July 30, 2012
Anticipating the Size of the 2012 Corn and Soybean Crops
The National Agricultural Statistics Service (NASS) of the USDA will release the first yield and production forecasts for the 2012 U.S. corn and soybean crops on August 10. The first forecasts of the season are always highly anticipated, but none more than this year as widespread drought conditions have resulted in a wide range of yield and production expectations.
It might be useful to briefly review the NASS methodology for making corn and soybean yield and production forecasts. Data for the forecasts are collected in two separate surveys conducted roughly in the last week of July and the first week of August for the August report. The Agricultural Yield Survey (AYS) queries farm operators in 32 states for corn and 29 states for soybeans asking operators to identify the number of acres to be harvested and to forecast the final average yield. The sample of operators is based on a sophisticated sample design to achieve the desired sample size and each state is expected to achieve a minimum response rate of 80 percent. In 2011, approximately 27,000 operators were surveyed for all crops for the August report. Each operator is surveyed in subsequent months to obtain new forecasts of acreage and yield. Historical relationships indicate that respondents tend to be conservative in early forecasts of final yields (underestimate yield potential), particularly in drought years. This tendency is quantified and factored into official yield forecasts.
The second survey is the Objective Yield Survey (OYS) and is based on an area frame sample of cultivated land in 10 principal states for corn and 11 states for soybeans. Based on the June acreage survey, a random sample of fields is drawn in each state and enumerators visit these fields to take measurements needed to forecast yields in pre-determined segments of the fields. In 2011 these measurements were taken in 1,920 corn fields and 1,835 soybean fields. For corn, the number of plants and number of ears per segment are counted and the size of the ears is measured. For soybeans, enumerators measure row width and count the number of plants, number of main nodes, lateral branches, dried flowers and pods, and pods with beans in each segment. The data are used to forecast grain weight (yield) per acre. Each segment is visited in September, October, and November (if not yet harvested) to take new measurements and counts to form new yield forecasts. Just before the operator harvests the field, each segment is hand harvested and weighed. The data from the two surveys are combined to forecast average yield and production. USDA makes new yield and production forecasts in September, October, and November with final estimates released in January. Because yield forecasts are limited by crop maturity and are influenced by subsequent weather, the August yield forecasts tend to have the largest deviation from the final estimates released in January. For the period 1970 through 2010, the August yield forecast for corn ranged from an overestimate of 18.3 percent to an underestimate of 10.1 percent. The middle 50 percent of the forecast errors ranged from an over-estimate of 1.3 percent to an under-estimate of 5.1 percent. For soybeans, the August yield forecast ranged from an overestimate of 16.2 percent to an underestimate of 10.2 percent. The middle 50 percent of the forecast errors ranged from an over-estimate of 3.0 percent to an under-estimate of 4.5 percent. While the USDA's August forecast will provide a benchmark for the size of the 2012 corn and soybean crops, the market will continue to form yield expectations beyond the release of the report. Analysts use a combination of techniques to judge yield potential, including crop condition ratings, crop weather models, satellite imagery, and analogue years. In the case of analogue years, there were six previous years since 1960 when the U.S. average corn yield was more than 10 percent below the unconditional trend yield. The shortfall in those years ranged from 10.4 percent to 25.6 percent and averaged 17.5 percent. A U.S. average yield 17.5 percent below trend would result in a 2012 average yield of 131 bushels, while a yield 25.6 percent below trend would result in an average yield of 118 bushels. There were also six previous years since 1960 when the U.S. average soybean yield was more than 10 percent below the unconditional trend yield. The shortfall in those years ranged from 11.8 percent to 19.3 percent and averaged 14.9 percent. A U.S. average yield 14.9 percent below trend would result in a 2012 average yield of 36.7 bushels, while a yield 19.3 percent below trend would result in an average yield of 34.8 bushels.
In addition to yield, the size of the 2012 crops will be influenced by the magnitude of harvested acreage. Harvested acreage, particularly for corn grain, may be unusually small in relation to planted acreage, further reducing production potential. The corn and soybean markets continue to trade smaller and smaller crops, but prices may not yet reflect the full extent of production shortfalls.
Issued by Darrel Good
Department of Agricultural and Consumer Economics
University of Illinois
July 27, 2012
The 2012 Drought and Income Tax Deferral of Crop Insurance and/or Disaster Payments
The drought in significant parts of the corn-belt during the summer of 2012 has raised familiar questions about deferability of crop insurance proceeds. The issue is especially important for those farmers that have a history of reporting crop income in the year after the year of harvest. The Internal Revenue Code allows deferability of crop insurance proceeds if certain requirements are satisfied.
For a cash basis taxpayer, proceeds from insurance, such as from hail or fire coverage on growing crops, are includible in gross income in the year that they are actually or constructively received.1 In essence, destruction or damage to crops and receipt of insurance proceeds are treated as a "sale" of the crop. Under a special provision, taxpayers on the cash method of accounting may elect to include crop insurance and disaster payments in income in the taxable year following the year of the crop loss if it is the taxpayer's practice to report income from the sale of the crop in the later year.2 The provision covers payments made because of damage to crops or the inability to plant crops. Also the deferral provision applies to federal payments received for drought, flood or "any other natural disaster."
Deferability and Payment Trigger Under Policy
A significant issue is whether the deferral provision also applies to new types of crop insurance such as Revenue Protection (RP), Revenue Protection with Harvest Price Exclusion (RPHPE), Yield Protection (YP) and Group Revenue Protection (GRP).3 As mentioned above, to be deferrable, payment under an insurance policy must have been made as a result of damage to crops or the inability to plant crops. Other than the statutory language that makes prevented planting payments eligible for the one-year deferral, the IRS position is that agreements with insurance companies providing for payments without regard to actual losses of the insured, do not constitute insurance payments for the destruction of or damage to crops.4 Thus, payments made under types of crop insurance that are not directly associated with an insured's actual loss, but are instead tied to low yields and/or low prices, may not qualify for deferral depending upon the type of insurance involved. For example, payments made under policies where yield loss triggers payment will, at least in part, qualify for deferral. Other types of policies may not hinge payment on physical damage or destruction to crop.
If a crop insurance payment is based on both crop loss and price loss from a revenue-based insurance policy, only the portion intended to reimburse the farmer for crop loss is deferrable. The portion payable because of a decline in market price is not deferrable and is income in the year the payment is received.
Consider the following example:
Al Beback took out an insurance policy (RP) on his corn crop. Under the terms of the policy the approved corn yield was set at 170 bushels/acre, and the base price for corn was set at $6.50/bushel. At harvest, the price of corn was $5.75/bushel. Al's insurance coverage level was set at 75 percent, and his yield was 100 bushels/acre. Al's final revenue guarantee under the policy is 170 bushels x $6.50 x .75 = $828.75/acre. Al's calculated revenue is his actual yield (100 bushels/acre) multiplied by the harvest price ($5.75/bushel) which equals $575/acre. Al's insurance proceeds is the guaranteed amount ($828.75/acre) less the calculated revenue ($575/acre), or $253.75/acre. His yield loss is the 170 bushel/acre approved yield less his actual yield of 100 bushels/acre, or 70 bushels/acre. Multiplied by the harvest price of $5.75/bushel, the result is a physical loss of $402.50/acre. Al's price loss is computed by taking the base price of $6.50/bushel less the harvest price of $5.75/bushel, or $.75/bushel. When multiplied by the actual yield of 100 bushels/acre, the result is $75/acre.
So, to summarize, Al has the following:
• Total loss (per acre): $402.50 (physical loss) + $75 (price loss) = $477.50
• Physical loss as percentage of total loss: 402.50/477.50 = .8429
• Insurance payment: $253.75/acre
• Insurance payment attributable to physical loss (which is deferrable): $253.75 x .8429 = $213.89/acre
• Portion of insurance payment that is not deferrable: $253.75 – 213.89 = $39.86
If harvest price exceeds the base price, consider the following example:
The facts are the same as in the previous example, except that the harvest price of corn was $7.50/bushel. Al's final revenue guarantee under the policy is 170 bushels/acre x $7.50 x.75 = $956.25/acre. Al's calculated revenue is his actual yield (100 bushels/acre) multiplied by the harvest price ($7.50/bushel) which equals $750.00/acre. Al's insurance proceeds are the guaranteed amount ($956.25/acre) less the calculated revenue ($750.00), or $206.25/acre. His yield loss is the 70 bushels/acre which is then multiplied by the harvest price of $7.50/bushel, for a physical loss of $525/acre. Al's price loss is zero because the harvest price exceeded the base price.
So, to summarize, Al has the following:
• Total loss (per acre): $525.00 (physical loss) + $0.00 (price loss)
• Physical loss as percentage of total loss: $525/525 = 1.00
• Insurance payment: $206.25/acre
• Insurance payment attributable to physical loss (which is deferrable): $206.25 x 1.00 = $206.25/acre
• Portion of insurance payment that is not deferrable: $206.25 – 206.25 = $0.00
Observation: Normally, if the price of crop at the time of harvest exceeds the base price, the physical loss will constitute 100 percent of the total loss, and the entire insurance payment will be deferrable. However, if insurance proceeds for physical loss to crops are collected before the harvest price is determined and the harvest price ultimately exceeds the base price, any additional payment attributable to the price difference could be deemed by IRS to be attributable to revenue loss that would not be eligible for deferral.
Note: For policies not based on physical loss (such as a GRP), payments received are not deferrable. The same holds true for an Average Crop Revenue Election (ACRE) payment because it is received after the end of the marketing year and in a year after the year the crop at issue is produced. There is no additional ability to defer income to a later year if it is actually received in a year following the year of crop loss.
Deferability of crop insurance proceeds requires the taxpayer to make an election on the tax return.5 The election is made by attaching a separate, signed statement to the return for the year of damage or destruction or by filing an amended return, which includes the name and address of the taxpayer along with a declaration that the taxpayer is making an election. The following should be included on the attached statement:
• The taxpayer's name and address along with a declaration that the taxpayer is making a deferral election;
• Identification of the specific crop or crops destroyed or damage;
• A statement that it is the taxpayer's normal business practice to report income derived from the crops that were destroyed or damaged in the taxpayer's gross income for a tax year following the tax year of damage or destruction;
Note: On this point, the taxpayer must establish a history of reporting more than 50 percent of the crop sales in the subsequent year.6 If multiple crops are involved, the 50 percent test must be satisfied with respect to each crop.
• A description of the cause of the destruction or damage of the crops;
• The date or dates on which the destruction or damage occurred;
• The total amount of payments received from payors such as insurance companies and government agencies (with itemization per crop and per payor).
The ability to defer crop insurance proceeds is an important planning tool for many farmers when weather interferes with normal crop production and marketing expectations. If the requirements can be satisfied, deferral can allow consistency in income tax reporting of insurance proceeds (and disaster assistance payments). Even if the technical requirements cannot be satisfied, deferral can still be accomplished if the insurance proceeds for a current year's crop are not received until the following year.
Issued by Roger McEowen
Center for Agricultural Law and Taxation
Iowa State University
July 17, 2012
Much of the country is experiencing drier than normal conditions this summer and, thus, some horses living on pasture might soon have limited forage choices. Owners must take care to ensure pastures do not contain certain plant and weed species capable of producing toxins during stress conditions such as drought.
Horses aren't as susceptible to nitrate toxicity or prussic acid poisoning from plants as are ruminant species, such as cattle and sheep. A rumen's microorganisms facilitate toxin release from the plants into the animal's digestive tract. Horses, however, are monogastric (one- stomached) animals and are more capable of breaking down prussic acid in the stomach, and convert very little nitrate to nitrite (wherein lies the problem in cows) in the large intestine.
Nitrate and prussic acid toxicity in horses are rare, but when they do occur, they typically have serious consequences.
During periods of low moisture, certain grass species can produce toxic products such as nitrates. Nitrates accumulate in plants--such as pigweed, smartweed, ragweed, nightshade, and goldenrod--that are heavily fertilized with nitrogen, or during certain weather conditions and after frost.
Should a horse consume excessive amounts of affected plants, the nitrates cause a series of reactions that prevent adequate oxygen transport in the blood cells. Clinical signs of poisoning might include difficulty breathing, weakness, tremors, ataxia, rapid heartbeat, grey/blue or brown discoloration of blood and tissues, seizures, and rapid death.
To prevent nitrate poisoning in horses, check pastures for plants that are most likely to produce nitrates (such as the aforementioned species) and remove them (for additional plants to watch for in specific geographic areas, contact your local extension agent). Additionally, have any hay produced during drought conditions analyzed by a laboratory to evaluate the nitrate concentration prior to feeding.
Prussic acid is another possible danger to horses on pasture during drought conditions.. This glycoside is normally present in plants but is produced in toxic levels during drought. The plant species of main concern include johnsongrass, sorghum, sudangrass, and wild cherry trees. Like nitrates, prussic acid affects the oxygen present in red blood cells.
Prussic acid levels decrease over time, and, therefore hay produced during drought will most likely be safe to feed horses if baled at 18-20% moisture, a common practice in hay production (hay baled above 20% moisture will often mold, ferment, or combust). If concerns arise, a hay analysis can determine whether prussic acid is present at toxic levels. Owners should fence off wild cherry trees in pastures so horses cannot chew on them, particularly the potentially toxic branches and leaves.
The most proactive approach to preventing your horse from ingesting drought-stressed plants that can produce nitrates or prussic acid is to avoid turning hungry animals out onto suspect pasture without an adequate, good-quality forage source such as hay. Additionally, evaluate pastures on a regular basis to determine if potentially dangerous species of grasses are present; if so, remove them from the field or fence them off to prevent consumption.
July 10, 2012
Pork Industry Faces Financial Disaster?
by Chris Hurt
Drought and the impact on feed prices may be on the verge of creating a financial disaster for the pork industry and other livestock species. The crop stress which began in Indiana and Illinois is now spreading further to the west. Most of the media attention has been focused on crop producers who face large yield losses; however the animal industries may ultimately fare even worse.
Crop producers have the potential for two compensating income streams when yields are low. The first is what is called the "natural hedge." When yields are low across a broad geographic area, then prices generally rise. This is especially true when stocks-to-use ratios are tight as they are now. Under these conditions a 10 percent reduction in national yield is offset by a rise in prices that is substantially more than 10 percent. This means that revenues tend to be less negatively affected by yield losses. Secondly, many crop acres have some type of crop insurance that can help cushion the financial blow of low yields. While these conditions hold on average, there will be considerable ranges in how individual farm families are impacted.
Pork and animal producers tend not to have any form of income protection against higher feed prices in the short-run. The weather market is just three weeks old at this writing. December 2012 corn futures have risen by $2.25 per bushel and December meal futures are up $100 per ton. These represent a 45 percent increase for corn and 28 percent increase for soybean meal. These higher feed prices have to be absorbed by the animal industry, causing a collapse in financial margins. This is because higher feed costs cannot be passed on to the consumer-there is no natural hedge for the animal industries in the short-run.
The collapse of margins results in financial losses which cause discouragement among animal producers. This will result in selling at lighter weights and the beginning of liquidation of some of the breeding herds and flocks immediately, but especially this fall. Unfortunately, the increased slaughter this summer and fall will tend to increase production and may cause some downward pressure on animal prices. Over time, meat, milk, and milk product production drops and prices of animals and products rise such that the costs of higher priced feed is passed to consumers. Animal producers ultimately do get compensation for the higher feed costs but that comes after a prolonged period of losses that some producers cannot survive.
How does this play out for the pork industry outlook today? December futures prices are $7.30 per bushel for corn and $450 per ton for meal. Estimated costs of pork production have reached record high levels for the third quarter of this year, at $72 per hundredweight, and drop only to $69 for the fall and winter. Hog prices cannot reach those lofty costs with losses anticipated to be about $20 per head for the next three quarters. There is little hope to cover costs until feed prices move lower, which may be the fall of 2013. That is a long horizon of losses.
Producers can be expected to respond by marketing animals more quickly and this means at lower weights. In the last three weeks, the average live weight has dropped from 277 pounds to 274 pounds. Further reductions should be expected in coming weeks. Producers also will quickly look for low productivity sows to cull. The decision to liquidate sows will take a bit more time, but that could begin by the end of the summer, and especially this fall. Sows that go to market and are not re-bred in August will not have a litter in December and will not have market ready hogs early next summer. The important point is that hog prices for the last-half of 2013 should begin to rise because of the quick beginning of liquidation this summer. This will likely be reflected in higher lean hog futures for the last-half of 2013.
The drought is on-going and the impact on feed prices will be dynamic. For those hog producers who can survive the financial pressure over the next year, there can be improvement starting in the last-half of 2013. That is because hog prices should be higher by that point, short feed supplies will have been rationed out, and prospects for more normal 2013 yields will hopefully be in place.
Those in the animal industry need to articulate the extreme financial stress they are likely to experience in the coming 12 to 15 months. The immediate view is that crop producers will bear the brunt of the financial losses, but losses in animal industries will be enormous over the next year, perhaps becoming considerably greater than for the crop sector. This articulation by the animal industries is important to alert consumers to higher retail food prices, but also to policymakers. Policymakers will likely have an influence on release of CRP lands for grazing and haying, on any potential disaster payments from the federal government, and in helping the EPA/USDA make decisions about the size for the 2013 Renewable Fuels Standard.
Issued by Chris Hurt