The “FOCUS ON AG” column is sent out weekly via e-mail to all interested parties. The column features timely information on farm management, marketing, farm programs, crop insurance, crop and livestock production, and other timely topics. Previous “FOCUS ON AG columns are available on the MinnStar Bank website at: https://www.minnstarbank.com/category/focus-on-ag/ or the MinnStar Bank Facebook page at: https://www.facebook.com/MinnStarBankNA/ Selected copies of the “FOCUS ON AG” column are also available on “The FARMER” magazine web site at: https://www.farmprogress.com/focus-ag
Back to Blog
The 2023 crop year will be the final year for the current Farm Bill, which is set to expire on September 30, 2023, unless there is an extension. A Farm Bill is one of the most comprehensive pieces of legislation that is passed by Congress. Passage of a new Farm Bill is very complex, with programs ranging from farm commodity programs to food and nutrition programs, from conservation programs to rural development programs, and several more. In many cases, finalizing a Farm Bill in Congress can be quite controversial, and not necessarily just by political party lines. The Farm Bill programs become quite geographical, with members of Congress wanting to protect the farm, food, conservation, and economic interests of their State or Congressional district.
Following are a few insights on some of the key provisions that are included in the current Farm Bill:
The Commodity Title includes all commodity farm program payments, marketing assistance loans (MAL), and other crop subsidy payments. In the past two Farm Bills, crop producers have had the option to choose between the price-only “Price Loss Coverage” (PLC) and county yield revenue-based “Ag Risk Coverage” (ARC-CO) program, which has been an annual choice since the 2020 crop year. Some farm organizations would like to see increased crop reference prices and MAL loan rates, as well as to make some adjustments to the ARC-CO program payment formula. The “Dairy Margin Coverage” (DMC) program, which has proved to be quite beneficial for small to medium sized dairy herds (under 300 cows), is also included under this Title and was enhanced in the 2018 Fam Bill.
Most crop producers and ag lenders will highlight a sound working crop insurance program through the USDA Risk Management Agency (RMA) as the “centerpiece” for a solid risk management plan in a farm operation. Over 95 percent of the corn and soybean acres in the Upper Midwest are typically insured by some type of crop insurance coverage, which are subsidized at a rate of 60-65 percent by the federal government. The RMA also offers some insurance products the dairy and livestock producers. Some members of Congress are calling for some changes and modifications to the current programs under this Title, while most farm organizations are lobbying to keep the current program intact. Some livestock organizations would like to see enhancements to RMA programs for livestock production.
The current Farm Bill set the maximum Conservation Reserve Program (CRP) acres at 27 million acres, with additional focus on the Grassland Reserve Program. The Farm Bill also set the maximum CRP rental rates at 90 percent (90%) of the average FSA “prevailing” rental rates for Continuous CRP contracts and at 85 percent (85%) for General CRP. There will likely be considerable support for expansion of the maximum CRP acres, as well as for increasing the maximum annual CRP rental rates to incentivize enrollment into the CRP program. The large 2022 “Inflation Reduction Act” contained several provisions that provided added funding for the Environmental Quality Incentives Program (EQIP) and the Conservation Stewardship Program (CSP), which are part of the Conservation Title.
This Title sets parameters and provides funding for the FSA direct and guaranteed loan programs, which have become quite important to farm operators and ag lenders. The direct FSA farm ownership loans are especially important to provide beginning farmers low interest loans to purchase farmland. Recently, there have been greater efforts to reach underserved farmers and ranchers with the FSA loan programs.
The Nutrition Title, which includes the SNAP program (food stamps), the Women, Infants and Children (WIC) nutrition program, and school lunch program, will probably be debated more than any other Title during Farm Bill hearings in 2023. The Nutrition Title will likely account for 80-85 percent of annual federal spending allocated under the next Farm Bill. Several billion dollars were added to the Nutrition Title budget base as part of COVID relief legislation and the 2022 Inflation Reduction Act. Some members of Congress would like to separate the Nutrition Title from the Farm Bill; however, ag policy experts have warned that funding for ag commodity programs could become much more difficult if SNAP and the other nutrition programs are removed from the Farm bill legislation.
Other Farm Bill Titles
There are seven other Titles in the current Farm Bill that authorize programs and funding that is administered by USDA. These Titles and programs include:
This Title reauthorizes funding for rural development loans to communities and businesses, as well as programs to assist local governments with everything from emergency service providers, fire protection, wastewater treatment, expansion of broadband service, and more.
Includes funding for important agricultural trade promotion programs, such as the Market Access Program (MAP) and the Foreign Market Development Program (FMDP). These trade related programs are important for opening new markets and maintaining existing markets for U.S. ag exports.
Provides funding for USDA programs that support the development of biofuels and renewable energy. There may be efforts to include other “green energy” programs in the Farm Bill.
Creates programs and provides funding for USDA collaborative efforts to battle forest fires, as well as for research and development, insect and disease control, and timber management.
Provides USDA funding for farmers markets and other local food programs, as well as for the national organic certification program. The last Farm Bill legitimized industrial hemp as an agricultural commodity, thus making hemp eligible for crop insurance and other USDA programs.
Research and Extension
USDA funding for ag research, extension programs, and other food research and education programs through the nation’s Land Grant University system are provided under this Title.
This Title covers any other programs offered by USDA, such as the provision in the last Farm Bill to provide funding for a foot-and-mouth disease (FMD) vaccine bank.
Farm Bill “Baseline Funding” and Summary
The amount of dollars that Congress allocates to a Farm Bill over a 10-year period is known as the “baseline funding”. This becomes very important in determining what the funding level is for each Title and the various programs in the Farm Bill. The current 2018 Farm Bill authorized $860 billion over ten years (2018-2027), with 76 percent going to nutrition, 9 percent to crop insurance, 7 percent each to commodity programs and conservation, and less than one percent to all other Titles. The initial “baseline funding for the 2023 Farm Bill proposes $1.3 trillion over ten years (2023-2032), with 84 percent for Nutrition, 6 percent for conservation, 5 percent for crop insurance, 4 percent for commodity programs, and less than one percent for the other Titles.
Both the U.S. Senate and U.S. House Ag Committees held hearings on a new Farm Bill during 2022 and more hearings will likely be planned early in the new Congressional session in 2023. The Congressional leadership has been very committed with plans to have a new Farm Bill completed by September 30, 2023, with very little talk of an extension to the current Farm Bill. Ultimately, there will likely be a compromise reached, and a new 5-year Farm Bill will be passed; however, given the political division that currently exists in Congress, a one-year extension of the current Farm Bill is certainly a possibility.
For additional information contact Kent Thiesse, Farm Management Analyst and Sr. Vice President, MinnStar Bank, Lake Crystal, MN.
(Phone - (507) 381-7960)
E-mail - email@example.com) Web Site - http://www.minnstarbank.com/
0 CommentsRead More
Back to Blog
At the end of every year, various publications, websites, etc. have their “Top 10” or “Top 5” list for that year. In this issue of “FOCUS ON AG”, I am high-lighting my “Top 5 Ag Topics” for 2022, based on issues that were discussed in the columns throughout the year. Following are my “Top 5 Ag Topics” for 2022:
1. Strong U.S. Net Farm Income levels continue in 2022
Based on the data in the latest “2022 Farm Income Forecast” that was released by the USDA EconomicResearch Service (ERS) in early December, U.S. net farm income is expected to increase by $19.5 billion or 12.8 percent above 2021 levels, which followed an increase of over 40 percent in 2021 as com-pared to 2020 net farm income levels. The estimated 2022 net farm income is now estimated at $160.5 billion. In the recent farm income report, USDA estimated the total U.S. net cash income for 2022 at $187.9 billion, which is an increase of $39.7 billion or 26.7 percent from a year earlier. When adjusted for inflation, the 2022 net farm income is the highest since 1973, while net cash income would be at the highest level since USDA began tracking this data in 1929. Net cash income includes cash receipts from all farm-related income, including government payments, minus cash expenses for the year. Net farm income is accrual-based 2020 net farm income levels. The estimated 2022 net farm income is now estimated at $160.5 billion. In the recent farm income report, USDA estimated the total U.S. net cash income for 2022 at $187.9 billion, which is an increase of $39.7 billion or 26.7 percent from a year earlier. Ehen adjusted for inflation, the 2022 net farm income is the highest since 1973, while net cash income would be at the highest level since USDA began tracking this data in 1929. Net cash income includes cash receipts from all farm-related income, including government payments, minus cash expenses for the year. Net farm income is accrual-based, which includes income adjustments for changes in inventories, depreciation, and rental income.
The very strong improvement in U.S. farm income levels that began in 2021 and continued through 2022 are considerably higher than farm income levels from 2014-2020. The improvement in 2021 and 2022 net farm income has largely been driven by continued strong commodity prices for crops and livestock, strong export markets, and better than expected crop yields in some areas. By comparison, the positive U.S. net farm income levels in 2019 and 2020 were largely driven by very high levels of government farm program payments, which included payments for trade-disruption and COVID-related payments, as well as some traditional farm program payments and disaster payments.
2. Inflation and rapidly increasing farm input costs.
Almost every input cost for crop and livestock production increased in 2022 compared to expense levels in 2021, and expenses are likely to increase again in 2023. Much of the focus has been in higher fertilizer costs for corn, which doubled for many producers in 2022, compared to aver-age 2021 fertilizer costs. Input costs in 2022 were also significantly higher for crop chemicals, diesel fuel, propane, repairs, custom work, and la-bor. In addition, the U.S. Federal Reserve Bank increased the prime interest rate from 3.25 percent at the beginning of 2022 to 7.5 percent by year-end in December, which will likely result in significantly higher interest costs for many farm operators in 2023. The cost of farm equipment and other capital improvements has also increased substantially in 2022 from a year earlier, which will likely increase depreciation and other overhead costs in the coming years. The combination of significantly higher crop input costs, along with increasing land rental rates, will likely put more pressure on crop breakeven price levels for 2023. Using typical crop input expenses, other direct costs, average overhead expenses, together with a land rental rate of $275 per acre and a targeted return to the farm operator of $50 per acre, the break-even price on cash rented acres to cover direct and overhead expenses for corn in the Upper Midwest for 2023 will likely be around $5.50 to $6.00 per bushel. This compares to corn break-even levels of $5.00 to $5.25 per bushel in 2022 and $3.75 to $4.00 per bushel in 2021. The break-even soybean price to cover the cost of production and $275 per acre land rent in 2023 will likely be about $12.00 to $13.00 per bushel, which compares to soybean break-even levels of $11.00-$11.50 per bushel in 2022 and $9.00-$9.50 per acre in 2021.
3. Strong grain prices continue in 2022
As in most years, where farmers were positioned in the grain market and the grain marketing decisions that were made by farm operators will have a big impact on the profit levels for their crop enterprise in 2022. Both corn and soybean markets have remained quite strong throughout most of 2022, due to increased demand both for domestic uses and for export markets, especially to China. The “basis” level between Chicago Board of Trade (CBOT) prices and local corn and soybean prices has remained extremely tight in many areas of the Upper Midwest due to strong local demand and tight grain supplies, which has also enhanced grain marketing opportunities during the year. “New crop” cash corn price bids in Southern Minnesota were near $5.25 per bushel early in 2022, before rising to near $7.00 per bushel by April and staying above $6.00 per bushel for the remainder of the year. The cash corn price was above $6.50 per bushel in mid-December. The 2022 “new crop” cash soybean bids in Southern Minnesota started the year at $12.50-$12.80 per bushel and rose to near $15.00 per bushel by late April, before finishing the year in the $13-$14 per bushel range from July to December. The cash soybean prices were above $14.25 per bushel in mid-December at many locations. USDA is currently estimating the average farm prices for the 2022-23 marketing year, which ends on September 30, 2023, at $6.70 per bushel for corn and $14.00 per bushel for soybeans. The current forward price bids being offered in many areas for the Fall of 2023 are near $5.50 per bushel for corn and $13.25 per bushel for soybeans.
4. Variable crop yields across the Midwest
Some crop farmers in Southern Minnesota and Northern Iowa would categorize 2022 crop yields as “better than expected”. Following a somewhat late planting season, favorable growing conditions for both corn and soybeans allowed crops in many areas to make rapid progress. Weather conditions turned very hot and dry from late May through July. Many portions of this region only received 50-75 percent of the normal growing season precipitation from May 1 through September 30, and much of that came in mid-August or later. However, the combination, of excellent planting conditions, no-drown-out loss, timely rainfall, and above normal growing degree units resulted in average to above average corn and soybean yields for the year in some portions of the region.
On the other hand, “mother nature” was not kind to many producers in Nebraska, Kansas, South Dakota, and Western Iowa, as well as in portions of Western Minnesota, as producers in those areas experienced some of the worst drought conditions since 2012, and in some cases the worst drought since 1988. The drought in these areas resulted in corn and soybean yields that were 20-30 percent or more below APH yields. The drought also resulted in very low hay and pasture production, which lead to many cow/calf producers in the region being forced to liquidate a portion of their beef herd.
5. Sharp increases in land values
Iowa State University recently released the “2022 Farmland Survey” results, which showed that average farmland values in Iowa increased by 17 percent in 2022 as compared to 2021 farmland value. The rather large percentage increase in annual land values this year came one year after a 29 percent increase in 2021, which was the second highest on record, trailing only a 32.5 percent increase in 2013. The 2022 average farmland value in Iowa was $11,411 per acre, compared to $9,751 in 2021 and $7,559 per acre in 2020. The 2022 average is at the highest nominal land value since Iowa State began surveying land values in 1941. Recent U.S. Federal Reserve data reported year-over-year average annual land value increases in the third quarter of 2022 at 30 percent in North Dakota, 27 percent in Kansas, 24 percent in Minnesota, 22 percent in Iowa, 20 percent in Nebraska and Illinois, 13 percent in South Dakota, and 12 percent in Wisconsin. The higher land values were largely driven by high farm profit levels in 2021 and 2022.
Back to Blog
Record grain prices, high farm profit levels, rapid increases in land values, large capital purchases on the farm, and strong optimism about the future of the farm economy. Sound familiar …… that was the situation in the late 1970’s; however, it also very similar to current farm economic situation in many areas of the United States. Of course, what followed in the 1980’s was the worst agriculture economy in the U.S since the Great Depression of the 1930’s, which resulted to extreme financial and mental stress for a large number of farm families, as well as leading to many forced farm sales and foreclosures. The farm stress of the 1980’s was caused by rapidly rising inflation and farm input costs, reduced commodity prices and poor farm profit levels, greatly reduced land values, and high interest rates, as well as by not adjusting to a changing farm economy.
Following are some factors to consider with today’s farm economy:
· Nearby soybean futures on the Chicago Board of Trade (CBOT) have traded above $12.00 per bushel since the beginning of 2021 and above $14.00 per bushel for much of 2022, reaching a high of $16.00-$17.00 per bushel in the Spring of 2022. Soybean futures prices were below $9.00 per bushel as recently as the first half of 2020. The last time we had an extended period of high CBOT soybean futures prices of $13 to $16 per bushel was from 2011 through the first half of 2014, reaching a high of $17.68 per bushel in September of 2012. By the end of 2015, soybean futures prices had retreated to below $9.00 per bushel.
· Similarly, nearby CBOT corn futures have traded above $6.00 per bushel for most of 2022, which compares to $3.25-$3.50 per bushel in the first half of 2020. Similar to soybeans, the last extended period of strong corn prices was from 2011 through the first half of 2013, when CBOT nearby corn futures price also traded above $6.00 per bushel most of the time, reaching a high of over $8.00 per bushel in the fall of the drought year of 2012. By mid-year of 2014, corn futures prices had dropped below $4.00 per bushel.
· According to the most recent USDA Economic Research Service (ERS) Farm Income Forecast on December 1, 2022, “net farm income” in the U.S. for 2022 is projected at $160.5 billion, which would be an increase of 12.8 percent or $19.5 billion from the $140.5 billion level in 2021. In the six previous years (2015-2020), the U.S. net farm income was below $100 billion.
· The last period of very strong net farm income levels in the U.S, occurred from 2011 to 2013. The average annual U.S. net farm income over the past two decades (2002-2021) was $104 billion per year. The very strong U.S. farm income levels in the past two years has been driven by strong commodity prices, improved livestock profitability, and excellent export levels of farm products to China and other countries.
· According to the latest ERS estimates, total farm expenditures in the U.S. are expected to increase by $69.9 billion or 18.8 percent, as compared to a year earlier, with fertilizer expenses leading the way with at a 47 percent increase year-over-year. The ERS also projects increased input costs for crop chemicals, diesel fuel, repairs, and farm labor, as well as livestock expenses. Farm input costs will likely be even higher in 2023.
· The U.S. Federal Reserve has increased the prime interest rate to 7 percent in early November, with the potential for another increase before the end of the year, which compares to a rate of 3.25 percent in the first few months of 2022. Farm operators that are paying 4 percent interest for a one-year operating loan in 2022 could likely be paying an interest rate of 8 to 9 percent for 2023. For farmers that rely on short-term credit during the year, this could easily add $15,000 to $25,000 to their farm operating costs in 2023.
· According to the USDA Land Value Summary Report, released in August of 2022, farmland values in the U.S. in 2022 averaged a record $3,800 per acre, which was an annual increase of 12 percent from mid-year of 2021. The $420 per acre increase nationally from 2021 to 2022 was the largest year-over-year increase ever recorded. The highest annual percentage increases in farmland values from 2021 to 2022 were 25 percent in Kansas, 21 percent in both Iowa and Nebraska, 19 percent in South Dakota, and 17 percent in Minnesota. Land values in many of those areas have continued to increase in recent months.
Many farmers and others in the agriculture industry remain very “bullish” on the future profitability in production agriculture and the overall U.S. agriculture economy. Until recently, it has been hard to find many people talking about a potential downturn in the agriculture economy anytime soon. Usually, when everyone is thinking one direction is when things change, and sometimes those changes can occur quite rapidly. In 1980, following some very robust farm income years, the U.S. Government implemented a grain embargo that caused a rapid decline in grain exports and resulted in much lower grain prices. This rapid drop in grain prices, along with lower farm profits, and much higher interest rates, led to the farm crisis of the 1980’s.
While economic conditions in the U.S. today are much different than in the late 1970’s and early 1980’s, there are some “yellow caution flags” to think about with today’s agriculture economy:
· The cost of production for corn and soybeans, including feed, fertilizer, chemicals, seed, fuel, and other expenses is expected to increase again for 2023 and will be nearly double the cost of production a few years ago. The increased cost of production, combined with the increased land rental rates and higher interest rates means that the break-even price in 2023 for corn production for many farm operators in the Midwest will likely be $5.50 to $6.00 per bushel for corn, and over $12.00 per bushel for soybeans, after being below $4.00 per bushel for corn and below $9.00 per bushel for soybeans as recently as 2020.
· If the high inflation rates continue into 2023 and beyond, it could impact consumer buying habits for some food items, such as high-end meat and dairy products, which could greatly affect livestock profit margins.
· There is growing concern regarding the future level on ag exports, given the continuing Russian war in Ukraine, growing U.S. trade tensions with China, and other worldwide political issues.
· The renewable fuel industry is kind of at a crossroads …… there is optimism surrounding the potential for higher blends of ethanol, increased production of renewable biodiesel, and development of sustainable aviation fuel. On the other hand, the “green energy” movement toward a rapid increase in electric vehicles and less use of traditional fuels could lower future demand for ethanol and traditional soybean diesel.
· Land values dropped by 40 to 60 percent in many areas during the 1980’s following their peak values in the late 1970’s. More recently, Iowa average farmland values dropped by 16 percent from 2014 to 2018 after the last peak in land values in 2013. Many analysts expect land values to plateau and possibly decline again in the coming years beyond 2023, following the current rapid rise in land values in 2021 and 2022.
· In 2020, we experienced the serious economic impact that a major human disease pandemic such as COVID can cause on the U.S. and worldwide economy, including the ag economy, How well are we prepare to withstand future pandemics, terrorist attacks, and other factors beyond a farmers control that could impact the financial well-being of individual farm businesses and the overall U.S. ag economy ?
· During recent events such as COVID, the trade war with China, and natural disasters, the Federal government has provided significant financial aide to farm operators to help offset reduced income. Many analysts wonder if the next Farm Bill and other government programs will offer that continued strong financial “safety net” for farm operators in the future.
The overall farm economy is quite strong right now and will likely remain at positive levels into 2023; however, as was pointed out there are some reasons to be concerned about farm profit levels in the future. One of the best hedges for farm operators against reduced farm profits in the coming years is to keep the “current position” (cash available) segment of the farm business strong. It may be better to use current excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than using the cash to purchase expensive land and other capital assets, or for excessive spending for non-farm expenditures. Farmers need to continue to look for ways to optimize production costs and to “fine-tune” grain and livestock marketing plans based on the “cost of production” in their farm operation. Even though we could face “strong headwinds” in the coming years, we do not necessarily need to repeat the ag financial crisis of the 1980’s.