Ag Connection
Your link to the Universities for ag extension and research information

Volume 6, Number 9
September 2000


This Month in Ag Connection












"Low Prices Don't Cure Low Prices?"
Corn Harvest 2000
Taxation Tidbits:  Estate Planning
Taxation Tidbits:  The Real Reason for Grain Storage
Alert for Missouri Permitted CAFOs

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"Low Prices Don't Cure Low Prices"

Low prices cure low prices is a market adage that is often quoted. This statement is rooted in the theory that low prices tend to discourage production and encourage consumption, which leads to tighter supplies and higher prices.

Darrel Good, University of Illinois Extension Economist, says "…low prices are not a cure for low prices. Low prices encourage consumption but they do not, of their own, increase demand." In the past, there was often a supply response to low prices in the form of government acreage reduction programs. This government policy response has been eliminated from current legislation and low prices have not caused producers to reduce planted acreage. "As long as supplies are large, prices will remain low to encourage consumption."

Consumption and demand are often confused. They are not the same. Consumption and price are components of demand. Only by increasing consumption at the same price is demand increased. Marketing newsletters and analysts often refer to increased consumption or heavy use as increased demand--this is really not quite correct. It is just increased consumption and won't increase price without a real change in demand or reduced production.

There are positive benefits to increased consumption that could eventually lead to higher prices. When supplies are large, increased consumption uses them up. This prevents ending stocks from becoming even more burdensome. It helps set the stage for supply and demand changes to increase price by not having a large leftover inventory. Then any reduced production or real increases in demand could quickly tighten up supplies and lead to higher prices.

Consumption has been high. USDA expects both new crop corn and soybean use (consumption) to increase to record levels in the next year. However, in spite of this record use, anticipated large production will result in record supplies and ending stocks will increase. The amount of ending stocks and the stocks to use ratios are the key factors to watch. They provide the best clues for price direction. Right now, these are projected to increase. This suggests that lower prices will be needed to use up increased supplies. Low prices may serve as a "treatment" by using up supplies. But, without a reduction in supply or an increase in demand, low prices alone won't "cure" low prices.

(Author: Melvin Brees, Farm Management Specialist)

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Corn Harvest 2000

Prospects of a large harvest combined with a large carryover of all types of grain could result in a shortage of storage space at harvest time. It is time to consider options for the harvest and storage of the fall crop.

Corn reaches physiological maturity at about 35 percent moisture. At this point, the corn has produced all of its dry matter and has achieved its maximum yield. Corn could be harvested at this stage to take advantage of the available storage. However, this may not be the best solution. Corn harvested at high moisture is more susceptible to harvest damage. The cost of drying high moisture corn could be prohibitive. Two local elevator drying charge estimates this week have ranged from 2 cents to 3.5 cents per point. Drying 35 percent corn to 15 percent corn would result in a drying charge of 40 to 70 cents per bushel. At current elevator prices of approximately $1.50, about half the crop's value would be spent in elevator drying charges. In addition to the drying charges there would be some dockage due to higher damage to the grain.

It will be tempting to let corn dry in the field this fall because of low prices and high costs of drying. Several factors should be evaluated before making this decision. Condition of the plants and their ability to support the ear until the grain is dry should be evaluated. Other risks include inclement weather resulting in poor or delayed harvest. Another factor is whether storage facilities will be available later in the fall.

On-farm drying costs may not be that high. September and early October weather conditions are usually favorable for natural air or low temperature drying in bins. This will not result in excessive drying costs and could likely be offset by the harvest and field losses that could result from delayed harvest.

Another option would be to consider temporary storage. Temporary storage considerations would include the following factors that were developed by Bill Wilke, Agricultural Engineer, University of Minnesota:  (Click here)

Ability to keep grain dry – Grain needs to be protected from all types of moisture. This requires a good roof or cover, good drainage away from the storage site, and a vapor barrier that prevents moisture from wicking into the bottom layers of grain.

Ability to withstand pressure exerted by dry grain – Most building sidewalls and some older silos will not withstand grain pressure without reinforcement. Alternatives to reinforcing building walls include setting portable bulkheads inside the walls, or assembling metal bin rings inside buildings.

Ease of aerating grain – In any situation where dry grain will be stored more than a month, it is important to install a grain aeration system. The design of the aeration system will depend on the type of temporary storage used. Since it is usually difficult to achieve uniform air movement or to move large volumes of air per bushel through facilities that have been adapted for temporary grain storage, it is generally best not to use temporary storage facilities for drying grain or holding wet grain.

Ease of moving grain in and out – For each potential storage site, consider how much labor, what kind of equipment, and how much grain damage and loss might be involved in filling and emptying the structure.

Economics Make sure that whatever facility you select does not lead to spoiled grain or have excessive cost per bushel (consider costs for remodeling, aeration, labor, and equipment rental). The amount of grain that you can get into a structure is an important part of the cost equation.

Finally, cylindrical metal bins are hard to beat for convenience and preservation of grain quality, so before putting too much effort or money into adapting other facilities for temporary grain storage, check with neighbors to see if they have any bin space available for rent. If you do rent space at another location, it is important to develop a written agreement that spells out who is responsible for checking the grain, electricity costs, and any repairs that might be necessary.

For more assistance, contact your local University Outreach and Extension Center or click here to visit our web site.

(Author: Wayne Crook, Agronomy Specialist)

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Taxation Tidbits

Estate Planning – The Ball Is In Your Court

Before you get swamped with the activities of fall harvest, now is a good time to review and make adjustments to your estate plan. Yes, Congress is considering some major changes that could later require additional adjustments to your plan. However, "the dealing is not done" and there are many important reasons for estate planning other than tax minimization. The following are some of the basic points of estate planning.

The first and most important activity is to identify and prioritize your estate planning goals and objectives. If you are married, you should not only identify your individual goals but also identify and prioritize your joint goals and objectives. Additionally, consider all goals under varying scenarios. For example, identify those goals if you were to die. Second, list goals to be met if you and your spouse should die at the same time. Finally, consider the objectives to be accomplished should the entire immediate family die in a common accident or disaster. Always test your estate plan with the worst-case scenario.

Estate planning needs and merits your active participation in the design, implementation and monitoring. All three phases benefit from your developing a basic understanding of the primary estate tax regulations, planning tools, and strategies. Generally, there are a number of tools available to choose from which will accomplish any particular goal. Remember, it is your estate plan. Each tool or strategy normally has its advantages and disadvantages. You are the one who should decide which tools and strategies will best fit your situation, circumstances, and priorities.

Estate planning, business planning, and financial planning go hand in hand. A team approach will help ensure that all of the important aspects of your particular situation are addressed. Your team might include an attorney, accountant, insurance agent, banker, and University Outreach and Extension Specialist. The time for planning is now. The young family just getting started needs a plan just as much – if not more – than the more senior couple entering into the retirement stage of their life.

Be realistic and honest as you gather information about your estate. You and your planning team will be developing strategies based on this information. After finalizing your plan, you should consider presenting your overall plan to your primary heirs. This is not to defend or debate, but to simply inform them of your plan and minimize confusion or debate between the heirs after you’re gone. Additionally, this meeting would be an excellent time to tell your heirs who members of your planning team are, funeral arrangements desired, where you keep the keys to your safety deposit box, and the location of other important documents. A side benefit of this meeting could be that it might encourage your heirs to review their estate and financial planning needs.

As a wise man once said, the longest journey begins with a single step. Although the entire process may at first seem overwhelming, breaking any complex situation into a number of small concerns and attacking and completing these smaller issues will soon accomplish the entire project. The ball is in your court!

(Author:  Parman R. Green, UO&E Farm Business Mgmt. Specialist)

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Taxation Tidbits

The Real Reasons for Grain Storage

Most producers want to avoid selling at low prices. Prices are often low at harvest time and it appears that will be the case again this year. To avoid these low prices, grain is stored in hopes that prices will improve--"store and hope!"

There are at least three reasons for storing grain: postponing taxes, avoiding harvest delays and capturing higher prices. Delaying sales to manage cash basis income tax is often a business reason for storing, but it not necessarily a good marketing decision. Avoiding harvest delays with longer hauls or waits in the elevator line are often reasons for using on-farm storage. Drying grain in bins to avoid moisture discounts may also contribute to storage decisions. However, most will likely say that the primary reason is storing (hoping) for higher prices.

Higher prices result from higher price levels in the futures market, improved cash market basis and capturing market carry (the difference between nearby and distant month futures). It is important to understand that storage isn't necessary to capture higher price levels in the futures market! In fact, using futures or call options to speculate on futures price gains avoids many of the risks and costs associated with storing cash grain (grain quality and condition, storage and handling costs, insurance and interest). This really leaves only two marketing reasons for storing grain--capturing basis gain and market carry.

Basis is usually weakest (widest) at harvest time and often quickly recovers after the harvest crunch is past. This recovery can provide a significant improvement in cash price even if the futures price doesn't increase. Basis gains can only be captured in the cash market and this may require storing the grain. However, once this basis recovery occurs, there is often little left to be gained in the cash market by continuing to store.

Market carry is the premium distant month futures contracts offer us to store or "carry" the grain for later sales. This gain can only be captured by forward contracting, selling futures, or speculating on stored grain. It cannot be captured if we sell at harvest and re-own with futures or options, since by paying the premium for a distant month futures contract we in effect "pay someone else to store."

Speculating on basis gains and capturing market carry may offer the best opportunity to get a return on storage. This usually occurs by mid to late winter--sometimes earlier. Continuing to store grain after basis gains and at least some market carry can be captured is very risky. At this point, if higher price levels are still anticipated, speculating on higher prices can be better accomplished by using the futures market.

(Author: Melvin Brees, Farm Management Specialist)

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Alert for Missouri Permitted CAFO's

All concentrated animal feeding operations (CAFOs) permitted under the general permitting guidelines should have received a letter in late July requesting they submit a "PERMIT RENEWAL APPLICATION". It is critically important that all active CLASS IC and IB operations (operations with >1000 animal units) complete this form and apply for renewal immediately.

The notification letter was sent July 18, 2000, from Missouri Department of Natural Resources Water Pollution Control Program. It stated that the General Permit will be expiring February 2, 2001, and renewal notification must be received 180 days prior to that date. The letter included a PERMIT RENEWAL APPLICATION and notification of a $150 renewal fee.

Most permitted CAFOs in Missouri receive their permit under the Missouri General Permit process. This process covers 366 of the 390 permitted CAFOs in Missouri. The General Permit expires every 5 years and at that time all permitted CAFOs must renew their permit. The current permit expires February 15, 2001.

Submitting your renewal notice is the first step in permit renewal process and is supposed to be completed 180 days before the renewal date. Therefore it is critical that all affected operations submit this form immediately.

The new General Permit to replace the one expiring in February is still being developed by MDNR. It is unlikely that your new operation permit will be ready by February 15, 2001. Submitting the renewal form allows you to continue operating as a permitted facility under conditions of the old permit until the new permit is implemented by MDNR.

Failure to immediately submit a renewal form means your operating permit will expire on February 15, 2001, and you will have no operating permit until you are issued a new operating permit under the new guidelines, a process that could take months.

This process affects operations that are permitted under the General Permit, that is primarily Class IC and Class IB operations. Operations that have a Letter of Approval (LOA) are not affected. Affected operations should have received a notification letter and a renewal application form by mail.

(Author: John Lory, Farm Management Specialist

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University Outreach and ExtensionAg Connection - September 2000 -- Revised: September 30, 2002