Illinois Grain and Feed Association

Farm Policy News

May 21, 2018

Weekly Outlook: Soybean Prices Focus on Trade and Weather

Todd Hubbs

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (8):92


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Soybean prices moved lower last week despite the positive outlook in the USDA’s May WASDE report. The report, released on May 9, projected that stocks of U.S. soybeans at the end of the current marketing year would total 530 million bushels, slightly less than generally expected. The recent choppy price pattern reflects uncertainty in trade negotiations, the large Brazilian soybean crop, and weakening South American currencies.

November soybean futures prices moved in a band between $10.20 and $10.50 after the release of the surprisingly low March Prospective Planting report placed soybean acreage at 89 million acres. Prices broke lower on May 7 and continued to show weakness through May 18. The July – November price spread moved into negative territory on May 7 and reflects near-term uncertainty regarding trade prospects and planting issues. An additional level of uncertainty is the recent strengthening of the U.S. dollar to the Brazilian real which saw Brazilian export prices move on par with U.S. Gulf export prices. Brazilian production estimates of 4.3 billion bushels are equal to last year’s record crop with some reports indicating the potential for even higher levels. The rapid drop in the Brazilian real last week brought increased sales by Brazilian farmers. Weekly exports of U.S. soybeans face increased competition from Brazil.

Currently, soybean exports are ahead of the pace needed to meet the projection of 2.065 billion bushels for the 2017-18 marketing year. As of May 17, soybean export inspections total 1.677 billion bushels. Cumulative Census Bureau export estimates from September 2017 through March 2018 exceeded weekly export inspections by 42 million bushels. If the same margin exhibited at the end of March continued through this period, exports through May 17 equaled 1.719 billion bushels. With 15 weeks remaining in the marketing year, 23.7 million bushels per week are necessary to meet the USDA projection. Over the last six weeks, soybean export inspections averaged 22.9 million bushels per week but varied with a low of 16.4 million bushels on for the week ending April 12 and a high of 32.8 million bushels for the week ending May 17. As of May 10, 397 million bushels of soybean had been sold for export but not shipped. This number exceeds the 346 million bushels necessary to reach 2.065 billion bushels based off of current sales figures and estimated export levels through May 17. A note of caution is warranted in the sales figures as China currently sits on 75 million bushels of unshipped sales and a 35 million bushel sales cancellation occurred on May 18. Recent developments in trade negotiations place a positive outlook for the remainder of the marketing year, but the uncertainty is not alleviated.

Soybean crush continues to provide support for soybean prices this year. April crush estimates by NOPA came in at 161.06 million bushels. Census Bureau estimates of crush during this marketing year run approximately six percent above NOPA estimates. If this pace continued, the Census Bureau crush estimate for the marketing year equals 1.365 billion bushels through April, 5.8 percent above last year’s total over the same period. The current estimate implies that the crush during the remaining four months of the year must total 625 million bushels, 2.1 percent higher than the crush of a year ago, to reach the USDA projection of 1.99 billion bushels. Soybean meal exports continue to be strong due to issues in Argentina, the world’s leading meal and oil exporter. Argentine production estimates sit at 1.43 billion bushels for the 2018 crop year, down 691 million bushels from last year’s production. Issues associated with soybean crushing in Argentina continue to crop up with a possible worker’s strike, port issues, and a weakening currency all looking to impact their potential for soybean crush over the next few months. Soybean crush shows no signs of weakening this summer in the U.S.

Early concerns about the 2018 soybean crop due to a slow start to the planting season have mostly dissipated. Concerns were mainly alleviated by the USDA’s weekly Crop Progress report that indicated that planting progress in the 18 major soybean producing states came in at above average pace on May 13 with particularly strong performance in the eastern Corn Belt. Still, there should be some concern about crop progress, acreage allocations, and yield prospects in northern growing areas where planting progress sat well behind the average pace as of May 13. The USDA’s Acreage report to be released on June 29 will also reveal any acreage changes from intentions published in the March survey.

Weather and trade issues will dominate price movements in the soybean market over the next few months. A resolution to the trade dispute with China would provide support for both new and old crop soybean prices, but uncertainty remains. Planting progress, crop conditions, and weekly export levels remain important variables to monitor as we move into the summer.

YouTube Video: Discussion and graphs associated with this article

 

Farm Policy News

May 1, 2018

Have Soybean Yields Increased Relative to Corn Yields in Recent Years?

Gary Schnitkey

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (8):78


Soybean yields across much of the Corn Belt have been exceptionally high in recent years, leading to the question of whether soybean yields are increasing relative to corn yields. This issue is examined here using state-level corn and soybean yield series for Corn Belt states. When compared to 1972 to 2017 averages, recent high soybean yields have not resulted in high soybean-to-corn yield ratios. There have been mostly stable soybean-to-corn yields in the eastern Corn Belt. Many states in the western Corn Belt have declining soybean yields relative to corn yields.

Illinois Analysis

The evaluation of soybean yields relative to corn yields begins with state-level yields for corn and soybeans. These data were obtained from the National Agricultural Statistical Service, an agency of the U.S. Department of Agriculture, through the Quick Stats database.

Figure 1 shows state-level corn yields for Illinois from 1972 to 2017. Over this period, corn yields increased an average of 1.9 bushels per year. The 2017 trend yield is found by fitting a line through the 1972-2017 data series and calculating trend yields for each year. The 2017 trend yield represents the expected yield for 2017. If 2017 could be repeated many times, the average of the resulting yields would come close to the 2017 trend yield. The 2017 trend yield is 179.8 bushels per acre. The 2017 yield was 201 bushels per acre, higher than the trend yield by 21 bushels per acre, and the highest Illinois state yield ever, besting the previous record yield of 200 bushels per acre set in 2014. Yields in recent years have been exceptional in Illinois, with yields exceeding trend by over 20 bushels in both 2016 (197 bushels per acre) and 2017.

fdd01052018_fig1.jpg

On average, soybean yields increased by .49 bushels per year from 1972 to 2017. The 2017 trend yield was 52.6 bushels per acre, with the actual 2017 yield being 58 bushels per acre. Soybeans were well above trend in each year since 2014. The 2014 yield was 56 bushels per acre (4.8 bushels above trend), the 2015 yield was 56 bushels per acre (4.3 bushels above trend), the 2016 yield was 59 bushels per acre (a recorded yield and 6.8 bushels above trend), and 2017 was 58 bushels per acre (5.3 bushels above trend). Recent high yields have led some to question whether new technologies and early planting has led to significantly higher soybean yields in Illinois.

fdd01052018_fig2.jpg

To evaluate whether relative yields have changed, soybean yields were divided by corn yields, resulting in soybean-to-corn yield ratios. If these ratios trend up over time, then soybean yields are increasing relative to corn. Conversely, if soybean-to-corn ratios are trending down then soybean yields are decreasing relative to corn yields.

Figure 3 shows soybean-to-corn yield ratios for Illinois, along with a regression line fit through the soybean-to-corn ratios. This is the “best” fitting line through the data and is the orange line in Figure 3. Note that this line has a slightly downward trend; however, the downward trend is not statistically significant, meaning that the downward slope does not add any explanatory power. A straight line through the data would fit the data almost as well as a slightly downward sloping line.

fdd01052018_fig3.jpg

The average soybean-to-corn ratio from 1972-2017 was .31, meaning that soybean yields were 31% of corn yields. In recent years, the soybean-to-corn ratios have been near this average. The soybean-to-corn ratio was .30 in 2016 and .29 in 2017. These recent ratios do not suggest that soybean yields are increasing relative to corn yields. Rather, recent high soybean yields have simply brought soybeans back to even relative to corn for the entire 1972 to 2017 period.

Indiana

An approach similar to that for Illinois was used for other states in the Corn Belt. For Indiana, corn yields increased an average of 1.7 bushels per year and the 2017 trend yield was 168.5 bushels per acre. Soybean yields increased an average of .49 bushels per acre and the 2017 trend yield was 52.5 bushels per acre. From a statistical standpoint, the soybean-to-corn ratio has not exhibited a trend. From 1972 to 2017, the soybean-to-corn ratio averaged .32. The 2017 ratio was above the average age at .33 and the 2017 ratio was below the average at .30. State level data in Indiana do not suggest soybean yields are changed (see Figure 4).

fdd01052018_fig4.jpg

Ohio

Ohio’s corn yield increased an average of 1.7 bushels per year and the 2017 trend yield was 164.8 bushels per acre. Soybean yields increased by .47 bushels per year and the 2017 trend yield was 49.8 bushels per acre. Soybean-to-corn yield ratios averaged .31 and did not exhibit a trend up or down.

fdd01052018_fig5.jpg

Wisconsin

Wisconsin’s corn yields increased by 1.8 bushels per year and the 2017 trend yield was 161.4 bushels per acre. Soybean yields averaged 45 bushel increase per year and the 2017 trend yield was 47.5 bushels per acre. Wisconsin’s soybean-to-corn yield ratios did not have a statistically significant downward trend. Over the 1972 to 2017 period, soybean-to-corn yield ratios averaged .31. Soybean-to-corn ratios were .31 in 2016 and .27 in 2017 (see Figure 6).

fdd01052018_fig6.jpg

Iowa

Iowa corn yields increased an average of 2.1 bushels per year and the 2017 trend yields was 186.0 bushels per acre. Soybean yields have trended up .48 bushels per year and the 2017 trend yield was 53.6 bushels per acre. Unlike states in the eastern Corn Belt, Iowa’s ratio of soybean-to-corn yield ratios has a statistically significant downward trend down over time (see Figure 7). In 2017, the expected soybean-to-corn yield ratio was .28. Actual soybean-to-corn ratios were .30 in 2016 and .28 in 2017.

fdd01052018_fig7.jpg

Minnesota

Minnesota’s corn yields have increased an average of 2.4 bushels per year and the 2017 trend yield is 182.0 bushels per acre. Soybean yields increased .41 bushels per year and the 2017 soybean yield was 45.9 bushels per acre. Soybean-to-corn yield ratios have trended down (see Figure 8). Over the 1972 to 2017 period, soybean-to-corn ratios averaged .29. The ratio was .27 in 2016 and .24 in 2018.

fdd01052018_fig8.jpg

Nebraska

Nebraska’s state corn yields increased an average 2.0 bushels per year and the 2017 trend yield was 177.3. Soybean yields increased by .65 bushels per year and the 2017 trend yield was 55.1 bushels per acre. Soybean-to-corn yields ratios did not exhibit trends. The soybean-to-corn yield ratio averaged .30 from 1972 to 2017 (see Figure 9). The soybean-to-corn ratio was .34 in 2016 and .32 in 2017.

fdd01052018_fig9.jpg

South Dakota

South Dakota’s corn yields increased an average of 2.4 bushels per year and the 2017 trend yield was 147.4 bushels per acre. Soybean yields increased an average of .40 bushels per year and the 2017 trend yield was 41.3 bushels per acre. In South Dakota, soybean-to-corn yield ratios trended down from 1972 to 2017 (see Figure 10). For the entire 1972-2016 period, the average soybean-to-corn ratio averaged .37. The ratios were .31 in 2016 and .30 in 2017. The downward trend in yield ratios may have stopped in recent years. Since 2000, the soybean-to-corn yield ratio has been relatively stable at a .29 level.

fdd01052018_fig10.jpg

North Dakota

North Dakota’s corn yields have increased an average of 1.9 bushels per year and the 2017 trend yield was 135.5 bushels per acre. Soybean yields increased an average of .34 bushels per year and the 2017 trend yield was 35.5 bushels per acre. Soybean-to-corn yield ratios have trended down over the 1972-2017 period (see Figure 11). Over the entire 1972-2017 time period, soybean-to-corn yield ratios averaged .31. The ratio was .26 in 2016 and .24 in 2018.

fdd01052018_fig11.jpg

Summary

None of the state yield series indicated that soybean-to-corn yields have changed in recent years. There is a marked difference in soybean performance relative to corn performance across the Corn Belt (see Table 1). States in the eastern Corn Belt (Ohio, Indiana, Illinois, and Wisconsin) had stable soybean-to-corn yield ratios across the 1972 to 2017 period. Recent yield ratios were near the 1972-2017 averages. Except for Nebraska, states in the western Corn Belt (Iowa, Minnesota, Nebraska, South Dakota, and North Dakota) had decreasing soybean-to-corn yield ratios. Except for South Dakota, recent yield ratios do not appear to be reducing the yield ratio declines.

fdd01052018_tab1.jpg

YouTube Video: Discussion and graphs associated with this article at: https://youtu.be/N-AJAViy3NI

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ACES News

Satellites, supercomputers, and machine learning provide real-time crop type data

Landsat satellite

URBANA, Ill. – Corn and soybean fields look similar from space – at least they used to. But now, scientists have proven a new technique for distinguishing the two crops using satellite data and the processing power of supercomputers.

“If we want to predict corn or soybean production for Illinois or the entire United States, we have to know where they are being grown,” says Kaiyu Guan, assistant professor in the Department of Natural Resources and Environmental Sciences at the University of Illinois, Blue Waters professor at the National Center for Supercomputing Applications (NCSA), and the principal investigator of the new study.

The advancement, published in Remote Sensing of Environment, is a breakthrough because, previously, national corn and soybean acreages were only made available to the public four to six months after harvest by the USDA. The lag meant policy decisions were based on stale data. But the new technique can distinguish the two major crops with 95 percent accuracy by the end of July for each field – just two or three months after planting and well before harvest.

The researchers argue more timely estimates of crop areas could be used for a variety of monitoring and decision-making applications, including crop insurance, land rental, supply-chain logistics, commodity markets, and more.

For Guan, however, the work’s scientific value is as important as its practical value.

A set of satellites known as Landsat have been continuously circling the Earth for 40 years, collecting images using sensors that represent different parts of the electromagnetic spectrum. Guan says most previous attempts to differentiate corn and soybean from these images were based on the visible and near-infrared part of the spectrum, but he and his team decided to try something different.

“We found a spectral band, the short-wave infrared (SWIR), that was extremely useful in identifying the difference between corn and soybean,” says Yaping Cai, Ph.D. student and first author of the work, following the guidance of Guan and another senior co-author, Shaowen Wang in the Department of Geography at U of I.

It turns out corn and soybean have predictably different leaf water status by July most years. The team used SWIR data and other spectral data from three Landsat satellites over a 15-year period, and consistently picked up this leaf water status signal.

“The SWIR band is more sensitive to water content inside the leaf. That signal can’t be captured by traditional RGB (visible) light or near-infrared bands, so the SWIR is extremely useful to differentiate corn and soybean,” Guan concludes.

The researchers used a type of machine-learning, known as a deep neural network, to analyze the data.

“Deep learning approaches have just started to be applied for agricultural applications, and we foresee a huge potential of such technologies for future innovations in this area,” says Jian Peng, assistant professor in the Department of Computer Science at U of I, and a co-author and co-principal investigator of the new study.

The team focused their analysis within Champaign County, Illinois, as a proof-of-concept. Even though it was a relatively small area, analyzing 15 years of satellite data at a 30-meter resolution still required a supercomputer to process tens of terabytes of data.

“It’s a huge amount of satellite data. We used the Blue Waters and ROGER supercomputers at the NCSA to handle the process and extract useful information,” Guan says. “Technology wise, being able to handle such a huge amount of data and apply an advanced machine-learning algorithm was a big challenge before, but now we have supercomputers and the skills to handle the dataset.”

The team is now working on expanding the study area to the entire Corn Belt, and investigating further applications of the data, including yield and other quality estimates.

The article, “A high-performance and in-season classification system of field-level crop types using time-series Landsat data and a machine learning approach,” is published in Remote Sensing of Environment [DOI: 10.1016/j.rse.2018.02.045]. Additional authors include Christopher Seifert, Brian Wardlow, and Zhan Li. The work was supported by NCSA, NASA, and the National Science Foundation.

Source: Kaiyu Guan, 217-300-2690, kaiyug@illinois.edu

News writer: Lauren Quinn, 217-300-2435, ldquinn@illinois.edu

Date: April 4, 2018

Editor’s note: images to accompany this story are available at https://photos.app.goo.gl/YrplQl59AFDGSemi1

Farm Policy News

Trade Worries Taint Farm Economy Outlook

A recent report from CoBank pointed out that trade worries are clouding the economic outlook for U.S. farmers and ranchers.  And, a recent report from Purdue University demonstrates that potential trade retaliation measures on U.S. soybeans by China could be costly.  Today’s update looks briefly at these two reports, as well as other news articles that highlight ongoing trade issues in the farm sector.

China Trade Issues Cloud Outlook, Soybean Worries Linger

Last month, CoBank released its Quarterly U.S. Rural Economic Review, which noted in part, “Ongoing trade negotiations and potential trade disputes are the major concerns in the near term. U.S. tariffs on steel and aluminum may elicit responses from other countries and will certainly impact the ongoing NAFTA negotiations. Recently announced U.S. tariffs on Chinese imports triggered China to announce its own list of retaliatory tariffs which would largely affect U.S. agricultural goods.

“The completion of the 11 country Comprehensive and Progressive Agreement for Trans-Paci c Partnership (TPP) that does not include the U.S. or China could result in some erosion in U.S. export potential.

The current trade environment will likely result in many countries reexamining their trade policy strategies and attempting to diversify their supply chain arrangements.

The CoBank update added, “There is considerable risk that China’s list of U.S. ag products on which levies will be applied could grow. China has hinted that it will ‘keep its powder dry’ which could put soybeans, corn, beef or other products at risk in the future.”

The CoBank report also noted that, “Lackluster export demand has plagued U.S. soybean markets in 2018’s first quarter.”

“QUARTERLY U.S. RURAL ECONOMIC REVIEW– Trade War Risks Loom over Agriculture.” CoBank Knowledge Exchange Division (March 2018).

And, trade data from USDA’s Economic Research Service in March showed that the value of soybean exports through January for this fiscal year are down compared to last year.

U.S. Agricultural Trade Data, USDA- Economic Research Service (Updated March 8, 2018) – Fiscal Year is from October 1 of previous year through September 30 of current year (https://goo.gl/wvf7Q5).

Last week, Financial Times writers Lucy Hornby and Gregory Meyer reported, “Retaliating against soyabean shipments would have a big impact on US farmers, many from states that voted for Mr Trump. But it would also involve significant pain for China which relies heavily on the US. More than one-third — 37 per cent last year — of the total soyabeans consumed in China are shipped from the US.

“‘Soy is the last resort. You don’t start with your biggest bullet,’ said Ma Wenfang, an analyst at Beijing Orient Agribusiness Consultancy. ‘If a true trade war were to erupt, they would roll out soy. That would really hurt the US.’”

With respect to how much soybean import restrictions by China could “hurt,” a Purdue University news release on Wednesday stated, “Chinese soybean imports from the U.S. could drop by as much 71 percent if China were to impose trade restrictions on U.S. soybeans in response to U.S. tariffs on Chinese products, according to a study for the U.S. Soybean Export Council conducted by Purdue University agricultural economists Wally Tyner and Farzad Taheripour.

“Using an advanced version of the Global Trade Analysis Project (GTAP) model developed at Purdue, Taheripour and Tyner projected the outcome of several prospective scenarios in which the Chinese government were to adopt tariffs ranging from 10 to 30 percent on U.S soybeans. China is the world’s largest soybean importer, buying 93 million metric tons of soybeans in 2016, mostly from Brazil, the U.S. and Argentina. Nearly two-thirds of all U.S. soybean exports – 62 percent – go to China.”

Last week’s release explained, “The analysis by Taheripour and Tyner produced a wide range of results under different assumptions of protection rates, model parameters, and product coverage.

Their best estimates of possible impacts of Chinses tariffs on soybean imports form U.S. show that if the Chinese were to adopt a 10 percent tariff on U.S. soybeans, U.S. exports to that country could fall by a third – 33 percent. Total U.S. soybean exports could decline by 18 percent, and total U.S. soybean production could drop by 8 percent, the study showed.

“In a scenario where China imposed a 30 percent tariff, Chinese imports of U.S. soybeans could drop by 71 percent, total U.S. soybean exports could fall by 40 percent, and total U.S. soybean production could decrease by 17 percent.”

However, Bloomberg News reported on Thursday that, “U.S. Ambassador Terry Branstad warned China against retaliatory measures aimed at imports of American soybeans, as the world’s two largest economies edged closer to a trade war.

“The former Iowa governor told Bloomberg Television on Thursday that any effort to curb U.S. soybean imports would harm regular Chinese citizens more than American growers. The crop provides a key source of protein, including as feed for hogs, for the country’s growing middle class, Branstad said in an interview at the U.S. Embassy in Beijing.

“‘It doesn’t make sense and it would hurt the Chinese consumers,’ Branstad said when asked about possible retaliation on soybeans. ‘Ultimately, the Chinese will realize we need to work together on these issues and retaliation is not the answer, but instead collaboration and cooperation to address the issues that have been around for a long time.’”

China Trade- Pork

Associated Press writer Tom Beaumont reported on Saturday that, “In Sioux County, [Iowa] where swine barns interrupt the vast landscape of corn-stubbled fields, exports of meat, grain and machinery fuel the local economy. And there’s a palpable sense of unease that new Chinese tariffs pushed by President Donald Trump — who received more than 80 percent of the vote here in 2016 — could threaten residents’ livelihood.

“The grumbling hardly signals a looming leftward lurch in this dominantly Republican region in northwest Iowa. But after standing with Trump through the many trials of his first year, some Sioux County Trump voters say they would be willing to walk away from the president if the fallout from the tariffs causes a lasting downturn in the farm economy.”

The AP article stated, “Sioux County seed dealer Dave Heying echoed a common refrain that any downturn in the farm economy would curb spending throughout the local economy, with direct impact on farm machinery dealers, mechanics and agricultural construction, among other businesses.

“‘Protecting our U.S. industries is important, but my concern is, at what expense to the farmer?‘ Heying said of Trump’s trade moves. ‘It is too early to say whether or not I would support him. These types of decisions give you hesitation.’”

China Trade- Ethanol

Bloomberg News reported last week that, “China’s purchases of ethanol from the U.S. climbed, with imports in coming months dependent on the Asian country’s plan to impose extra import duties that could wipe out the margin that’s seen buying surge this year.

Imports of ethanol from U.S. totaled 189,035 cubic meters in February, the highest since May 2016, according to Chinese customs data. Purchases had slumped in 2017 after China imposed a 30 percent tariff on imports from the U.S.”

“China Imports of U.S. Ethanol Surge Ahead of Tariff Threat.” Bloomberg News (March 26, 2018).

The Bloomberg article indicated that, “China on [March 23rd] announced plans for reciprocal tariffs on $3 billion of imports from the U.S., including denatured ethanol, in response to President Donald Trump’s levies on Chinese metal exports. Chinese companies have ordered more than 600,000 tons of ethanol from the U.S. for blending into gasoline in the first half of the year, according to the China Alcoholic Drinks Association, which oversees the fuel ethanol industry. China is expanding its ethanol mandate nationwide by 2020.”

Keith Good

Keith Good

Keith Good is the social media manager for the farmdoc project at the University of Illinois. He is well known in agricultural circles for the daily FarmPolicy.com News Summary.

Farm Policy News

March 27, 2018

Cash Rents on Professionally Managed Farmland in 2018 and 2019

Gary Schnitkey and Bruce Sherrick

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (8):53


The Illinois Society of Professional Farm Managers and Rural Appraisers recently released their estimates of 2018 cash rents as well as their expectations for 2019 cash rents. Cash rent levels on professionally managed farmland were roughly the same in 2018 as in 2017. Given corn prices continuing in the mid-$3.00 range, 2019 cash rents would be expected to be the same or have slight declines from 2019 levels.

Background on Illinois Society of Professional Farm Managers and Rural Appraisers

The Illinois Society of Professional Farm Managers and Rural Appraisers (ISPFMRA) is an association of farm managers and rural appraisers. Farm managers care for the farmland of absentee landowners, offering services that include selecting farmer tenants, negotiating rental arrangements with farmer tenants, inspecting farmland, and providing reports to landowners. Rural appraisers provide valuations of farm properties, mostly for legal purposes such as providing documentation for loans and providing prices used for settling estates. More information on the ISPFMRA, including a directory of members, is available on the ISPFMRA website (www.ispfmra.org).

The ISPFMRA conducts an annual effort to collect data on farmland values and lease trends for nine regions of Illinois, resulting in a yearly “Illinois Farmland Values and Lease Trend” booklet. Booklets for previous years are available on the ISPFMRA website. The 2018 Booklet can be purchased on the ISPFMRA website.

2018 Cash Rents

Figure 1 presents summary information on average cash rents on Illinois farmland. More detailed information for the nine regions is available in the 2018 Booklet. Figure 1 shows average cash rents on professionally managed farmland for the years from 2007 through 2018 for four land classes:

  1. Excellent farmland has productivity indexes (PIs) that are over 133. These PIs are based on ratings contained in Bulletin 811, Optimum Crop Productivity Ratings for Illinois Soils. These soils have high yielding capabilities and are typically located in the northern and central part of the state. A map of PIs for Illinois is available here.
  2. Good farmland has PIs between 117 and 132. Fair farmland is located throughout Illinois, with larger pocket sin western Illinois and eastern Illinois.
  3. Average farmland has PIs between 100 and 116. Fair farmland is located throughout Illinois, with larger pocket sin western Illinois and eastern Illinois.
  4. Fair farmland has PIs less than 100. Fair farmland typically is located in southern Illinois

fdd03272018_fig1.jpg

Overall, crop yields will be the highest for excellent quality farmland and decrease for good, average, and fair classes. As a result, cash rents averaged highest for excellent class farmland and the lowest for fair class farmland (see Figure 1). Figure 1 presents average cash rents over time. There are considerable ranges around these averages. On professionally managed farmland, for example, some excellent class farmland had rents considerable higher and lower than the averages. More detail is provided in the 2018 Booklet.

The four classes of farmland had the same trends. Average cash rents for all land classes increased from 2007 and reached highs in 2013. Cash rents then declined from 2013 to 2017. For example, excellent farmland had rents that increased from $183 per acre in 2007 to $396 per acre in 2013. From the 2013 high, cash rents decreased to $300 per acre in 2017. These rents follow with lags income levels on farms (see farmdoc daily, March 13, 2018, for a chart of incomes).

Cash rents in 2018 are roughly as in 2017. For example, excellent class farmland had a $300 cash rent in 2017 and $298 per acre in 2018. Good and average classes had the same rent in 2017 as in 2018: $260 per acre for good farmland and $225 per acre for average farmland. Fair productivity farmland has a slight increase: $175 per acre in 2017 to $186 in 2018.

ISPFMRA and Average Cash Rents

The ISPFMRA cash rents are some of the first published cash rents for 2018. Over time, ISPMFRA cash rents on professionally managed farmland follow closely rents based on rents that include more than just professionally managed farmland. To illustrate, Figure 2 shows cash rents for excellent farmland from ISPFMRA, the same series that is shown in Figure 1. Also shown are average cash rents for central Illinois farms having high-productivity farmland that are enrolled in Illinois Farm Business Farm Management (FBFM). FBFM cash rents are available in a Revenues and Costs publication available on farmdoc.

fdd03272018_fig2.jpg

Overall, FBFM farms had lower cash rents than ISPFMRA, in large part because the FBFM high-productivity series contains all cash rents and not only those on professionally managed farmland. Over time, professionally managed farmland tend to have higher cash rents than farmland that is not professionally managed. While the ISPFMRA rents are higher, ISPFMRA and FBFM cash rents track each other, having a correlation coefficient of .95 over the years from 2007 to 2017. While highly correlated, ISPFMRA professional managed farmland has larger changes than the FBFM averages. For example, ISPFMRA average went up more than FBFM average during the 2010 to 2013 period when returns to farmland were high. ISPFMRA average rents have come down more since 2013 than have FBFM averages.

The small declines in ISPFMRA cash rents suggest that average cash rents had small changes between 2017 and 2018.

Expectations for 2019

ISPFMRA members were asked their expectations for 2019 cash rents. Obviously, economic conditions will impact 2019 cash rents. When asking cash rent expectations, we first indicated that the 2019 expected corn price was near $3.50 per bushel. In this case, 58% of the members responding to the survey indicated that farmland prices would stay the same while 36% indicated that cash rents would decline between $5 and $25 per acre (see Figure 3). Six percent of respondents indicated that cash rents would increase. A $3.50 price is roughly the same as prices have been s in 2016 and 2017. These expectations suggest continuing, modest declines in 2019 cash rents if prices remain roughly at their current levels.

fdd03272018_fig3.jpg

ISPFMRA members also were asked what would happen if the expected 2019 corn price was near $4.20 per bushel. In this case, 83% of respondents indicated that cash rents would increase. A $4.20 per bushel corn price is considerably higher than current expectations. However, the price is not outside the realm of possible 2018 rents.

We are still always away from setting 2019 cash rents. Survey responses indicated that corn prices continuing at current levels would result in modest declines in average cash rent levels on professionally managed farmland. Higher prices would result in increases in cash rents. Lower prices likely would result in lower cash rents.

Summary and Concluding Comments

Results suggest roughly stable cash rents on professionally managed farmland between 2017 and 2018. Given high correlations between ISFPRMA and other cash rent series, one should expect modest changes in average levels on other cash rent series. Given mid-$3.00 corn prices, farm managers indicated that cash rents would remain stable to decline slightly. Continuing these levels of cash rents may place some farms in the position of facing low incomes and deterioration of financial positions (see farmdoc daily, March 13, 2018). We are still several months away from setting cash rents. As always, much will depend on the 2018 growing season. Moreover, commodity demand conditions also will play a role in economic outcomes.

References

Illinois Society of Professional Farm Managers and Rural Appraisers (ISPFMRA). Land Values Archive. http://www.ispfmra.org/land-values-archive/

Olson, K.R. and J.M. Lang. “Optimum Crop Productivity Ratings for Illinois Soils.” Bulletin 811, College of Agricultural, Consumer and Environmental Sciences, Office of Research, University of Illinois. August 2000. http://soilproductivity.nres.illinois.edu/Bulletin811ALL.pdf

Schnitkey, G. “Trends in Farm Balance Sheets over Time.” farmdoc daily (8):44, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 13, 2018.

Schnitkey, G. “Revenue and Costs for Corn, Soybeans, Wheat, and Double-Crop Soybeans, Actual for 2011 through 2016, Projected 2017 and 2018.” Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February, 2018.

USDA, NRCS, Soil Data Mart. “Optimal Productivity Index map.” https://www.nrcs.usda.gov/Internet/FSE_MEDIA/stelprdb1167165.jpg

Farm Policy News

Ag Economy: Farmland Values; and Off-Farm Income

March 19, 2018

Today’s update looks briefly at recent news items that highlight current information on farmland values.  In addition, key parts of a recent Wall Street Journal article that focused on the importance of off-farm income to U.S. farm households are also included.

Farmland Values

In a front page article last week in the Minneapolis Star Tribune, Tom Meersman reported that, “Prices for farmland declined across Minnesota in 2017, another sign of a weak farm economy that’s been plagued by low crop prices and reduced incomes for the past four years.

“In Farm Country, Slump Isn’t Over,” by Tom Meersman. Minneapolis Star Tribune front page (March 12, 2018).

Experts say many farmers are dealing with land values about 20 percent lower than when the market peaked in about 2012, when commodity prices were historically high.

For 2017, numbers based on fiscal year sales data reported to the Minnesota Department of Revenue and analyzed by the University of Minnesota showed that the median price per acre of farmland was $4,625, down 5.4 percent from the previous year.

“‘Land values are an important part of a farmer’s equity, so obviously that land component is an important part of a farmer’s collateral,’ said Bruce Peterson, a former president of the Minnesota Corn Growers Association who farms near Northfield. ‘If that drops 30 percent, then it makes for a much more sticky situation for people in a tighter situation financially.’”

The Star Tribune article noted that, “Last week the Federal Reserve Bank of Minneapolis reported that the agricultural sector in Minnesota and nearby states remains weak but stable. Lenders responding to a January Fed survey of agricultural credit conditions indicated that farm income and capital spending decreased compared to the previous year, with further declines expected for the coming three months.

“‘We’re in the third to fourth year of farm stress,’ said Ward Nefstead, University of Minnesota Extension economist.”

“In Farm Country, Slump Isn’t Over,” by Tom Meersman. Minneapolis Star Tribune front page (March 12, 2018).

Last week’s article pointed out that,

‘Land values haven’t gone down as much as they could have,’ said David Bau, a University of Minnesota Extension educator who has been tracking farm economics in southern Minnesota for the past two decades. ‘Prices are starting to hold their own.’

“That’s also true in neighboring states such as Iowa, where a December report from Iowa State University showed average farmland values increasing slightly by 2 percent last year. A January report by Farm Credit Services of Omaha found that South Dakota farmland values dipped by 3.1 percent in 2017.”

“In 2003-08, cropland appreciated almost uniformly across the regions. However, in 2009-14, cropland appreciation was mostly concentrated in four regions: the Northern Plains, Corn Belt, Lake States, and Delta States. This was largely due to increases in commodity prices for grain and oilseed crops.” Farmland Values, Land Ownership, and Returns to Farmland, 2000-2016, ERR-245. USDA, Economic Research Service (February 21, 2018).

Meanwhile, DTN writer Todd Neeley reported late last week that, “Average Nebraska agriculture land values declined for a fourth-consecutive year, according to preliminary results of a University of Nebraska-Lincoln survey released on Thursday.

“The survey of land professionals that included appraisers, farm and ranch managers and agricultural bankers, points to low commodity prices and state property tax issues as the reasons for the continued fall.

UNL found average agricultural land values declined by 3% in the past year, and by 17% since reaching an average high of $3,315 per acre in 2014.

The latest survey found Nebraska all-land average values as of Feb. 1 averaged $2,745 per acre.

Off-Farm Income

Wall Street Journal writers Jacob Bunge and Jesse Newman reported late last month that, “Most U.S. farm households can’t solely rely on farm income, turning what was once a way of life into a part-time job. On average, 82% of U.S. farm household income is expected to come from off-farm work this year, up from 53% in 1960, according to the U.S. Department of Agriculture.”

“To Stay on the Land, American Farmers Add Extra Jobs,” by Jacob Bunge and Jesse Newman. The Wall Street Journal Online (February 25, 2018).

Off-farm work has become more important since a slump in prices for corn, wheat and other farm commodities over the past five years has cut total U.S. farm income in half. Last week, the USDA said income from farming is expected to fall further over the next decade. Now, picking up work in construction or truck driving is required for many farmers to fund seed and fertilizer purchases, and keep current on loan payments for tractors and land.

‘Most farmers are still on their land today because of their off-farm jobs,’ said Dan Kowalski, head of research at CoBank, one of the largest U.S. agricultural lenders. ‘Without these jobs, these farms would be consolidating at a faster rate.’

The Journal writers explained that, “U.S. food producers as a result are increasingly exposed to economic forces far beyond the fields. Many farms have become reliant not just on sales of crops and livestock, but on the health of rural businesses such as trucking companies and manufacturing plants. Those jobs have been slow to bounce back from the 2008 financial crisis. As of mid-2016, the number of jobs outside of metro areas remained 3% below their prerecession peak, while those in metro areas had grown 5%, according to federal data.

Rural manufacturers such as Iowa’s Pella Corp. and Hy-Capacity Inc., which rebuilds tractor parts, increasingly support agricultural production by hiring smaller-scale farmers.”

Bunge and Newman pointed out that, “Farmers say their independence and satisfaction from growing a crop keeps them holding down other jobs while working the land. For many farmers who work at Pella, expanding their farms to a size that could provide a complete family income is out of the question. An acre of Iowa’s rich, black soil in the area sells for $4,000 to $8,000, and the state’s average is four times what it was in 2000, according to Iowa State University. Land rental rates in the state have more than doubled in that time.”

“To Stay on the Land, American Farmers Add Extra Jobs,” by Jacob Bunge and Jesse Newman. The Wall Street Journal Online (February 25, 2018).

The Journal article added that, “Larry Stenger, regional president at First Mid-Illinois Bank & Trust in Sullivan, Ill., said farmers in his region often use their trucking fleets for off-farm work in winter months, transporting grain for nearby elevators or hauling goods for other trucking firms. ‘There are opportunities out there for those looking for it,’ Mr. Stenger said.

“Some larger-scale farmers, who dominate U.S. food production, plow some crop profits into trucking or supply companies to diversify income and insulate themselves from agriculture’s price swings.”

Keith Good

Keith Good

Keith Good is the social media manager for the farmdoc project at the University of Illinois. He is well known in agricultural circles for the daily FarmPolicy.com News Summary.

Farm Policy News

Update

March 8, 2018

Federal Reserve: Observations on the Ag Economy- February ’18

Graph of Fed Districts from, “The Beige Book.”

* Sixth District- Atlanta– “Agriculture conditions across the District were mixed. Drought conditions persisted in much of the District. However, rain in February brought some relief. The January forecast for Florida’s orange crops was down further from the previous report as the effects of the Hurricane Irma continued to be felt. On a year-over-year basis, prices paid to farmers in December were up for cotton rice, beef, broilers, and eggs and down for corn and soybeans.”

* Seventh District- Chicago– “Expectations for overall farm income in 2018 improved somewhat in January and early February, though much of the District’s farm sector remained under stress. There were reports of more small tracts of ground being offered for sale.

Corn and soybean prices were up enough to cover a slight rise in projected production costs for 2018.

Agricultural Prices. USDA- National Agricultural Statistics Service (February 27, 2018).

USDA- Economic Research Service Webinar, “Farm Income and Financial Forecasts, February 2018 Update.” (February 7, 2018).

Soybeans remained more profitable than corn for most operations—one contact predicted that the split of corn and soybean acres planted this spring will be close to even (corn has consistently comprised the larger share).”

“Iowa Ag News – Monthly Prices,” Upper Midwest Regional Field Office. USDA- National Agricultural Statistics Service (February 27, 2018).

“Contacts noted that subsoil moisture was very depleted in many areas because of drought conditions last year, making timely spring and summer rains more important for crop health this coming growing season. Hog, cattle, and egg prices were higher, but dairy prices lagged, leading to an increase in the number of liquidations of diary operations.”

* Eighth District- St. Louis– “District agriculture conditions have improved slightly since the previous reporting period. In spite of concerns about low temperatures in early January, the percent of District winter wheat rated fair or better ticked up about a percentage point from the end of December to the end of January.

Contacts expressed optimism about near-term farm income as area farmers were able to turn strong yields into profits in 2017, although some expressed concern about the downside risks of NAFTA renegotiations.

* Ninth District- Minneapolis– “District agricultural conditions were stable at low levels. Respondents to the Minneapolis Fed’s fourth quarter (January) survey of agricultural credit conditions indicated that farm income and capital spending decreased relative to a year earlier, with further declines expected for the coming three months. Most of the Dakotas and portions of Montana were experiencing below average snowfall over the winter, with concerns that drought conditions could persist into the spring planting season.”

* Tenth District- Kansas City– “The Tenth District farm economy remained weak, but farm real estate values slowed their decline from the previous months, providing some stability for farm finances.

Graph from the Federal Reserve Bank of Kansas City, Ag Credit Survey (February 2018).

Farm income continued to decrease.

Agricultural credit conditions weakened further against year-ago levels, but at a more modest pace than in previous reporting periods. Although prices for most agricultural commodities increased slightly in February, prices for corn, soybeans and hogs were still lower than a year ago. Alongside an increase in cattle, wheat and cotton prices, farmland values declined only slightly and stabilized significantly in the western portion of the District. Conditions in the farm economy in Oklahoma also improved notably due to an increase in cotton acreage and a moderate increase in cotton revenues.”

* Eleventh District- Dallas– “Agricultural producers were concerned about worsening drought conditions. As of February 20, 70 percent of Texas was experiencing at least moderate drought, with some extreme drought in the High Plains and Panhandle.

U.S. Drought Monitor. (March 1, 2018– Data valid: February 27, 2018 at 7 a.m. EST).

“However, rainstorms late in the reporting period likely alleviated the dry conditions in parts of the state. The cattle sector remained solid with strong demand for beef, both domestic and international, and rising cattle prices. However, the dairy industry continued to struggle with declining prices.

Cotton acreage will likely be up in Texas this year, and there was excitement among producers about cotton provisions being added back into the Farm Bill legislation.

Financial concerns continued among grain farmers as they prepared for planting, with crop prices remaining low and some inflation seen in fuel and fertilizer costs. NAFTA renegotiations also remained a source of concern and uncertainty.”

* Twelfth District- San Francisco– “On balance, conditions in the agriculture sector deteriorated modestly. Low snow and rainfall over the reporting period limited new planting in Central California and resulted in weak crop yields.  Contacts in Idaho noted that excess supply drove a decline in dairy sector profits to breakeven levels, with smaller producers being hit particularly hard.  Grain inventories in the Mountain West were at record levels. Conditions in the swine industry continued to improve on a year-over-year basis. Increased global demand for beef products boosted feed lot utilization.”

Keith Good

Keith Good

Keith Good is the social media manager for the farmdoc project at the University of Illinois. He is well known in agricultural circles for the daily FarmPolicy.com News Summary.

Farm Policy News

February 21, 2018

Will Farm Income Really Drop to a 12-Year Low in 2018?

Todd Kuethe

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (8):30


On February 7, USDA’s Economic Research Service (ERS) released their initial 2018 farm income forecasts. ERS forecasts a number of farm financial measures. The two most commonly reported measures are net farm income and net cash income, and both are predicted to decline in 2018. The recent forecast history, however, suggests that the forecasts are likely to improve.

Net Cash Income vs. Net Farm Income

As the name implies, net cash income is the farm sector’s gross cash income less all cash expenses, such as feed, seed, fertilizer, taxes, interest payment, wages, and rent. Net farm income, on the other hand, includes additional noncash income and expenses, such as the value of inventory adjustment and capital consumption. ERS forecasts 2018 net cash income at $91.9 billion, a 5.2% reduction from their current forecast for 2017 of $96.9 billion, and ERS forecasts 2018 net farm income at $59.5 billion, a 6.7% reduction from their current forecast for 2017 of $63.8 billion.

ERS Forecast History

ERS releases four farm income forecasts a year: in February, in August, in November, and in February following the reference year (when the first forecast of the new year is released). A series of recent articles examined ERS’ net farm income forecast since 1975 (August 25, 2017; August 31, 2017; November 29, 2017). The analysis shows that initial forecasts tend to under-predict realized net farm income, or in other words, the initial forecasts tend to be conservative. In addition, the analysis shows that ERS’ net farm income forecasts tend to become more accurate during the forecast process, but the later forecasts often over-predict net farm income.

The dark line in Figure 1 plots ERS’ initial February forecast of net cash income since 2004, and the blue dashed line represents the current official estimates of net cash income from 2004 through 2016. Over this period, ERS’ initial forecast of net cash income was less than realized values for all but two years, 2008 and 2009. On average, the initial forecast was 12.6% below realized values. The vertical orange bars in Figure 1 show the range of forecasted values for each year. The ranges show that ERS’ forecast of net cash income vary throughout each, with an average range of $14.3 billion. The initial forecasts tend to be among the lowest forecasted values, yet the highest forecast values typically over-predict realized net cash income. Thus, we can expect ERS to revise late net cash income forecasts up, but these revisions will likely over-shoot realized values.

fdd21022018_fig1.jpg

Figure 2 presents the same information for ERS’ net farm income measure. Between 2004 and 2016, ERS’ initial net farm income forecast of was below realized values 77% of the time. The exceptions occurred in 2008, 2009, and 2013. On average, the initial forecasts were 7.8% below realized values over this period. The forecasts similarly exhibited a wide range throughout the forecast year, at an average of $19.1 billion. Again, the initial forecasts tend to be at the lower end of the forecast range, and the later forecasts tend to over-predict net farm income.

fdd21022018_fig2.jpg

Conclusions

In sum, recent history suggests that as ERS is likely to revise their 2018 net cash and net farm income forecasts up. However, there is a tendency for these later forecasts to be a bit too optimistic. If the same pattern since 2004 holds, net cash income is likely to improve by approximately 12.6% to roughly $130.5 billion. This rough estimate is above the most recent official estimate of $94 billion in 2016 but

well below the high cash incomes experienced between 2011 and 2014. Net farm income can similarly be expected to improve by approximately 7.8% to roughly $64.1 billion. This would also be an improvement relative to the most recent official estimate of $61.5 billion in 2016 but far below the record highs of 2011 to 2013.

It is also important to keep in mind that the USDA defines a farm as “any place from which $1,000 or more of agricultural products were produced and sold, or normally would have been sold, during the year.” ERS’ measures of farm income are, therefore, very broad, and the variation in farms around these aggregate trends is substantial.

References

Kuethe, T., T. Hubbs, and D. Sanders. “Interpreting USDA’s November Farm Income Forecast.” farmdoc daily (7):219, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, November 29, 2017.

Kuethe, T., T. Hubbs, and D. Sanders. “Interpreting USDA’s Recent Farm Income Forecast.” farmdoc daily (7):160, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 31, 2017.

Kuethe, T., T. Hubbs, and D. Sanders. “Interpreting USDA’s Net Farm Income Forecast.” farmdoc daily (7):156, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 25, 2017.

USDA, Economic Research Service. Data Products/Farm Income and Wealth Statistics: Net Cash Income. Updated February 7, 2018. https://data.ers.usda.gov/reports.aspx?ID=17831

USDA, Economic Research Service. “Highlights From the February 2018 Farm Income Forecast.” Updated February 20, 2018. https://www.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/highlights-from-the-farm-income-forecast/

Farm Policy News

February 13, 2018

Revised 2018 Corn and Soybean Budgets

Gary Schnitkey

Department of Agricultural and Consumer Economics
University of Illinois

farmdoc daily (8):24


Revised 2018 corn and soybean budgets are available in the management section of farmdoc (here). The major revision was to commodity prices. A $3.60 per bushel corn price and $9.60 per bushel price are now used in budgets, closely matching current fall delivery bids. Those prices are higher than in the July 2017 release. Still, the revised budgets suggest low returns and soybeans still are projected more profitable than corn.

Central Illinois High-Productivity Budgets

Table 1 shows budgets for high-productivity farmland in central Illinois. Three other sets of budgets are available in the “2018 Crop Budgets”: 1) Northern Illinois, 2) Central Illinois farmland with low productivity, and 3) Southern Illinois. In all cases, budgets are given for corn-after-soybeans, corn-after-corn, soybeans-after-corn, soybeans-after-soybeans, and wheat. Double-crop soybean budgets are provided for central and southern Illinois.

fdd13022018_tab1.jpg

For all regions, budgets are based on historical values from grain farms enrolled in Illinois Farm Business Farm Management (FBFM). Historical values for the regions are shown in “Revenues and Costs for Corn, Soybeans, Wheat, and Double-Crop Soybeans“, a publication available in the management section of farmdoc. Historical values in FBFM are updated to current conditions based on changes in commodity and input prices.

Budgets do not represent a specific production system. Rather they represent the average of all costs and revenues of farms enrolled in FBFM.

Yields Used in Budgets

Corn yield used in the corn-after-soybeans budget is 208 bushels per acre. This yield is a trend yield for high-productivity farmland in central Illinois. The trend yield represents an expectation of yield for the coming year. As always, actual yield will vary from the trend yield based on conditions experienced during the growing season. Note that the 208 bushel yield is well below yields in recent years. Corn yields on high-productivity farmland were 228 bushels per acre in 2016 and are projected to be 226 bushels per acre in 2017. Corn yield in 2015 was 200 bushels per acre, below the 208 bushel per acre yields in 2018 budgets.

Corn yields in the corn-after-corn budgets are ten bushels lower than corn-after-soybean budgets, representing a typical yield drag from corn following corn. The yield drag can vary from year-to-year, with a much larger yield drag often occurring in stressful years like drought years.

Soybean yield used in the soybean-after-corn budget is 63 bushels per acre. Similar to corn yield, the 63 bushel yield is a trend yield. Similar to corn, recent yields have been higher than the 63 bushel trend yield. Soybean yields were 66 bushels per acre in 2015, 69 bushels per acre in 2016, and 67 bushels per acre in 2017.

Soybean yield used in soybeans-after-soybeans is 60 bushels per acre, 3 bushels lower than the soybeans-after-corn yield. This lower yield represents a typical yield drag associated with soybeans following soybeans.

Commodity Prices

A $3.60 per bushel corn price and $9.60 per bushel soybean price are used in budgets. These represent current fall delivery bid prices for the two crops. Obviously, corn and soybean prices can vary from those shown in budgets.

The 2018 projected corn price is higher than those of recent years. Corn prices received by central Illinois farmers averages $3.47 in 2017 and are projected to average $3.50 for 2018. The 2017 soybean price is near the same in recent years. Central Illinois farmers received $9.50 per bushel in 2016 and are projected to average $9.50 in 2017. `

Non-land costs

Non-land costs shown in Table 1 are lower than those in recent years as continued costs reductions are projected. For example, the $534 per acre estimate of non-land costs for corn-after-soybeans is about $10 per acre less than non-land costs in 2017.

Operator and land returns

Operator and land return represents a return to the farmer and landowner. If farmland is cash rent, the cash rent would be subtracted from operator and land return. Take the operator and land return of $215 per acre for corn-after-soybeans and a cash rent of $260 per acre, close to the average for high-productivity farmland in central Illinois. In the case, the farmer’s return is -$45 per acre (-$45 = $215 operator and land return – $260 can rent).

Negative returns are projected for cash rented farmland at average cash rents, given that yields are at trend levels and prices are near fall delivery prices. For farms to be profitable on corn-after-soybeans, either yields or prices must be higher. Take a $300 operator and land return as an example. A $300 return would allow payment of a $260 cash rent and a modest return for the farmer. For corn-after-soybeans to generate a $300 return, yields would have to be 231 bushels per acre, given that all other prices and costs are as shown in the budget. That yield is close to the exceptional yields of 2016 and 2017. Alternatively, a $4.00 corn price would generate a $300 per acre return given a 208 bushel per acre yield and $534 of non-land costs shown in the budgets. As noted previously (farmdocDaily, January 30, 2018), either exceptional yields or above $4.00 corn prices are needed for reasonable returns in 2018.

Corn Versus Soybeans

Soybeans are projected to be more profitable than corn, similar to results for all years since 2013 (farmdoc daily, July 25, 2017). Soybeans-after-corn is projected to have a $270 per acre return compared to $215 per acre of corn-after-soybeans.

Soybeans-after-soybeans is projected to have $231 per acre of returns, a $16 higher return than corn-after-soybeans. The soybeans-after-soybeans has a 3 bushel per acre lower yield than does soybeans-after-corn and costs that are $10 higher on a per acre basis. While higher, the soybeans-after-soybeans return may not be large enough to warrant planting soybeans versus planting corn. Soybeans-after-soybeans represents a higher risk level than is represented by a corn-soybeans rotation. The soybeans-after-soybeans yield drag may be more significant in a year with an adverse growing season.

Corn-after-corn has a $164 operator and land return, significantly lower than $270 return for soybeans-after-corn. Corn-after-corn has a 10 bushels lower yield than corn-after-soybeans and $13 per ace higher costs. It seems difficult to economically justify planting corn-after-corn.

Summary

Budgets for 2018 depict a low to negative return environment for corn and soybean production in 2018. These projections do not differ greatly from projections made in 2016 and 2017. Similar to 2016 and 2017, high yields again could lead to higher returns. Alternatively, higher prices could occur. However, neither of those situations are foregone conclusions. A very poor income will result if prices do not increase and yields are close to historically expected levels.

Soybeans are projected to be more profitable than corn. Again, these projections do not differ from those in recent years. Illinois farmers have been shifting to more soybeans. In central Illinois, additional risks associated with soybeans-after-soybeans production may not outweigh the additional projected returns from soybeans-after-soybeans. Perhaps more important, corn-after-corn does not seem like an economical alternative in 2018.

References

Schnitkey, G. “2018 Crop Budgets: More of the Same.” farmdoc daily (7):134, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 25, 2017.

Schnitkey, G. “Crop Budgets, Illinois, 2018.” Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February, 2018.

Schnitkey, G. “Revenue and Costs for Corn, Soybeans, Wheat, and Double-Crop Soybeans, Actual for 2011 through 2016, Projected 2017 and 2018.” Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February, 2018.

Farm Policy News

Jacobs, K. “A Discussion of the Sec 199A Deduction and its Potential Impacts on Producers and Grain Marketing Firms.” farmdoc daily (8):13, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 26, 2018.

Permalink: http://farmdocdaily.illinois.edu/2018/01/a-discussion-of-the-sec-199a-deduction.html


The newly passed Tax Cuts and Jobs Act of 2017 introduced substantive changes to individual and entity-level tax rates and deductions, many of them welcomed by individuals and corporations. One section of the Internal Revenue Code (IRC) in particular–IRC § 199A Deduction for Qualified Business Income of Pass-Through Entities (Sec 199A hereafter)–is getting a lot of attention, raising questions and eyebrows for its potential impacts on grain marketing decisions. In essence, language in this section of code gives producers marketing grain a significant incentive to sell to a cooperative rather than a non-cooperative firm.

The purpose of this article is to highlight the primary features of the Sec 199A deduction causing concern and discuss potential implications for producers and grain marketing firms. Note that at one month into the new tax year, there are ongoing efforts directed at modifying the language in the code to correct the unintended effects on producers and grain marketing firms.

What Does Sec 199A Do?

Sec 199A is a deduction that applies to income earned from the business activities of pass-through entities, like S corporations, sole proprietorships, partnerships, and so forth. These are businesses whose income is not taxed at the entity level, but passed-through to its owners. The intent in crafting Sec 199A was two-pronged: 1) to ensure that these pass-through, non-corporate entities had a deduction similar to the reduction in the corporate tax rate, which dropped from a maximum of 35% to a flat rate of 21%, and 2) to retain, for cooperative organizations, a prior deduction that was removed: Domestic Productions Activity Deduction (DPAD), or Sec 199. This is not a typo: Sec 199A replaces Sec 199 of the 2001 Bush tax cuts. Note that the DPAD was a jobs-creation deduction and available to manufacturing firms across many sectors, including agricultural cooperatives marketing farmers’ domestic production of grain.

The Sec 199A deduction for pass-through entities is based on qualified business income (QBI). There are restrictions on what qualifies as a business activity for this deduction (many services, for example, do not), and both the definition of qualified business income and calculation of the actual deduction are complicated. But in simple terms, the deduction is 20% of the qualified business income, subset to a wage limitation. Though complicated, this portion of the code is not contentious.

Sec 199A has a second feature, and this is the part that leaves open a number of questions about unintended consequences. In addition to the deduction related to qualified business income, it provides a 20% deduction on ‘qualified cooperative dividends.’ Typically we think of qualified cooperative dividends as the annual allocation of profits from a cooperative to its members–these are better called qualified cooperative patronage allocations. In this new law, those are indeed included in the payments eligible for 20% deduction and also not hugely controversial. However, another payment by cooperatives to its members is also included in the definition of ‘qualified cooperative dividends’: per unit retains (more correctly called per unit retains paid in money, or PURPIM). Per unit retains, in the simplest terms, are the payments from cooperatives to members for their grain or other agricultural production. Note the deduction applies only to the marketing or pooling functions (grain and other agricultural products) and does not include purchases by members for agronomy, seed, fuel, etc.

Per unit retains were defined as ‘qualified cooperative dividends.’ As a result, a producer selling grain can receive a 20% deduction of gross grain sales (before farm expenses) from taxable income less capital gains if s/he is a member selling to a cooperative. If instead the sale is to a non-cooperative marketing firm or processor (e.g., ADM, Cargill, or any number of independent grain marketing firms), the deduction is 20% of the net income. At the surface, this creates a significant effective basis gap between otherwise equal basis bids for grain or other agricultural commodities. A simple example, abstracting from the complexities of QBI and marginal tax calculations shows the potential.

A farmer has $500k in gross grain sales (140,000 bushels) and $100,000 in net farm income, all from selling grain. If she markets through a cooperative, she anticipates a patronage allocation of $0.025 cents per bushel, or $3,500.

  • Choice A: She markets the crop to an independent grain firm or processor and, through Sec 199A, she deducts up to 20% of her QBI: 20% x $100,000 = $20,000 potential deduction.
  • Choice B: If she markets the crop to her cooperative, she deducts up to 20% of gross sales (20% x $500,000 = $100,000) because they qualify as per unit retains, plus 20% of any qualified patronage allocation (20% x $3,500 = $700). The potential deduction is $100,700.

At a 22% marginal tax rate based on selling to an independent marketing firm or processor (Choice A), the deduction difference between these two choices is $80,700, which equates to $0.12 per bushel in taxes. Estimates from tax professionals working with producers is that the tax effect may range from $0.05 – $0.20 per bushel.

It is clear to see why producers are eager for clarification on this law and why independent grain firms and processors want it changed. Facing equivalent cash bids in the market, the signal is pretty clear that it is advantageous to market to a cooperative.

What if it stays as written?

The above example is meant for illustration, and there are a number of factors that might mitigate the true differential created by the law, and these are producer-specific. Still, contemplating its preservation, a cascade of questions emerge regarding grain and agricultural product movements, local capacity, optimal organizational structures for farmers, and the fate of independents. Below are my thoughts summarized in the two broader questions I receive, vetted with trusted colleagues and grain marketing experts. The perspective I provide here applies to agricultural producers and grain marketing in the Midwest, but certainly there are related or larger impacts for other types of ag cooperatives throughout the country.

  1. Do cooperatives have the storage and transport capacity to handle agricultural products if all producers sell to a cooperative? What happens if not? What will be the local price impacts?

Generally speaking, it is unlikely that cooperatives have sufficient facilities currently to handle the harvest grain movements and other seasonal gluts that arise in the Midwest. But storage is a local phenomenon and each region will be different. In Iowa, for example, approximately 72% of the 1.4 billion bushels of licensed grain warehouse capacity (state and federally licensed) is held by a cooperative. If one considers on-farm storage, the argument could be made that this law wouldn’t create a significant grain-movement challenge in a number of parts of Iowa. In Kansas, approximately 70% of the grain storage is held by cooperatives or on-farm. Cooperatives in both states use ground piles to manage harvest gluts, and if this law sticks, that challenge may be exacerbated in the short term. But cooperatives and producers would respond to the economic incentives to invest in grain storage in that case. Condominium grain storage is another option for producers to mitigate storage constraints.

Grain storage facilities aside, a number of mitigating origination options are already used. In regions where processors and ethanol plants exist, producers use ‘direct-ship’ contracts to haul grain directly to a processor even though it is sold to the cooperative. Without recent data regarding the proportion of grain moving this way, it is hard to say whether we will see a significant change in those patterns, and even if so, grain movements and prices will find an equilibrium. Independent grain firms and processors likely will seek to establish marketing arrangements with cooperatives as a way to secure footing locally in the grain business.

Local price impacts are another unknown. On the one hand, some independents and corporations received a nearly 40% reduction in taxes (from 35% to 21%) via Sec 199A that cooperatives, which pass through member-based income to patron-members did not. The argument has been made that they can use those tax savings to be price competitive in the eyes of producers making the marketing decision. On the other hand, local capacity constraints at cooperatives may depress local basis, particularly during harvest, which partially mitigates the tax-differential created by Sec 199A. Cooperatives typically do not turn away grain from members, which is why we observe large grain piles on the ground during harvest. Producers individually will need to weigh the potential tax deduction benefit with other costs associated with marketing grain: hauling distance, local basis differential, differentials in wait times at grain dumps, and so on. If net farm income is expected to be low, the per-bushel estimated tax difference created by Sec 199A dissipates.

  1. 2. Will producers form their own cooperatives or independents reorganize as a cooperative?

In local areas without grain/oilseed marketing cooperatives, the potential exists to see producers forming closed cooperative organizations to capitalize on the Sec 199A deduction. More likely, however, is that existing cooperatives acquire or build assets in those areas, or as mentioned above, form marketing arrangements with existing firms. In much of the Midwest, existing cooperatives are of sufficient size and capitalization and have the spatial presence to respond much faster to the need for capacity and changing grain dynamics than a start-up could accomplish. Alongside the temptation to form a cooperative, the new tax code creates incentives for producers to reconsider their own operation’s structure, potentially reorganizing as a C corporation or S corporation or changing from one to the other. Those details aren’t discussed here, but are complicating factors in determining how the farm economy might change if Sec 199A holds as written.

Effects on grain cooperatives

Producers will be impacted not only by the farm-level deduction of Sec 199A but, as members of cooperatives, stand to notice positive changes related to their cooperative’s patronage allocations and equity redemption. The tax savings to cooperatives on non-member business and the supply-side of their business are just like those for other corporations, and the new tax rate is 21% instead of a maximum of 35%. However, if the Sec 199A deduction for producers marketing through a cooperative holds, all producers selling grain to a cooperative will choose membership, effectively eliminating any non-member marketing business. That aside, tax savings on cooperative profits related to input supply or other non-marketing functions could be used to accelerate the cooperative’s equity redemption which gets income into the members’ hands more quickly. Alternatively, the tax savings could be used to improve facilities and service offerings to benefit members.

For those wanting more details, the fact sheet “Impact of Tax Reform on Agricultural Cooperatives” (Briggeman and Kenkel, 2018) dives into the expected changes in cooperative patronage allocation and member-level returns from the law using simulation.

Conclusion

The questions that fall out of the reality of the Sec 199A code as written are important ones, as their answers weigh on the potential for significant changes in the structure of the agricultural supply chain for crops, in grain movements, and in farm-level incomes.

In a statement on January 12, 2018, the U.S. Department of Agriculture’s Under Secretary for Marketing and Regulatory Programs Greg Ibach wrote, “The aim of the Tax Cuts and Jobs Act was to spur economic growth across the entire American economy, including the agricultural sector. While the goal was to preserve benefits in Section 199A for cooperatives and their patrons, the unintended consequences of the current language disadvantage the independent operators in the same industry. The federal tax code should not pick winners and losers in the marketplace. We applaud Congress for acknowledging and moving to correct the disparity, and our expectation is that a solution is forthcoming. USDA stands ready to assist in any way necessary.”

The agricultural industry–cooperatives, too–anticipated that the existing DPAD deduction would not stand in the tax reform negotiations, but thought a similar provision would replace it. Few, if any, anticipated that a cooperative deduction would be expanded to the producer-level, or believe it will stand as written. Organizations such as the National Grain and Feed Association (NGFA) and the National Council of Farmer Cooperatives (NCFC) are working jointly on a revision with Congress. Tax professionals, agricultural businesses, and producers are waiting for clarification on whether the law will stay as-is or be changed, and will then await guidance from the IRS on interpretation.

References

Briggeman, B.C., P. Kenkel. “Impact of Tax Reform on Agricultural Cooperatives.” Special Edition ACCC Fact Sheet Series, Collaborative Research KSU / OSU, January 10, 2018. https://www.agmanager.info/agribusiness-management/papers/impact-tax-reform-agricultural-cooperatives-special-edition-accc

U.S. Department of Agriculture, Statement of Under Secretary Greg Ibach on Section 199A Tax Code Fix, Release No. 0010.18, January 12, 2018. https://www.usda.gov/media/press-releases/2018/01/12/statement-under-secretary-greg-ibach-section-199a-tax-code-fix