Economic and Policy Update - UKAg

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2017 Revenue Protection Insurance Safety-Net Potentially Much Improved for Soybeans

February 27, 2017 Volume 17, Issue 2 Edited by Will Snell & Phyllis Mattox

2017 Revenue Protection Insurance Safety-Net Potentially Much Improved for Soybeans - Todd Davis

February is when the projected price for Revenue Protection (RP) crop insurance is established based on the December 2017 corn and November 2017 soybeans futures contracts closing prices for this month. With the price discovery period halfway completed, the projected price for corn and soybeans are estimated at $3.96 and $10.20 per bushel, respectively. A projected price for corn at $3.96 would only be a $0.10/bushel increase over last year’s price and would be $1.69 per bushel below the guarantee in 2013 the year before the enactment of the current Farm Bill. The 2013 coverage may have been sufficient to provide a revenue guarantee that covered per acre input costs and cash rent, which is not the case this year.

In contrast, soybeans are projected to have an improved safety net in 2017 due to the rally in the futures market throughout fall and winter. The current projected price for soybeans at $10.20/bushel would be a $1.35/bushel increase over the 2016 price.

Figure 1 compares the expected crop insurance guarantees for corn and soybeans compared to the budgeted total variable costs plus cash rent for corn and soybeans. The combination of lower production costs and better safety net protection reinforces the anecdotal evidence of acreage shifting from corn to soybeans in Western Kentucky. While farmers have historically not purchased RP insurance at the 85% coverage level, managers should work with their crop insurance agent to evaluate the potential safety net for the farm provided by buying up coverage in 2017.

Corn ($3.96)

Soybeans ($10.20)

$50

$18

Bale Grazing: Increasing Fertility While Reducing Costs - Greg Halich

$0 70%

Policy Briefs: Tobacco, Trade, and Farm Bill - Will Snell

80% -$10

85%

-$38

-$50 -$66

$/Acre

Beef Herd Expansion Continues Despite Lower Prices - Kenny Burdine

75%

-$100 -$101 -$131 -$150 -$161 -$200

-$190

-$250

RP Insurance Coverage Level (%)

Figure 1. 2017 Corn (blue) and Soybean (red) Revenue Protection Guarantee Compared to Total Variable Costs Plus Cash Rent for Various Coverage Levels.

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UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, & KENTUCKY COUNTIES COOPERATING.

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Bale Grazing: Increasing Fertility While Reducing Costs Drive through a major cattle-producing area from December to March and you will see tractors hauling round bales. Sometimes they will be going from a barn lot directly into a feeding area. Sometimes they will be traveling on a public road to get to a more remote spot where cattle are located. Sometimes this hay will be fed in a dry lot, sometimes it will be fed on the edge of a pasture next to the road, and sometimes you will even see this hay unrolled out in the pasture.

There are usually at least a few weeks during a typical Kentucky winter when it is exceedingly muddy and difficult to feed these round bales without causing significant damage to pasture areas. Imagine not having to use a tractor during those periods to feed your hay. Now imagine not having to use a tractor to feed during the entire winter.

Drive through a major cattle producing area in late March after the first few nice days of early spring and you will see buggy tracks every 30-40 feet traversing the pastures on many of these same farms, where fertilizer was just spread onto depleted pasture soils.

Now imagine this soil growing the heaviest pasture growth you have ever seen on that farm and imagine doing this without any commercial fertilizer whatsoever.

Feeding hay without a tractor and lush pastures without fertilizing. Is this just a cattleman’s dream? Ten years ago, it would most likely have been just that, a dream in the depths of a dreary winter. However, the last few years we have seen a few farms in Kentucky change their hay feeding system and experience exactly this: Feeding round bales without a using a tractor and building up the fertility of their pastures. How could this be possible? These cattle farmers are using a feeding technique called “Bale Grazing.�

What is Bale Grazing?

Bale Grazing on the Hodges Farm Green County, Kentucky

Bale grazing is a winter-feeding technique where bales are set out on pasture before winter and fed in a planned, controlled manner, somewhat like rotational grazing. Temporary electric fence and posts are used to allow cattle access to those bales that you want fed in the current move. Each move a new fence is erected to expose new bales, usually 25-100 feet in front of the current fence. The previous fence is then taken down to allow the cattle access to the new bales. The hay rings are then rolled to the new bales and flipped over into place. Repeat the process every 1-7 days, depending on a number of factors that will be discussed in detail later.

Properly planned, you will not need to use a tractor the entire winter and nutrients will be deposited where they are needed.

Simple, cheap, and effective. The only requirements are an open mind, the capacity for advanced planning, the ability to roll hay rings up to 100 feet, and cattle trained to electric fence.

Planning Table 1: Cow Feeding Days for Various Sized Round Bales Bale Size Waste Rate 4x4 4x5 5x5 5x6 6x6 Low (10%) 17 23 32 43 52 Med (20%) 15 21 28 38 46 High (30%) 13 18 25 34 40 Note: Assumes 1300 lb. cow on average with 2.4% hay intake per day

Ideally, hay is set out on pastures in late fall and early winter, right where you want it fed. In Kentucky we will normally have good conditions for driving out on pasture through Thanksgiving, and sometimes longer. These drier conditions are ideal for setting out bales without causing any damage, and doing it efficiently.

Moreover, on most farms (reasonable slope), you can pull a loaded hay wagon with a pickup truck in dry conditions and roll the bales off, right into place without using a tractor. We have moved all our winter hay onto pasture in less than half a day using this method.

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In order set out the hay this early, you will need accurate estimates for your winter hay needs. Table 1 gives estimates on how many cow-feeding days you can get from various size bales and with various combined waste rates (storage and feeding). This assumes a spring-calving 1300 lb. cow. For example, if you are using 5x5 bales and assume a medium combined storage and feeding waste rate, you should expect about 28 cow-days of feeding from each bale. In other words, one bale would feed 28 cows for a day. If you were allocated three bales for each move, than you would expect about 28 x 3 = 84 cow feeding days from this hay. If you had 50 cows in your herd, then three bales would last 84 cow days / 50 cows = 1.7 days.

If you expect to feed 50 cows for 120 days during the winter, then this would equate to 6000 cow-feeding days (50 cows x 120 days). You would just divide the 6000 cow feeding days by the expected feeding days per bale, in this example 28, to arrive at an estimate of 215 bales needed for the winter.

Table 2: Cow Grazing Days per Acre for Bale grazing combines very well with stockpiled pasture.

Various Stockpile Scenarios With this system, cattle get both hay and a strip of stockStockpile Quantity piled pasture with each move. Since stockpiled pasture is typically much better in both energy and protein Utilization Poor Fair Good Excellent compared to typical hay, the stockpile can effectively High 10 22 54 86 serves as both an energy and protein supplement. Table 2 provides estimates for the number of cow grazing days you Med-High 9 21 51 81 could expect from various scenarios. If we had 15 acres of Medium 9 20 48 77 stockpiled pasture that we rated as “Good” quantity and Note: Assumes 1300 lb. cow on average with had a medium-high utilization rate, we could expect around 2.3% dry matter intake per day 51 cow grazing days per acre. 51 cow grazing days per acre x 15 acres = 765 cow grazing days. Thus, we would now subtract the estimated cow grazing days from the original estimate for cow hay feeding days to come up with the modified cow hay feeding days: 6000 cow hay feeding days less 765 cow grazing days = 5235 cow hay feeding days. Dividing this by the expected feeding days per bale, in this example 28, we get approximately 190 5x5 bales needed for the winter.

Even if there is no real “stockpile”, your cattle will get some residual grazing from the pastures that will be bale-grazed. It is not going to be much, so I would recommend using the “Poor” stockpile category for this estimate. I like to use about a third of the overall pasture to bale graze each winter. If we had 100 acres of pasture in the previous example, a third of this would be 33 acres that we will bale graze on. Since we have 15 acres of real stockpile, we would feed hay on an additional 18 acres of pasture. 18 acres x 9 cow grazing days per acre (poor stockpile and med-high utilization rate) = 162 cow grazing days. We would subtract this from our modified total of 5235 cow hay-feeding days to get 5073 cow hay feeding days. Dividing this by the expected feeding days per bale, again 28 in this example, and we get approximately 182 5x5 bales needed for the winter. These will be bale grazed on 15 acres of stockpiled pasture and an additional 18 acres of grazed pasture.

As a practical matter when starting out, I would recommending setting out 80-85% of your calculated hay needs in late fall and plan to feed the remainder at easy access points in the pasture near the hay source. This way if you overestimated the required hay needs you will not have to move bales off pasture in April. After a couple of winters, you will be able to refine your hay needs better.

If we set out 182 bales over 33 acres, this would mean we would be setting out 5.5 bales per acre on average. This is a fairly low density and is ideal for Kentucky conditions since we often have muddy conditions during the winter. It will keep pugging damage to a minimum by constantly moving cattle to new areas. At the same time, this amount of hay will deliver a surprising amount of nutrients to those pastures. Assuming 10% of N, P, and K from the hay remain with the animal, and 50% of the remaining nitrogen gets lost due to volatilization/leaching, this would still amount to roughly 9 lbs. N, 7 lbs. P, and 25 lbs. K deposited to pasture for each 5x5 bale. So feeding 5.5, 5x5 bales per acre would amount to roughly 50 lbs. of effective N, 38 lbs. of P, and 138 lbs. K per acre. All as a by-product from feeding hay on pasture.

However, it will not build up fertility as quickly compared to higher density bale grazing. If you have pastures that are extremely low in P and K and you are trying to build them up quickly, I would recommend 10, 5x5 bales (or their equivalent in other sizes).

Just be prepared for a little more pasture damage in these areas. I would personally rather feed 2-3 years in a row at the lower bale rate on that low-fertility ground compared to one year of heavy bale grazing. Probably the most common mistake I see people making when they start bale grazing in Kentucky is having too many bales out per acre and they are surprised that these pastures get pugged excessively when it is wet.

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Executing Determining how often to move the temporary fence will depend on how many hay rings you plan to use and how much stockpiled pasture (if any) will be included with the move. As a general rule of thumb, I like to move the fence 2-3 times per week. Twice is ideal, three times maximum. So it is more an exercise of determining how many bales and how much pasture to give them to make sure they have enough to eat in that timeframe. Continuing with the previous examples where we have 50 cows and are feeding 5.5 bales per acre on good stockpiled pasture, we would thus on average have .18 acre of pasture per bale (1 acre / 5.5 bales). The .18 acres would provide approximately 9.2 cow grazing days (.18 acres x 51 grazing days per acre), while the one 5x5 bale would provide approximately 28 cow feeding days. Thus, each bale with equivalent pasture would provide 37.2 cow feeding days (9.2 days for the pasture + 28 days for the hay). Fifty cows would require approximately 1.34 bales and .24 acres of pasture per day (50 cows/37.2 cow feeding days). If you wanted to move fence twice a week, that would be a 3.5 day requirement. 3.5 days x 1.34 bales per day would be 4.7 bales per move, and 3.5 days x .24 acres of pasture would be .84 acres.

From a practical standpoint, this would be equivalent to about five bales and .75 acre of pasture for one of the moves, and 4 bales and 1.0 acres of pasture for the other move that week. Obviously, you will have to be someone flexible and make adjustments since you have whole bale increments.

Always start from a water source and move away from it. You do not need to, and do not want to set up a back-fence. Cattle will have access to areas previously bale-grazed. It is a good idea, when practical, to set up two forward fences. One for the current move and another for the next move. In case something happens to your first fence (wind blows it off a few posts, etc.), you will still have an additional fence that will protect the bulk of the hay bales and stockpiled pasture. If cattle have access to a 10-acre pasture with 50 unprotected bales, they can do a lot of damage in a couple days. Speaking of which, you need to keep your fence hot! Carry a voltmeter and make sure the fence has plenty of power. Find and correct any shorts before cattle figure it out.

Concerns with Bale Grazing Probably the main reason people are afraid to try bale grazing is that they are concerned it will damage their pastures. While this is a legitimate concern, I have generally found it to be unfounded, provided that you are careful. Cattle can and will pug pastures to some degree during wet weather, but the degree that this occurs at low bale densities spread over 25-33% of the overall pasture will be minimal. The problems I have seen are where someone tries bale grazing their entire winter hay supply on 5-10% of their pasture acreage. In the above example, feeding 182 bales on 10 acres (10% of the pasture) would be just over 18 bales per acre. Aside from the high damage potential to the pasture, this would amount to 162 lbs. on effective N, 126 lbs. P, and 450 lbs. K. Obviously, we would be wasting many nutrients in this situation. Keep your bale densities to a reasonable level and the short-term pasture damage will be minimal. Also, do not constrict cattle to small areas. When I start bale grazing a new pasture, I continue to give them access to the previous pasture, in either full or in part. You will have some short-term damage, but done right it should be minimal.

Keep your perspective on what matters: Long run, there will be no comparison in pasture productivity between bale-grazed pastures and non-fertilized pastures.

Our Land-Grant Values The University of Kentucky College of Agriculture, Food and Environment was founded as, and remains a land-grant institution, committed to improving the quality of life for Kentuckians. Our research, teaching, and extension programs are part of a national system that maintains a statewide presence and links local, state, and global issues. Agriculture, food, and environmental systems are key components of Kentucky's economic future, and the college is playing a prominent role in those areas with its programs.

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Beef Herd Expansion Continues Despite Lower Prices USDA’s annual estimate of the number of cattle in the U.S. held some surprises this year. While this report is typically not a shortterm market mover, it has considerable implications in the long-term as we consider the size of the U.S. cowherd. It was not surprising that the U.S. beef herd grew over the course of 2016, but it did grow at a rate that exceeded most expectations.

According to the report, U.S. beef cow numbers grew by 3.5% from January 1, 2016 to January 1, 2017. This represents a little over one-million cows, after a slight downward revision to the January 2016 estimate. The immediate implication is for even more calves moving through markets this year than expected.

As I have talked with producers across the state, many seem extremely surprised by this change in national numbers. I think much of that surprise stems from the fact that we didn’t see the same pattern in KY. The USDA estimate for our state was very consistent with our expectations as Kentucky cow numbers were relatively flat. However, we also have to remember that while Kentucky is home to more than one-million beef cows, this only represents about 3.3% of the U.S. beef cowherd. Considerable growth in beef cow numbers was seen in Texas, Oklahoma, Missouri, Nebraska, and Kansas and this really worked to drive the national inventory.

Heifer retention provides us an indication of future herd growth expectations and does suggest more moderate expansion for the current year. The number of beef heifers held for replacements was up by a little more than 1%. Ultimately, weather and profitability at the cow-calf level will determine where beef cow numbers go in the future. While both are difficult to predict, it is worth thinking about factors that will impact calf prices for 2017.

Let’s start by getting on the same page about 2016. The calf market reached a bottom in late October / early November with Medium / Large frame #1-2 steers selling around $120 per cwt on a state average basis. Obviously, larger high quality groups did much better than this and smaller groups and singles did much worse, but that should help set the baseline. Those same steer calves, in early February of 2017, were selling in the low $130’s on a state average basis and are very likely to continue to see price increases as we move towards grass this spring. The seasonal increase in calf prices that typically occurs from fall to spring is driven by stocker demand, not a change in the fundamentals of the beef market.

As we think about expectations for fall 2017, we have to think about what fundamental market factors will be different this year.

We are very likely to see increases in beef, pork, and poultry production for 2017, all of which will put pressure on fed cattle prices in the foreseeable future. This expectation can be seen by looking at CME© Live Cattle futures, which are currently trading into April 2018 and suggest declining fed cattle prices over this period. As we sell feeder cattle in the future, they will be sold with an expectation of lower values at their eventual harvest, which will make them less valuable for placement into finishing programs.

While I know the general tone of this article has not been encouraging, I have always preferred a direct and straightforward approach. Barring something unexpected, I don’t think we have seen the bottom of the calf market yet. Cost control and efficiency are usually keys in these types of markets. Here are a few ideas that might be worth consideration.

First, truly work to understand your cost per cow. Leave it to an economist to start with this one, but it is impossible to manage what you don’t measure. Through tracking of expenses, producers can get a feel for what it costs them to maintain a cow for a year. Then it is easy to consider what calf prices need to be to cover those costs and leave you with an acceptable return.

Second, don’t be afraid to cull hard. With calf markets as high as they were in 2014 and 2015, it was possible to justify keeping some poorer producing cows around. In the current market, cows really need to earn their keep. Additionally, reducing your stocking rate has the added benefit of allowing you to stretch your grazing season and reduce your dependence on winter feed.

Third, consider post-weaning programs. There appears to be some premium right now for weaned and well managed calves which, when combined with weight gain, might make pre-conditioning programs attractive. Again, this is one where you want to push the pencil, but it is common for these programs to become more attractive when there are more calves on the market.

About two years ago, I was talking about how decisions that we make during good times have implications for how we get through the challenging times. I really wish that I could have talked about that a lot longer, but here we are already, talking about challenges. The decisions that we make today, will have implications for us several years from now. As you manage your way through 2017, be sure to think about where you want to be in 3-5 years.

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The USDA report is summarized in the table below and the full report can be accessed at http://usda.mannlib.cornell.edu/usda/current/Catt/Catt-01-31-2017.pdf

USDA January 1, 2017 Cattle Inventory Report 2016 2017 (1,000 hd) (1,000 hd) Total Cattle and Calves 91,918.0 93,584.6

2017 as % of 2016 102

Cows and Heifers That Have Calved Beef Cows Milk Cows

39,476.2

40,559.2

103

30,165.8 9,310.4

31,210.2 9,349.0

103 100

Heifers 500 Pounds and Over For Beef Cow Replacement For Milk Cow Replacement Other Heifers

19,907.3 6,340.2 4,814.0 8,753.1

20,052.0 6,419.2 4,754.0 8,878.8

101 101 99 101

Steers 500 Pounds and Over Bulls 500 Pounds and Over Calves Under 500 Pounds

16,315.4 2,142.4 14,076.7

16,353.5 2,233.6 14,386.3

100 104 102

Cattle on Feed

13,157.0

13,067.0

99

2015 Calf Crop

34,086.7

2016 35,082.7

2016 as % of 2015 103

Source: NASS, USDA

Policy Briefs ď Ž

TOBACCO: FDA has proposed a rule to limit tobacco-specific nitrosamine (N-nitrosonornicotine or NNN) in finished smokeless tobacco products (e.g., moist snuff and chewing tobacco) to 1.0 microgram per gram of tobacco on a dry weight basis. This proposed rule could have significant implications for dark tobacco growers. For details on the rule, and how to submit comments prior to the April 10, 2017 deadline, go to https://www.gpo.gov/fdsys/pkg/FR-2017-01-23/pdf/2017-01030.pdf.

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TRADE: Trade received a lot of attention in the 2016 U.S. Presidential race with debate certainly heightened during the early months of the Trump administration regarding the impact of trade agreements and trade policy on U.S. jobs and economic growth. In recent years, record high agricultural trade has accounted for around 20% of the value of U.S. agricultural production and nearly 40% of Kentucky agricultural sales. While the U.S. exports ag commodities and products to more than 100 nations worldwide, our top three markets, China, Canada, and Mexico, comprise nearly one-half of U.S. ag export sales.

These three markets are obviously the major nations in the middle of the current trade debate. Former USDA chief economist, Joe Glauber recently outlined significant challenges confronting U.S. farmers and food consumers if a trade war occurs (see http://www.ifpri.org/blog/likely-effects-trade-war-us-agriculture-sad). Earlier this month, over 130 farm organizations and food companies sent a letter to President Trump indicating the importance of trade to the U.S. farm economy and expressing their support for expanding trade opportunities for U.S. agriculture.

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FARM BILL: The 2014 Farm Bill will expire in September 2018 so policymakers, farm organizations, and other interested parties have already begun the debate on the next farm bill. The House Agriculture Committee held its first full Committee hearing of the 115th Congress on February 15, 2017 titled Rural Economic Outlook: Setting the Stage for the Next Farm Bill.

(Click on http://agriculture.house.gov/calendar/eventsingle.aspx?EventID=3643 for individual testimonies from the hearing).

The Senate Ag Committee held a field hearing title Hearing from the Heartland: Perspectives on the 2018 Farm Bill at Kansas State University on February 23, 2017. (Click on http://www.agriculture.senate.gov/hearings/hearing-from-the-heartlandperspectives-on-the-2018-farm-bill-from-kansas to review the Senate Ag Committee Field hearing). U.S. net farm income has declined 45% over the past three years, the largest three year decline since the Great Depression. The farm economy is forecast to struggle again in 2017 in response to ample world supplies of most ag commodities, a slowdown in global economies, and a strengthening U.S. dollar. This situation is creating liquidity and cash flow concerns for a growing number of farms across the nation. Despite the slumping farm economy, government payments are expected to decline in the last two years of the current farm bill given current price forecasts coupled with how the safety net was structured in the 2014 Farm Bill. Consequently, farm and commodity organizations are beginning to identify policy changes to provide an improved safety net for U.S. agriculture. Some of the early issues being discussed in the current farm bill debate are:  Annual flexibility in selecting safety net options (ARC vs PLC)  Modifying yield calculations and other changes in payment methodology within the ARC-CO program  Timing of payments  Evaluating payment differences across counties  Strengthening/maintaining crop insurance as the primary risk management tool  Conservation compliance issues impacting eligibility  Additional support for young or beginning farmers  Modifications to dairy and cotton safety net programs Budgetary issues will continue to be a challenge as farm organizations attempt to strengthen the safety net for U.S. agriculture during efforts to reduce government outlays. Plus, debate will continue on whether to maintain farm and nutrition programs together in farm bill legislation.

College of Agriculture, Food and Environment Department of Agricultural Economics 315 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-7288 Fax: 859-257-7290 http://www.uky.edu/Ag/AgEcon/extbluesheet.php

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