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.

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.

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.

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.

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.

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

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

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.

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.

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.

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.

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.