farmland

Farmland Values Continue Steady, Gradual Decline

A steady but gradual decline in farmland values continued into the first half of 2016 across the states served by Frontier Farm Credit and Farm Credit Services of America (FCSAmerica). Iowa has experienced the greatest decline in average farm values – about 20 percent since the market’s 2013 peak. Nebraska and South Dakota farmland has declined by a more modest 12.5 and 4.8 percent respectively.

Demand for farmland also is down. Public land auctions declined 8 percent in the first six months of 2016 compared to the previous year. This percentage includes public auctions in Iowa, Nebraska, South Dakota and Wyoming, as well as Kansas, where FCSAmerica works in alliance with Frontier Farm Credit to monitor farmland values.

Across the five states, lower farm incomes and per-acre profitability continue to put downward pressure on farmland values. Unlike last year, when a strong livestock market led to increased demand for pastureland, values on both pasture and cropland are generally down in 2016. This reflects lower commodity prices for grain as well as cattle.

Twelve-Month Change in Value
State Cropland Pasture
Iowa -5.7% -1.8%
Kansas -0.9% 0.8%
Nebraska -4.7% -2.2%
South Dakota -3.2% -3.1%
Wyoming 1.1% 20.8%

The fall in commodity prices has outpaced the rate of decline in farmland values and FCSAmerica continues to forecast a soft landing for agriculture as the current market correction brings supply and demand back in line.

Below is the average change in benchmark farm values, with the number of benchmark farms appraised in each state noted in parenthesis:

State Six Month One Year Five Year Ten Year
Iowa (21) -4.0% -5.6% 19.6% 139.4%
Kansas (7) -2.0% -0.2%
Nebraska (18) -4.5% -4.4% 68.5% 212.3%
South Dakota (23) -3.6% -3.5% 79.1% 208.3%
Wyoming (2) 7.8% 10.6% 35.8% 67.7%

Trends in farmland values by state include:

IOWA: Fourteen benchmark farms declined in value during the first six months of 2016, while seven showed no change. The average sale price for cropland has reached a 5-year low, but average land quality continues to be at historically high levels.

iowa

KANSAS: Two benchmark farms increased in value, three were unchanged and two declined in value. Benchmark farms in Kansas were appraised for the first time in 2015. As a result, historic data is unavailable. Much of the increase in cropland prices seen in the second quarter of 2016 was attributable to two farmland sales.

kansas

NEBRASKA: Two benchmark farms increased in value, four were unchanged and 10 declined an average of 7.5 percent. Lower sale prices for dry and irrigated cropland were due, at least in part, to deterioration in the average soil quality of land sales.

nedryland

neirrigated

SOUTH DAKOTA: While three benchmark farms increased in value, eight lost value. As a percent of total sales, public auctions have grown significantly, increasing 65 percent from a year ago.

SouthDakota

WYOMING: A benchmark farm comprised of cropland saw no change in value in the first half of 2016, while the second, a pasture unit, increased in value 15.6 percent. Farmland sales were too few to accurately discern any trends.

Wheat LDPs Kick In For Some

When Marketing Assistance Loans (MAL) were authorized in the 1985 farm bill, the intent was to provide financing at harvest so producers could meet cash flow needs without selling their production when prices typically are low and the supply chain is full.

MALs are “nonrecourse” loans in that the loan can be repaid or cancelled by delivering the commodity that was pledged as collateral to the Commodity Credit Corporation (CCC). In an effort to minimize deliveries, the marketing loan gain (MLG) and loan deficiency payments (LDPs) provide a market-based approach to close out the loan when the crop is worth less than the loan. LDPs actually provide the market benefit without taking out a loan.

To qualify, the producer must still have beneficial interest in the crop, meaning you have control over it and hold the title to it. If you have sold or delivered the crop, ownership/control may be considered to have been transferred even if you haven’t yet received payment.

In addition, you must be in compliance with conservation and wetland requirements, submit an acreage report to account for all cropland on all farms and meet income limitations.

How MALs Work

After harvest, you request a loan on a specific number of bushels at the Farm Service Agency (FSA), using the crop as collateral. The national winter wheat loan rate is $2.94/bu. However, you receive the county loan rate for the county where your crop is stored. Interest, set by USDA based on an index above the CCC’s cost of borrowing from the U.S. Treasury at the time the loan is made, accrues on the loan, which matures at the end of the ninth month from loan approval.

At any time prior to maturity, you can settle the loan by paying what is due or an alternative loan repayment rate determined by the Commodity Credit Corporation (the Posted County Price). County PCPs change daily and can be found at http://www.fsa.usda.gov/FSA/displayLDPRates?area=home&subject=prsu&topic=ldp-ldp. If the PCP is below the loan rate, the gap is the MLG. Upon maturity, you can forfeit the grain and keep what you owe. For specific details regarding forfeiting the grain, visit with your local FSA office.

For instance, suppose your county loan rate is $2.43 and you have accrued 3 cents interest so your amount due is $2.46. Say the PCP is $3.28. You would be better off repaying the loan. But suppose the PCP is only $2.38 – your MLG would be 5 cents.

LDPs simplify matters: You forego taking out the loan and simply request payment of the LDP at any time before the final date. In the example above, if you didn’t take out a loan, you could simply request a 5 cent LDP.

The final MAL or LDP availability date for wheat is March 31.

Once you take the MLG or LDP, you must be able to provide proof of production (such as warehouse receipt if you are subject to a spot check).

Payment Limitations

Beginning with the 2014 crop year, the total amount of MLGs, LDPs, payments under Agricultural Risk Coverage (ARC) and/or Price Loss Coverage (PLC) that a person or legal entity can receive, directly or indirectly, cannot exceed $125,000/year. In addition, producers or legal entities whose average adjusted gross income exceeds $900,000 are not eligible for MLGs or LDPs but can take a MAL and repay it at principal plus interest. They also can participate in the Commodity Certificate Exchange program by taking a MAL and immediately trading it for a Certificate. In that case, the payment limitation does not apply.

For USDA’s Fact Sheet on MALs and LDPs, visit: http://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2016/mal_ldp_2016.pdf

Corn Crop Off to a Good Start: Future Uncertain

Despite a wet spring in some areas, the corn crop was planted on time and emergence as of June 26 is one percentage point ahead of the five-year average.

This week, USDA’s National Agriculture Statistics Service rates 75 percent of the national crop good/very good and only 5 percent poor/very poor. This compares with 68 and 8 percent, respectively, last year. The Kansas crop is shown as 65 good/excellent and 8 percent poor/very poor.

The Kansas crop is well ahead of average, with 17 percent already silking, against a five-year average of 12 percent.

Likewise, the national soybean crop got off to a good start, with 72 percent good/very good and 5 percent in the poor/very poor categories nationally. Last year saw 63 percent in the top two and 9 percent in the bottom two. The Kansas crop is not among the top ratings: 59 percent is rated in the top two categories and 8 percent in the bottom two. Nor is it as good as last year’s 63 percent and 9 percent, respectively.

Of course, July weather is critical to corn yield and August often makes or breaks the bean crop. In its June supply/demand report, USDA’s projected yields similar to trend yield of 168 bu. for corn and 46.7 bu. for beans. These are based on a weather-adjusted trend model that assumes normal summer weather. USDA rarely changes its projections before August.

At a meeting late last week, Sterling Smith, agricultural analyst for Bloomberg, said he is using a 160-bu. corn yield based on the expectation that this summer’s weather will be hotter and drier than normal as La Niña kicks in. While some don’t expect La Niña to be in place until after the U.S. growing season, others see it ramping up as early as July.

That’s what has driven commodity funds to flip from a short position of 265,394 contracts on March 8 to a net long of 280,642 contracts – meaning they bought more than 546,000 contracts in just over three months, according to Smith. This provided a rally from $3.70 to $4.40 in December corn.

“Given prices as of June 20 and 160-bu. corn, estimated margins went from strongly in the red to about $29/acre of black ink,” Smith said.

Still, the industry hasn’t seen the kind of move that occurred in 2012, when funds bought a much more modest 289,253 contracts over a 60-day period and prices soared from $5 to $8.

“This suggests they may be back with more money this year if weather actually does turn adverse,” Smth said.

The situation is similar for soybeans: Fund holdings are not far short of the record long position of 259,763 contracts set May 1, 2012, after being short almost 87,000 as of March 1, 2016. November 2016 prices rose from the $9 area to $11.75 in mid-June before easing lower again.

Fundamentals look a little better for soybeans, with ending stocks projected at a not-excessive 260 million while corn’s 2.008 billion ending stocks are among the highest in decades. Smith expects USDA’s planted acreage report on June 30 to come in with 1.85-2.1 million more acres of soybeans and for corn to be just a bit lower than intentions, probably not more than 1 million – probably not much of a surprise to traders. So it’s all about weather. And the fact that investors still have money in their checkbooks and few places to profit from it.

Impressive wheat crop

Meanwhile, with winter wheat harvest going full bore through Kansas and Oklahoma and moving north, its condition is rated as 62 percent good/excellent and 9 percent poor/very poor. Last year, the national rating was 41 percent good/excellent and 23 percent poor/very poor.

The Kansas crop is 64 good/excellent, compared with only 41 percent last year. Just 8 percent is considered poor/very poor against 64 percent last year. Yields ranging from 40 to 80 bu./acre are being reported and test weights, from 58 top 65 lb./bu. Of course, as always, not every farmer is enjoying above-average yields. Hail and heavy rain/strong winds have taken their toll for some. If you are one of the unfortunate, contact your local crop insurance team for help with your claim.

Cattle Transition Part Two: Cow/Calf Caution

Cattle feeders aren’t the only ones who have seen price adjustments as production ramps up. Calf prices – including seedstock – have moved in lock step with fed cattle prices, narrowing cow-calf margins as well.

“I think margins will get tighter faster than anyone thought they would,” said Jay Wolf, a member of the third generation at Wagonhammer Ranches, Bartlett, Neb., a family-owned business that’s been in operation more than 100 years. “Everyone manages costs even in good times, but in this environment, some equipment acquisition might be put off for a time.”

University of Nebraska economists have run 2016 budgets for several sizes of operations in several locations, employing data from a survey of producers. Their conclusion confirms Wolf’s observation: Profits have declined compared with 2015 in every budget group.

Lower revenue is a primary cause, as it has dropped 65 percent to 74 percent year-over-year. However, increases in feed costs also contributed to the squeeze in three of four budgets the economists ran. With a cost increase of $251/calf, the budget for 500 cows in the Sandhills showed the greatest bump. This was due to strongly higher grazing lease costs.

Sandhills also saw the largest decrease in profitability – a substantial $916/calf, from a positive $492 last year to an estimated $424 loss this year.

“Lower cattle prices and higher feed costs explain all but $19 of this decline,” according to Roger Wilson, University of Nebraska budget analyst.

In fact, he reports that a 750-cow budget, representative of the Central Agricultural Statistics District in the state, is the only one with a positive profit for 2016 – $218/calf, a $562 decline from last year’s $780.

“Budgets for ranches that rely primarily on owned grazing land may still show substantial profits given the current price structure, if they are not including an opportunity cost for grazing land,” Wilson said. “It may be that the profit is a return on land investment rather than profitability of the cow operation.”

However, Jim Van Kirk, vice president of credit at Frontier Farm Credit, observes that an unprecedented number of good years has generally left cow-calf operations in sound financial condition.

“We expect the price impact of bigger calf and beef supplies to continue and even accelerate in the next few years,” he said. “The higher grazing cost is a significant factor that may need to be adjusted going forward.”

Pasture outlook for 2016

With the exception of California and the Southwest, the United States has started the growing season with very favorable pasture and forage conditions. Only 10 percent of total acres were rated poor or very poor, down from 13 percent last year and a five-year average of 21 percent. The Great Plains, at just 8 percent poor/very poor, and the Western region, at 12 percent, have seen the most improvement, while the Southern Plains and Corn Belt are about even with last year.

The Climate Prediction Center’s three-month outlook for May to July promises additional moisture across the southern half of the United States, before the June to August and July to September outlooks shift to neutral — equal chances of above, normal or below rainfall.

Cow market

As producers adjust to existing and expected lower cow-calf profits, beef cow slaughter is up 4 percent from last year’s levels, while dairy cow slaughter is level, bringing total cow slaughter to about 1 percent over 2015. Bred cows averaged $1,350 to $2,100 in western markets and $1,600 to $2,350 in the Midwest in April; bred heifers, $1,550 to $2,100 in the West and $1,700 to $2,300 in the Midwest; and pairs, $2,000 to $2,500 in the West and $2,100 to $3,000 in the Midwest.

Market cow prices have been quite disappointing, near 91 on CattleFax’s Seasonal Utility Cow Price Index, compared with 104 last year. CattleFax expects cow prices to be flat through spring and summer, in the $70s/cwt. range, dropping to a fall low in the $50 to $60 area.

Hence, the balance is swinging from producers facing a decision between keeping cows to produce another high-priced cow versus selling for a good slaughter price to a decision of keeping for a lower-priced calf for selling for a lower slaughter price.

Wolf expects that in areas such as Nebraska, which remained fully stocked through the liquidation, the decision will be steady as she goes. In areas such as Oklahoma and Texas, where drought forced cattle off the land, additional herd rebuilding is more likely and replacements have gotten more reasonable.

Seeking Efficiency

“In this part of the cycle, it is even more important to know your cost of production at every level of production,” said Jud Jesske, Frontier Farm Credit vice president, agribusiness lending. “It’s a time to make decisions geared to boosting efficiency.”

Main measures that separate high-profit from low-profit operations include calf-crop percentage, weaning rate, calving interval and weaning weight.

An increase in the percentage of cows successfully bred and delivering a calf will have a large impact on profitability. Reducing calf loss will have a similar impact.

The more calves for sale, the more the income and the less expenditure without return on investment. A study from the University of Georgia identified 85 percent as the level required to meet production expenses, on average; 90 percent is considered a well-managed herd. And a goal of a 95 percent calf crop during a 60-day calving season is a target that can be reached, according to Ted G. Dyer, Extension animal scientist at the university.

The chart below illustrates the impacts of percent calf crop and average weaning rate. For instance, if a ranch has a weaning rate of 85 percent and weaning weight of 500 lb., over all cows in the herd, that would be equal to 425 lb. per cow. At 90 percent, pounds produced increases to 450 lb.

Pounds of Calf Produced per Cow

SOURCE: UNIVERSITY OF GEORGIA

An improved calving interval not only means less cow downtime, but the more calves born on the early end of the calving season, the more pounds there will be at weaning. For instance, a calf born 15 days earlier will weigh about 30 lbs. more if one assumes a 2- lb.-per-day rule of thumb for gain.

One recent survey found a 50 lb. difference in weaning weight between high-return and low-return producers. At last year’s prices, that would have been about $125/calf in added return.

“We expect several years of tighter margins and Frontier Farm Credit is looking at all options to help producers get through this challenging time,” said Jesske. “It may be early to say this, but at times, that means looking beyond cash-flow and considering restructuring loans to provide working capital or even considering different business models.”

Transition Time for the Cattle Business: Part 1, Feedlots

Cattlemen are experiencing both long- and short-term effects of the transition to more beef production.

“The feedlot business has really seen a boom–bust move over the past few years,” said Jay Wolf of Wagonhammer Cattle Company, part of a diversified Nebraska ranching business that has been family owned for more than 100 years. “At our Albion feedlot, we often own animals for more than 12 months. We thought that sometime during that period we’d see an opportunity to at least lock in breakeven but that has not occurred.”

Looking at the most recent move, June fed cattle prices, which had traded in the $132/cwt. area in mid-March, fell to $114 in late April before more recently improving to $122 to $124. Negative price action in April took many by surprise since it came during a month when prices usually trend higher, before dropping to summer lows (see seasonal price chart).

Choice Steer Chart
The reason: Slaughter picked up before grilling season demand was able to do so. The last two weeks of April saw steer/heifer slaughter near 590,000 head/week – more than any other week since August 2013 – and the month’s total was 6 percent over a year earlier. Analysts had expected numbers to be flat or lower compared with last year. A fairly large kill is expected to continue through May.

Packers had seen their bottom line move into the black and encouraged pulling sales forward to take advantage of April futures being sharply discounted to cash prices. That now has reversed because they were forced to discount boxed beef prices to move product.

The good news is the industry now is current. As the USDA’s May 12 data in the chart below show, weights now have fallen to 2015 levels. Given the seasonal pattern, it’s likely they’ll begin heading higher again in the next few weeks.

Weekly Steer ChartRetailers are well stocked and should have enough beef to run features through May, fueling up grills as Memorial Day approaches, albeit six days later than last year.

“The big question for the short-term now is whether beef demand will be sustained after the holiday,” says Steve Meyer, coauthor of The Daily Livestock Report.

With recent high numbers moving, fed-cattle supplies are projected to slide lower into July. In this month’s Cattle on Feed report, cattle on feed 150 days or more are projected to be 14 percent below last year, according to Steve Kay of Cattle Buyers Weekly. CattleFax estimates a reduction of just 1 percent. This could lead to contra-seasonal price strength during June (see seasonal price chart), some analysts believe.

In addition, beef supplies in cold storage are being drawn down: In its April report, USDA reported inventories dropped 5 percent from the prior month and were down 10 percent from two months earlier. Compared with a year ago, there was 3 percent less on hand at the end of March than a year ago and a half percent less than the five-year average. Lower imports are helping reduce available supplies.

Demand side

Not only are we entering a seasonally stronger time frame for beef, but exports are showing signs of improvement as well – especially in Asian markets such as South Korea and Taiwan, where volume in the first quarter jumped 25 percent and 20 percent above the same time last year. Our long-term top market, Japan, boosted purchases by a more modest 9 percent from a year ago. First-quarter exports to Canada fell 9 percent and to Mexico, 14 percent, mainly due to exchange rates.

“Exports are critical to beef producers,” said Wolf, “And the last year or so was frustrating, both because of the strong dollar and the fact that Australia was able to negotiate lower tariffs in Asia, putting the United States at a disadvantage. It is encouraging to see some improvement in 2016, but the beef industry really would like to see the Trans-Pacific Partnership signed into law.”

What’s Next

The earlier-than-expected downturn created some potential for producers to lock in breakeven or even a small profit on the next turn of cattle, noted Adam Wacker, Frontier Farm Credit vice president, credit – beef industry.

“By at least one profit estimate, cattle put on feed in the second week of May had a projected breakeven of about $116/cwt. and the futures price for when they leave the feedyard in mid-May was about $118/cwt., implying some profit potential, subject to basis at the time of sale.

Click to read Part two in the series on Cattle Transition: Cow/Calf Caution