Drought 2012 James H. Jensen Farm Management Specialist

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

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

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

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

Example for Corn RP 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 = $ –Yield = 50 bu/a, 78 bu. x $7.70 = $ –Yield = 0 bu/a, 128 bu. x $7.70 = $985.60

Example for Soybeans RP 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 = $ –Yield = 15 bu/a, 24 bu. x $16.00 = $ –Yield = 0 bu/a, 39 bu. x $16.00 = $624.00

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

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.

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.

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

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.

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 $6.50 Guaranteed revenue is $83,200 Crop yields are below expectations Local price goes up to $7.50 at harvest

Forward Contract with Short Crop and Insurance: Example Average yield128 Bu/a100 bu/a50 bu/a Bushels of shortfall (100 a.)None2,8007,800 Forward contract $6.50 $83,200 - Purchase of short $7.50 $0$21,000$58,500 + Crop insurance $0$22,400$62,400 = Total revenue$83,200$84,600$87,100

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.

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

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

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

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

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

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

ACRE Program 2012 Crop Must be enrolled (16% of Iowa acres) State revenue must be below trigger level: Corn Soybeans 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

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?

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)

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