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MFP Payments Will Bolster Income in a Challenging Year

We recently sponsored a webinar, “MFP 2019: From D.C. Policy to Farm Budgets,” featuring Agriculture Economic Insights co-founders Brent Gloy and David Widmar. Register for our next free webinar, ARC/PLC Selection, on August 22 at 12:30 p.m. CST. Highlights from MFP webinar are below or watch the full webinar.


How should you view your MFP payments?

Direct farm payments in 2019 could constitute one-fourth of net farm income, the highest proportion in a dozen years. The Market Facilitation Program (MFP) implemented to offset the impact of trade disputes to U.S. agriculture will provide more than $50 per acre in income to producers in parts of our territory (see map). Click to view Kansas county payment rates on agmanager.info.

A webinar hosted by Farm Credit Services of America and Frontier Farm Credit helps producers better understand the impact of this year’s direct payments – for both their operations and the industry as a whole. Presenters David Widmar and Brent Gloy, co-founders of Agricultural Economic Insights (aei), as well as Derek Mohr, a financial officer based in Perry, Iowa, spoke just hours after USDA announced details about the issuance of MFP payments.

The first payment, expected this summer, will be up to half the announced rate for a producer’s county. Payments can range from $15/acre to $150/acre. There is no guarantee rounds two and three will occur.

MFP payments 2019 - five states
The $14.5 billion earmarked for MFP payments is big, but no record. Direct payments were higher in inflation-adjusted dollars in each of several years between 1985 and 2005, the economists noted.

Real Direct US Farm Payments
Government payments issued in 2018 proved significant for grain-producing states. Overall net farm income for members of the Kansas Farm Management Association increased from 2017 to 2018, with 80 percent of the increase attributed to direct government payments (including MFP, ARC/PLC, disaster payments and conservation payments).

net farm income and govt payments 2014-2018
Gloy and Mohr advised producers to be strategic about how 2019 government payments fit into their financial planning.

“When MFP payments were announced last year, we counseled our customers to retain as much as they are able and use the money to replenish working capital. Liquidity is essential in this ag environment. We are recommending the same this year, especially for those who end up having a good year.”
– Derek Mohr, financial officer based in Perry, Iowa

He noted that crops in his area are looking good – and market volatility offered better-than-expected prices for corn and soybean.

“It is risky to make any plans based on government programs,” Gloy said. “I would not make tax or purchasing decisions driven by this income, for instance,” he said.

Watch the full half-hour webinar below.

MFP Payments Will Help This Year

USDA has announced new details about its $14.5 billion Market Facilitation Program (MFP). One of the most important details for grain producers – payments will be based on your county crop history, not on the crop you grow.

In parts of our eastern Kansas, growers will receive more than $50 an acre in MFP payments. The map below, developed by the consulting company Agricultural Economic Insights (aei), shows MFP payments will range from $15/ to $150/acre, with the highest payments expected in the Delta and cotton areas of other states.

MFP payments 2019

Signup for 2019 MFP payments begins July 29 and runs through December 6. Producers are expected to receive a payment this summer. Experts say there could be three installments of 2019 MFP payments, with the first being the largest – but they also caution that the number of payments and their scheduling remains unknown.

Payment caps will apply. For example, in neighboring Iowa’s Boone and Dallas counties, where the county payment rate is $65/acre, farmers top out at 3,850 acres of nonspecialty crops.

MFP payments for livestock include milk, 20¢/cwt., and hogs, $11/head based on inventory. The payment calculation period for livestock has not been announced. Visit Farmers.gov for full details about MFP.

Frontier Farm Credit and Farm Credit Services of America hosted a live webinar on July 25 featuring aei economists Brent Gloy and David Widmar discussing MFP payments and their impact on farm budgets. Watch frontierfarmcredit.com for a recording of the webinar.

What’s Your Storage Strategy?

With the bounty of the 2017 harvest comes the need to review your marketing plans for inventory. 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, futures carry was 30¢ from December to July for corn – nearly full carry, and likely to cover the cost of on-farm stored bushels but not bushels stored commercially by farmers.

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 separately, when it improves.

corn basis trendsBasis

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. As the chart illustrates, this has been the case – in the face of increasing ending stocks – since 2014, with a 15¢-20¢/bu. improvement seen from late harvest to early January. Basis appreciation in January and February is limited because large volumes of corn need to be moved out of temporary storage and farmers need to sell to meet winter cash flow needs. Note that fall basis was stronger (less negative) in 2012 and 2013, when harvest was smaller and stocks were tighter.

corn cost-of-ownership trendsCost of storage

Knowing your cost of ownership of stored bushels is critical. The following assumptions are used for 2017 production in the graph below: cash corn at harvest, $2.97/bu. (price on Oct. 26); interest at 5% annual percentage rate (APR); on-farm storage cost is 1¢/bu.; commercial storage is 16¢ for the first 90 days and 2.8¢ a month thereafter. Clearly, these factors will be different based on your circumstances.

The dark, solid line is the cash price bid at one elevator since harvest. As the chart shows, bushels stored on the farm have a better chance of being sold above the cost of ownership than commercially stored bushels. However, a significant increase in the futures price along with basis appreciation will both likely be needed to see cash prices offered above the cost of ownership.

Spell out your plan

Calculate your own cost of ownership for stored bushels. Consider creating a line graph like the one above to help assess profitability of storage. Lock in futures carry when it is available. Historically, 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.

However, if you make cash sales in the winter months, you will not be able to capture the futures price carry offered in the deferred contracts (May or July). As noted earlier, a futures hedge or HTA are ways to lock in the futures component.

Visit the Iowa Commodity Challenge site more information regarding storage and marketing.

6-10 day outlook temp prob June 11 2017

Good/excellent Wheat Now Under 50 Percent: Crop Progress Report

USDA trimmed another percentage point from the good/excellent category for winter wheat condition in the 18 states it tracks. It is now pegged at 49 percent. The poor/very poor end of the scale held steady this week at 15 percent. The Kansas crop is rated 26 percent in poor/very poor status, with 43 percent in the top end of the scale.

The 18-state crop progressed to 87 percent headed, 2 points ahead of average. Ten percent of the winter crop has been harvested.

Ninety percent of the spring wheat crop has emerged, 5 points ahead of average. Condition of the spring crop worsened noticeably, with the good/excellent categories slipping from 62 percent to 55 percent and poor/very poor increasing to 11 percent from 6 percent.

Corn Crop Condition Improved

With 86 percent of the corn emerged (against 87 percent average), USDA’s Crop Progress report rated corn condition as of June 4 at 68 percent good/excellent, 3 points better than its first condition report, and 6 percent poor/very poor, a 1 percentage point improvement. This compares with 75 percent on the top end and just 4 percent on the bottom end last year.

Percent of corn in the top and bottom ends of the range in the 18 states accounting for 92 percent of 2016 corn acres

Good/excellent Poor/very poor
USA 68 6
KS 61 9
IA 77 3
NE 79 2
SD 62 6
CO 89 0
IL 59 11
IN 46 17
KY 82 4
MI 70 4
MN 77 2
MO 59 7
NC 77 5
ND 67 7
OH 49 10
PA 82 0
TN 83 3
TX 79 5
WI 67 7

Data: USDA/NASS

Soybean status

Soybean planting has reached 83 percent, ahead of its 79 percent average, according to USDA. Indiana, Michigan and Wisconsin continue to lag their averages.

Emergence in the 18 states is at 58 percent, only 1 point behind the five-year average, but states that are behind in planting, such as Ohio, are double-digits behind average for emergence.

Percent planted and emerged in the 18 states accounting for 95 percent of 2016 soybean acres

Planted

Emerged

6/4/17 5-yr avg Difference (percentage points) 6/4/17 5-yr avg Difference (percentage points)
USA 83 79 4 58 59 -1
KS 59 57 2 39 39 0
IA 91 84 7 62 65 -3
NE 91 90 1 62 67 -5
SD 92 83 9 62 55 7
AR 85 76 9 78 67 12
IL 85 81 4 62 66 -4
IN 75 85 -10 47 64 -17
KY 60 54 6 38 37 1
LA 96 91 5 93 84 9
MI 75 85 -10 46 61 -15
MN 94 86 8 68 63 5
MS 92 88 4 89 78 11
MO 71 60 11 51 44 7
NC 57 53 4 42 39 3
ND 94 81 13 57 50 7
OH 74 87 -13 52 62 -10
TN 62 60 2 45 41 4
WI 73 80 -7 34 53 -19

Data: USDA/NASS

Grain Sorghum Planting

Grain sorghum in the 11 states USDA reports stands at 55 percent, with Kansas one quarter completed. The average for this time is 60 percent. Kansas is 14 percentage points behind its 39 percent average.

Weather ahead: A mixed bag

The six to 10 day forecast points to slightly better than average probability of above average precipitation through the Midwest, while the Eastern Corn Belt has normal chances. This should allow producers in the states that are lagging their normal soybean planting progress to forge ahead.

6 to 10 day Outlook Precip Prob - Jun112017

At the same time, most of the country east of the Rocky Mountains faces well above probabilities of hotter than normal temperatures.

6 to 10 day Outlook Temp Prob - Jun112017

Farm Credit Live from Trade Talk

Courtesy of The AGgregator, Farm Credit

By Karen Macdonald

From Farm Credit AGgregator

Today, ag journalists at the National Association of Farm Broadcasting (NAFB) convention in Kansas City, Missouri, are stopping by the Farm Credit booth to interview Mark Jensen and Carl Horne with Frontier Farm Credit and Tanner Ehmke with CoBank, which finances ag exports as well as cooperative and rural infrastructure providers.

Here is a preview of some of the insights and expertise on industry trends, challenges and opportunities you might hear in coming days on regional and national ag broadcasts:

International market forces are dramatically impacting domestic grain producers, says Ehmke, a senior economist.

“So far this year, exports have been excellent, in large part because our major international competitors all faced production issues: Brazil with corn, Europe with wheat and Argentina with soybeans,” Ehmke says. “Looking forward, Argentina, Brazil and Russia are all expected to increase their production over the next few years. With the dollar as strong as it is against their currencies, it will grow difficult to compete on the export front.”

Ehmke points out bright spots domestically: grain elevators benefit from the demand for storage, wheat is working its way into the livestock feed mix and ethanol production is at a record high. According to Ehmke, the challenge for producers will be to recognize and take advantage of rallies, which will be brief. Producers will need to know where their profit point is so they know when to sell their inventory.

Jensen, chief risk officer, points out that Midwest commodity producers are facing high cash rents, high overall costs of production, significant levels of machinery debt and increased living expense. Many producers are well-positioned in terms of cash flow and liquidity, but some who were not as strong financially are bearing more of the brunt of the current market cycle.

“We’re working with our customers individually to help each assess their operation and their financial position today, and how they’ll be positioned over the next few years,” Jensen says. “For those in less favorable positions, we’re helping them figure out how they can reduce costs to a more viable level to weather this cycle.”

One ongoing issue is land values, which trended up for many years but are now seeing a lot of variability, though Jensen expects values to regulate over the next couple of years. Dropping land values can mean lower cash rent costs for producers who lease but can signal hardship for owners. In Iowa, for example, 65 percent of farmland is owned by those older than 65 years and nearing retirement, so the upcoming land transfer will be significant. Such an unprecedented land transfer in sight represents a tremendous opportunity for many.

Some purchasers of the land coming available may well be young, beginning or small farmers. Horne, young, beginning and small program and outreach manager, says that there’s a lot of reason to be optimistic. Even in difficult times like what the grain sector is facing, there is much opportunity for those who are prepared.

“Beginning farmers are actively taking advantage of the vast amount of information available to them in today’s environment, gaining more insight and creating more collaboration,” Horne says. “This means we have producers today who are better prepared than ever to access the information that’s available, sift through it, and find perspectives to help them make better decisions about identifying and capitalizing on new market opportunities.”

Horne recommends that all producers – beginning producers in particular – also build a network of advisors, including their lender, accountant and other producers. Sharing information, asking questions and soliciting opinions on new ideas can help identify opportunities worth pursuing, even in a challenging market environment.