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Again in 2014, 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 May31 (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 the middle of June 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 the middle of June is not recommended in Minnesota.)
• 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: DelayedplantingevaluatorMinnesota2014.xls

USDA's Risk Management Agency's (RMA) information on final planting dates and other crop insurance information can be found at 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 www.rma.usda.gov/fields/mn_rso/2013/2013preventedplanting.pdf.

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.

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.

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.

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.

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