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Drought 2012

Drought 2012. James H. Jensen Farm Management Specialist 319-385-8126 jensenjh@iastate.edu. Pricing Drought-damaged Corn Silage: Short M ethod. Standing silage (buyer harvests) Normal silage: 1 ton = 7 x price of corn Corn price = $6, 1 ton of silage is worth $42

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Drought 2012

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  1. Drought 2012 James H. Jensen Farm Management Specialist 319-385-8126 jensenjh@iastate.edu

  2. Pricing Drought-damaged Corn Silage:Short Method Standing silage (buyer harvests) • Normal silage: 1 ton = 7 x price of corn • Corn price = $6, 1 ton of silage is worth $42 • Drought-stressed silage: similar value • Less grain but more sugar in stalks • Silage with little or no grain content: 5 x price of corn • Corn price = $7, 1 ton of silage is worth $35 • Or, 40% of grass hay price (adjusted for moisture level) • Harvested silage: add $5-10 per ton • Depends on distance hauled, tonnage per acre

  3. Pricing Corn Silage: Long Method Cost to seller • Lost income from grain sales • Lost income from stover sales or use • Added fertilizer expense for next year • Minus harvesting costs not incurred Value to buyer • Tied to price of corn and grass hay • Lower % grain decreases feed value Buyer and seller can negotiate within this range. See Ag Decision Maker decision file A1-65 www.extension.iastate.edu/agdm

  4. Crop Insurance Coverage 2012 • About 90% of Iowa corn and soybeans acres are covered by MPCI • 90% of insured acres have Revenue Protection (RP), 7% Yield Protection (YP) • YP bushels covered at February futures price • Corn $5.68 / bushel • Soybeans $12.55 / bushel • RP bushels covered at October futures price (if higher than Feb. price) • Dec. corn contract, Nov. soybean contract

  5. Crop Insurance Coverage 2012 • Guarantee levels: 13% of acres @ 70% 32% of acres @ 75% 34% of acres @ 80% 15% of acres @ 85% • Proven yields could be increased for yield trend in 2012 • Corn by 10-13 bu/acre • Soybeans by 2.5 to 3.0 bu/acre

  6. Example for Corn • RP policy @ 80%, 160 bu/a proven yield • October average futures price = $7.70 ? • Guarantee = 80% x 160 bu x $7.70 = $986 • Indemnity payment will be: • Yield > 128 bu/a: none • Yield = 100 bu/a, 28 bu. x $7.70 = $215.60 • Yield = 50 bu/a, 78 bu. x $7.70 = $600.60 • Yield = 0 bu/a, 128 bu. x $7.70 = $985.60

  7. Example for Soybeans • RP policy @ 75%, 52 bu/a proven yield • October average futures price = $16.00 ?? • Guarantee = 75% x 39 bu x $16.00 = $624 • Indemnity payment will be: • Yield > 39 bu/a: none • Yield = 30 bu/a, 9 bu. x $16.00 = $144.00 • Yield = 15 bu/a, 24 bu. x $16.00 = $384.00 • Yield = 0 bu/a, 39 bu. x $16.00 = $624.00

  8. Remember • Production is averaged over all acres in the insured unit • Prices could go down by October • Some acres are not insured (10%) • Some acres have low proven yields • Must continue to care for crop

  9. Reporting Losses • Contact your crop insurance agent before you harvest or destroy the crop • Adjuster will evaluate the crop • Possibilities: • Declare total loss. Do what you want. • Partial loss. Leave it until fall and harvest. • Partial loss. Chop it and leave check rows.

  10. Reporting Losses • File a claim within 72 hours after loss is discovered, or within 15 days after crop is or harvested. • Must continue to “care for crop”. • If harvested, document production in usual way. • Add-on policies do not cover drought.

  11. Should I Harvest the Crop? • Minimum revenue needed Variable costs for combining $15.00/a. (fuel & repairs, or custom charge) Expected price $7.00? / bu - Extra P and K fertilizer if harvested (.375 lb. P@$.65, .30 lb. K @$.60) $.42 / bu. • hauling ($.15), drying ($.20) $.35 / bu =Net price $7.00 - .42 -.35 = $6.23 = Breakeven yield = $15.00 / $6.23 = 2.4 bu/a.

  12. Preharvest Pricing • Futures contracts: can lift hedges if production is insufficient • Options: keep upside price potential open • Forward contracts: obligated to fulfill the contract. May have to buy extra bushels. • Crop insurance can help.

  13. Forward Contract with Short Crop and Insurance: Example • 100 acres of corn insured at 80% of 160 bu/a proven yield (12,800 bushels covered) • 12,800 bu/a forward contracted @ $6.50 • Guaranteed revenue is $83,200 • Crop yields are below expectations • Local price goes up to $7.50 at harvest

  14. Forward Contract with Short Crop and Insurance: Example

  15. Forward Contract Considerations • Crop insurance will help offset cost of buying out a contract. • But don’t contract more than you have insured (% guarantee x proven yield). • Insurance price will exceed cash price by value of the grain basis in October. • Delivery month may be later than October, buy back price could change.

  16. USDA Emergency Programs • Must be a USDA secretarial disaster county or contiguous county • 30% or more damage to at least one crop • 8 consecutive weeks as “severe drought” • Counties as of July 16

  17. USDA Emergency Programs • FSA emergency loans available at 2.25% for actual production losses • Haying or grazing of CRP acres • Livestock Forage Disaster Program (expired) • SURE crop disaster program (expired) • ACRE still in effect

  18. Haying or Grazing CRP Land • CRP acres can be hayed or grazed starting August 2. • Managed haying/grazing • One year out of three, for 90 days • Payment reduced 25% • Emergency haying/grazing • Payment reduced 10% • Must apply to FSA

  19. Haying or Grazing CRP Land • At least 50% of a field or contiguous fields must remain unhayed • At least 25% of a field or contiguous fields must remain ungrazed or acreage is grazed at 75% of grazing rate • One cutting of hay is allowed by 8/31/12 • Hay must be removed from CRP by 9/30/12

  20. Haying or Grazing CRP Land • Practices eligible for emergency haying and grazing are: • CP1 • CP2 • CP4B • CP4D • CP10 • CP25 is eligible for grazing only

  21. Livestock Forage Disaster Program • Must have purchased forage insurance • But beginning farmers are exempt • Farming less than 10 years • Not own a farm > 30% of median county size • Payments for up to 3 months depending on severity of drought • Monthly payments per head have been about $35 for beef cows , $90 for dairy cows, $8 for ewes

  22. ACRE Program 2012 Crop • Must be enrolled (16% of Iowa acres) • State revenue must be below trigger level: CornSoybeans Iowa trigger $710/a. $522/a. Projected MY price $5.90 $14.00 Maximum yields 120 bu. 37 bu. to trigger payment (Iowa average) • Farm level must also trigger a loss

  23. Farm Lease Considerations • Communicate with your landowner • Send photos of the crops, pastures • Adjustments for 2012? • Discuss rent for 2013 • Yields down, prices up, rent ?? • Flexible leases: are crop insurance proceeds included in the rent formula?

  24. Income Tax Considerations • Can defer reporting crop insurance proceeds if normally sell over 50% of crop in next tax year. All or nothing. • Can defer early sales of market livestock if they would have been sold in next tax year. • Sales of breeding livestock due to drought are not taxed if replaced within 2 tax years (4 tax years if in disaster county)

  25. Financial Considerations • Rethink marketing plans • Revise cash flow budget for 2012 • Talk to your lender (no surprises) • Assess your liquidity • Get an income tax estimate • Postpone equipment purchases

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