Graphic owner: UKZN SAEES: school website & Policy Update August 24, 2017 Volume 17, Issue 8 Edited by Will Snell & Phyllis Mattox FEATURED ARTICLES USDA Surprises Corn & Soybean Markets with August Yield Projections - Todd Davis USDA SURPRISES CORN AND SOYBEAN MARKETS WITH AUGUST YIELD PROJECTIONS Have you ever held onto an opinion so strongly that you were convinced that you knew what was going to happen? You may have felt that way about your favorite sports team you knew that your team was going to win. Do you remember the let down you felt when your team lost? That analogy is what happened to the corn and soybean markets after the August 10 Crop Production, and World Agricultural Supply and Demand Estimates (WASDE) reports. Market analysts knew that the statistical trend yields used by USDA would be adjusted lower once NASS surveyed farmers and conducted in-field measurements of the crops. The late corn planting in the Eastern Corn Belt coupled with the hot and dry weather in the Western Corn Belt contributed to the analysts belief that the corn yield would be lowered to 166.2 bushels/acre, which would be 4.5 bushels/acre less than the July estimate. The analysts were more conservative with their soybean projections but believed the August yield would be reduced 0.5 bushels/acre from the July estimate to 47.5 bushels/acre. USDA did lower the projected corn yield, but only by 1.2 bushels/acre to an estimated yield of 169.5 bushels/acre. For soybeans, USDA estimated a national yield of 49.4 bushels/acre, which is a 1.4 bushel/acre increase from July. The USDA projections were a bearish surprise to the market. Determining the Economic Cost for Drying & Storing Corn this Season - Jordan Shockley Beef Cattle Herd Growth Likely to Continue - Kenny Burdine Stockpiled Fescue Profitability An Unresolved Story - Greg Halich Preparing for Retirement - Michael Forsythe Table 1. U.S. Corn Supply and Use 2014-15 2015-16 2016-17 2017-18 Change from Estimated Projected 16-17 Planted Area (million) 90.6 88 94.0 90.9-3.1 Harvested Area (million) 83.1 80.8 86.7 83.5-3.2 Yield (bushels/acre) 171 168.4 174.6 169.5-5.1 ------------------- Million Bushels ------------------- Beginning Stocks 1,232 1,731 1,737 2,370 +633 Production 14,216 13,602 15,148 14,153-995 Imports 32 67 55 50-5 Total Supply 15,479 15,401 16,940 16,573-367 Feed and Residual 5,323 5,131 5,425 5,450 +25 Food, Seed & Industrial 6,560 6,635 6,920 7,000 +80 Ethanol and by-products 5,200 5,206 5,450 5,500 +50 Exports 1,864 1,898 2,225 1,850-375 Total Use 13,748 13,664 14,570 14,300-270 Ending Stocks 1,731 1,737 2,370 2,273-97 Stocks/Use 12.6% 12.7% 16.3% 15.9% -0.4% Days of Stocks 46 46 59 58-1 Price ($/bu) $3.70 $3.61 $3.35 $3.30 -$0.05 Source:August 2017 WASDE - USDA: WAOB. PAGE 2 Continued on Page 2
PAGE 2 How bearish? Very. The December 2017 corn and the November 2017 soybean futures contracts closed sharply lower in the aftermath of the reports. The December 2017 corn futures contract closed $0.15 ¼ lower on the report day and by August 18 was $0.20 ½ per bushel lower than the closing price on August 9 (before the report). Soybeans, with the surprising yield increase, closed $0.33/bushel lower on the report day with selling continuing to a recent contract low of $9.24 ¼ on August 15 which was $0.49/bushel lower than the closing price on August 9. As of August 18, the November 2017 soybean contract is $0.35 ½ below the price before the release of the August report. The impact on the corn and soybean balance sheets is bearish as the corn market was factoring in that the combination of reduced area and lower yields would allow ending stocks to decline. With a national yield of 169.5 bushels/acre, the 2017 corn crop is projected to be 995 million bushels less than the record 2016 crop. However, the market was expecting a 166.2-bushel yield, which would have reduced the 2017 corn crop by an additional 275 million bushels from last year. Corn demand remains strong; however, increased competition from South America is projected to reduce export sales from last year. Reduced demand will limit the beneficial impact of a smaller crop on stocks. Current projections are for corn stocks to decline marginally (97 million bushels) from the previous year. This more than adequate level of corn inventory will weigh on the market and limit price potential. The U.S. farmlevel average price is estimated to be $3.30/bushel, which would be $0.05 bushel less than last year if realized. The soybean market suffered from the combination of 6 million additional harvested acres over 2016 and a projected yield of 49.4 bushels/acre (Table 2). The 2017 soybean crop would be a new record of 4.38 billion bushels if realized. Total soybean supply would increase to 4.77 billion bushels for the 2017-18 marketing-year. Table 2. U.S. Soybean Supply and Use 2014-15 2015-16 2016-17 2017-18 Change from Estimated Projected 16-17 Planted Area (million) 83.3 82.7 83.4 89.5 +6.1 Harvested Area (million) 82.6 81.7 82.7 88.7 +6.0 Yield (bushels/acre) 47.5 48 52.1 49.4-2.7 ------------------- Million Bushels ------------------- Beginning Stocks 92 191 197 370 +173 Production 3,927 3,926 4,307 4,381 +74 Imports 33 24 25 25 +0 Total Supply 4,052 4,140 4,528 4,777 +249 Crushings 1,873 1,886 1,890 1,940 +50 Exports 1,843 1,936 2,150 2,225 +75 Seed 96 97 104 101-3 Residual 49 24 14 35 +21 Total Use 3,862 3,944 4,158 4,301 +143 Ending Stocks 191 197 370 475 +105 Stocks/Use 4.9% 5.0% 8.9% 11.0% +2.1% Days of Stocks 18 18 32 40 +7.8 Average Price ($/bu) $10.10 $8.95 $9.50 $9.30 -$0.20 Source:August 2017 WASDE - USDA: WAOB. Soybeans benefit from strong demand. Exports and crush demand are projected to be 75 and 50 million bushels above the previous year. Total soybean use is expected to increase by 143 million bushels over last year. Strong demand will limit the impact of another large soybean crop. Ending stocks are expected to increase to 475 million bushels, which would be a stocks-to-use ratio of 11%. If exports do not materialize as planned, the potential stocks could begin to weigh on the soybean market and limit price potential. The 2017 U.S. farm price is projected at $9.30 per bushel, which would be $0.20/bushel below last year s price. Continued on Page 3
PAGE 3 Is there any good news? Perhaps, as there is potential for the yields and production estimates to be revised lower as USDA conducts more thorough samples of the developing crops nearing physiological maturity. The August reports should serve as a reminder of the great production capacity of U.S. agriculture and the ability of corn and soybean farmers to produce abundant crops. The focus will then be on the demand side of the balance sheet to chew through growing inventories of both crops. DETERMINING THE ECONOMIC COST FOR DRYING AND STORING CORN THIS SEASON Corn harvest has started in some parts of the state, and USDA National Agricultural Statistics Service estimates that 215,460,000 bushels of corn will be produced in Kentucky this year. Historically, about 50% of the harvested corn will be dried and go into storage. Almost 25% of the corn harvested in Kentucky will be sold in January, the largest of any month. Therefore, it is important to know the cost for drying and storing corn to ensure the cash price received will cover the costs. The economic costs to consider are both operating and ownership costs. Operating costs include energy (electric and fuel), repairs and maintenance, shrinkage, additional hauling, interest, and moisture discounts. Energy costs represent the largest portion for drying and storing corn. According to the U.S. Energy Information Administration, current energy prices are higher than last year at $0.0963 /kwh for electric and $2.11/gal. for propane. Due to energy demands, the cost of drying corn will depend on the type of dryer. Natural air dryers will have significantly less cost than high-temperature dryer systems. Table 1 estimates the energy costs ($ per bushel point) for drying corn based on dryer systems for this year and compares that to the costs in 2016. For example, if the average harvest moisture of corn is 20% and dried with a high-temperature, no air recirculation dryer to 16%, then the estimated energy cost would be $0.192/bu. ($0.048 x 4 points). Table 1. On-farm energy costs estimates for drying corn in Kentucky ($ per bushel point) 2017 2016 Electric Propane Total Total Natural Air 0.012 0.012 0.012 Low Temperature 0.014 0.015 0.029 0.027 In bin, stirred or continuous flow 0.001 0.033 0.034 0.030 High Temperature, air recirculation 0.002 0.036 0.038 0.034 High Temperature, no air recirculation 0.001 0.047 0.048 0.042 Sources: U.S. Energy Information Administration average monthly prices and Iowa State University Extension Corn Drying and Shrink Comparison Additional operating costs include repairs and maintenance, which is roughly 3% of the dryers purchase price. To determine the cost per bushel, divide 3% of the dryers purchase price by the total bushels of corn dried this season. Corn shrink will also occur from both drying and additional handling. Previous research estimates corn shrink at 1.25% from mechanical drying (Edwards, 2014; Hicks, 2001). Therefore, to determine the shrinkage cost, multiply 1.25% by the future cash price for corn. Additional hauling costs may exist from delivering corn to the storage and drying system are $0.015/bu./mile. Interest also exists on stored corn since the corn sold at harvest can earn interest or paying off current short-term loans. Therefore, a short-term interest rate of 5% is appropriate to determine interest costs. Finally, adjust for any moisture discount that occurs when delivering stored corn to market. Continued on Page 4
PAGE 4 In addition to operating costs of drying and storing corn, ownership costs exists. Ownership costs will vary based on the size and total investment in storage systems. Ownership costs include depreciation, interest, taxes, and insurance. In 2016, data was collected on the investment cost of storage systems from dealers serving Kentucky. Figure 1 illustrates the annual ownership cost ($/bu) of on-farm storage systems in Kentucky based on bushel capacity. These annual costs exclude the addition of upgraded dryer systems. As a reference, if a 100,000-bushel storage system were to upgrade to a high-temperature dryer that costs $50,000, the annual ownership cost would be $0.10/bu. (see Figure 1) plus an additional $0.04/bu. for the dryer upgrade, totaling $0.14/bu. Figure 1. Estimated annual ownership costs for on-farm storage systems in Kentucky - 20 year economic life, 4.25% interest rate, and 0.5% tax & insurance rate - Quotes came from dealers serving Kentucky for GSI, Conrad and VALCo (April 2016) - Excludes dryer systems Determining the economic cost for drying corn will aid in marketing to ensure the cash priced received for the corn in the bin will cover the additional costs of drying. To determine whether to store and for how long, current corn prices must be discounted and compared. First, discount the cash prices at harvest by any anticipated costs, such as moisture penalties. Next, discount the future cash price (including local basis) by the additional costs for drying and storing discussed above. If needed, resources such as DTN provide current and historical local basis for select corn markets in Kentucky. If the discounted future cash price is greater than the discounted harvest price, drying and storing is an optimal decision. On the next page is a worksheet with an example of determining the cost of stored corn, as well as an area to personalize drying and storage costs. Replicate this worksheet with different storage durations and future cash prices to determine the optimal length to store to maximize returns. Utilizing the estimated drying costs coupled with the marketing resources available in the monthly Crops Marketing and Management Update will aid in maximizing returns to storing corn this cropping season (Crops and Marketing and Management Update available online: http://www.uky.edu/ag/agecon/davis_todd_pubs.php) Example: Store and dry 85,000 bu of corn with a 100,000 bu bin storage capacity with a high temperature air recirculating (tower) dryer. Average moisture of corn harvested is 20% and dried to 16%. Harvest is conducted in September and stored until January (4 months stored). Current cash price at harvest is $3.35 and January future cash price is $3.75. The elevator discount schedule is 2.0% per point above 15%. Continued on Page 5
PAGE 5 Example Your Farm DRYING & STORING OPERATING COSTS Energy Cost (refer to Table 1) $0.038 x (20-16) = $0.15/bu. Energy Cost ($/bu.) Repair & Maintenance Cost $50,000 x 3% 85,000 = $0.02/bu. R&M Cost ($/bu.) Shrink Cost $3.75 x 1.25% = $0.05/bu. Shrink Cost ($/bu.) Hauling Cost $0.015 x 5 miles = $0.08/bu. Hauling Cost ($/bu.) Interest Cost $3.35 x (100% 1.25%) = $3.31/bu. $3.31 x 5% = $0.17/bu. $0.17 x ( 4 months ) = $0.06/bu. Interest Cost ($/bu.) 12 months Moisture Discount Cost $3.75 x 2% x (16-15) =$0.08/bu Discount Cost ($/bu.) HARVEST DELIVERY OPERATING COSTS Moisture Discount Cost $3.35 x 2% x (20-15) =$0.34/bu. Discount Cost ($/bu.) PRICES NET OPERATING COSTS FOR COMPARISON Drying and Storing Net Price $3.75 - $0.15 - $0.02 - $0.05 - $0.08 - $0.06 - $0.08 = $3.31 Harvest Delivery Net Price $3.35 - $0.34 = $3.01/bu. PRICES NET OPERATING AND OWNERSHIP COSTS FOR COMPARISON Drying and Storing Net Price Net Price of Variable Costs Only = $3.31/bu. 100,000 bu. bin storage ownership costs (refer to Figure 1) = $0.10/bu. $50,000 dryer = $0.04/bu. Net Price of Operating and Ownership = $3.31 - $0.10 - $0.04 = $3.17/bu. Harvest Delivery Net Price No bin or dryer ownership costs so the same as the price net of operating costs = $3.01/bu. References Edwards, W. 2014. A2-31: Estimating the Cost for Drying Corn. Iowa State University. Available online: https://www.extension.iastate.edu/agdm/crops/html/a2-31.html Edwards, W. 2014. A2-32: Corn Drying and Shrink Comparison. Iowa State University. Available online: https://www.extension.iastate.edu/agdm/crops/html/a2-32.html Hicks, D.R. and H.A. Cloud. 2001. Calculating Grain Weight Shrinkage in Corn Due to Mechanical Drying. National Corn Handbook Fact Sheet NCH 61. Iowa State University. Available Online: http://store.extension.iastate.edu/product/nch61-pdf U.S. Department of Agriculture-National Agricultural Statistics Service. 2017. Acreage.ISSN: 1949-1522. Washington, DC: USDA. Jordan M. Shockley, Assistant Extension Professor, Agricultural Economics jordan.shockley@uky.edu 859-218-4391
PAGE 6 BEEF COW HERD GROWTH LIKELY TO CONTINUE USDA released their mid-year cattle inventory report in late July. This report estimated the number of cattle in the United States as of July 1, 2017. This mid-year report was not conducted last year due to budgetary constraints, so year-over-year comparisons are not possible. Rather, July 2017 estimates are compared to July 2015 in the table below. While state-by-state numbers are not estimated mid-year, the report did confirm significant expansion of the beef herd over the last 24 months at the national level and was largely consistent with what was seen in the January inventory report. As expected, beef cow numbers were up about 7% over the last two years. It is well established that this herd has grown rapidly since 2015. This was partially in response to extremely high calf prices in 2014 and 2015 and also because weather has been favorable. This general expansion can been seen across the board in the report as one looks at breeding stock, cattle on feed, and the size of the calf crop. The one number that looks odd is the 2% decrease in heifers held for beef cow replacement and I thought it might be worth looking into that a bit more. First, we have to remember that this is making a two-year comparison, rather than the single year comparison that we are used to seeing. Second, we have to consider the base year, which in this case was 2015. On July 1 2015, USDA estimated there were 4,800 heifers being held for beef cow replacement, which was the largest beef cow replacement number since 2006. So, we are comparing the 2017 number to a very large 2015 number. Remember how strong calf prices were in the summer of 2015 and how intense the interest in expansion was that year. Another way that I like to look at beef heifer retention is to consider it as a percent of beef cow inventory. Beef heifer retention at mid-year, as a percent of beef cow inventory, was above 15% in both 2014 and 2015 (remember there was not a mid-year 2016 report). Clearly, both of these were expansion years. Beef heifer retention as a percent of beef cow inventory was 14.5% in July 2017. While less than what was seen in 2014 and 2015, this is still not a small number. In fact, with the exception of 2014 and 2015, we would have to again go back to 2006 to find a larger percentage than the 14.5% seen this year. So, it is very likely that the growth rate of the US beef herd is slowing, but I do think it is still growing. The USDA report is summarized in the table below and the full report can be accessed at: http://usda.mannlib.cornell.edu/usda/current/catt/catt-07-21-2017.pdf USDA July 1, 2017 Cattle Inventory Estimates 2015 2017 2017 as % of 2015 (1,000 hd) (1,000 hd) Total Cattle and Calves 98,200 102,600 104 Cows and Heifers That Have Calved 39,800 41,900 105 Beef Cows 30,500 32,500 107 Milk Cows 9,300 9,400 101 Heifers 500 Pounds and Over 15,700 16,200 103 For Beef Cow Replacement 4,800 4,700 98 For Milk Cow Replacement 4,200 4,200 100 Other Heifers 6,700 7,300 109 Steers 500 Pounds and Over 14,100 14,500 103 Bulls 500 Pounds and Over 1,900 2,000 105 Calves Under 500 Pounds 26,700 28,000 105 Cattle on Feed 12,100 12,800 106 2015 2017 2017 as % of 2015 Calf Crop 34,087 36,300 106 Source: NASS, USDA Continued on Page 7
PAGE 7 As always, it is good to think about implications on calf markets, which have been a real roller coaster ride over the last several years. As can be seen in the chart below, auction prices for 550 lb. steer calves have dropped by more than $10 per cwt since June and are very close to 2016 levels. Given spring CME Feeder Cattle futures, there is likely still room for calf prices to drop between now and fall. Fortunately, under current market conditions, I don t think calf prices are likely to get near as low as they did last fall. I am expecting a fall calf market between current prices and what was seen in the fall of 2016. 550# Medium & Large Frame #1-2 Steers KY Auction Prices Source: USDA-AMS, Livestock Marketing Information Center, Author Calculations As we start thinking about next year, I am working from an expectation that the US beef herd will be 1% larger on January 1, 2018. Due to the more rapid expansion of the cowherd in previous years, beef production will be up by more than that next year. Plus, USDA is currently forecasting increases in both pork and poultry production. Given those expectations, calf prices are very likely to be lower in 2018 than in 2017 as we compare fall-over-fall. So, I still think cow-calf operators have some challenges on the horizon. In a market environment where little returns are being seen, and the expectation is for things to get worse before they get better, having a solid understanding of costs is important. It is very likely that some producers are profitable in this environment, while many others are not. Making sound decisions starts with knowing where you are on that spectrum. Profitable producers may well view times like this as an opportunity to expand, while many others may be looking to reduce their size of their herds. Regardless, all producers should have a solid understanding of their cost structure in order to make sound management decisions.
PAGE 8 STOCKPILED FESCUE PROFITABILITY - AN UNRESOLVED STORY Stockpiling tall fescue pastures has been promoted as one of the main approaches to extend the grazing season in the Upper South. It has been heavily promoted here at the University of Kentucky as well as other states as a way to reduce hay feeding costs and improve profitability. But will it actually do that? I am going to go out on a limb here and contend that collectively, there is still a lot of research and analysis that needs to take place before we can answer the question conclusively. We will start out with the typical simple analysis and show how it does not tell the entire story. The Simple Analysis: Pasture is set aside in early to mid-august, nitrogen is applied to boost growth, and the pasture rested until the end of the growing season. If we apply 50 units of N (109 lbs. urea) per acre, and get 20 lbs. dry matter response per unit N (a reasonably good response rate), we would grow an additional 1000 lbs. of forage per acre on a dry matter basis. Assuming we utilize 70% of this, 700 lbs/acre would be our effective gain from the nitrogen. If an average cow consumes 25 lbs. of dry matter per day once we start grazing this would give us 28 extra grazing days per acre. If nitrogen costs $.35/unit, this would amount to $17.50/acre for the nitrogen. If it cost $5.50/acre to spread it, our total cost for the nitrogen application would be $23/acre. Dividing the total cost by the 28 extra grazing day works out to a cost of $.82 per extra grazing day. This is much lower than a typical hay feeding cost of $1.25-$2.00/day per cow (see Table 1), thus it looks like an attractive option. If for example, a hay-feeding day cost us $1.50 we would appear to be saving $.68 per cow day, or about a $20/acre savings due to the stockpiling. Table 1: Hay Feeding Cost per Day: 1300 lb. Cow Hay Cost per Ton Waste Rate $40 $60 $80 $100 $120 10% $0.74 $1.11 $1.48 $1.85 $2.21 20% $0.83 $1.25 $1.66 $2.08 $2.49 30% $0.95 $1.42 $1.90 $2.37 $2.85 40% $1.11 $1.66 $2.21 $2.77 $3.32 Note: 2.3% dry matter intake. Labor and nutrient value not accounted for in this table. Of course, soil moisture conditions in late summer and fall may be less than expected and the response rate may drop. At a 15-1 response rate (15 lbs. of dry matter production for one unit of N) the cost of an extra grazing day would be $1.10. It would take an extremely low response rate of 10-1 before the cost of an extra grazing day, $1.64 per cow-day, got up in the range of a typical hay feeding day. It is also possible that we have exceptional soil moisture conditions and have a high response rate (30-1) in which case the cost of an extra grazing day would be $.55, or a savings of $40/acre if our hay feeding cost was $1.50 per cow day. So on the surface it looks like applying N and stockpiling fescue pastures is generally profitable in most years. Of course, there have been years where N cost was significantly higher than $.35/unit, or where soil moisture conditions were low going into August. This was the primary reason that I updated the Profitability of Nitrogen Applications for Stockpiling Tall Fescue Pastures on a yearly basis: we had a lot of volatility in nitrogen prices from 2007 to 2013. However, since that time fertilizer prices have stabilized and it is mainly the soil moisture conditions that will vary from one year to the next. With the lower nitrogen prices the last few years it has appeared that applying N and stockpiling fescue pastures would be profitable given decent soil moisture conditions. However, as will be detailed below, there have been a few steps that have been left out of the simple analysis that will affect the profitability of the practice, most of them negatively. The Biological Problem: In 2017 we have been blessed with good summer rains as well as lower temperatures, and the resulting pasture growth in most of central Kentucky has been excellent. However, in a typical year pasture growth is struggling by early August due to lower soil moisture conditions and high temperatures that lead to a semi-dormancy of cool-season pastures. Continued on Page 9
PAGE 9 Unless we were understocked by conventional standards, we would not likely have any excess pasture to set aside for stockpiling in August in a typical year. On most farms, pastures growth has slumped by this time and we need all of our pastures in the rotation. The only way to be consistently able to stockpile pasture on most farms is if we permanently reduced our stocking rate. In this situation, we would also need to account for the loss in profit from the de-stocked animals. How much will the reduced stocking rate cost us? I have started doing work related to the optimal stocking rate for cow-calf operations and it is complex to model. The results vary from farm to farm and by expected market conditions. But it is possible that the combined cost between the nitrogen application and the loss of profit from the de-stocked animals will exceed the benefit. For folks that are currently overstocked the cost from destocking may actually be a benefit. Thus, it needs to be evaluated on a case-by-case basis to know for sure. The Industrial Problem: On farms that produce their own hay there is another consideration that we must account for. When these farms feed less hay, they will potentially be spreading their fixed costs of production over fewer tons of hay. The fixed costs we are concerned with are depreciation and interest on the haymaking equipment. Part of this depreciation is fixed and part variable. That fixed portion of depreciation and the interest can add up to a significant part of the overall hay costs for producers who have high equipment costs and have relatively low hay production volume. I would put the typical range for many of our cattle farmers at $.20-.40 per cow feeding day equivalent. In other words, if their overall hay production cost equates to $1.75 per day cow feeding cost, the actual cost savings from an extra day of grazing would be reduced to $1.35-1.55 per cow day. Without getting caught up in too much detail, the only ways this cost can be avoided is if 1) the excess hay is sold at the full cost of production (including the fixed costs), 2) haymaking equipment is downsized to a proportional level, or 3) the haymaking equipment is sold off entirely and hay is bought. You might make the argument that these farms can simply carry over the excess hay and use it next year. However, we would just be compounding the problem the following year. The Soil Nitrogen Paradox: UK extension has had county ANR agents involved in local nitrogen trials for stockpiled fescue for a number of years. I have seen some of the data on the response rates from these trials and was surprised at how variable the response rates were from one location to the next in the same year, even after accounting for soil moisture conditions. I assumed it was related to soil fertility levels where plots with better P, K, and ph levels were showing better responses. However, a presentation at the American Forage and Grassland Council last January by Alan Fanzluebbers (Research Ecologist USDA Raleigh NC) casted doubt on this reasoning. Although still in the early stages off a long-term study, what Alan is finding is that soils with high organic matter levels showed the lowest responses to nitrogen applications for fall stockpiling. His reasoning is that the higher the organic matter in the soil, the more nitrogen that is naturally released by biological processes. Applying nitrogen to these soils for fall stockpiling may not prove profitable, even when using the simple approach outlined earlier. Summary: First of all, I want to be clear that I am not saying we shouldn t apply nitrogen and stockpile fescue for fall and winter grazing. There are many situations when the practice would clearly be profitable. The first and main point is that a one size fits all approach for stockpiled fescue recommendations will most likely not work. What will profitably work on one farm may be unprofitable on another farm. What will work when calves are selling for $1.00/lb. (low stocking rate is desirable) may not work when calves are selling for $2.00/lb. (higher stocking rate is desirable). The second point is that we still have a lot of research and analysis that needs to be done before we can fully determine the profitability of nitrogen applications for fall stockpiling. In particular, research is needed to determine how different types of soils (based on organic matter or possibly other indicators) will respond to late summer nitrogen applications. Pastures can be stockpiled without nitrogen applications. On soils with high organic matter, or otherwise have high soil nitrogen content (e.g. good stand of red clover that played out during the summer), this may prove more profitable than applying nitrogen. There are other research questions that will affect the final profitability: Will long-term late summer nitrogen applications crowd out clover? This is of particular relevance here in Kentucky where clovers help dilute the effects of the fescue endophyte. How is hay being fed? If pastures need nutrients and hay is being fed strategically out on pasture (e.g. bale grazing or unrolling), we should credit an appropriate fertilizer value for the hay, and thus reduce the effective cost of a hay feeding day. How would the use of summer annuals or warm-season perennials affect the overall profitability of this practice by allowing you to get off fescue pastures in August? Would feeding hay in August and September and thereby allowing you to get off and stockpile pastures prove profitable? How could the use of a summer stockpiled system, such as that being experimented with at Virginia Tech s Shenandoah Valley AREC unit, allow for more opportunities for fall stockpiling? Continued on Page 10
PAGE 10 There are still many unanswered and unresolved questions related to the profitability of stockpiling fescue pastures. It is not a closed story by any means. Specialists from various departments, and universities, as well as county agents, will need to work together in order to answer many of them. In the meantime, let us hope for continued good rain into the fall, and a long extended grazing season. Greg Halich is an Associate Extension Professor in Farm Management Economics for both cattle and grain. Greg Halich, Associate Extension Professor in Farm Management Economics for Cattle and Grain Production, Agricultural Economics greg.halich@uky.edu 859-257-8841 PREPARING FOR RETIREMENT Planning for retirement is imperative for all farmers and it should start at least 3-4 years before expected retirement. One major issue a farmer must prepare for when looking toward retirement is the dreaded tax liability that comes with it. In many cases, a farmer will sell all of his equipment and possibly even some of his land once he retires. Below are some options to consider that may help spread the tax liability over a longer time period. One option a farmer has is to lease his equipment to a local farmer for a number of years. The equipment could then be sold to that farmer later at a lower value. The rent collected would be ordinary income and the farmer would be allowed to deduct any remaining tax depreciation on the equipment. Once the equipment is eventually sold, the gain would be considered ordinary income. The selling price of the equipment at that point should be significantly lower. The leasing option allows income to be spread over several years and is a great option if there is an interested lessee. The retiring farmer must make sure that the lease agreement and the equipment sale are considered two completely separate events. If the two events are too closely tied together, the IRS may consider it a financed sale that would be taxable upfront. Additionally, in most cases equipment rental income is subject to self-employment tax. Another issue farmers may face when retiring is what to do with their owned land, especially if they do not have heirs. A farmer usually has two options in this case: he can rent the land to another farmer, or he can sell the farm. If a farmer chooses to sell a farm, he may incur a very large capital gain depending on the basis he has in the property. One way he may be able to divert some of that income for a longer period is by selling the property through an installment sale. An installment sale requires at least one payment after the tax year of the sale. Each payment is broken into three parts: interest income, return on basis, and gain on sale. Each year the interest income and gain on sale must be reported as income on the proper tax forms, but the return to basis is not included. Installment sales require very specific guidelines to be followed, so it is very important to work closely with your accountant when considering this option. Retirement is definitely something that needs advance planning and consideration. It is a major step for any farmer, but steps can be taken to lessen the tax burden with proper planning. As with any decision regarding retirement or any other major decisions, it is very important to involve your accountant and other advisors in the planning process. Michael C. Forsythe, Area Extension Specialist/Farm Business Management, Pennyroyal Group michael.forsythe@uky.edu (Some items in this article were originally discussed by Andy Beibl in Ask the Taxman by Andy Biebl: Big Capital Gain? Avoid the Auction and Ask the Taxman by Andy Biebl: Avoid Ag s Exit Tax )
PAGE 11 College of Agriculture, Food and Environment Department of Agricultural Economics 315 Charles E. Barnhart Bldg. Lexington, KY 40546-0276 Phone: 859-257-7288 Fax: 859-257-7290 Economic & Policy Update View all issues online at http://www.uky.edu/ag/agecon/extbluesheet.php Educational programs of Kentucky Cooperative Extension serve all people regardless of race, color, age, sex, religion, disability, or national origin. UNIVERSITY OF KENTUCKY, KENTUCKY STATE UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE & KENTUCKY COUNTIES COOPERATING.