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May 2014 Archive for The Farm CPA

RSS By: Paul Neiffer, Top Producer

Paul is now part of the fourth generation in America that is involved in farming and hopes the next generation will be involved also. Through his blog he provides analysis and insight to farmer tax questions.

USDA to Award $6 Million for Farm Bill Help

May 30, 2014

?The USDA announced yesterday ?that they will be awarding $ 6 million to help farmers analyze their farm bill options primarily related to ARC and PLC. There will also be tools to analyze the options for dairy producers under the new Dairy Margin Protection Program that should start September of this year and the Noninsured Crop Disaster Assistance Program (NAP) that will being early in 2015.

The University of Illinois, Missouri and Texas A & M have been elected as the co-leads for the design and implementation of the online tools to help farmers. The bill allocated $3 million toward these tools and another $3 million will be allocated to state cooperative extension services for outreach and education on the new Farm Bill programs. Here is the amount allocated to each state.

The FSA has also produced a table of the projected 2014 effective prices and PLC payment rates for each covered crop. Here is a pdf of the table and here is an excel spreadsheet of the table. For example, corn's statutory reference price for the 2014 crop year is $3.70. The projected price is $4.20. Since $4.20 is greater than $3.70, there is no expected PLC payment. The 2014 National Loan Rate is $1.95, therefore, the maximum PLC payment is $1.75 ($3.70-$1.95). Currently, the table lists the following crops as being eligible for a PLC payment assuming USDA's projected prices are correct (estimated payment amounts are listed):

  • Barley $.10 per bushel
  • Peanuts $.0675 per pound
  • Sunflowers $.004 per pound
  • Canola $.0115 per pound
  • Safflower $.0015 per pound

Assuming USDA price projections are correct, all other crops would not receive a PLC payment.

There is also a table of the projected county ARC prices for the 2014 crop years. Here is a pdf of the table and here is an excel spreadsheet of the table.? The table shows the actual prices from the 2009 crop year to the 2013 crop year with a projection for each of the 2014 crops. We previously provided some estimates on what the 2014 crop prices would be for corn, soybeans and wheat and the current projected prices from the USDA are not too far off from our original estimates. We estimated corn at $4.65 and USDA is at the same number. We estimated wheat at $6.50 and USDA is at $6.85 (with the downturn in May prices, I estimate this number may be closer to $6.80) and for soybeans we were at $13.25 and USDA is at $13.10. One was spot on, one was a little high and one was a little low. Overall, not too bad of an estimate.

Once these numbers are finalized, we will know the benchmark revenue for each commodity. The key thing to look for in this table is to find your crop and see how the projected benchmark price compares to both current estimated 2014 crop prices and the statutory reference price. For example, soybeans reference price is $8.40. The projected benchmark price is $12.30. 86% of this number is $10.57. The projected price is $10.75. Although the projected price is slightly higher than the $10.57 effective benchmark price, if yield is down a little bit, soybeans would get an ARC payment, but prices would have to drop under $8.40 before any PLC payment is received.

I have bookmarked the FSA ARC/PLC Programs page and you may want to either bookmark it or at least check it out periodically for updates or keep checking our blog since we will continue to update you.

Where are all the Chickens?

May 29, 2014

Following up on a few of our previous posts on cattle and hog numbers from the 2012 AG census, we now will review chickens. As you might guess, we count cattle and hogs in the millions, but we count chickens in the billions. As of 2012, there were about 8.5 billion chickens marketed for the year. This does not count chickens that are laying eggs, but rather, the number sold for food. The chicken count is down from the 2007 total of 8.9 billion, even with 2002 and about 1.1 billion ahead of 1997 levels. Due to the very high feed costs of 2010-2012, we would expect chicken numbers to be down a little, but we guess that 2014 numbers may be higher than 2007 already.

Only two states exceeded 1 billion chickens sold, with Georgia at 1.37 billion and Alabama at 1.02 billion. The top five states are:

  • Georgia 1.37 billion
  • Alabama 1.02 billion
  • Arkansas 975 million
  • North Carolina 802 million
  • Mississippi 761 million

These five states comprise over 58% of total chickens sold during 2012, while the top 10 states totalled over 78% of total sales. Almost every major chicken state is what we would call a "southern" state. The only states that might not be considered southern in the top 15 states are Missouri and California (although it touches Mexico).

I will recap some of the major crops and where they are grown over the next few weeks.

Does Warren Buffett Practice What He Preaches?

May 27, 2014

President Obama sometimes refers to the Buffett Surtax when promoting a new budget or tax law changes. This surtax refers to the famous Omaha investor (Warren Buffet) who talks about volunteering his willingness to pay a higher income tax rate than the current law provides for.

However, much of Warren's wealth is not current income which would be subject to income taxation, but rather, shares in Berkshire Hathaway. He has already indicated that his estate plan is to transfer almost all of his shares in Berkshire Hathaway to the Gates Foundation. By making this transfer, almost all of his wealth will be exempt from federal estate taxes (depends on how much he leaves to his child and others). Therefore, raising the federal estate tax to 50% or more would not change the amount of tax that Warren's estate might pay. Now, if Congress eliminated the deduction for transfers to charities, then Warren may not be pleased with that provision.

The other area where Warren actually does a great job of paying his "low" fair share of taxes is inside of Berkshire Hathaway. This company owns several utilities in the US and UK and the production of wind and solar energy entitles Berkshire Hathaway or its subsidiaries to substantial credits. Credits are better than a tax deduction since they offset tax dollar for dollar. The National Legal and Policy Center just released their estimated analysis of the 2013 Berkshire annual report and how the income tax rate for the energy section of Berkshire Hathaway enjoys a less than 10% tax rate which is substantially lower than the overall 31% reported for other operations.

The energy part generated pre-tax income of $1.806 billion yet only had a tax provision of $170 million or a 9.41% tax rate. In reading through the analysis which is very detailed, it becomes apparent that since Berkshire Hathaway now generates about 7% of the green energy produced in the US, this results in credits of about $450 million being utilized by the company to reduce its overall tax burden. All of this is allowed by the Code and Warren and his company is smart in taking advantage of it.

The cost to Warren individually of raising his individual income tax bracket by 10% annually may cost him personally a couple of million or less, while his company saves over $400 million in tax by using energy tax credits. I would make the trade-off any time.

State Estate Tax - 2014 Update

May 26, 2014

Many states have either completely repealed their state estate tax or they have an estate tax that is tied to the old federal state estate tax credit. Since the federal law changed many years back to repeal the state tax credit, all of those states that relied upon receiving the state tax credit amount really no longer have an estate tax. Many of these states are in the process of administratively eliminating the state estate off of their books. However, there are still several states that have an estate tax and we will recap the current law (based upon a chart maintained by McGuire Woods LLP):

States with a current estate tax and the threshold amount:

  • Connecticut - $2 million
  • Delaware - $5.34 million indexed for inflation
  • District of Columbia - $1 million
  • Hawaii - $5.34 million indexed for inflation
  • Illinois - $4 million
  • Maine - $2 million
  • Maryland - $1 million
  • Massachusetts - $1 million
  • Minnesota - $1.2 million (increases by $200,000 each year until 2018 when it is $2 million)
  • New Jersey - $675,000
  • New York - $2,062,500 (from April 1, 2014 to March 31, 2015, will then gradually increase until it equals the federal amount on January 1, 2019)
  • Oregon $1 million
  • Rhode Island - $921,655
  • Vermont - $2.75 million
  • Washington - $2 million

You need to be careful when reading the threshold amounts. In many cases, the threshold amount is based upon the gross value of the assets held by the decedent in all states. So, if you lived in South Dakota, but had inherited farm land in Washington state with a value of $1.875 million, many taxpayers would naturally assume that no Washington state estate tax is due since $1.875 million is less than the $2 million threshold amount. However, if the total value of all assets owned by the decedent is $5 million then, Washington state would effectively assessed tax based on the $5 million value times 37.5% ($1.875 million divided by $5 million). Therefore, assuming the gross tax on a $5 million estate in Washington is $450,000, the actual amount of Washington state estate tax would be $168,750 (not zero as many would assume). Most states use this method. If you state is listed as having an estate tax, you would need to check how the threshold amount applies to your situation.

Many farmers with larger estates have already placed their farm land into some type of limited entity (LLC, LLP, LP, etc.). In many cases this converts your holdings of real estate into holdings of personal property. Assuming you have now moved to a state with no estate tax, you may assume that you no longer owe tax to the state where your farmland is based. In many cases, this is not correct since the state will "impute" that real estate to you based upon your ownership interest. One example is Minnesota.

State estate taxes remains an ever evolving process and we will try to keep you updated on an annual basis (or sooner is something major happens).

The Long-Term Trend in Hog Numbers

May 22, 2014

We recently reviewed the trend in cattle numbers based on the 2012 census. Those numbers show a decrease in cattle numbers and we had assumed that hog numbers would actually show a small increase in numbers due to the recent profitability numbers for hogs. However, since the last census was in 2007 which was before the couple of years of large negative losses, the final numbers for 2012 show a small decrease in numbers.

As of 2012, total hogs in the US is about 66 million down from 67.8 million hogs in 2007. The peak numbers over the last 15 years was in 1997 with about 61.2 million head.

There are 13 states with more than 1 million hogs and the top five are:

  • Iowa - 20.5 million
  • North Carolina - 8.9 million
  • Minnesota - 7.6 million
  • Illinois - 4.6 million
  • Indiana - 3.7 million

Iowa has more hogs than almost the next three highest states combined. Since 1997, only two states have shown a large increase in hog numbers. Iowa increased their herd from 14.5 to 20.5 million an increase of about 6 million hogs or 41%. The only other state with a large increase was Minnesota going from 5.7 to 7.6 million, an increase of 1.9 million or about 24%.

On the reduction side, it is interesting to note that Arkansas in 1997 had almost 900,000 head, while in 2012, these numbers had dropped to 100,000 or a decrease of 87%. Arkansas went from being ranked 14th in production in 1997 to being number 29 in 2012. I am not sure why Arkansas had the large drop in hog numbers. This may be a good post in the future. Perhaps when I recap the chicken numbers, we will find that Arkansas had a large increase in those numbers to offset the hog decrease.

Farm Income and Land Values Continue to "Soften"

May 19, 2014

I periodically recap some of the surveys done by the Kansas City Federal Reserve. Their region comprises one of the major corn belt states (Nebraska) along with Kansas, Missouri, Oklahoma and the Mountain States. The survey released on May 15 recapped the responses of Ag bankers in the district. These bankers reported lower farm income in the first quarter as compared to the first quarter of 2013 primarily due to tighter margins for farm producers. The district calculates a diffusion index to show how high or how low expected farm income is to actual farm income. This index subtracts the percentage of responses indicating lower farm income from the percent indicating higher farm income and then adds 100 to it. If the highs and lows are equal, the index would stand at 100. Over the last 10 years, this index has ranged from a low of under 60 in 2009 to a high of 160+ in 2011. 2007-2008 the index was at a high of about 150; during 2009-2010, it was under 100 and from 2011 to 2013, it was over 100. Starting early last year, the index has stayed under 100 with a current reading slightly less than 80.

Although crop prices have trended down hurting row crop farmers, these low prices have help livestock producers rebound nicely. This district is composed of several of the top 10 livestock states (Nebraska, Missouri, Kansas and Oklahoma). The value of cow-calf production less operating costs jumped 34% from 2012 to 2013 and it appears that 2014 should see another good size jump if current trends continue.

Farmland values dipped about 1.4% from the fourth quarter of 2013 to the first quarter of 2014 for non-irrigated ground. Irrigated ground eked out a small .5% gain. As could be expected, high-quality grazing ground increased by about 2.6% in the quarter. Nebraska, being the third largest corn producer in the country, saw the largest drop in farmland values falling about 5% for the quarter.

During the quarter, the demand for farm loans increased and bankers reported seeing more requests for loan renewals and extensions than in years past. The demand for capital spending is approaching the lows last seen in 2009-2010. Part of this may be due to the continued uncertainty regarding Section 179 and Bonus Depreciation.

Although farm income is softening, the 228 bankers responding still indicate farming is very healthy and after several strong years, a softening is to be expected.

What if USDA Average Prices Occur?

May 15, 2014

The USDA has provided their long-term price outlook for the major crops over the next few years. Since ARC and PLC are both based upon what the average marketing price by crop year will be, I decided to run another analysis assuming that these prices occur. PLC has no yield variability, while ARC can be impacted by yields above or below the five-year Olympic average. Therefore, this analysis assumes that yields will remain constant over the five-year life of the farm bill.

For corn, USDA is forecasting the following prices (crop year marketing years and based on February, 2014 FAPRI forecast):

  • 2014 $3.65
  • 2015 $3.30
  • 2016 $3.35
  • 2017 $3.40
  • 2018 $3.60

Plugging these numbers into the calculations for PLC, it shows that total payments per eligible bushel over the five years is $1.20. Plugging the same numbers into ARC calculations and assuming the 2013 crop average price will be $4.60, we come up with payments in 2014 and 2015 of $.53 (limited to 10% of benchmark revenue per bushel of $5.33) and $.48 in 2016. This equates to a total payment of $1.54 which is greater than PLC. Remember, however, that if yields are lower, then payment will be higher (subject to 10% limit) and if yields are higher, than payments are lower.

For soybeans, USDA is forecasting the following prices:

  • 2014 $9.75
  • 2015 $8.85
  • 2016 $8.90
  • 2017 $9.05
  • 2018 $9.25

Since these prices are all higher than the $8.40 reference price, there would be no PLC payment. Plugging in these numbers for ARC calculations, we come up with payments ranging from $.09 in 2017 to $1.23 per bushel in 2015 (limited to 10% of benchmark revenue). Total payments will equal $3.37 over the five-year life of the farm bill.

For wheat, USDA is forecasting the following prices:

  • 2014 $4.90
  • 2015 $4.35
  • 2016 $4.35
  • 2017 $4.45
  • 2018 $4.60

In this case, since all of these prices are lower than the $5.50 reference price, a PLC payment would be made each year. These five payments total $4.90. Plugging these prices into the ARC calculation, we come up with maximum payments in 2014 and 2015 of $.65 and $.63 in 2016 and a final payment of $.17 in 2017 for a total of $2.10

As you can see compared to our previous analysis, our final conclusions do not change much. We previously indicated a leaning toward ARC for corn and using USDA prices, that is still the conclusion. Total ARC payments are about $.34 higher than PLC. With regards to soybeans, our analysis indicated ARC would be better than PLC and using USDA that is certainly true since there would be no PLC payments. For wheat, we leaned toward wheat in our previous analysis and using USDA still bears this out. Total PLC wheat payments would be about $2.80 higher than ARC.

USDA is not always right on these forecasts (OK, almost never right) and they tend to be fairly conservative. If they are indeed conservative for the 2014-2018 crop years, then ARC will tend to perform even better than what is shown here.

The USDA is supposed to have decided on which organizations to award their $3 million of grants for decision-making analysis, but I am hoping that this analysis and others we have done will give you a head start.

2012 Cattle Inventory

May 15, 2014

Most everyone knows that the cattle inventory numbers have been trending down for a few years now. The 2012 Ag Census confirms this.

In 1997, there were 34.2 million cattle on hand. Over the next 15 years, this steadily dropped to a final 28.95 million cattle in 2012. As we can probably guess, the top state is Texas with 4.3 million down over 1 million over that same 15 year span. Those states with more than a million head are:

  • Nebraska - 1.73 million
  • Missouri - 1.68 million
  • Oklahoma - 1.78 million
  • South Dakota - 1.61 million
  • Montana - 1.44 million
  • Kansas - 1.27 million

In 1997, there were 11 states over 1 million head (with Florida, Iowa, Kentucky and Tennessee joining the above 7). Only one state with more than 100,000 head has added to the count since 1997 and that is Wisconsin with an increase from 220,031 to 248,305.

I will keep posting AG facts from the census over the next few weeks, but here is the update for today.

The 2012 Billion Dollar Counties

May 14, 2014

I had previously posted on the 2007 Ag Census for those counties in the US that exceeded $1 billion in annual farm sales. In that census, there were 20 counties in the US with sales in excess of $1 billion and almost all of them were in California. Six other states had counties in excess of $1 billion, but no state had more than two counties.

The recently released 2012 Ag census now indicates there are 29 counties in the US with sales in excess of $1 billion and Texas now has four of them and instead of six states other than California, there are now 10 states. The leader again with almost $5 billion in annual sales is Fresno County in California. This county actually has more ag sales than 23 other states. All of these counties on their own would have greater sales than 15 other states.

Here is a listing of all counties with sales in excess of $1 billion for 2012:

State

County

Sales (in 1,000s)

Arizona

Maricopa

$ 1,003,475

California

Fresno

$ 4,973,041

California

Tulare

$ 4,017,073

California

Kern

$ 3,998,990

California

Monterey

$ 2,979,735

California

Merced

$ 2,967,523

California

San Joaquin

$ 2,250,158

California

Stanislaus

$ 2,228,135

California

Imperial

$ 1,888,639

California

Kings

$ 1,829,236

California

Madera

$ 1,602,766

California

Ventura

$ 1,440,132

California

Santa Barbara

$ 1,177,916

California

Riverside

$ 1,038,949

Colorado

Weld

$ 1,860,718

Colorado

Yuma

$ 1,150,344

Iowa

Sioux

$ 1,613,087

Kansas

Haskell

$ 1,009,877

Nebraska

Cuming

$ 1,081,302

North Carolina

Duplin

$ 1,276,421

North Carolina

Sampson

$ 1,258,793

Oklahoma

Texas

$ 1,013,921

Pennsylvania

Lancaster

$ 1,474,954

Texas

Deaf Smith

$ 1,379,076

Texas

Parmer

$ 1,329,538

Texas

Castro

$ 1,312,140

Texas

Hartley

$ 1,180,897

Washington

Grant

$ 1,762,295

Washington

Yakima

$ 1,645,510

2012 US Farm Census

May 13, 2014

The USDA performs a farm census every five years. They just released the final numbers for the 2012 census. Over the next few months, I will do various posts regarding this census on a more detailed basis, but I thought I would give some highlights now:

  • Total US farm sales for 2012 were $395 billion dollars up from $297 billion in 2007 (the last census taken).
  • Total farms with more than $500,000 of sales is 155,178 (out of 2.1 million total farms) which is about 7.4% of the total farmers in the US. However, these farms produce $317 billion of sales which is about 80% of all farm sales and if you include all farms over $250,000 in sales, you equal about 89% of all farm revenue.
  • As you can probably guess, California is still number one in farm revenue at $42.6 billion up from $33.9 billion in 2007. Iowa is number 2 at $30.8 billion up from $20.4 billion.
  • There are 11 other states with revenues in excess of $10 billion - Texas ($25.4), Nebraska ($23.1), Minnesota ($21.3), Kansas ($18.5), Illinois ($17.2), North Carolina ($12.6), Wisconsin ($11.7), Indiana ($11.2), North Dakota ($10.9) and South Dakota and Ohio each at $10.1.
  • The major row crops by value are (1) Corn $67.25 billion, (2) soybeans $38.7 billion, and (3) wheat $15.8 billion.
  • Livestock values are (1) Cattle $76.4 billion, (2) Poultry and eggs $42.8 billion, (3) Milk $35.5 billion and (4) Hogs $22.5 billion.
  • For the first time (at least in a long-time), crop values exceeded livestock values at $212 billion versus $182 billion. In 2007, crop values were $144 billion and livestock was $154 billion.
  • Total vegetable values were $16.9 billion and all fruit sales were $25.9 billion for about $43 billion of total fruits and vegetables or about 11% of total farm sales.

This is just some of the summary data available at the USDA on the census. If you are interested in getting more detail, you can access the census data here.

STAX-Cotton Stacked Income Protection Plan

May 12, 2014

We have done numerous posts on the new ARC and PLC programs, however, cotton producers are not eligible to participate in either of these programs, so we thought it would be helpful to update cotton producers on the new program available to them.

First, 2014 is a transition year for cotton producers. For 2014, they will be entitled to the following:

  • 60% of cotton base acres times,
  • The difference between the midpoint average year cotton marketing price as of June 12, 2013 as compared to December 10, 2013 times 597 (pounds per acre), and
  • The payment yield for the farm divided by 597 (pounds per acre).

If the STAX program is not available in their county for 2015, then #1 will be equal to 36.5% not 60%. According to this column from the National Cotton Council, this amount will be equal to 5.4 cents/pound on all 2013 base acres and direct payment yield. There is a separate $40,000 limit for each crop year.

For example, if a cotton farmer had 1,200 cotton base acres with an average yield of 600 pounds per acre, this would equate to a total payment of $38,880. Since this amount is less than $40,000, the full payment would be allowed. If STAX is not available for the 2015 crop year, the farmer would be eligible for an additional $23,652 ($38,880 X 36.5%/60%).

Beginning in 2015, cotton farmers are eligible for an additional "crop insurance" product call Stacked Income Protection Plan or STAX. This plan is similar to supplemental coverage option, but is strictly for cotton producers. Producers would pay a premium and receive an indemnity (if a loss is triggered). It is designed to cover county-wide revenue losses (similar to the old GRIP program). It is a new concept since it allows the producer to "stack" an additional crop insurance policy on top of their current policy thus allowing a portion of that deductible to be covered by a county triggered program.

It does not provide double coverage, but allows a producer to stack layers of insurance protection to provide greater risk coverage. If the producer does not have an individual policy, the range of coverage is from 10% to 30% in 5% increments. However, if there is crop insurance coverage, then the amount of coverage available is 90% minus the amount of coverage elected under the policy (to a maximum 30%). For example, if the cotton producer has a 70% RP policy, then the maximum amount of STAX coverage available is 20%. STAX is subsidized at 80%, so producers would pay 20% of the premium (this subsidy is most likely greater than current crop insurance subsidies).

Producers could elect a payment rate multiplier of up to 120%. This concept works the same as the old GRIP or GRP insurance programs and has two purposes:

  • Account for the increased variability of individual farm yields as compared to county-average yields, and
  • Allow producers with above average farm yields to purchase a higher level of coverage.

The multiplier would increase the maximum protection per acre but would not impact the trigger revenue required to receive a STAX indemnity.

Assume a county has a trend yield of 600 pounds but a five-year average of 700 pounds. The projected price is 80 cents, but actual harvest price is 90 cents. The expected county revenue is:

  • The greater of trend or five-year average or 700 times
  • The greater of projected or harvest price or 90 cents for a total of $630.

The actual county yield is 500 pounds per acre. The actual county revenue is 500 times 90 cents or $450. This results in $117 per acre of payment loss. If the producer elected 20% coverage, then their loss would be limited to 20% of expected county revenue or $126.00. Since $117 is less than $126, then the full loss payment is allowed subject to the overall payment limitations.

This post is little longer than normal, but wanted to outline both the transition payment calculations and the new STAX program. The FSA has not issued final regulations on this policy, so some changes may occur.

I will keep you posted.

Payments to Veterinarians Require 1099 (Even If Incorporated)!

May 06, 2014

Most farmers are used to preparing form 1099s in January of each year for any unincorporated businesses that provide services to them during the year. Once those total payments exceed $600, the farmer is required to issue a form 1099-MISC. If the business providing the services is incorporated, then a form 1099 is normally not required.

However, for many years, Congress has required a form 1099 be issued to any medical provider that provides services exceeding $600 in a calendar year and these rules require a form 1099 for any entity. Therefore, if the medical provider is incorporated, the business would still need to issue a form 1099.

The IRS released guidance late last year indicating that veterinarians meet the definition of a medical provider, therefore, if the farmer pays more than $600 to any vet during the year, they should issue a form 1099 at the end of the year, even if the vet is incorporated. If you have a vet that provides services during the year and these payments exceed $600 for the year, make sure to issue a form 1099 to them at year-end. Instead of being listed in box 7 (non-employee compensation), these payments will be listed in box 6 (medical and health care payments).

Tomorrow starts the three-day AICPA Ag Conference in Austin, Texas. I am looking forward to the line-up of speakers that we have this year and will fill you in on anything worthwhile that may happen.

100 Million Pounds Not 10 Million Pounds

May 01, 2014
In my last post, I referenced a sample dairy farmer taking advantage of the Dairy Margin Dashboard put out by the University of Illinois. Since my eyes have gotten a little older, I missed the fact that my input was based on 100 million pounds, not 10 million pounds. Everything else is correct, other than the fact the dairy is 10 times as large. 100 million annual pounds is close to a 4,500 head dairy.

Nice Dairy Margin Management Dashboard

May 01, 2014

The University of Illinois issues a daily "farmdoc" and today's release was a nice dashboard for dairy farmers to determine how much margin protection they could have received if the margin protection program had been around since 2000. The dairy farmer can plug in their elected coverage levels; the amount of protection they want (from $4 to $8); and the amount of annual production. Based on the year they select (from 2000-2013), the dashboard would indicate the amount of net income or expense from the program by each two month segment.

For example, I plugged in a dairy with a production history of 10 million pounds per year that wants $6.50 of coverage and elects to cover 75% of his production. Running the numbers for each year, we ended up with a net income or (expense) of:

2000 $(209,600)

2001 $(209,600)

2002 $(150,928)

2003 $(18,039)

2004 $(209,600)

2005 $(209,600)

2006 $(209,600)

2007 $(209,600)

2008 $(209,600)

2009 $1,434,452

2010 $(209,600)

2011 $(209,600)

2012 $860,073

2013 $171,031

As you can see, if the dairy farmer had started participating in the program in 2000, there would be nine straight years where the farmer would incur a net loss and only in 2002 and 2003 would the farmer collect any program payments. During these nine years, the dairy farmer would be out a total of $1,636,167. However, beginning in 2009, the dairy farmer collects just in one year almost all of this back ($1,434,452) and over the years 2000-2013, the dairy farmer would be $410,189 ahead by participating at these levels in the program. If he waited until 2009 to start, he would actually be ahead by $2,043,356.

This dashboard provides the dairy farmer with a good set up of historical what ifs to help them in their decision. If they expect a repeat of the high feed prices incurred between 2009 and 2013, they may want to participate at the higher levels. If, however, they feel that feed costs will remain at current levels and milk prices will remain strong, they will most likely opt for the $4 protection level since that costs nothing other than the annual $100 fee to participate in the program.

I re-calculated the numbers at the $4 level and the farmer would receive $317,049 in 2009 and $205,906 in 2012. Not a bad return for a cost of $100 per year, however, in all other years, the farmer would get nothing.

This can be a very valuable analysis tool for our dairy farmers. If you operate a dairy, make sure you run your numbers.

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