Economic and Policy Update

& Policy Update Graphic owner: UKZN SAEES: school website

June 23, 2017 Volume 17, Issue 6 Edited by Will Snell & Phyllis Mattox

FEATURED ARTICLES KFBM Tobacco Summary - Laura Powers Summary of Pennyroyal Grain Farms for 2016 - Rush Midkiff MarketReady Producer Training Update - Alex Butler - Tim Woods

2016 Kentucky Farm Business Management Tobacco Summary There were 258 farms represented in the final analysis of the Kentucky Farm Business Management (KFBM) Program for 2016. Included in those farms are 55 farms with burley tobacco, 43 farms with dark air cured tobacco, and 37 farms with dark fired cured tobacco. Average production from all types of tobacco was the lowest over the last five years. Of the five regions reporting burley tobacco production, the Pennyroyal region reported the most farms (and acres) of production for all types of tobacco, but the Bluegrass region recorded the highest average yields of burley tobacco.

The weather in 2016 played havoc on tobacco in the western part of the state. A very wet spring and early summer resulted in yields two-thirds of what western Kentucky farmers would produce in an “average� year. For some farms, the only tobacco-related revenue earned was from crop insurance as their total crop was destroyed. Central Kentucky farms fared much better, with some areas reported yields higher in 2016 than they were in 2015. Average tobacco yields for KFBM farms in 2016 were as follows: 1,493 pounds/acre of burley (down from 2,076 pounds in 2015); 1,582 pounds/acre of dark air cured (down from 2,546 pounds in 2015); and 1,961 pounds/acre of dark fire cured (down from 2,802 pounds in 2015).

Prices for the 2016 crop for burley ($1.98 per pound) and dark air-cured ($2.38 per pound) tobacco were relatively stable with those in 2015. At $2.68 per pound, the average dark fire cured crop price was $0.09 higher than last year, due to reduced supplies and a modest increase in contract prices.

Tobacco profitability remains a concern to producers. The chart below displays the Kentucky average crop value, by tobacco type from 2012 through 2016. Crop value is defined as gross sales of the crop in the current year (old or new crop) plus the change in inventory value. Gross value for the crop had been relatively stable over the last few years, although it took a hit for many western Kentucky producers in 2016, which brought the average for the entire state down. However, crop expenses, especially labor costs, continue to increase. For many tobacco farms, hired labor can be as much as 50% of total operating expenses. While there have been some advancements in labor mechanization in tobacco production, there has not been widespread, financially feasible options recently to significantly reduce labor requirements. For more information of KFBM average tobacco data for 2016, please see the upcoming tobacco summary on the KFBM website: www.uky.edu/Ag/KFBM/

Tobacco Crop Value Per Acre U.S. Prices Received

By Farmers 1990 - 2016 - USDA/ERS

$9,000 $8,000

$7,000 $6,000 $5,000

By the Numbers

$4,000 $3,000 $2,000 2012

2013 Burley

Source: KFBM farms

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2014 Air Cured

2015 Fire Cured

2016

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Summary of Pennyroyal Grain Farms for 2016 In 2016, the average Pennyroyal grain farm was 3,064 acres, of which 2,845 were tillable acres. Average tillable operator acres, acres from which the farmer receives revenue, were 2,701 acres. The average Pennyroyal grain farm owned 32% of their tillable acres and rented the remainder on a crop share or cash rent agreement. Cash rent continues to be the dominant rental agreement as 53% of the acreage is cash rented and 15% is crop shared.

Pennyroyal farms can also be sorted, according to their management returns,1 into high and low third groups. The high third sort averaged 3,612 tillable acres, of which 3,483 acres were tillable operator acres. In other words, 96% of their acres are tillable operator acres. This group owned 36% of their land, rented 12% on a crop share, and cash rented the remaining 52%. The low third group averaged 2,010 tillable acres, of which 1,913 acres are tillable operator acres. Tillable operator acres account for 95% of their total tillable acres. The low third group owned 33%, crop shared 16%, and cash rented 51%.

Both cash and non-cash costs are analyzed on an accrual basis. Non-cash costs include depreciation, unpaid labor, and an opportunity/ interest charge on both land and non-land resources. In 2016, Pennyroyal grain farms averaged non-feed costs of $848.59 per acre. Crop expenses made up 31% of all costs, land charge accounted for 22%, power and equipment 20%, other costs 13%, labor 10%, and building 4%.

Non-feed expenses decreased about $35 per acre from 2015 to 2016 for Pennyroyal grain farms. On a per acre basis, building was the only expense to increase from 2015 to 2016. Crop expenses, land charge, power and equipment, other costs and labor decreased on a per acre basis. The high third group saw decreases in all categories except land charge. The low third group showed decreases for all expenses on a per acre basis, except building costs from 2015 to 2016.

Crop expenses account for the majority of the non-feed costs, thus it is essential to manage these costs efficiently to maintain profitability. Even a change in a single crop input can have a significant impact on the budget. With falling grain prices, there has been some relief in input costs. In 2016, Pennyroyal grain farms spent $263.50 per acre on crop expenses compared to 2015 crop expenses of $277.88. The average Pennyroyal grain farm spent $113.54 per acre on fertilizer, $68.40 on pesticides, and $81.55 on seed. The high third group had crop expense costs of $266.91 per acre; the low third group had crop expenses of $242.66 per acre.

Pennyroyal area farms saw a decrease in net farm income (NFI)2 and management returns in 2016, as did the entire state of Kentucky. NFI averaged $200,101 per KFBM farm, which was well below the five-year average of $399,844 and the ten-year average of $413,085. Management Returns averaged -$41,830 a decrease of $39,939 compared to 2015 returns of -$1,891.

It is interesting to analyze the upper and lower third of Pennyroyal grain farms as well. The upper third had Management Returns of $89.27 per acre and NFI of $177.51 per acre. In 2016, the high third group had higher crop yields on all crops than the low third group following suit with the last few years. Marketing strategies were similar between both groups as seen by similar prices on 2016 crops; however, the high third group was the better marketer of wheat. Old crop prices were similar between the two management groups, as well. The low third averaged management returns of -$162.47 per acre and NFI of -$74.25 per acre. The lower third owns 33 percent of their land base, while the high third farms own 36 percent of their land base. The high third was much more efficient in operating expense, as shown with the operating expense ratio of 68.97% versus 88.49% for the low third.

This means the high third group received a dollar of gross revenue for 68.97 cents of expenses vs the low group having to spend 88.49 cents to gross a dollar in revenue. That translates to nearly a 29% advantage in the NFI from the operations ratio for the high third group relative to the low third.

More details of this information plus detail tables and charts will be forth coming. It will be available at http://www.uky.edu/Ag/KFBM.

Rush Midkiff, Area Extension Specialist/Farm Business Management, Pennyroyal Group rmidkiff@uky.edu

_____________________________ 1 2

Management returns are calculated by subtracting a capital investment charge for the operator’s equity and a charge for operator’s labor.

Net farm income includes returns to the farm for unpaid family and operator labor, the interest on invested capital, and management.

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MarketReady Producer Training Update The MarketReady Producer Training Program, an Extension program training producers to sell into commercial market channels, has recently finished its fourth training and first Meet the Buyer Forum of the 2017 season, continuing to grow its graduates to over 700 in Kentucky. Recently expanding into Colorado, partnering with Colorado State, and restructuring the training in Louisiana with their partners at Louisiana State University, the national graduates reaches into the thousands. Graduates are asked to participate in a voluntary post training evaluation approximately 6 months after completing the training, which allows the MarketReady team to track graduate progress. The team can then use this information to adjust the program to better fit the needs of its graduates and future trainees, while noting the impact MarketReady has on the local food economy.

Kentucky’s 6-month post training evaluation is sent out by mail or email to graduates who submitted an on-site evaluation and indicated they would like to continue to participate in future training evaluations. The post training evaluation is a short two-page survey that measures several growth indicators of small-scale agribusiness producers. These indicators are new business contacts, contacting technical support agency, marketing program participation, business development, and remaining questions with an opportunity for open response.

Examining the most recent 75 graduates from the 2015 – 2016 MarketReady season provides insight into the impact of the training. Graduates that returned an evaluation indicated 130 contacts made between restaurants, grocery stores, and whole markets, which include schools, distributors, and foodservices.

Table 1 shows the graduates response for the total number of contacts made for the three individual markets. The evaluation continues by showing the frequency with which graduates contacted technical support agencies.

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MarketReady graduates were given the opportunity to openly respond about the most useful experience producers have had since graduating from the training program in addition to any other questions, comments, or ideas for additional market training. Table 4 highlights a few of these responses.

The MarketReady Producer Training Program is continuing to track its graduates. The team uses this feedback to design trainings such as their MasterCourse Webinars which takes an in depth look into the training’s specific business functions or to continue to develop their web platform for easier graduate access and more pertinent information. The team also gets to see the usefulness of its partnering agencies and their program to help graduates better succeed in today’s market. Additional information about MarketReady can be followed on the program website: www.uky.edu/marketready.

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Information from the United States Department of Agriculture, Economic Research Service

Although prices for agricultural commodities frequently vary from year to year, they have generally moved higher in the past decade. In these aggregate measures, by 2014, price indices for crops were up more than 35 percent above their 2006 levels, while those for livestock rose over 75 percent from 2006 to 2014. Prices for both crops and livestock have fallen since 2015 (crop prices began falling earlier in 2013), as U.S. and global markets responded to higher prices by increasing production. While the aggregate prices received for all agricultural production fell 17 percent, livestock and its related products fell by 26 percent since 2014. The fall in prices for livestock coincides with declining input costs for feed commodities like corn and soybean. Additionally, this reflects the beginning of the recovery in the cattle and beef industry that had seen production declines since 2010. Crop prices also declined, but to a lesser extent at 10 percent since 2014. This chart appears in the ERS publication, "Selected charts from Ag and Food Statistics: Charting the Essentials, 2017,"

By the Numbers …. 

Canadian hemp planted area retreated from record levels approaching 100,000 acres in 2015 to reportedly around 50,000 acres in 2016 as the market adjusted to excessive inventories. However, industry sources indicate that acreage may escalate to record high levels in 2017 -- perhaps to as much as 150,000 acres with the expanded export sales to South Korea and the United States.

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Since the 2004 tobacco buyout, the value of U.S. tobacco production has declined 27%, U.S. cigarette sales are down 35%, but U.S. consumer expenditures on tobacco products has increased 18% in response to manufacturer price increases, higher taxes, and expanded snuff sales.

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The U.S. agricultural trade surplus is expected to total $22.5 billion in FY 2017, with China, our leading customer accounting for 80% of the trade surplus. Alternatively, the United States is projected to run an ag trade deficit with our second and third largest export customers – Canada and Mexico.

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