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

Volume 5, Number 9
September  1999


This Month in Ag Connection


Risk Management Issues
Gambling on the Loan Deficiency Payment
Web Sites That May Be of Assistance
Be Aware of Nitrates in Forages

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Risk Management Issues

This issue of Ag Connection is probably the most important and most challenging issue to date. The goal of this issue is to communicate information and resources available to assist with difficult financial situations. Hopefully, this information will help in planning end of the year transactions, and provide insight at looking at all possible scenarios. Obviously, not all topics can be addressed in a newsletter, so if you need additional information, contact your county extension center.

Given the weather conditions and commodity prices, this year will be challenging and stressful. What can you do to ease the stress? Astute business managers recognize problems early and take action. (In the family budget and the business operation.) Look at financial records early – do not wait until the end of the year.  Give yourself some planning time or time to seek assistance. Make time for your family – do activities together.  (it doesn’t have to be costly to have fun).

Risk comes in all shapes and forms. While many people focus on just a few of these risks, you must be concerned with all of them.
blueball.gif (303 bytes)Marketing blueball.gif (303 bytes) Financial
blueball.gif (303 bytes) International Issues blueball.gif (303 bytes) Environmental
blueball.gif (303 bytes) Weather/Production blueball.gif (303 bytes) Farm policy
blueball.gif (303 bytes) Legal/ Regulatory blueball.gif (303 bytes) Personnel
blueball.gif (303 bytes) Health and safety blueball.gif (303 bytes) Technology

Farm Financial Ideas

Given the 1999 Missouri summer weather and agricultural commodity prices, one can conclude that agriculture income will be low and it is time to consider appropriate responses. Keep lines of communication open with family members (spouses and children) and farm creditors. Do not hesitate to seek outside help if you need it.

First you need to determine the impact this year will have on the farm business? A current balance sheet and cash flow statements for the next few years will help in determining the position of the farm business. The following are some suggestions that might be helpful to your situation.

diamond_.gif (84 bytes) Expenses: Monitor business and family expenditures closely. If replacement or additional equipment is necessary, look at alternative methods of acquisition (leasing, joint ownership). Analyze prepaid expenses — will the discounts justify the interest cost?

diamond_.gif (84 bytes) Marketing: Marketing and making sales decisions are among the most important jobs of a farm manager. Study and develop an understanding of a variety of marketing methods to determine the most profitable for you.

diamond_.gif (84 bytes) Generating Cash: Evaluate farm assets to determine if all are being fully utilized. If there are underused or idle assets, seek ways for those items to generate cash. For example, empty hog buildings or empty cattle lots, can they be rented out? Other opportunities include custom work and off-farm income, whether it be full-time, part-time or seasonal work.

diamond_.gif (84 bytes) Government Payments: If the farm participates in government programs, look at all alternatives to determine which best fits your situation. While the CCC marketing loan provisions provide price support, you must have production to participate (zero yield = zero LDP). When looking at the alternatives, keep in mind the tax effects as well.

diamond_.gif (84 bytes) Tax Planning: Seeking early advice from your accountant is even more important this year. Several tax management ideas can help in managing taxes: net operating loss, earned income credit.

diamond_.gif (84 bytes) Land Rent: With current commodity prices, it may be necessary to talk with landowners. It may be time to re-negotiate leases: cash, share-crop, and flexible cash. County Extension Centers have information about the types of leases.

diamond_.gif (84 bytes) Farm Enterprises: Take a good look at all enterprises that make up the farm. Are they profitable? If not, do some enterprises need to be eliminated? Others changed or added? What are the consequences of those changes? Will there be excess labor? If so, how can that labor be used to be profitable? If a major enterprise needs to be eliminated, be sure to examine the income tax effects.

diamond_.gif (84 bytes) Refinance: Interest rates are still reasonably low. There may be some opportunity to refinance debt at lower levels. Calculations will need to be done to see if the cost of refinancing is lower than the interest savings.

diamond_.gif (84 bytes) Debt Restructure: Another possibility is moving short-term debt to longer-term debt by refinancing. Before doing that, look at the farm business to see if it can handle the debt payments long term.

diamond_.gif (84 bytes) Rent Out Land: If the enterprises are not producing income, there may be reasons to rent out the crop ground for a year or two. If this is an option you decide to use, be sure to keep creditors informed.

diamond_.gif (84 bytes) Partial or Complete Liquidation: If the decision is made to cut back or discontinue farming, do so before all equity is gone. Utilize your accountant or attorney to calculate tax consequences of this decision before liquidating assets.

The above list is only a few ideas. There are still opportunities in agriculture, but they may not be traditional. For example farmers are trying and succeeding at growing crops for niche markets such as organic crops, vegetables, flowers, etc. If you are interested in changes do your homework before the decision is made. Investigate the crop, markets, and input requirements.

(Author: Mary Sobba, Farm Management Specialist)

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Gambling on the Loan Deficiency Payment

In the Fall of 1998 farmers became all too familiar with the term "loan deficiency payment or LDP". And, no decision was of more interest to program participants than when to take the LDP. The regulations of the loan deficiency payment stated that a program participant could elect to receive the LDP at any time during predetermined time limits given the program participant has "beneficial interest" in the commodity.

Beneficial Interest. To be eligible for the LDP, you must have beneficial interest in the commodity. This means you must have control of the commodity, you must have title to it and you must still have risk of loss of the commodity. If these tests are met, completing the proper FSA paperwork prior to harvest and delivery prepares you for collecting the LDP.

Caution, some cash grain contracts, seed grower contracts and identity preserved grain (high oil corn, food grade soybeans, etc.) may cause problems with maintaining beneficial interest and eligibility for the LDP. Most forward cash contracts are properly worded and some of the previous problems with seed grower contracts have been corrected. However, there may still be problems with some of these and especially some of the more recent identity preserved grain contracts. If you have one of these contracts and are unsure about it, contact your FSA office for a determination. If the contract makes you ineligible, it may still be possible to get an addendum to the contract to correct the problem prior to harvest. Do it now! After the grain is harvested it will be too late!

Therefore, a farmer could have sold at harvest and taken the harvest-time LDP, taken the harvest-time LDP and stored, or stored production and taken the LDP at a later date not beyond the end of May, 1999.

Many producers who elected to store grain had post harvest opportunities to take a sizeable LDP payment. Were these good opportunities after allowing for storage costs? Figure 1 and Figure 2 graph the daily LDP rates for corn and soybeans in Howard county between October 1998 and the end of May 1999. For each figure, both the actual LDP and LDP adjusted for storage costs are shown. The gap between the with and without storage cost LDP increases monthly as storage costs accumulate. The monthly storage costs were assumed to be 3.5/bushel for corn and 4.5 for soybeans. Figure 1 and Figure 2 indicate that while post harvest opportunities existed to take an LDP, factoring in storage costs made taking the harvest-time LDP and selling the grain as profitable for soybeans and more profitable for corn. Additionally, the market has not allowed for profit taking from storage beyond the rally in the market during mid December.

Figure 1
Howard County corn loan deficiency payment before and after storage costs (October 1998 to May 1999).


Figure 2
Howard County soybean loan deficiency payment before and after storage costs (October 1998 to May 1999).

If the farmer would have elected to take the harvest-time soybean LDP and store soybeans, he/she would have realized a loss versus storing and gambling on a LDP increase. For the case of corn, a producer would have been better off taking the harvest time LDP and storing corn versus storing and gambling on a LDP increase. The LDP rates are likely to follow a different pattern in 1999, but before you gamble on a higher LDP make sure you consider storage costs.

Author: Joe Parcell, University of Missouri Extension Farm Management Spec.

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Be Aware of Nitrates in Forages

When forage plants are under water stress and high levels of nitrogen fertilization, they tend to accumulate high nitrate levels. These nitrates can be toxic to animals feeding on these forages. Doses not high enough to kill livestock can reduce milk production, cause abortions, and reduce weight gain from vitamin A deficiency, thyroid insufficiency, and impaired carotene use.

Some of the forages that accumulate high levels of nitrates and should be tested are; pearl millet, Sudan grass, corn, orchardgrass, and tall fescue; smooth bromegrass, timothy and ladino clover accumulate moderate levels; and alfalfa, Kentucky bluegrass, and wheat accumulate at low nitrate levels.

You may bring a sample of your forage to your local University of Missouri Extension center to have it tested for nitrates. This test shows whether or not nitrates are present, but doesn't tell you how high they are. Before you feed forages this year, it would be wise to have them tested. Forages or feeds that could be poisonous must be tested further to know the level of nitrates. Then the proper steps can be taken to insure the safety of livestock.

Points to Consider:

gem_blue.gif (91 bytes) Livestock that are young, old, or in a weakened condition are the most susceptible to nitrate poisoning.

gem_blue.gif (91 bytes) Nitrate concentrations are not uniform across a field or pasture.

gem_blue.gif (91 bytes) The more plants that are tested from more places will give a better idea of the situation.

gem_blue.gif (91 bytes) Remember where the samples were taken. Areas of a field or pasture high in nitrate can be avoided during harvesting or feeding.

gem_blue.gif (91 bytes) Feed green chop while it is fresh. Letting a wagon of green chop sit overnight is not recommended because the level of nitrate may build up. Forages that may have high prussic acid concentrations complicate this recommendation. Cyanide found in prussic acid will be lost during overnight storage.

gem_blue.gif (91 bytes) Making silage may be a solution to salvaging high nitrate forages. Nitrogen is lost from nitrates in the form of nitrogen oxide during the ensiling process. Extra caution is needed since nitrogen oxide is a gas toxic to humans and animals that can collect in the bottom of pits or in unventilated silos. Silage made from high nitrate crops should still be tested before feeding to determine if there is still a problem.

For more information , see UMC Guide G9811, "Qualitative Nitrate Detection For Toxicity Potential" or contact your local Extension Center.

(Author: Jim Jarman, Agronomy Specialist)

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University of Missouri ExtensionAg Connection - September 1999 -- Revised: April 20, 2004