Kentucky Economic and Policy Update

& Policy Update Graphic owner: UKZN SAEES: school website

October 28, 2016 Volume 16, Issue 10 Edited by Will Snell & Phyllis Mattox

Dairy Market Continues to Struggle Like many agricultural sectors, 2016 has not been kind to dairy producers. The decrease in farm-level milk prices over the last 24 months has rivaled that of any two-year period in recent history. All the usual suspects have contributed to the decline including increased production, decreased export levels, and weaker markets for most dairy products. Figure 1 shows US All Milk price from 2012 to 2016. Note the sharp drop starting in the fall of 2014 and the steady decline from fall 2015 through this summer.

Figure 1: US All Milk Price Jan 2012 to Aug 2016 ($ per cwt)

Dairy Market Continues to Struggle - Kenny Burdine - Tyler Mark The Economic Value of Applying Poultry Litter in the Fall - Jordan Shockley

Family Living and Net Farm Income - Suzy Martin

Fall 2016 Wheat Planting Decision - Greg Halich

Source: Understanding Dairy Markets and Author Calculations Declining feed prices have only softened the blow somewhat and margins remain very tight. US corn price was $0.42 per bushel lower in August of 2016 than August of 2014, while US All Milk price was down by $7.10 per cwt. Figure 2 depicts MPP-Dairy margin from January 2012 to August 2016, which is the last month that data was available at the time of this writing. The margin calculation used in the MPP-Dairy program includes US All Milk, corn, alfalfa hay, and soybean meal. While the MPP margin doesn’t perfectly describe an individual dairy operation, it does do a good job capturing the overall milk / feed price relationship and is relevant, as over 58% of dairy operations are now enrolled in the MPP-Dairy program (USDA FSA).

Much discussion this summer centered around the first sizeable payments made from this program as the MPP-Dairy margin averaged $7.15 for the March-April couplet and $5.76 for the May-June couplet. This was the first time, since the program’s inception, that payments were received at a coverage level lower than $8. To put this in perspective, a producer enrolled at the $8 level would have a received payment of $0.85 per cwt on 1/6 (two months) of their annual enrollment for March-April and $2.24 per cwt for May-June.

The two payments combined would be a little over $0.51 per cwt if annualized, which would have slightly exceeded the $8 premium level of $0.48 per cwt for covered milk under 4 million lbs. Put simply, producers who enrolled in MPP-Dairy at highest $8 level would have received slightly more in payments than they spent in premiums in 2016. And, it is possible that additional payments could be received for the September-October and PAGE 2 November-December couplets.

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.

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Figure 2: MPP-Dairy Margin Jan 2012 to Aug 2016 ($ per cwt)

Source: Understanding Dairy Markets and Author Calculations

While over half of dairy operations are enrolled in the MPP-Dairy program, very few chose coverage levels that would have received payments in 2016. According to FSA, over three-fourths chose the lowest $4 coverage level and over 97% chose $6.50 or lower. So payments that were made this year went to a small number of operations that enrolled at higher levels.

Given the current state of profitability in the dairy sector, it is very likely that many producers will choose to enroll at higher levels for 2017. Further, USDA has extended the deadline for enrollment for 2017 into December of 2016. So, producers will have the ability to decide on their enrollment levels up until about two weeks before the new year begins.

By all means, producers should consider their options with this program and see how it might fit within their overall risk management plan.

We would also add that producers may want to consider other risk management strategies in addition to MPP-Dairy.

Producers currently enrolled in MPP-Dairy are ineligible for the LGM-Dairy program, but this remains an option for many. Further, producers still have the ability to utilize contracting, futures, options, and other risk management strategies to manage downside risk on milk price and upside risk on feed prices. There is no single solution for managing risk for a dairy operation and no policy tool will work perfectly. Rather, producers should be aware of all the tools at their disposal and make an informed decision about which fit best given their goals.

Kenny Burdine, kburdine@uky.edu Tyler Mark, tyler.mark@uky.edu

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The Economic Value of Applying Poultry Litter in the Fall Spring application of poultry litter is ideal for maximizing the economic value of poultry litter but faces challenges that include wet soil conditions, lack of time to spread litter near planting, and availability of poultry litter in the spring. Therefore, it is a common practice in Kentucky to apply poultry litter in the fall. While not optimal from an economic, agronomic, or environmental perspective, producers still need to understand the economic value from applying poultry litter in the fall.

Poultry litter applied in the fall to fallow cropland will suffer from ammonium volatilization and leaching resulting in little to no nitrogen available to the crop come spring. This results in an economic value less than if applied in the spring. To evaluate the economic value of poultry litter applied in the fall, first assume that soil test recommendations indicate the need for phosphorus and potassium. Also, assume that “as received� poultry litter has a nutrient content of 50 lbs of nitrogen, 56 lbs of phosphorus, and 47 lbs of potassium (average for Kentucky). With current fertilizer prices of $560/ton for anhydrous ($0.32/lb N), $435/ton for MAP ($0.35/lb P 2O5) and $289/ton for potash ($0.24/lb K2O), the expected value of poultry litter applied to fallow cropland in the fall is $28/ton. This value should cover the price paid for the poultry litter, transport, and application to compete with commercial fertilizer when applied in the fall. The value of poultry litter increases to $33/ton if it is spread in the fall to cropland that has a cover crop planted.

If availability of poultry litter in the spring is a concern, stockpiling litter purchased in the fall can be an option if local, state and federal regulations allow. With the correct storage techniques and a properly staked litter pile, producers can expect minimum nutrient loss for spring application. If the same commercial fertilizer prices hold, the average poultry litter in Kentucky would have a value of $38/ton if properly stored and applied in the spring. If commercial fertilizer prices change come spring, the value for poultry litter can be seen below in Table 1.

Table 1: The economic value of spring applied poultry litter if commercial fertilizer prices today of $560/ton for anhydrous ($0.32/lb N), $435/ton for MAP ($0.35/lb P2O5) and $289/ton for potash ($0.24/lb K2O) vary in spring.

% Change in Current Commercial Fertilizer Prices + 20% + 10% 0% - 10% - 20%

Economic Value of Spring Applied Poultry Litter $45/ton $41/ton $38/ton $34/ton $30/ton

The above poultry litter values for the spring assume all fertilizer (N, P 2O5, and K2O) increase or decrease by the same percent. Even if current fertilizer prices decrease by 20%, the economic value of litter stored properly in the fall and applied in the spring is greater than poultry litter applied to fallow cropland in the fall ($30/ton vs. $28/ton).

The value of poultry litter differs in the fall if applied to pastures or land for hay production. If applying poultry litter to an established stand of alfalfa with a legume mix of <25% of the stand, the average poultry litter in Kentucky at current commercial fertilizer prices has a value of $42/ton. The value of poultry litter will vary based on grass type, established stands vs. new seeding/renovation, and whether the land is used for hay, pasture, or silage.

Since the value of poultry litter is dynamic and always changing, decision tools have been developed so producers can enter soil test data, nutrient content of measured litter, commercial fertilizer prices, and management practices of poultry litter applied to determine the value. Tools for applying poultry litter to both grain crops and land in hay/pasture/silage are available and can be found on my website at the following link: http://www.uky.edu/Ag/AgEcon/shockley_jordan.php

Jordan Shockley, Jordan.shockley@uky.edu

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Family Living and Net Farm Income Everyone is aware that the net farm income (NFI) for farmers in Kentucky was down substantially in 2015. For the 175 Kentucky Farm Business Management (KFBM) farm families whose living expenses were included in the family living study, their average NFI was just $21,795. This is much lower than the five-year average of $156,784 and even below the ten-year average of $139,030. With that being said, you might assume there were adjustments made to either family living expenses or sources of non-farm income. Unfortunately, the answer to that is…. not really. Total family living expenses for 2015 were $70,309. This includes contributions, medical, life insurance, capital items (non-farm) and expendables. This does NOT include income and social security taxes which were an additional $35,229. The five-year average family living cost (not including taxes) is $70,518 and the ten-year average is $69,483. The net non-farm income (including non-farm wages, social security, interest income, etc.) for 2015 was $29,714. The five-year average is $33,306 and the ten-year average is $33,687.

Operations will see significant pressure on their net worth when family living costs ($70,518) exceed the sources of farm and non-farm income ($21,795+ $29,714= $51,509.) The difference of $19,009 ($70,518 - $51,509) must come from other sources. For example, the additional funds might come from savings accounts, stock accounts, sale of assets, etc.

Or, it could come from additional borrowing of funds. In either case, the result is a decrease in net worth.

Keep in mind the shortfall of $19,009 does not include the taxes paid in 2015 of $35,229. The mindset of deferring the taxes has created a cash flow problem for some clients. In other words, they potentially owe taxes on income built up from prior years and don’t currently have the cash to either pay the taxes or spend the money to defer it even further.

There are a few cost saving measures that farm families can use to help trim the family budget. Health Savings Accounts (HSA) and flex spending accounts can be used to put money away pre-tax for out of pocket medical costs. Contributions could be made with commodities rather than cash which would decrease the amount of social security tax owed. If the operation is a sole proprietorship or a partnership where the husband and wife are the only partners and their kids (under 18) work on the farm, then the amounts paid to them could be deducted as employee wages with zero withholdings.

These are just a few ideas to help in planning the family budget. Talk to your specialist or tax preparer about the details and rules involved with these types of options.

From a specialists’ point of view, family living expenses can be a difficult subject to discuss with cooperators. During this downturn in the ag economy, it’s going to be necessary. It is going to be important to work on a realistic family budget based on the various sources of income. It needs to be written down! Remember, goals that are not written down are just wishes.

Suzy L. Martin, slmartin@uky.edu Ohio Valley Farm Analysis Group, Owensboro, KY

Kentucky Farm Business Management

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Fall 2016 Wheat Planting Decision Kentucky grain farmers are harvesting corn and are getting to the point where they will decide if and how much wheat they will plant this fall. In Kentucky, wheat is almost always planted in the fall following the harvest on corn ground, and then double-cropped with soybeans in early summer after the wheat harvest. This allows for two crops in one year.

However, soybeans planted after the wheat harvest are more susceptible to summer drought, which means on average yields are lower for these double-cropped soybeans. In Kentucky, this yield reduction typically averages around 20%  and needs to be factored into the overall decision along with grain prices to determine if double-cropping makes sense in a particular year.

A major change this year is a continued drop in wheat prices while soybean prices have actually increased slightly. This will make planting wheat less attractive this fall. The following analysis attempts to quantify the extent of the relative change in profitability for 2016. The analysis includes estimated returns comparing double-cropped wheat/soybeans with full-season soybeans for the 2016 crop, and the likely implications for Kentucky grain farmers.

Additional costs associated with the double-cropping are accounted for, including fuel, machinery repairs and depreciation, labor, hauling, etc. 2016 new crop CME future’s prices in early October, 2016 are used as the base, and are adjusted for a basis of -$.20 for soybeans and -$.15 for wheat. This results in new crop prices of $9.50/bu for soybeans and $4.25/bu for wheat. Two regions with different agronomic characteristics are evaluated. The first region is along the southwest tier of counties near Hopkinsville, which traditionally does a lot of double-cropping. The second region is along the northwest tier of counties (Ohio Valley region) that has some of the best yields for corn and soybeans, but traditionally plants less wheat. Cash rent is assumed to be $175/acre for both these regions (note: this will vary substantially, but is done here for illustrative purposes only). Net profit is estimated after subtracting out all variable and fixed costs represented by an efficient operation. Major assumptions are: $2.00/gallon fuel, 25-mile oneway grain hauling, $.35/unit N, $.30/unit P, and $.25/unit K. Southwest Tier Assumptions (Average Ground): 70 bu wheat 35 bu double-cropped soybeans 44 bu full-season soybeans Resulting net profits: -$99 double-crop -$31 full-season soybeans This results in a $68 difference in favor of the full season soybeans. The double-cropped soybean yield would have to increase to 42 bu before wheat/double-crop soybeans were as profitable. This would amount to only a two-bushel yield reduction over full-season soybeans.

Southwest Tier Assumptions (Best Ground): 90 bu wheat 44 bu double-cropped soybeans 55 bu full-season soybeans Resulting net profits: +$72 double-crop +$71 full-season soybeans This results in basically the same profitability as full season soybeans.

Northwest Tier Assumptions: 65 bu wheat 38 bu double-cropped soybeans 50 bu full-season soybeans Resulting net profits: -$91 double-crop +$25 full-season soybeans This results in a $116 difference in favor of the full season soybeans. The double-cropped soybean yield would have to increase to 50 bu in this case before the wheat/double-crop soybeans were as profitable.

This would equate to the same yield as full-season soybeans.

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Given the current market conditions, double-cropping doesn’t look remotely attractive in 2016-2017 for the majority of Kentucky. On the very best wheat ground in the state it looks to be a breakeven situation compared to full-season soybeans.

This analysis doesn’t account for potential payments from the ARC and PLC Farm Bill programs. However, these programs would pay on base acre crop allocation and not planted acres, so there would be no effect on the planting decision.

To change the assumptions above to your specific conditions and evaluate your expected profitability, go to the grain budget site at: http://www.uky.edu/Ag/AgEcon/halich_greg_rowcropbudgets.php The Corn-Soybean Budgets and Wheat Budgets can be downloaded or opened directly from this page.

Greg Halich, Greg.Halich@uky.edu Phone 859-257-8841

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

Economic & Policy Update

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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, & KENTJCKY COUNTIES, COOPERATING.