Economic and Policy Update

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January 24, 2017 Volume 17, Issue 1 Edited by Will Snell & Phyllis Mattox

Can Cattle be Finished on Pasture in Kentucky?

- Greg Halich Final Crop Estimates Provide Another Surprise for the Grain Markets - Todd Davis 2016 Tax Seminar Season - Steve Isaacs Tax Information for Vines, Trees and Hoop Barns - Jerry Pierce

Can Cattle be Finished on Pasture in Kentucky?

Can beef cattle be finished efficiently on pasture here in Kentucky? That was a question that I and another extension specialist at UK had six years ago when corn prices were soaring to unprecedented levels and feedlot finishing costs were high. The two of us had just started raising stocker cattle together in Woodford County and had also been involved in an extension program helping producers get started with pasture-finished beef production. Wanting to see how theory and practice might match up, we decided to keep four steers that would have otherwise been sold that fall, and hold them for an additional year to see how well we could get them to finish.

That first year in 2012 had mixed results. We learned quite a bit from that first season however, and the following year, in 2013, we adjusted our management and had impressive results: We finished six animals, four that we direct marketed and two that we sold to our processor. The average live-weight was 1245 pounds, the average carcass weight was 776 pounds, which equated to an average dressing percentage of 62%. All four of the animals that were graded (the ones that were direct marketed) hit low Choice marbling grade. Since then, our dressing percentage has averaged right around 60% and we are consistently hitting 50-60% low Choice marbling grade. This has been done with a 100% pasture and hay feeding protocol. We are not on row-crop soils. The farm is in southern Woodford County where shallow soils are the norm, and is representative of typical livestock farms in central Kentucky.

So to answer the initial question, yes, beef cattle can definitely be finished efficiently in Kentucky, but with the caveat that it will take good management skills. Pasture management in particular is critical.

Typical pasture management that will work adequately for a cow-calf operation will not work well for finishing. However, if you can raise stocker cattle purely on pasture and average near 1.5 lbs./day gain for an entire grazing season, you should be able to make the transition to finishing without too much trouble. We have found that our finishing steers (yearlings) gain about .25 lbs./day more than our calves do during the grazinggain season. (yearlings about .25 lbs/day more than our calves do during the grazing While I would never advise someone to try to finish cattle on a pure or mostly fescue pasture, a season. fescue-based pasture that has a good mix of clover, bluegrass, and other forages can work well if managed correctly. The more predominant fescue is in the pasture, the more selective you will have to let the finishing animal be. Pasture and grazing management are generally more important than forage species.

PAGE 2 Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin.

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

PAGE 2 It will also take good planning skills as well as patience. Pasture-finished cattle will not grow nearly as quickly as they would in a feedlot, and if you try harvesting one at 16-18 months of age you will likely be disappointed with both the quantity of usable meat as well as the quality of that meat. For a 100% pasture-forage protocol, we have found that spring-born calves finish well in midJune to early July when they are roughly 26-28 months old. Fall-born calves finish well from early September to mid-November when they are 24-26 months old. These are for Kentucky conditions and other regions may have different optimal timeframes.

Again, this assumes extremely good grazing management. You can use the “Pasture Finishing Worksheet for Beef Cattle” tool to help plan your production system available at: http://www.uky.edu/Ag/AgEcon/pubs/BeefPastureFinishing.xlsx Since you will be keeping calves 24-28 months, winter feeding will be necessary. Our calves gain somewhere between 0.4 - 0.7 lbs./day over the winter. While this is definitely not going to put on marbling during the winter months, our strategy is to put on both the bulk of the gains and the marbling when it is cheapest, during the grazing season. There is definitely something to be said about the power of compensatory gain. The only study I have been able to find that evaluated growing cattle over two pasture seasons was in the 1939 Yearbook of Agriculture (USDA). This study found that although the difference in gains between the high and low winter treatments was 130 lbs., the final weight difference at the end of the second grazing season was only 37 lbs. Thus, the cattle that gained slower during the winter gained 72% of the difference back during the two pasture seasons. It is much cheaper to put on gains while on pasture.

Local markets exist for both a grain-on-grass and pure pasture-finishing approach. Both typically pay nice premiums over conventional feedlot finished beef. With a grain-on-grass approach, you can get by with lower quality pasture and still get as good or better gains as with a pure pasture-finished approach. For many cattlemen this might be the best approach. Your markets will play the biggest role in determining which approach is needed. If customers mainly want a “local” product that is antibiotic and hormone free and are fine with some grain feeding then the grain-on-grass approach might work best.

Marketing is usually the biggest hurdle for most finishing operations. A wholesale market where you sell finished animals to a processor are sometimes available (at a reduced sale price), but most often you will have to sell your product as freezer beef (i.e. quarters, halves, or whole) or retail (by the cut). Refer to the publication at the end of this article for details on marketing.

There was a lot of volatility over the last six years with calf prices and fat cattle prices so determining profit based on rising and falling markets where you keep animals for two years can be misleading. If I hold the market constant (assume animals were hedged on the market I bought them on) profitability was at least twice the profit per animal per year (adjusted for the longer period held) compared to our stocker cattle. This is assuming selling directly to our processor where we don’t have to do any marketing. The profit potential on the direct-marketed animals is considerably higher, but you also need to weigh this with the additional time, effort, and headaches you will have dealing with customers.

One of the biggest impacts on profitability is having a fully finished animal. The most common mistake that I see is trying to finish a spring-born calf on pasture before its second winter. It will be about 18 months old and will likely be 900-1000 pounds. Yes, you will have additional costs to winter one more season and then keep on pasture for three more months, but that same animal will weigh around 1250 pounds and will generally yield 150 additional pounds of wrapped meat. If you are selling that at or near $5/lb you will be far ahead profit-wise by waiting.

Harvesting an 18-month-old steer on pasture is like cutting a 16-inch diameter walnut tree. If you waited another 10-15 years it would be 20-inches in diameter and hit veneer quality. You gain in both volume and quality with both the tree and the steer. The main difference is that you only have to wait another six or seven months with the steer! Unfortunately, I see the former happening time and time again. One of the most important attributes necessary to be successful in finishing cattle on pasture is learning to work at nature’s pace.

The UK extension publication, “Producer’s Guide to Pasture-Based Beef Finishing,” is a 45-page guide that goes into much greater detail on pasture-based finishing and is available at your county extension office or at: http://www2.ca.uky.edu/agc/pubs/ID/ID224/ID224.pdf

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Final Crop Estimates Provide Another Surprise for the Grain Markets As Michael Corleone from the Godfather movie says, “Just when I thought I was out…they pull me back in.” This quote comes to mind when reacting to the January 12, 2017 USDA Crop Production and updated WASDE reports. The corn and soybean markets were lulled into a belief that the final production estimates would not change dramatically from the November estimates. In essence, the market was prepared to be bored by the January report as the analysts surveyed before the report was released believed that both the corn and soybean crop production estimates would decline slightly. The updated USDA projections surprised the market by reducing the soybean crop below even the lowest amount projected by analysts before the report. USDA also reduced the 2016 corn crop to a level below the average expectation but within the range projected by analysts before the report. Like Don Corleone, the analysts got pulled back into the details in the USDA reports.

Table 1 provides a combined supply and demand balance sheet for corn, soybeans, and wheat for the 2016-17 marketing-year. The 2016 corn and soybean crops are still records even after USDA trimmed the projected size of both crops. While not a record, the 2016 wheat crop was about 250 million bushels larger than last year’s crop despite farmers’ efforts to reduce production by seeding almost 5 million fewer acres in 2016. Mother Nature blessed the three crops with abundant yields and production that the market now has to chew through to keep stocks from growing to burdensome levels.

Table 1. Consolidated Corn, Soybean & Wheat Balance Sheets for the 2016-17 Marketing-Year.

Corn Soybeans Wheat ------------------- Million Bushels -----------------Beginning Stocks Production Imports Total Supply

1,737 15,148 55 16,940

197 4,307 25 4,528

976 2,310 125 3,410

Domestic Use Exports Total Use

12,360 2,225 14,585

2,058 2,050 4,108

1,249 975 2,224

Ending Stocks Days of Stocks U.S. Average Farm Price

2,355 59 $3.40

420 37 $9.50

1,186 195 $3.80

Source:January 2017 WASDE - USDA: WAOB.

USDA will not update the production estimates in future reports, so the focus shifts to the demand side of the balance sheet. The corn and soybean markets have benefited from production problems in Argentina and Brazil in March-May 2016 that reduced the soybean and corn crops. Export demand usually met by the South American markets shifted to the United States providing price rallies last spring. The stronger than expected export demand is already incorporated into the export projections for the 2016 corn and soybean use projections. Weather or logistical problems in South America may shift additional export sales to the United States to increase the amount exported for 2016-17. In general, the export projections have limited upside potential.

Because of the very strong soybean demand from September 2016 to date, soybean prices are not reflecting the impact of projected increase in stocks. If realized, the 2016-17 U.S. average farm price will be $0.55/bushel higher than the previous year. In contrast, increased stocks are expected to push the average corn price lower by about $0.21/bushel from last year.

The only positive story to tell about wheat is that winter wheat seedings are estimated to be reduced by 10% from last year.

According to the agriculture media, this may be the smallest winter wheat seeded area since 1909. While corn and soybeans can tell a story of strong domestic and export demand, wheat cannot tell that story. Exports for 2016 are projected to be 200 million bushels above last year but remain 200 million bushels below the amount exported in 2013. The U.S. is a residual export supplier waiting for production problems elsewhere to provide stronger export sales.

PAGE 4 Based on closing prices on January 20th, the March 2017 corn futures contract closed $0.01 higher on the report date and had worked $0.12 ½ higher from the pre-report closing price on January 11th. Surprisingly, the March 2017 soybean futures contract has increased $0.56 from the January 11th closing price. Both the old crop contracts are reacting favorably to potential production loss in Argentina from excessive rains that may drown crops and prevent planting. The new crop corn and soybean futures contracts have increased by $0.10 and $0.30 ¾, respectively, from their closing prices on January 11th. Prices have been supported due to the slightly smaller 2016 crops and the potential to benefit from South American production problems. The 2017 July wheat contract also has been moving higher by $0.11 ¼ from the January 11th closing price supported by the prospect of a smaller 2017 wheat crop.

Producers holding old crop corn and soybeans should evaluate if there are profitable pricing opportunities for the stored grain.

Profitable pricing opportunities are available for the 2017 soybean crop, and managers should assess the benefits of protecting a portion of planned production at profitable prices.

2016 Tax Seminar Season The UK Income Tax Seminar Program reached a milestone in 2016. This marked the 50th year of delivering continuing education for income tax professionals in Kentucky. Steve Allen, an Extension Specialist in Ag Economics, initiated the program in 1966 and “farm taxes” were the primary topic. While farm tax issues are still included, the topics are much broader today.

UK Ag Economics partnered with the Kentucky Department of Revenue and the Internal Revenue service to deliver seminars at fifteen locations from Prestonsburg to Paducah. Total registrations for the 2016 season were 1,520, down from 1,606 in 2015. Six of the seminars had over 100 participants, and the Lexington downtown location had 197 in attendance.

Two teaching teams staffed by accountants, a retired IRS agent, Kentucky DOR employees, IRS staff, and KFBM area specialists delivered the fifteen, 2-day seminars between October 27 and January 5. This was one more location than in 2015.

UK Ag Economics is a member of the Land Grant University Tax Education Foundation, a consortium of 26 universities which produces a 700+ page workbook used in the seminars. Registrants received over 1000 pages of educational materials and updates, a completion certificate, and continuing education credits for their participation.

The targeted audience was accountants/CPAs; certified financial planners; enrolled agents; attorneys; financial, insurance, farm management, and real estate professionals; and registered tax return preparers. CPAs are the largest professional category accounting for 37% of participants. Enrolled agents were 11%, and “other tax return preparers” were 32% of attendees.

The two-day seminars were designed for preparers with at least one year of experience and covered individual taxpayer and small business issues and included one session dedicated to agricultural topics. New legislation, rulings and cases, retirement topics, and ethics were also covered. The two-day seminars were approved for Continuing Education credit by the IRS, the KY State Board of Accountancy, the KY Department of Insurance, the Certified Financial Planners Board of Standards, the National Association of State Boards of Accountancy and the KY Bar Association.

Planning is underway for the next half century of tax seminars to be delivered this fall. For additional information contact Kathy Roe or Emily Brown, Program Coordinators at UK, or see the UK Income Tax Seminar website at www.uky.edu/uktax/.

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Tax Information for Vines, Trees and Hoop Barns New Bonus Depreciation on Vines and Trees The 2015 PATH Act allows farmers an election to deduct 50% of the cost of planting or grafting plants that have a pre-productive period of two years or more. This includes orchard and vineyard crops like apples, blueberries, grapes, nuts, and peaches. See IRS Notice 2013-18 for list of crops. Planting costs include plants & planting, ground preparation, fertilizer, equipment, labor, spraying, repairs, and other costs. Plants must be planted or grafted after December 31, 2015 and before January 1, 2020 to qualify.

The Act provides two benefits that give taxpayers more flexibility in the timing of deducting costs. First, famers may claim bonus depreciation in the year plants are planted rather than waiting until the year plants become productive. Second, farmers who elect out of uniform capitalization (UNICAP) rules are not allowed to claim bonus depreciation when the plants become productive.

Now they may elect the new bonus depreciation on planting costs incurred before the pre-productive period.

What is a Hoop Barn?

This question is asked frequently by farmers wanting to know what depreciation to use and whether Bonus Depreciation and Section 179 Expensing apply. There are two reasons they ask.

One reason is that the construction is different from traditional barns. A hoop barn is generally made of fabric stretched over metal hoops. It may or may not be attached to the ground. It is relatively quick and inexpensive to build. The other reason is that the Internal Revenue Code and The Farmers Tax Guide (Pub 225) do not mention hoop barns.

The Revenue Code does define structures used on the farm and their tax treatment. Hoop barns must fit into one of these definitions. The two most likely are general purpose barn and single-purpose livestock structure.

A general purpose barn may be used for many different purposes: to store hay, to house livestock, to provide work space, or to store machinery and equipment. Recovery period for a barn is 20 years. Barns may qualify for Bonus Depreciation, but not for Section 179 Expensing.

A single-purpose livestock structure is “Any enclosure or structure specifically designed, constructed, and used for housing, raising, and feeding a particular type of livestock and for housing the equipment used to raise that type of livestock.” The key words are “designed, constructed, and used.” The farmers’ intent is to house, raise, and feed a particular kind of livestock.

Occasional use to put up livestock or store hay does not qualifying as specific intent. Recovery period is 10 years for singlepurpose livestock structures. They may qualify for both Bonus Depreciation and for Section 179 Expensing.

Can a hoop barn be treated as a grain storage structure, similar to a grain bin? Not likely. Tax courts have ruled against treating flat storage buildings as a grain storage facility. They note that flat storage, like a hoop barn, can be easily converted to other uses, making it a general purpose barn.

Kentucky Farm Business Management

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College of Agriculture, Food and Environment Department of Agricultural Economics

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Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin.

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