12.1% percent increase again, applied to 2013 rate, the average rent for Southwest Minnesota would project to $263 for 2014.

Can farmland rents continue this increasing trend in 2014? The projected 2014 corn and soybean total income and expenses would indicate a loss at current cash forward contract prices available using historic yields. If prices increase or farmers are able to get better yields in 2014 than projected, it would be possible to pay these trending higher rental rates, but based on the current corn and soybean prices for 2014, there is a real potential for farmers to lose money. If this occurs it should cause lower or flat farmland rental rates in 2014 as compared to 2013.

Spring rains and flooded fields have delayed or prevented planting for many farmers in Minnesota. If farmers have multi-peril crop insurance and have not been able to plant by their crop's final planting date, they do have options.

For most of Minnesota, the final planting date for corn is May 31. For the northern counties it is May 25. The final planting date for soybeans in Minnesota is June 10. The late planting period extends for 25 days after the crop's final planting date.

If a farmer was unable to plant corn on or before May 31 (in most of Minnesota) because of an insurable cause of loss, the farmer may:


  • Plant corn during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date. (But planting corn in Minnesota after June 10 is not recommended due to potential frost before harvest.)

  • Plant corn after the late planting period, that is after June 25. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage. (Again, planting corn after June 10 is not recommended.)

  • Plant soybeans on the land intended for corn before June 25 with full insurance coverage for the soybeans (but no prevented planting payment for corn).

  • Not plant a crop and receive a prevented planting payment.

  • Plant a cover crop and receive a prevented planting payment.

  • After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the corn.

If a farmer is unable to plant soybeans on or before June 10 in Minnesota because of an insurable loss, farmers have a similar set of options. They may:


  • Plant soybeans during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date.

  • Plant soybeans after the late planting period, that is after July 5. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage.

  • Not plant a crop and receive a prevented planting payment.

  • Plant a cover crop and receive a prevented planting payment.

  • After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the soybean.

The first step for farmers is to contact their crop insurance agent to review their policy and options before making a decision.

Farmers and their advisers can use a worksheet developed by Iowa State and adapted for Minnesota by Kent Olson to evaluate their options when prevented from planting. The worksheet also helps in the evaluation of whether to replant or not. The worksheet is available here: DelayedplantingevaluatorMinnesota.xls

USDA's Risk Management Agency's (RMA) information on final planting dates and other crop insurance information can be found at http://www.rma.usda.gov/aboutrma/fields/mn_rso/. RMA defines prevented planting as a failure to plant an insured crop with the proper equipment by the final planting date designated in the insurance policy's actuarial documents or during the late planting period, if applicable, due to an insured cause of loss that is general to the surrounding area and that prevents other producers from planting acreage with similar characteristics. More information can be found on RMA's Prevented Planting fact sheet at http://www.rma.usda.gov/fields/mn_rso/2013/2013preventedplanting.pdf.

Choosing ACRE or DCP: The view in late May

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Earlier this month, the choice between the Average Crop Revenue Election (ACRE) program and the Direct and Countercyclical Program (DCP) seemed to be tilting towards signing up for DCP in 2013. Now in late May, that tilting towards DCP has strengthened for Minnesota farmers after the rapid planting rate, the improvement in soil moisture in Minnesota, and the recent upward price movements in future prices.

The rapid planting rate during May and the soil moisture improvement have made it harder to argue that yields will vary widely from averages and trends. So, ACRE payments appear to depend more on the future prices for the crops being planted now. The recent improvement in future prices for the new crop suggest that prices will not be at levels that make the actual state revenue below the benchmark.

Using trend yields for the state yields and historical yields for individual farms, my analysis of 17 example farms across Minnesota show that the breakeven Marketing Year Average (MYA) prices for individual crops are estimated to be about $4.35 per bushel for corn, $10.90 for soybean, and $5.35 for wheat. These are not absolute, but they do give us some information for decisions. If MYA prices were to drop below these price levels (and yields were at trend levels), the ACRE program would likely make a payment larger than the required 20% cut in direct payments under ACRE. If the MYA prices end up higher than these estimated breakeven prices, the DCP program would be the best program for the farmers.

Looking at recent history, the MYA price has tracked the Chicago futures price very closely for the December contract for corn and wheat and November for soybean. In late May, the Chicago price is over $5 for corn, over $12 for soybean, and over $7 for wheat. These are well above the breakeven prices I estimated for the 17 example farms. If these prices hold and yields are close to average levels, the DCP program would be the best choice.

However, there is still uncertainty on actual state and individual farm yields. So every farmer still needs to evaluate his or her own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013.
Farmers and their advisers can use a worksheet provided by University of Minnesota Extension (http://z.umn.edu/dkf) to help them evaluate their situation for the 2013 decision.

As noted before, the extension of the 2008 Farm Bill opens up the decision to participate in either of the safety net programs: ACRE or DCP. Farmers have until June 3, 2013 to sign up for the ACRE program and August 2, 2013 for the DCP program.

Under the earlier rules of the 2008 Farm Bill, farmers who signed up for ACRE had to remain in ACRE through 2012. The extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013.

ACRE vs. DCP in 2013

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The extension of the 2008 Farm Bill opens up the decision to participate in the Average Crop Revenue Election (ACRE) program or the Direct and Countercyclical Program (DCP). Under the earlier rules of the 2008 Farm Bill, if a farmer signed up for ACRE, they had to remain in ACRE through 2012. But the extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013. (Farmers do have the option to not sign up for either program, but this is not a sensible choice for 2013 in almost all cases.)

Farmers have until June 3, 2013, to sign up for the ACRE program and August 2, 2013, for the DCP program.

The 2013 decision to sign up for ACRE involves some uncertainty because the drought of 2012 has cast doubt on the potential yields for 2013 and thus the potential market prices. Plus, changes in the demand side for grains may have weakened the market's ability to absorb higher production at current price levels.

At this point in late April, the decision seems to tilt towards the sign up for the DCP in 2013. As we learn more about the planting season and potential production levels and price movements, this situation may change. So farmers need to pay attention to these changes and make their final choice between ACRE and DCP closer to the deadline of June 3.

Due to this uncertainty and their individual situations, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013. Even if they had signed up for ACRE previously, they can change their choice under the extension of the farm bill for 2013.

Farmers and their advisers can use this Excel worksheet to help them evaluate their situation for the 2013 decision.

By David Bau, Extension Educator, University of Minnesota

Farmland rental rates have increased dramatically the last few years as commodity prices have reached record levels and remained high compared to historic averages. But grain prices will go lower again, and rental rates often lag and do not decline as rapidly. This will leave farmers with high rental rates locked in, creating a loss for the year. A dry year producing lower yields will expand this loss; here the farmers bear all the risk. One way to share the risk and rewards with the landlord is to enter into a flexible land rental agreement. This will reduce the loss for the farmer and share more risk with the landlord.

In 2008, Iowa State Extension reported that nearly 12 percent of all cash leases were flexible. In Minnesota, less than 10 percent of leases are flexible. In a dry year, I encourage farmers and landlords to consider setting up a flexible agreement.

Flexible leases have several advantages:


  • The actual rent paid adjusts automatically as yields and/or prices fluctuate as determined by the agreement.

  • The yield and price risks are shared between the landlord and the tenant.

  • Owners are paid in cash so they do not have to be involved in the crop management decisions.

  • If the agreement includes base cash rent agreement with a bonus, FSA will consider the lease a cash rental agreement; therefore, all government payments would go to the tenant and not have to be divided.

  • In a dry year with lower yields, the farmer will only be locked into paying a base rent, which is usually lower than the typical cash rent.

Base rents vary by area, but in Southern Minnesota the range could be from $100 to $250. Then a flexible component is added based on price, yields, gross revenue, or some combination of these components.

There are many ways to set up a flexible land rental agreement. The farmer and landlord should determine what both are looking for. The higher the base rent, the higher the farmer's risk. The lower the base rent, the higher the landlord's share of risk with no crop insurance to protect their revenue.

Here are some short definitions of different types of flexible rental agreements:

  • Flexible rents based on gross revenue: This is a rental agreement where rental payments are based on gross revenue of the farmland. It can include a base payment in the crop year and a final payment after the actual yield and price are determined.
  • Base rents plus a bonus: This is a rental agreement where a base rent is paid and then a bonus may or may not be paid determined if yields exceed a base goal. Then these additional bushels would be shared between landlord and tenant. The bonus can also be determined by yield and price together or price alone as well.
  • Flexible rent based on yield only: This is a rental agreement where the landlord receives a set base number of bushels with additional bushels if yields are higher than was determined for the base payment. This can also be done with a cash payment based on yield and the price at an elevator.
  • Flexible rent based on price only: This is a rental agreement where the rental payment is based on crop prices. Often it is an average price of the previous twelve months or a quarterly price which is multiplied times the agreed-to bushels. Rental payments can be made at the quarterly price setting times, half and half, or after harvest.
  • Profit sharing flexible rent agreements: This is a rental agreement where the landlord and the tenant share the profit from the farmland. This agreement is similar to a 50-50 crop share lease where they share crop yields 50 percent to landlord and 50 percent to the tenant and some of the expenses are paid by each party.

If a farmer and landlord can come to an agreement on a flexible lease agreement, they can share in both the risk and reward. The lower base payment will reduce the farmer's loss in a short crop and/or poor price year caused by the drought conditions. If timely rains are received and/or prices are good, a farmer and landlord can both share in the additional crop and additional revenue caused by higher prices.

By David Bau, Extension Educator, University of Minnesota

In dry years, livestock producers are exposed to increasing feed costs. Concurrently, liquidation from producers who have run out of feed--or who are reducing livestock numbers to match feed supplies--can cause prices for the finished product to go lower. What can livestock producers do in a dry year to protect against higher feed costs and less than profitable market prices?

Producers should constantly monitor their cost of production for their livestock enterprise. If the markets allow a producer to lock in a profit on the future contracts, they should do it. They still are exposed to varying local basis and quality premiums or discounts.

If the producer raises their own feed, they should still account for the current feed costs when looking at locking a profitable price for the finished commodity.

Locking in feed supplies and costs can also give producers some assurance in a dry year. If hay prices are going up, look at reducing the hay use in rations. Also look at locking in the hay supply required to get through the year as soon as possible because in dry/short crop years, hay prices will continue to rise as supply shrinks. Farmers should examine feed rations to determine if there are less expensive alternatives.

If a producer is using corn in their rations, and they have locked in a final profitable finished market price, they should also purchase the required corn supplies either on the futures board or with forward contracts with local elevators. If they are planning to raise the corn on their fields, what can they do when the drought conditions lower yields significantly? These producers can buy a call option on the December contract on a percent of the crop they are concerned they might not produce. Even in the last major drought of 1988, Minnesota yields were about half the normal year's yield, so farmers should be confident if they purchased calls on half of their normal corn production.

The producer needs to treat the cost of these calls as price insurance on the feed supply. So if the drought is severe and corn prices increase significantly, the call option's value will increase in a parallel fashion and the producer will be able to purchase the higher-priced corn with the profits from the call option. In 2012, the corn price increase of $3.50 in June and July with call options in place, a farmer would have profits on the call option that could be used to purchase the higher priced corn. Producers who utilize soybean meal could buy call options on November soybeans and have the same price insurance.

Farmers should try to source the physical crop in advance from the elevator, feed mill, or neighboring farmer.

Livestock producers could consider decreasing livestock numbers, culling less profitable livestock heavily, and weaning calves early. Producers should work with a vet and nutritionist to determine the lowest cost ration that will ensure optimal health and growth.

How to market grain in a dry or drought year

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By David Bau, Extension Educator, University of Minnesota

How should a farmer approach commodity marketing plans in a dry year? Last year was the driest year on record since the 1950s in the United States. Crops varied widely across the country, but Minnesota was fortunate to receive May rains and timely rains thereafter in parts of the state. Minnesota's average corn year led the country. Unfortunately, going into the 2013 crop year, Minnesota's sub soil moisture is at extremely low levels--much lower than the 2012 conditions. What can a farmer do to enhance their commodity marketing under these conditions?

Start by considering purchasing a higher level of insurance coverage. The majority of farmers purchase 75 percent coverage level and some form of revenue product that insures both yield and price. The prices for soybeans and corn are set at the average of the November and December futures contract during the month of February each year. The 2013 prices are set at $5.65 for corn and $12.87 for soybeans. A harvest price is set with the average of these future contracts for the month of October. The revenue insurance sets a total revenue guarantee at the APH (actual production history) multiplied by coverage level (75 percent), multiplied by the spring price (February average). If a farmer purchases a higher coverage level, they have purchased a higher total revenue guarantee that could cover expenses if below-average yields occur due to dry conditions.

A farmer should consider optional units over enterprise if their farmland quality varies significantly. With enterprise insurance, your premiums are much lower, but it requires crop losses across a broader region. Your whole-farm average yields have to be below your coverage level to get indemnity payments. While with optional units, if one or more of your fields have lighter soil, they would receive an indemnity payment on how each field performs--not your entire operation's average yields.

Pre-harvest marketing historically has been beneficial to farmers by locking in higher prices than are offered at harvest. But going into 2013, corn prices could go to above $8 if drought continues or decline to under $4 if a near normal crop is produced on a large planted acreage. Therefore farmers are hesitant to prepare their 2013 marketing plan and sell any crop at near breakeven prices and well below 2012 crop prices.

As the first part of every marketing plan, a farmer should determine their 2013 estimated breakeven prices. This would be the starting or minimum price for pre-harvest marketing their 2013 crop. A more conservative approach due to the drought conditions might be to lower expected yield below the APH. I might also lower the percent of my crop I am willing to price in my pre-harvest marketing plan to compensate for the current moisture levels.

Art Barnaby, one of the originators of the crop insurance policy from Kansas State, said, "If you buy crop insurance and don't do pre-harvest marketing you are wasting your insurance money."

But with crop insurance--even if you sell 75 percent of your crop pre-harvest--you have some assurance that if your yields are lower than 75 percent of APH, your insurance will reimburse you for the lower yield at the spring or harvest price, whichever is higher. Make sure you do not use the Harvest Price Exclusion product. This way, if prices are much higher at harvest than spring, you will receive a higher guarantee price and be able to repurchase any of your pre-harvested grain that you did not produce with the insurance revenue.

Once the spring price is set for revenue crop insurance, a farmer should not sell below this price or risk losing some of the insurance coverage. Farmers could discount the APH yield as well if drought conditions exist and use this lower yield to. If you choose this option you should recalculate your higher estimated breakeven prices with the lower yields and adjust your marketing plan accordingly.

Each year is different, but if you have a proactive marketing plan in place, you will be better able to adapt to what happens in each crop marketing year. You'll also be prepared for a short crop if the drought conditions persist.

Kent Olson, Professor and Extension Economist, Applied Economics

May 2012

Direct payments to farmers under the current farm bill have been a small, but stable and important part of farmers' income. These direct payments are cut in the draft farm bill from the Agriculture Committee of the U.S. Senate.

In the last few years, those direct payments have been essentially the only government payments made to farmers on the basis of their crop acreage. Crop prices have been higher that the levels that would create payments under the counter-cyclical and ACRE programs. Based on the Minnesota farms in the FINBIN sample at the University of Minnesota, direct payments have been a fairly stable source of income for farmers: a five-year average of $13,044 for all farms in the sample and $17,980 for crop farmers. For all farms, the highest average payment was $13,873 per farm in 2010; the lowest was $12,399 per farm in 2011.

These direct payments have been a small part of gross cash farm income: 2% over the past 5 years for all of these farms and 2.8% for crop farmers. However, direct payments have been an important part of net farm income: 8.8% for all farms and 9.8% for crop farmers. These percentages have declined slightly over the past five years except for 2009 which was a low income year for farmers. For crop farmers, direct payments as a % of net farm income ranged from a low of 7.7% in 2011 to a high of 19.1% in 2009.

Direct payments are a fixed payment in contrast to Counter Cyclical payments that vary with price levels and ACRE payments which vary with price and yield levels. The policy draft from the committee replaces these three payment systems with a new program called Agriculture Risk Coverage (ARC) and expanded insurance subsidies. These proposals will move federal farm support into more of a risk management program with coverage levels moving with changes in yields and market prices over a moving five year time frame.

Direct Payments table.pdf

Switch from corn to soybeans? Not so fast!

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Kent Olson, Extension Economist
Jeff Coulter, Extension Corn Agronomist

May 25, 2011

Delayed Corn Planting.jpg


With a wet spring and delayed planting, many farmers are thinking of switching from corn to soybean due to potential yield losses in corn as planting is delayed. However, if farmers consider potential net revenue, they may not make this switch as fast as if they consider just the potential yield loss.

Simple supply and demand considerations drive this analysis. Much of the U.S. Corn Belt is suffering from poor planting conditions this year, so total corn production likely will decline. Markets will react and have reacted by pushing corn prices up. And if more farmers switch to soybeans, total soybean production may increase and markets will push soybean prices down. So, since both yield and price are affected, revenue needs to be considered as well as yield.

Using last year's costs of production from the Center for Farm Financial Management's FINBIN database of Minnesota farmers' actual expenses, these farmers' three-year average yields, projected harvest prices, and estimated government payments, forecast net revenue is estimated to be $443 per acre for corn and $195 for soybean (Table 1). These estimates indicate a tremendous advantage for corn over soybean and the need for a large decrease in corn yield before soybean is more profitable than corn.

A simple sensitivity analysis shows this to be true. Suppose a farmer was able to plant corn and soybean in a timely manner and did not suffer a yield loss but many farmers across the Corn Belt switched to soybean and markets pushed the corn price up by 5% and the soybean price down by 5%. The estimates show an increase in net revenue for corn for this example farmer and a decrease for soybean (scenario 2 in Table 1).

In another situation, a farmer had corn planting delayed and suffered a 10% yield loss for corn but no yield loss for soybean. Again suppose many farmers switched to soybean so prices increased 5% for corn and decreased by 5% for soybean (scenario 3 in Table 1). In this situation, corn still has a higher net revenue than soybean for the example farmer. Switching for this farmer would lower total revenue.

Other scenarios show similar results: corn continues to have a higher net revenue. And if many farmers were to suffer a corn yield loss, the market would certainly push the corn price higher than current levels.

In one last situation, suppose the example farmer has to plant corn very late and suffers a 25% decrease in corn yield, but the soybean yield does not change and forecast prices do not change. In this situation, the estimated net revenue for corn does drop slightly below the estimated net revenue for soybean (scenario 4 in Table 1). This situation with no price changes is unlikely to happen this year since planting is being delayed across most of the Corn Belt and prices of both corn and soybean are being affected.

In a recent issue of Minnesota Crop News, Jeff Coulter and Seth Naeve report the research that show yields declining as planting date is delayed. However, in a year such as 2011 with lower growing degree days, they estimate the potential corn yield loss may be lower than in a normal year, perhaps 15% if planting is delayed to late May. Thus, potential corn yield losses may be less than the 25% loss in scenario 4.

Thus, farmers may be well served to keep their cropping plan unchanged even though yields may be lower. These estimates should hold if farmers are able to switch to shorter maturity corn hybrids.

However, if farmers stick with their full season corn hybrids, there is a good chance that these full-season hybrids will freeze early in the fall (when the grain is near 40% moisture) and that test weight will be low (as in 2009). That creates all kinds of problems with harvest, drying, marketing, and dockage. Regions in Minnesota that appear to be farthest behind in corn planting this year (parts of central and northwest Minnesota) are also those which often have below normal temperatures during the growing season. This creates a greater risk of the crop freezing before maturity if growers stick with full-season hybrids.

Farmers, lenders and others can make their own estimates of net revenue to analyze their own situations under different price and yield conditions. A management tool that may help are the enterprise budget worksheets developed by my colleague, William (Bill) Lazarus, available at http://faculty.apec.umn.edu/wlazarus/documents/Cropbud_lateplant.xls.


References

Coulter, J., and S. Naeve. 2011. Guidelines for Late-Planted Corn and Soybean in Minnesota. Minnesota Crop News. Posted on May 24, 2011, at http://blog.lib.umn.edu/efans/cropnews/2011/05/guidelines-for-late-planted-co.html


Switch from corn to soybean.jpg

Economics of Farm Management in a Global Setting

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A new book on farm management is available. I just published Economics of Farm Management in a Global Setting. As it says on the back cover of the book:

Advances in technology, communication, transportation, and policy are bringing farmers closer to the global market than they ever have been. To prepare for the future in the midst of these changes, farmers need an orderly process for developing strategic and operational plans and the ability to describe them in a structured business plan. Economics of Farm Management in a Global Setting provides the right blend of tools and knowledge for undergraduate Farm Management and Agricultural Economics students. It covers new and innovative topics needed for today's and tomorrow's farm managers while keeping the fundamental concepts at the forefront. New management tools and methods include:

• Strategic and operations management
• Quality management and control
• Production contract evaluation
• Farm Transfer and Succession Planning

Praise for Economics of Farm Management in a Global Setting

"Practical examples. Hands on. Clear text. Good breadth of material.
Michael Popp, University of Arkansas

Current, complete, concise."
Wayne A. Knoblauch, Cornell University

"Three strengths [of Economics of Farm Management are]: The strong focus on strategy (four chapters) generally lacking in most other texts. ... The integration of lessons from microeconomics and particularly macroeconomics ... [and] its practical orientation by incorporating very practical issues such as operations, quality management, land use and control, contract evaluation, etc. often forgotten by others."
Erik Mathijs, Catholic University of Leuven, Belgium

"As a teacher of Farm Management courses, I find this text very appealing... This text is well balanced and the material covered is up-to-date. It will certainly enrich the existing literature on Farm Management... It not only covers the current topics in the subject, but it also takes into consideration the global nature and competitiveness of today's farming."
Pierre Boumtje, Southern Arkansas University

The complete list of chapters is:
1 Managing the Farm in an Integrated World Economy
2 Management
3 Business Plans
4 Lessons from Microeconomics
5 Lessons from Macroeconomics
6 Government Policies Affecting Farming around the World
7 Strategic Management: Planning
8 Strategic Management: External and Internal Analysis
9 Crafting Strategy
10 Strategy Execution and Control
11 Marketing Basics
12 Financial Statements
13 Financial Analysis
14 Financial Management
15 Enterprise Budgets: Uses and Development
16 Partial Budgets
17 Whole-Farm Planning
18 Operations Management for the Farm
19 Quality Management and Control
20 Investment Analysis
21 Land Ownership and Use
22 Risk Management
23 Production Contract Evaluation
24 Human Resource Management
25 Business Organization
26 Farm Transfer and Succession Planning
27 Farming in the Future

Managing in Turbulent Times

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Given all the uncertainty of the future in the macroeconomic, politics, and the world in general, I decided to re-read "Managing in Turbulent Times," Peter Drucker's classic book from 1980. Even though Drucker was writing for a time period different in many ways from ours today, he still writes a core set of ideas that are pertinent to today's manager.

1. First task is survival. Do what needs to be done to survive today in order to be in business tomorrow.

2. Manage the fundamentals. Pay attention to the traditional measures and do what needs to be done to maintain liquidity and financial strength. Drucker adds, "Liquidity by itself is not an objective. But in turbulent times, it becomes a restraint. It becomes a survival need."

3. Manage productivity. Make the right choices to maintain and increase productivity of all resources: capital, physical assets, time, and knowledge. The productivity of each of these is managed separately with overall productivity being the ultimate goal.

4. "Tomorrow is being made today." In turbulent times, earnings made today should be used to pay the costs of staying in business tomorrow. This phrase is also the recognition that the changes that are part of today's turbulence are creating the business environment of tomorrow. So paying close attention to all the changes today will enable a manager to understand the foundations of tomorrow's market.

5. Concentrate resources on results. This means having to say, "No." Evaluate the business and the market to determine what is making money and/or establishing a base for tomorrow. If part of the business is not producing the needed results, start to let go of it. Drucker says, "Feed opportunities, starve problems."

6. Slough off yesterday. Drucker says the manager should ask, "If we weren't in this already, would we go into it knowing what we know now?" Tradition is a strong force, but if the foundations are changing, what was profitable and successful when it was started may not hold the key to success in the future. If the answer to Drucker's question is, "No," a manager should start looking at how to get out of that activity or at least asking how to stop putting additional resources into it.

7. Growth shifts to new foundations. Managers need to identify where the growth areas are that match their strengths and to start shifting resources to where the new opportunities can be found. Drucker's analogy is that business needs to distinguish between "muscle, fat, and cancer." He adds, "The rules are simple: Any growth which, within a short period of time, results in an overall increase in the total productivities of the enterprise's resources is healthy growth. It should be fed and supported. But growth that results only in volume and does not, within a fairly short period of time, produce higher overall productivities is fat. A certain amount of fat may be needed; but few businesses suffer from too little fat. Any increase in volume that does not lead to higher overall productivity should be sweated off again. Finally, any increase in volume that leads to reduced productivities, except for the shortest of start-up periods, is degenerative if not pre-cancerous. It should be eliminated by radical surgery - fast."

Even though they are 30 years old, Drucker's points are still valid today.

ACRE Payments more likely for 2010

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If they did not sign up in 2009, farmers have until June 1, 2010, to sign their farms up for the Average Crop Revenue Election (ACRE) program, the optional safety net for farmers provided in the 2008 Farm Bill. And farmers should pay close attention to this decision for 2010.

Current research results from University of Minnesota Extension tilt towards the decision to sign up for the Average Crop Revenue Election (ACRE) program in 2010. The decision in 2009 was a toss up as to whether ACRE or counter-cyclical payments (CCP) was a better bet.

My example calculations point toward ACRE payments for corn, soybean and wheat in Minnesota, but this is not certain. There are many interrelated moving parts in this decision. To predict the probability of ACRE payments in the midst of uncertainty, I estimated the potential values and distributions of yields and prices for 2010 and combined them with the ACRE program's rules in a statistical model. The results estimate potential state ACRE payment rates in Minnesota near $50 per acre for corn, $30 for soybeans, and $27 for wheat, with positive payment rates estimated to occur in more than 50 percent of the estimations. Actual payments to individual farms would depend on whether each farm had a loss under ACRE rules, the second trigger in the ACRE program. However, these are just estimates. The possibility of no payments also exists.

Farmers who did not sign up for ACRE in 2009 need to evaluate their specific conditions and payment limits and decide which program is the best option for them in 2010. (Those who signed up for ACRE in 2009 cannot revoke this decision.)

Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments in 2010 are available in the Farm Bill section at Minnesota Extension's Ag Business Management web page. Also, further information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at: www.fsa.usda.gov.

2010 DCP and ACRE Signup begins, deadline June 1, 2010

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USDA announced today that the signup period for the 2010 Direct and Counter-Cyclical Program (DCP) and the Average Crop Revenue Election (ACRE) program has begun and will continue through June 1, 2010.

However, don't rush out to sign up. Let's watch how the programs unfold for the 2009 crop being harvested now. Let's see how the ACRE payments work for those signed up for ACRE.

Since the deadline is June 1, 2010, we'll have a good idea of actual planting decisions, but we won't know much about the weather for the 2010 crop. So the decision to switch from DCP to ACRE will require more analysis about potential yield variability on the farm and for the State as well as some estimates of price variability. We can't assume that the 2010 ACRE payment will be the same as the one for the 2009 crop. Stay tuned for more information about decision tools as we move into the fall and winter.

If you signed up for ACRE in 2009, you can't change back. That decision is irrevocable.

ACRE for 2009? More likely for corn and wheat

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If yesterday's yield and price forecast releases from USDA hold, the potential for a positive ACRE payment rate for Minnesota has increased. This is especially true for corn and wheat. If the low part of the WASDE price forecast becomes reality, we would likely see positive State ACRE payment rates for corn, soybeans, and wheat at current yield estimates.

However, the State payment rate is only the first trigger for an ACRE payment to an individual farm. The individual farm also has to have lower revenue than that farm's benchmark revenue. If a farm is expecting better than average yields from recent years, the farm may not receive a payment even if the State has a revenue shortfall.

And if farmers sign their farms up for the 2009 crop, the farm is enrolled for all four years. If farmers expect normal yields and future prices to be below recent levels, the ACRE program could look very attractive compared to the 20% cut in direct payments. If future prices are expected to increase, the likelihood of ACRE payments decreases.

Farmers have until August 14, 2009, to elect and enroll their farms in either the ACRE program or the Direct and Counter-cyclical Program (DCP) program for their 2009 crop.

Especially due to the closeness of this decision, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2009. Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments is available in the 2008 Farm Bill section at Minnesota Extension's Ag Business Management web page. Also, further information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at: www.fsa.usda.gov.

ACRE for 2009? We're on the fence in late July

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With recent crop price declines, farmers have become more interested in whether they should sign up for the Average Crop Revenue Election (ACRE) program. And they are right to be more interested. Farmers have until August 14, 2009, to elect and enroll their farms in either the ACRE program or the Direct and Counter-cyclical Program (DCP) program for their 2009 crop.

For corn and soybeans, current average price and yield projections for the 2009-10 marketing year and the 2009 crop put potential actual state revenue for corn and soybeans essentially equal to the almost final state ACRE guarantees. If the actual is equal to or more than the guarantee, the State payment rate for ACRE would be zero. However, my estimates show that it doesn't take much of a price drop to have an ACRE payment rate that would cover the required 20% in direct payments (DP).

For wheat, the forecast wheat price for 2009-10 indicates a high likelihood that the potential ACRE payment will be greater than the required 20% reduction in direct payments. Any farmer with wheat needs to give serious consideration to signing up for ACRE instead of DCP and watch which direction price forecasts move before August 14.

This decision is not an obvious choice for corn and soybeans but it is becoming clearer, especially for wheat, as we learn more about where yields and prices may be for the 2009 crop and the 2009/10 crop marketing year. Under ACRE program rules, the revenue guarantees are being set fairly high for Minnesota due to good yields and high prices in recent years. But since forecast prices for 2009/10 are also quite high and Minnesota crop conditions are good for the 2009 crop (from a statewide perspective), actual revenue in Minnesota may not be low enough to trigger an ACRE payment large enough to counter the required 20% reduction in direct payments (DP). In Minnesota, the highest chance of an ACRE payment being made is for wheat. For corn and soybeans, the choice lies in great part on whether prices for the 2009-10 year will be lower than current forecasts, not what prices are doing right now, but what we think prices will be for the entire 2009-10 marketing year.

Especially due to the closeness of this decision, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2009. Further information for Minnesota farmers and an Excel worksheet for analyzing the choice between ACRE and CC payments is available in the 2008 Farm Bill section in the left hand menu at Ag Business Management web page. More information on the ACRE and other FSA programs are available at local or State FSA offices or on FSA's Web site at www.fsa.usda.gov.

ACRE? -- a new worksheet

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A new Excel worksheet has been developed that makes a few corrections.

new Excel worksheet

ACRE? Sign up or not?

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Starting with the 2009 crop year, the Average Crop Revenue Election (ACRE) program is a new, optional safety net for farmers provided by Congress in the Food, Conservation, and Energy Act of 2008 (commonly called the farm bill). The ACRE program is based on changes in crop revenue. It is an alternative to the counter-cyclical (CC) program which is based only on changes in crop prices. Farmers have to choose between the two programs; they cannot receive benefits from both. At first, farmers may find this safety net based on crop revenue appealing; however, making this choice is more complicated than it first appears. The complexities essentially take away any possibility to develop simple decision rules or breakeven prices for farmers to make the decision to choose between ACRE and CC. The attached factsheet and Excel worksheet are designed to help farmers understand the ACRE program and to help farmers make the choice between ACRE and CC by estimating payments under different views of the future.
ABM factsheet
new Excel worksheet

2008 Farm Bill updates

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Keep on top of Farm Bill updates on the Ag Business Management website.

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