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Economic Considerations

Economic Considerations. Chad Hart Assistant Professor of Economics Extension Economist (515) 294-9911 chart@iastate.edu. Should I Harvest the Crop?. Minimum revenue needed Variable costs for combining $15.00/ac (fuel & repairs, or custom charge) Expected price $7.85 / bu

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Economic Considerations

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  1. Economic Considerations Chad Hart Assistant Professor of Economics Extension Economist (515) 294-9911 chart@iastate.edu

  2. Should I Harvest the Crop? • Minimum revenue needed Variable costs for combining $15.00/ac (fuel & repairs, or custom charge) Expected price $7.85 / bu - Extra P and K fertilizer if harvested (.375 lb. P@$.65, .30 lb. K @$.60) $0.42 / bu - Hauling ($.15), drying ($.20) $0.35 / bu = Net price $7.85 - 0.42 - 0.35 = $7.08 / bu Breakeven yield = $15.00 / $7.08 = 2.12 bu/ac

  3. Pricing Drought-damaged Corn Silage:Short Method Standing silage (buyer harvests) • Normal silage: 1 ton = 7 x price of corn • Corn price = $7, 1 ton of silage is worth $49 • 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

  4. 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

  5. USDA Emergency Programs

  6. Recent Changes USDA made some major adjustments Monday. Opening up more CRP and WRP land for haying and grazing Allowing changes in EQIP contracts to allow some additional grazing and watering for livestock

  7. Haying or Grazing CRP Land • CRP acres could be hayed or grazed starting August 1. • Managed haying/grazing • One year out of three, for 90 days • Payment reduced 25% • Emergency haying/grazing • Payment reduced 10% • Must apply to FSA

  8. Causes of Loss for Iowa Corn, 1948-2010

  9. Causes of Loss for Iowa Soy, 1955-2010

  10. Crop Insurance Coverage 2012 • About 90% of Iowa corn and soybean acres are covered by federal crop insurance • 90% of insured acres have Revenue Protection (RP), 7% have Yield Protection (YP) • YP coverage at Feb. futures price on harvest contracts (Dec. for corn, Nov. for soybean) • Corn $5.68 / bushel • Soybeans $12.55 / bushel • RP coverage at Oct. futures price (if higher than Feb. price)

  11. Crop Insurance Coverage 2012 • Coverage 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 (Trend-Adjusted Yield Option) • Corn by 10 to 13 bu/acre • Soybeans by 2.5 to 3.0 bu/acre

  12. Example • RP policy @ 80%, 160 bu/ac proven yield • October average futures price = $7.85 • Coverage = 80% x 160 x $7.85 = $1,004.80 • Indemnity payment will be: • Yield > 128 bu/ac: none • Yield = 100 bu/ac: 28 bu. x $7.85 = $219.80 • Yield = 50 bu/ac: 78 bu. x $7.85 = $612.30 • Yield = 0 bu/ac: 128 bu. x $7.85 = $1,004.80

  13. 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

  14. 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.

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

  16. 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.

  17. Forward Contract with Short Crop and Insurance: Example • 100 acres of corn insured at 80% of 160 bu/ac proven yield (12,800 bushels covered) • 12,800 bu/ac forward contracted @ $6.50 • Guaranteed revenue is $83,200 • Crop yields are below expectations • Local price is $8.00 at harvest

  18. Forward Contract with Short Crop and Insurance: Example

  19. 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 differ from cash price by value of the grain basis in October. • Delivery month may be later than October, buy back price could change.

  20. Other Considerations • Rethink marketing plans • Revise cash flow budgets for 2012 and 2013 • Talk to your merchandiser & lender (no surprises) • Assess your liquidity • Get an income tax estimate • Postpone equipment purchases

  21. Thank you for your time.

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