Gary Schnitkey of the University of Illinois just released an excellent analysis of the projected crop payments under the old ACRE program or the proposed Senate ARC or House RLC or House PLC programs.  As most know, under the old Farm Bill, a farmer could elect to participate in the ACRE program in return for giving up 20% of their direct payments.  With the new Farm Bill (either Senate or House), the ACRE program goes away.  We had many wheat farmers in our area get almost a $100 per acre payment about three years ago from this program.

Under the new Farm Bill proposals, the farmer can elect either a revenue option (Senate ARC or House RLC) or a price option (House PLC) that will kick in if prices get low enough.  Gary ran some numbers for an Illinois sample farmer with an average yield of 182 bushels per acre.  Gary assumed a long-term trend price of $4.50, $4.00 and $3.50 for each year from 2013 to 2016 and then crunched the numbers to determine respective payment amounts.

At the $4.50 level, the only program that made any payments was ACRE.  Over the 4 year period, $117 of total per acre payments would be collected by the farmer over the four years.  None of the other programs made any payments.

At the $4.00 level, ACRE would pay out $289, ARC $110, RLC $50 and PLC zero.

At the $3.50 level, ACRE would pay out $498, ARC $291, RLC $248 and PLC $100.

As you can see for corn farmers, the old ACRE program is much better than any of the new programs offered.  For other farmers, such as peanut and rice farmers, the difference may be much smaller or even tilt toward the new programs, but for corn, bean and wheat farmers, it appears the new programs will pay-out much lower than the old ACRE program and in many cases, there will be no pay-out, even with lower prices.

Paul Neiffer, CPA

Farm Doc Daily from the University of Illinois just release an extremely good article updating the total net crop losses incurred during 2012.  As most of us are aware, 2012 resulted in the highest amount of indemnity payments ever paid under the crop insurance system at slightly more than $17 billion.  2010 was in second place at $10.7 billion.  Due to these large payments, the system ended up with a net loss of about $6.4 billion for the year.  Total premiums for the year were $17.2 billion, however, the government subsidized these payments by about $6.7 billion.  Without this subsidy, there would have been a small gain for the year.

Although last year was a very large loss to the program, insurance is not based on what happens in one year, but rather, what happens over several years.  The article does a good job of explaining this, but in summary, what I noticed is that the gain from the crop insurance program for 2009 ($3.5 billion) and 2010 ($3.1 billion) was about $6.6 billion in total.  This amount would be in excess of the loss realized for 2012 and over the last five years, the total net gain to the program is about $2.1 billion.  Since 1995, the crop insurance program shows a net loss ratio of about 93%, therefore, it appears that the program is accomplishing what it is intended to do and I would suggest that Congress really does not need to tweak the subsidies involved since this may end up with unintended consequences. 

For example, if the subsidy is reduced for higher income farmers, we could see many of these farmers electing to self-insure and the reduction of those premium payments may result in greater overall losses to the program.

All in all, the crop insurance program appears to be one of the more successful government/private programs and lets try not to mess it up too much.

Paul Neiffer, CPA

As I type this post, December corn futures are currently trading at $5.59 and November beans futures are at $12.84.  Both of these prices are within a few pennies of the spring price that was set based on the average February prices of these futures contracts ($5.65 and $12.87, respectively).  It is interesting that after 3 months of trading that both contracts are within this range. 

Now that these prices are getting back to these levels, are you upgrading your 2013 crop budgets to determine if you need to hedge any of your bushels that are not covered by crop insurance.  Although weather may push prices higher, a couple of weeks of good weather can push them lower too.  We are not recommending a hedge, but rather, check your budget to see if hedging part of your crop at these prices makes sense.

We see too many farmers that try to get $13 or $8, when the price is with a few pennies of this price and a month later, the price is a $1 or $2 lower.

Remember, you are in the farming business and when you can hedge in a good profit, it may be prudent to do. 

Paul Neiffer, CPA

The Kansas City Federal Reserve just released a workpaper entitled “Farm Investment and Leverage Cycle: Will This Time Be Different?”. 

The article describes the four major farm cycles that have occurred since 1900.  The first cycle begin in 1910 and ended in 1940.  The First World War caused farm prices to rise dramatically which led to an increase in farmland prices.  Once the great depression started, this increase in farm land prices was mostly wiped out and many farms went bankrupt.

The second cycle began in 1940 with the start of World War II and continued to until 1960.  Real farm income tripled from 1940 to 1943 causing a resulting increase in land prices.  However, unlike any other farm boom cycles of the last 100+ years, this cycle did not end in any type of bust.

The third cycle started in the early 1970s and ended in the late 1980s.  With the rapid increase in crop prices due primarily to the US-Russia grain pact, farmland prices started to rise dramatically.  There were other inflation pressures during this period that also help cause the increase.  As prices rose, farmers continued to expand with more debt than was proved prudent.  This led to the crash of the 1980s that really took at least 15 years or more to recover from.

This brings us to the latest cycle that started in 2005.  Many factors led to increased crop prices (ethanol, China, etc.) and this cycle is still in process.  The authors indicate that things still look good, but if there is a dramatic drop in land prices and if the debt to asset ratio crosses over 20% again (like the 1980′s), then we will have a bust to end the cycle.  However, if this ratio stays at 17% or lower, then we will not have a bust (similar to the 1940-60 cycle).  The ratio (using their definition) is currently at 10% which is the lowest it has been since the mid 1950s.

The authors are not predicting a bust but are letting us know the parameters that may cause one.  It will be important to watch these signals and be ready to respond accordingly.

Paul Neiffer, CPA

The Kansas City Federal Reserve issued their latest Agricultural Credit Conditions report for the 4th quarter of 2012.  Due to the widespread drought in their area, irrigated cropland values saw a 13 percent jump in the 4th quarter alone and up 30% for the year.  Cash rental rates for irrigated cropland also surged more than 20% from the prior year.

Although fourth-quarter incomes were better than expected, but there is concern about the drought affecting certain areas in the months ahead.  Capital spending rebounded in the 4th quarter although loan demand remained low.

More non-farmers appear to be buying farmland for recreation and residential development than the prior year, although levels are still much lower than previous years, primarily due to farmers snapping up most of the available land.

Crop land surged by more than 25% compared to the previous year in Kansas and Nebraska with Missouri not too far behind.

Paul Neiffer, CPA

Four Senators (two Democrats and two Republicans) this week introduced a bill “The Farm Program Integrity Act of 2013″ to place a cap on farm payments that an individual farmer can receive and try to close “certain perceived” loopholes in the farm payment program.  This bill closely follows language that was included in the original 2012 Senate farm bill proposal.

The bill would establish a per farm cap of $50,000 on all commodity program benefits plus $75,000 on any loan deficiency payments and marketing loan gains.  This would result in an overall $125,000 per farm cap which is doubled for a husband and wife.  The $50,000 cap would apply to any new farm programs that are developed as part of the final 2013 farm bill (assuming one gets done).

The bill tries to close the perceived loophole that currently allows “non-farmers” to qualify for federal farm payments.  This provision will prevent non-farmers from being able to use the management “loophole” that is in the current law.  The bill would clearly define the scope of people who qualify as actively engaged in farming by only providing management for the farming operation.  However, like most law, it is our opinion that “clearly define the scope” will not be quite as black and white as the Senators would like.

Both the National Farmers Union and the National Sustainable Agriculture Coalition support the bill.

On another related note, as part of the Sequester talks, there is a chance that 2013 Ag payments may be reduced.  The discussion right now is an 8% haircut, but we know anything is possible in this process.

We will keep you posted.

Paul Neiffer, CPA

February sets the price level for crop insurance on Corn, Beans and some of the other major crops.  Last year’s spring price was $5.68 for corn and $12.55 for beans.

We have had 4 trading days for this month out of 20 total and so far the average corn price is $5.89 and the average bean price is $13.40.  After coming off of the large harvest prices, these levels may seem low, but they are still higher than compared to the same 2012 numbers.

We have 16 trading days to go and this Friday’s USDA report may provide a dramatic swing either way.

We will keep you posted.

Paul Neiffer, CPA

Dodge ran a 2 minute commercial during the Super Bowl utilizing the Paul Harvey “On the 8th Day God created Farmers”.  I thought it was one of the best commercials during the game and Entertainment Weekly thought the same thing.  It was very well done and we just wanted to say how proud we are of the American Farmers.  Without them, America would not be as great as it is today.

Paul Neiffer, CPA

Every five years the Department of Agriculture sends out a very detailed census form for farmers to prepare and send back.  We have already discussed this form with several farmers and as usual it can be very hard to follow the paper form.  We have found preparing the form online can save some time and frustration.

This is primarily due to the computer automatically taking you to the next part of form based on how you fill out each answer.  This is not true in all cases, but based on our feedback, the online version seems to create less frustration.

This census does provide valuable information to the Department of Agriculture, and thus, should not be ignored.

Paul Neiffer, CPA

The Kansas City Federal Reserve Bank just released their third quarter Agricultural Credit Conditions report.  The report indicated that the drought caused lower farm income for the quarter which caused farmers to increase their farm operating loans.  Capital spending plummeted in the quarter.  This could have been caused by the drought or perhaps the lower Section 179 limits and 50% bonus depreciation may have already reduced farmers appetite for more equipment.

The sharpest income declines emerged in cattle feedlot and hog operations.  With the drought, feed prices appreciated over the previous year and quarter and summer pasture dried up.  The bankers also reported that corn and soybean income fell below last years levels, however, wheat farm income was actually higher than last year.  The drought came too late to affect wheat production.

Bankers expressed concerns about the drought effect extending into 2013.  The spike in feed costs has already resulted in some herd liquidations.  The reported closing of a Cargill beef plant in Texas last week is probably primarily caused by these conditions also.

Bankers reported the steepest quarterly increase in farm loans since the first quarter of 2010.  This was offset with the lowest demand for equipment financing since the same early 2010 period.

Even with the drought, farmland prices continue to rise.  The district saw a 24% overall rise in non-irrigated farmland with Nebraska leading at 30% with Kansas and Missouri right behind at 22-23%, respectively.  About three-quarters of the bankers thought that farmland values would stabilize for 2013.

Paul Neiffer, CPA