After the House passed their Farm Bill today, it appears that their version on the Senate version are not too far apart.  The key points for both are:

• An elimination of all direct farm payments
• A reduction in CRP acreage to either 24 or 25 million acres
• Consolidation of many farm programs
• A Price Support program that guarantees a farmer a minimum price for their crop, or
• A Revenue Program that a farmer can elect (they have to elect one or the other).

The Price Support program is either based on a price set by Congress (the House version) or based on the average Olympic average of the prior 5 years of prices (the Senate version).  If a farmer elects the Price program, they cannot participate in the Revenue program and vice versus.

A couple of key differences is a payment limitation in the Senate of $50,000 per person for the Senate and $125,000 for the House.

The Senate also eliminates these payments if your adjusted gross income is over $750,000 while the house boosts this to $950,000.  This will most likely make the accounting simpler than it is now since you will most likely only need to look at the bottom line income shown on the bottom of your Form 1040 page 1.

We would guess that a final farm bill will be ready for a vote in the  next week or so, but with Memorial Day only a week from Monday, who knows long Congress will take off for that Holiday.

We will keep you informed.

I was doing a google search on the House Farm Bill today and the 10th item that showed up in my search was this article.  With a title of "House Ready to Make Draconian Cuts to Food Stamps in House Bill" I was interested in what these "draconian" cuts were.  As you read the article, you will note that the author point out that the House Farm Bill is proposing cutting "Food Stamps" by about $2.5 billion per year or $25 billion over the 10 years.  This compares to the Senate Bill which calls for lower cuts of about $4.1 billion in total over 10 years.

On the face of it, $2.5 billion might be a lot of money, however, the total "Food Stamp" portion of the Farm Bill is close to $60 billion per year.  The proposed $2.5 billion cut equates to a 4% reduction.  I would normally not consider that to be "Draconian".  The House is most likely battling this issue as I write this post and it will be interesting to see what final number they pass onto the floor for a vote.

It also appears that the Dairy margin management program is still part of the Bill, but this may get eliminated or changed in the committee between the House and Senate.  We will keep you posted on any material changes in both versions.  So far, the Senate Bill appears to mostly follow the bill passed last summer.

The University of Illinois puts out a great daily email called the "Farm Doc Daily".  In today's email, they summarized the debt to asset ratio from 2005 through 2011.  The lower this ratio goes, the better.  Their database showed that the average farmer in Illinois for 2005 had total assets per acre of $1,267 and related debt of $365.  This resulted in a debt to asset ratio of 29%.  For 2011, the total assets had increased to $2,385 while related debt increased but by a lower % to $500.  This resulted in the debt to asset ratio declining from 29% to 21% in 2011.

Farmers have done a great job over the last few years in keeping this ratio low, however, you can note that total debt has increased from $365 to $500 per acre.  I wondered how this ratio would change if we assumed that the three major asset categories used (crop and feed inventories, machinery and farm land) would each decrease by 10% or 20%.  A 10% reduction would lower total assets from $2,385 to about $2,150 and would increase the ratio from 21% to 23%.  A drop of 20% would put total assets at about $1,900 resulting in a ratio of 26%.

As you can see, even if all asset values decrease by 20%, farmers are still better off (using this ratio) than they would have been in 2005.  To get to the same 2005 29% ratio would require an almost 28% drop in asset values.

Keep up the good work.

The Kansas City Federal Reserve 4th quarter survey of Ag conditions spotlighted an ever upward trend in farm land prices.  On a year-over-year basis, irrigiated farmland in Kansas, Nebraska and the Mountain states all saw increases over 30% and non-irrigated land increased by more than 20% in all states.

For the last two plus years, land prices on a year-over-year basis in most corn belt states have increased 15% or more.  We are starting to see the Federal Reserve discuss how to reduce and then eliminate the fiscal stimulas (QE 1, 2, 3 .....).  Once this stimulas is removed, interest rates should start to revert to their norm.  The question is what the norm will be.  If we end up like Japan, we may still have very low interest rates.  If we end up like previous recoveries from recessions, long-term interest rates should range around 3% plus inflation.  Currently, this would suggest rates in the 5-6% range.  How would this effect farm land prices.

If cash rents are at $350 per acre and land is trading for $15,000, then the cash return is about 2.3%.  In today's very low interest rate environment, this may be acceptable.  But if rates rise to 5% and a farm investor wants a cash rate of return of 4% on their land, this suggests a value of $8,750 per acre.  Also, there are certain expectations built into land right now (the price is going up, I need to grab that quarter section before the neighbor does) that "gooses" land values.

What happens when these "gooses" fly away.  Does the mentality revert back to the 1980s or will we see something in between. 

We shall see.

Creighton University produces a monthly index called the Rural Mainsteet Index (RMI) indicating the overall economy for several rural states in the Midwest and Mountain states. The May Index was recently released and I thought this month I would recap the index for each of the states covered.

Any value greater than 50 indicates economic growth. The Index values by state are as follows:

• Colorado - 73.1 down from a strong 75.2 in the previous month
• Illinois - 56.7 down slightly from 56.9
• Iowa - 62.3 an almost 3 point dip from 65.2
• Kansas - 61.8 a full 9 points higher than an almost neutral 52.8 reading
• Minnesota - 66.7 almost no change from 66.8
• Missouri - 71.7 a substantial increase from 56.3
• Nebraska - 57.3 up from 54.9. In January the index was actually under 50
• North Dakota - 78.8, as would be expected this state has the highest index reading (shale oil and low unemployment will do that)
• South Dakota - 57.2 a small decrease from 58.8
• Wyoming - 55.1 a good increase from 52.8

Many of the states farmland indexes appear to be having more swings both up and down versus a more sustained increase in several previous months. Are we seeing a crest in land prices (leading to a dip) or is this just the start of the next wave. We shall see.