Transcript Economic Considerations Chad Hart Assistant Professor of Economics Extension Economist (515) 294-9911 [email protected] Should I Harvest the Crop? • Minimum revenue needed Variable costs for combining (fuel &

Economic Considerations
Chad Hart
Assistant Professor of Economics
Extension Economist
(515) 294-9911
[email protected]
Should I Harvest the Crop?
• Minimum revenue needed
Variable costs for combining
(fuel & repairs, or custom charge)
Expected price
- Extra P and K fertilizer if harvested
(.375 lb. P@$.65, .30 lb. K @$.60)
- Hauling ($.15), drying ($.20)
= Net price $7.85 - 0.42 - 0.35 =
Breakeven yield = $15.00 / $7.08 =
$15.00/ac
$7.85 / bu
$0.42 / bu
$0.35 / bu
$7.08 / bu
2.12 bu/ac
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
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
USDA Emergency Programs
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
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
Causes of Loss for Iowa Corn, 1948-2010
Plant Disease
2%
Insects
2%
Other
Wind
6%
4%
Drought
40%
Hail
12%
Frost
3%
Flood
4%
Excess
Moisture
27%
Causes of LossWind
forOther
Iowa Soy, 1955-2010
Plant Disease
1%
Insects
0%
2%
5%
Drought
28%
Hail
29%
Frost
2%
Flood
6%
Excess
Moisture
27%
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)
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
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
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
harvested.
• Must continue to care for crop.
• If harvested, document production in usual
way.
• Add-on policies usually do not cover drought.
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/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
Forward Contract with Short
Crop and Insurance: Example
Average yield
Bushels of shortfall
Forward contract revenue
@ $6.50
- Purchase of short bushels
@ $8.00
+ Crop insurance payment
@ $7.85
= Total revenue
128
bu/ac
None
$83,200
-$0
100
bu/ac
2,800
$83,200
50
bu/ac
7,800
$83,200
-$22,400 -$62,400
$0
$21,980
$61,230
$83,200
$82,780
$82,030
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.
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
Thank you for your time.