farmer in the field

New in 2019: Multi-county Enterprise Unit

Farmers now can choose to combine acreage of an insured crop across county lines into a Multi-county Enterprise Unit Endorsement (MCEU). This allows farmers to qualify for the better EU premium rate on land that wasn’t eligible for an EU in the past.

The basics:

  • One county must qualify independently for EU; the other county must not qualify.
  • The land in the combined EU must all have the same elections (insurance plan, coverage level and practice, such as irrigated or nonirrigated).
  • The MCEU doesn’t combine the county crop policies – only all insured acreage of the crop/practice. Separate applications and policies are required for each county.
  • APH yields for each county are not impacted.
  • Premium, guarantee and liability will be calculated separately for each county based on the acres and actuarial documents for that county. But the EU premium discount will be determined by using the total acres in the MCEU.

Don’t wait until the last minute to look into this new option.

Your Frontier Farm Credit crop insurance team has been trained to understand the rules involved. We are ready to help you assess whether the new MCEU would be advantageous to your operation.

Call your local Frontier Farm Credit office or 800.397.3191 for help with this decision today.

grain bin winter

Grain in the bin is not a plan

After the prolonged harvest many producers endured, followed by a scramble to get production reports pulled together, it isn’t surprising if a sigh of relief is the main emotion. But grain in the bin cannot be considered a marketing plan and the job isn’t finished if the grain isn’t priced.

If you don’t have your 2018-crop and a preliminary 2019-crop marketing plan in writing yet, this is a great time to sit down and do it. “Timely marketing of grain was a big delineator of winners and losers in 2018,” noted Tyson Anderson, financial officer, Frontier Farm Credit.

Start with your true and total cost of production, Anderson said, adding that using a computer-based software program or the association’s Magnify accounting program is critical. “Accurate accounting makes it easier to create a marketing plan and pull the trigger on sales when the time is right,” he explained.

Once you have calculated your cost of production and know what price you need to be profitable, there are three factors to consider in marketing old-crop production: futures price “carry,” local basis and the cost of grain ownership.

Separating futures from basis presents an opportunity to improve your price received.

Futures carry

Futures carry is the difference between the price of nearby futures and contracts further into the future: March, May and July. In times of large carryover, it is typical for the market to offer carry, to incentivize elevators and farmers to hold the crop off the market. This year was no exception. By late fall, corn futures carry was 25¢-30¢ from December to July – nearly the full cost of carry, and likely to cover the cost of on-farm stored bushels but not farmer-owned bushels stored commercially.

To capture that carry, farmers would have to hedge their bushels by selling futures in the deferred months or initiate a hedge-to-arrive contract. In either case, basis could be set separately, when it improves.

Basis

Basis is simply the local cash price minus the nearby futures contract. It reflects local supply/demand and can vary by elevator, co-op, processor or river terminal. Basis typically is weakest (and cash price lowest) at harvest, when supplies are ample, and then improves into the new calendar year. Basis appreciation in January and February tends to stall because large volumes of corn need to be moved out of temporary storage and farmers need to sell to meet winter cash flow needs. Then, during the summer, when stocks are drawn down, basis becomes stronger and more erratic until new-crop harvest begins.

five year average corn basis Kansas

five year average soybean basis Kansas

Cost of Storage is not free

Knowing what it costs you to store is critical. Even if your bins are paid off, there is an opportunity cost. The following assumptions are used in the graph below: cash corn at harvest, $3.30/bu. and soybeans, $7.60/bu.; interest at 5% annual percentage rate (APR); on-farm storage cost (bin depreciation, shrink, etc.), 1¢/bu./month; commercial storage charge, 5¢/bu./month. Clearly, these factors will be different based on your circumstances.

As the chart shows, bushels stored on the farm have a better chance of being sold above the cost to hold them than commercially stored bushels.

Note, however, that does not address whether it is possible to sell them for a profit. When the starting price is below cost of production, the ending price could be even more below the cost of production – unless futures prices and/or basis improve.

corn cost of ownership trends 2018

soybeans cost of ownership trends 2018

Spell out your plan

Identify your target price needed to create a positive return. Calculate your cost of ownership for stored bushels and adjust your target price accordingly. Consider creating a line graph like the one above to help assess profitability of storage.

As noted earlier, lock in futures carry – via a HTA contract or futures hedge – when it is available or at least set your target price for a cash sale on seasonal price strength. Historically, corn futures tend to peak seasonally between Easter and mid-July  – a little later for soybeans.

Keep track of your local basis at least weekly and lock in that component when it has improved post-harvest.

Consider using a variety of marketing tools, including basis or minimum price contracts so you can eliminate storage costs and lock in the basis if attractive.

And keep in mind that winter cash sales for cash-flow needs mean you will not be able to capture the futures price carry offered in the deferred contracts. That’s why it’s important to plan ahead.

farmland

Farmland Values Soften Modestly

Farmland values in eastern Kansas softened slightly in the last half of 2018, but remained stable overall.

While benchmark farmland values in eastern Kansas improved throughout 2018, the gain was modest in the last six months of the year.

In the neighboring state of Nebraska, farmland values as a whole declined 1.0 percent in the last half of 2018 and 0.9 for the year. Iowa, which generally is on the leading edge of changes in the real estate market, declined 1.4 percent in the last six months of 2018, but were largely unchanged for the year.

“The softening of the market in the latter half of 2018 wasn’t unexpected and, in fact, it better aligns farmland values to profitability in the grain sector,” said Tim Koch, chief credit officer for Frontier Farm Credit. “The industry continues to be challenged by compressed margins. For producers who rent farmland, softening in the market will help their bottom line.”

Continued pressure on profit margins could lead to additional softening in 2019. However, the same factors that have helped to stabilize the market for the past three years remain in place, including interest rates near historic lows and strong demand for quality land that is in tighter supply.

The chart below reflects changes in farmland values for the benchmark farms that Frontier Farm Credit tracks in eastern Kansas. The number of benchmark farms is noted in parentheses.

STATE Six Month One Year
Kansas (7) 0.7% 2.8%

Cropland in 2018 saw a 0.6 percent increase in value; pasture land gained 5.8 percent in value.

Frontier Farm Credit appraises its benchmark farms twice a year, in January and July. In addition, the cooperative compiles records from farmland sales. The cooperative’s objective in using the benchmark farms is to track real estate values without the influence of changes in land quality on sale prices.

The chart below tracks quarterly changes in actual farm sales:

Kansas Cropland Values 122018

Frontier Farm Credit Reports Slight Softening of Farmland Values in Last Half of 2018

Farm real estate market remains stable overall

Farmland values in eastern Kansas softened slightly in the last half of 2018, but remained stable overall.

While benchmark farmland values in eastern Kansas improved throughout 2018, the gain was modest in the last six months of the year. Cropland in 2018 saw a 0.6 percent increase in value; pasture gained 5.8 percent in value.

In the neighboring state of Nebraska, farmland values as a whole declined 1.0 percent in the last half of 2018 and 0.9 for the year. Iowa, which generally is on the leading edge of changes in the real estate market, declined 1.4 percent in the last six months of 2018, but were largely unchanged for the year.

“The softening of the market in the latter half of 2018 wasn’t unexpected and, in fact, it better aligns farmland values to profitability in the grain sector,” said Tim Koch, chief credit officer for Frontier Farm Credit. “The industry continues to be challenged by compressed margins. For producers who rent farmland, softening in the market will help their bottom line.”

Continued pressure on profit margins could lead to additional softening in 2019. However, the same factors that have helped to stabilize the market for the past three years remain in place, including interest rates near historic lows and strong demand for quality land that is in tighter supply.

The chart below reflects changes in farmland values for the benchmark farms that Frontier Farm Credit tracks in eastern Kansas. The number of benchmark farms is noted in parentheses.

STATE Six Month One Year
Kansas (7) 0.7% 2.8%

Frontier Farm Credit appraises its benchmark farms twice a year, in January and July. In addition, the cooperative compiles records from farmland sales. The cooperative’s objective in using the benchmark farms is to track real estate values without the influence of changes in land quality on sale prices.

About Frontier Farm Credit

Frontier Farm Credit is a customer-owned financial cooperative proud to finance the growth of rural America, including the special needs of young and beginning producers. With $2.1 billion in assets and $461.4 million in members’ equity, Frontier Farm Credit is one of the leading providers of credit and insurance services to farmers, ranchers, agribusiness and rural residents in eastern Kansas. Learn more at www.frontierfarmcredit.com.

Top Line Farm Bill Features

Overall, reaction to the 2018 farm bill (Agriculture Improvement Act of 2018) is positive. While there are many tweaks to farm safety nets, most programs are not radically different from those producers have known for the past four years.

Many details are yet to come as USDA writes regulations, sets deadlines, etc., but a few that have been written into the law will interest many farmers, including:

Loan rates raised

  • For the first time since the 2002 farm bill, loan rates for marketing assistance loans (MAL) and loan deficiency payments (LDP) are for most commodities. There was no change to the $10.09/cwt. rate for minor oilseeds such as sunflower, canola or safflower.
  • MAL and LDP payments will not count toward the $125,000 payment limit that applies to ARC and PLC payments.

 

Current loan rate 2019-2023 loan rate Percentage increase (rounded)
Corn $1.95 $2.20 13
Soybeans $5.00 $6.20 24
Wheat $2.94 $3.38 15
Grain sorghum $1.95 $2.20 13

Agricultural Risk Coverage/ Price Loss Coverage
Economists say that current price expectations favor PLC over ARC, especially for corn; the soybean choice is slightly less clear. This is the opposite of the 2014 bill, when 97 percent of corn growers and 94 percent of soybean growers chose ARC. On the other hand, economists say, odds of a payout with either are fairly low at this time.

  • Agriculture risk coverage-county (ARC) and price loss coverage (PLC) are not a one-time decision under this bill. Producers will choose between them for 2019 and 2020 and then, beginning with 2021, the choice will be made annually. As was the case under 2014, the default option is PLC. ARC-Individual ends with 2018.
  • USDA will announce payment rates for each county within 30 days of the end of the marketing year.
  • Payment limits: Individual payment limits remain unchanged at $125,000 for an individual or $250,000 married; the adjusted gross income cap remains at $900,000.
  • The definition of family now extends to nieces, nephews and first cousins.
  • Base acres: This law prevents payments on any base acres if all the cropland on the FSA farm was planted to grass or pasture during 2009 to 2017, although the base acres remain on record and will count toward base for future legislation. These base acres will be eligible for the CSP grasslands program and qualify for a payment of $18/acre.

   PLC

  • Producers have a one-time chance to update their program yields for PLC, effective with the 2020 crop year.The two-step formula is somewhat complicated, but the provision is designed to let producers who had lower yields in 2008 to 2013 adjust based on yields in 2013 to 2017.
  • Effective reference prices (ERP) used for PLC payments now will rise if market prices improve, with a limit of 15 percent. The statutory/base price remains unchanged:
 

Statutory reference price

Maximum (115%)
effective reference
Corn $3.70 $4.26
Soybeans $8.40 $9.66
Wheat $5.50 $6.33
Grain sorghum $3.95 $4.54

   ARC

  • Separate irrigated and dryland ARC-CO guarantees and payments will be calculated in every county.
  • The plug yield used in the Olympic average calculation for ARC-CO rises to 80 percent, from 70 percent, of the transitional yield to replace the producer’s yield in any year it is lower than the plug.
  • ARC-CO payments will be based on the physical location of the farm, not the administrative county.

Crop Insurance
Most provisions in the crop insurance title were unchanged. Tweaks include:

  • Enterprise units are allowed across county lines.
  • The law gives RMA the authority – but does not require – expanding availability of limited irrigation crop insurance.
  • Changes in cover crop details may increase their use in some areas, Kansas State University economists say. The bill defines “cover crop termination” as “a practice that historically and under reasonable circumstances results in termination.” It also provides that cover crop practices are to be considered “good farming practice” if terminated according to USDA guidelines or an agricultural expert and that termination should not impact the insurability of the insurance crop.

Dairy Insurance

  • The dairy margin protection program (MPP) was renamed dairy margin coverage (DMC). Building on the improvements made last February:
  • The top margin coverage available on the first 5 million pounds of production (about 240 cows) increases from $8cwt. to $9.50/cwt.
  • Annual premiums on both the first 5 million pounds of production and Tier II (above 5 million pounds; coverage levels $4-$8/cwt.) are greatly reduced.
  • Coverage cannot exceed 95 percent of production history.
  • Producers who lock in DMC for five years qualify for a 25 percent discount on premiums.
  • Those who were enrolled in MPP could get 75 percent of their premium refunded to use toward buying DMC coverage; they could get half the MPP premiums refunded in cash if they don’t want to enter the new program.

Conservation

  • The conservation reserve program (CRP), currently capped at 24 million acres, will increase to 27 million by 2023. However, rental rates will be reduced to 85 percent of the county rental rate for general sign-ups and 90 percent of the county average for continuous enrollment.
  • The conservation stewardship program (CSP) will be phased out as a stand-alone acre-based program, with existing five-year contracts continuing and those expiring before the end of 2019 being allowed a one-year extension. Going forward the CSP will be administered via a specific funding level each fiscal year, similar to the environmental quality incentives program (EQIP).

Other

  • Livestock producer groups lobbied hard and succeeded in getting provision for a federal vaccination bank that prioritizes foot and mouth disease.
  • Hemp becomes a legal agricultural crop – and will qualify for crop insurance. Industrial hemp is cannabis that has no more than 0.3 percent of the psychoactive compound THC in any part of it. Under the 2014 farm bill, which allowed it to be grown in a narrow range of cases, producers grew 25,713 acres of hemp in 19 states in 2017.

Producers will need to understand state law because the farm bill stops states from interfering with interstate commerce but does allow them to set more restrictive regulations regarding its production and use, including banning hemp growing.