Newsletter | Past Issues

January, 2007

In This Issue:

2007 Enterprise Budgets for Corn, Soybeans, Wheat and Hay

Conservation Security Payments (CSP) and Taxes

Crop Input Outlook 2007

OSU Extension Conducting Wage and Benefit Survey

Domestic Production Activities Deduction

Agri-Business Retention and Expansion Roundtable Calendar
Transition Planning Workshops Slated for Ohio

Do you have a question that you would like to ask the Ohio AG Manager Team?  If so, click here to email your question.

2007 Enterprise Budgets for Corn, Soybeans, Wheat and Hay

Barry Ward, Leader, Production Business Management, OSU Extension and The Department of Agricultural, Environmental, and Development Economics

Whether it's done in an Excel spreadsheet or simply mulled over in one's mind, “budgeting”, or estimating profitability of an enterprise, is an important process. Budgeting is often described as “penciling it out” before committing resources to a plan. Ohio State University Extension has had a long history of providing “Enterprise Budgets” that can be used as a starting point for producers in their budgeting process.

Newly updated Enterprise Budgets for 2007 have been completed and posted to the Farm Management Website of the Department of Agricultural, Environmental and Development Economics. Updated Enterprise Budgets have been published for the following field crops: Corn-Conservation Tillage, 2 nd Year Corn-Conservation Tillage, Soybeans-No-Till (Roundup Ready), Wheat-Conservation Tillage-Wheat and Straw Harvested, Alfalfa Hay and Grass Hay-Large Bale System.

These updated Crop Budgets are available at:

http://aede.osu.edu/Programs/FarmManagement/Budgets/crops-2007/

Our enterprise budgets are compiled on downloadable Excel Spreadsheets that contain macros for ease of use. Users can input their own production and price levels to calculate their own numbers. These Enterprise Budgets have a new look with color coded cells that will enable users to plug in numbers to easily calculate bottoms lines for different scenarios. Detailed footnotes are included to help explain methodologies used to obtain the budget numbers.

This year's Crop Enterprise Budgets assume nitrogen costs of 24.4 cents per pound of actual N and $2.20 per gallon for off-road diesel.

The entire set of Enterprise Budgets can be accessed at:

http://aede.osu.edu/Programs/FarmManagement/Budgets/

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 Conservation Security Payments (CSP) and Taxes

Donald J. Breece, Farm Management Specialist, OSU Extension Center at Lima

The CSP program is a voluntary program that provides financial and technical assistance to promote soil and water conservation. Selected watersheds are protected by paying qualified producers stewardship payments for achieving specified levels of compliance within the standards for soil and water conservation. CSP also may provide cost share payments to producers and landowners for various practices.

County Farm Service Agency offices had distributed copies of the USDA notice to recipients of CSP payments indicating that some of the CSP payments may be excluded from income, under Internal Revenue Code (IRC) Section 126. Some farmers have misinterpreted the notice, thinking that all CSP payments are excluded from income. Unfortunately, this is not the case. The following article will explain the rules for taxation of CSP payments.

Stewardship payments are made to qualifying farmers at Tier I, II and III levels. Larger payments are received for meeting higher Tier levels of compliance with resource management systems. These payments are ordinary income (lines 6a and 6b of Schedule F) and are subject to self-employment earnings. Likewise, any incentive payments are also considered ordinary income. For share-rent landowners, filing Form 4835, lines 3a and 3b are used to report CSP payments, and are subject to ordinary income taxes, but would not be subject to self-employment (SE) tax. However, IRS may argue that share-rent landlords may also be required to use Schedule F to report the CSP stewardship payments so that SE tax may be collected. For example, IRS Notice 2006-108, recently released, addresses the application of the Self-Employment Contributions Act to Conservation Reserve Program (CRP) payments. In this, CRP payments, no matter the situation, are subject to SE tax.

IRC Section 126 excludes cost-share payments from income only if they are for a capital expenditure and meet other requirements. Clearly, stewardship payments are not for capital expenditures thus are not eligible for exclusion under IRC Section 126.

If cost sharing payments are for non-depreciable soil and water conservation improvements, these may be deducted under IRC Section 175. This section allows for deduction of such improvements as for the treatment or movement of earth, construction of drainage ditches or earthen dams, eradication of brush or the planting of windbreaks. The deduction is limited to 25% of gross farm income (line 14 of schedule F), with the excess carried forward to future tax years. Expenses for improvements that can be depreciated cannot be claimed under IRC Section 175. A cash-rent landlord can not use this deduction.

Under IRC Section 126, cost-share payments for depreciable improvements made to farmers and landowners may be eligible for exclusion from income. This exclusion may be useful if the allowable depreciation for the capital improvement is less than the cost-share payment received, such as for a manure storage structure. For the IRC Section 126 exclusion, three conditions must be met: 1) The payment must be for a capital expenditure, 2) The capital expenditure must not substantially increase the annual income for the affected property, and 3) The payment must have been certified by the Secretary of Agriculture for the conservation purpose.

Under Section 126, a mathematical calculation must be made to determine the taxable portion, if any. Begin by determining the value of the Section 126 improvement. In other words, what would a willing buyer pay a willing seller for the improvement. Treasury Regulation 16A126-1 gives an example of $21,000 as a fair market value for an improvement that cost $700,000. The next step is to determine the portion of the cost-share that is excludable from income. To do this, it is the greater present value analysis of either 10% of the average annual income from the affected property for the 3 years immediately prior to the improvement or $2.50 per affected acre. Subtract this figure and the taxpayers contributing cost of the improvement from the value of the improvement to determine the taxable portion. On the Agricultural Program Payments line of Schedule F, 6a is where the entire 1099G amount is to be reported. On line 6b, only the taxable amount is written. As one can see, it may be advisable to seek a qualified income tax practitioner to assist with wading through such calculations. The IRS web site is also a useful resource: www.irs.gov .

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Crop Input Outlook 2007

Barry Ward, Ohio State University Extension, Leader, Production Business Management Department of Agricultural, Environmental and Development Economics

Lower fuel and nitrogen prices in the last half of 2006 have signaled trends that should hold throughout 2007. The outlook numbers laid out in this article can be used to formulate budgets for 2007. Outlook information presented here was developed with data from AEDE research, Energy Information Administration, USDA, other Land Grant research, futures markets and retail sector surveys.

Fuel

As of December 12 th , the Energy Information Administration (EIA) pegged the average price for West Texas Intermediate Crude Oil at $65.17 per barrel for 2007. The EIA projects the Henry Hub Natural Gas price to average $7.87 per thousand cubic feet (mcf) in 2007. The Henry Hub in Louisiana is the nexus of 16 intra- and interstate natural gas pipeline systems that draw supplies from the region's prolific gas deposits. The pipelines serve markets throughout the U.S. East Coast, the Gulf Coast , the Midwest , and up to the Canadian border. Natural Gas Futures quotes are available via the online New York Mercantile Exchange at: http://www.nymex.com/

(Natural Gas Futures are traded as million British Thermal Unit (mmBtu). One contract equals 10,000 mmBtu. Natural Gas is sold wholesale per thousand cubic foot (mcf). Btus per cubic foot of natural gas do vary. One cubic foot of natural gas = 1000 to 1031 Btu. One thousand cubic feet (1 mcf) of natural gas = 1to 1.031 mmBtu.)

Off-road diesel is expected to average $2.20/gal for 2007. This represents approximately a 2% decrease from 2006.

Futures prices of natural gas and retail survey data point toward slightly higher propane prices in 2007. The price of propane is expected to increase slightly in 2007 and average $1.50/gallon. A warm start to winter in much of the country may allow for lower prices of some fuel related inputs.

Fertilizer

Nitrogen

Natural gas prices have fallen substantially since they peaked in the winter of 2006 when the Henry Hub price for Natural Gas was around $15 per thousand cubic feet (mcf). Since then, the Henry Hub natural gas price has fallen below $8 per mcf. (For the week (Wednesday-Wednesday, December 13-20), the price for next-day delivery at the Henry Hub decreased 78 cents per MMBtu, or 10.8 percent to $6.43 per MMBtu.)

The average price of nitrogen increased 37% from 2004 to 2006. Natural Gas, DAP, Urea and UAN(28%) Futures together with surveys of industry personnel signals lower N prices in 2007. Using anhydrous ammonia as our base for projections, N is expected to average $0.244 per pound of N in 2007. (NH3 price of $400/ton equals price per actual pound N of $0.244.) This is a 27% decrease from 2006.

Phosphorous (P 2 O 5 )

The average price of phosphorous fertilizers increased approximately 29% from 2004 to 2006. Increases in anhydrous ammonia price and transportation costs together with strong world demand continue to pressure phosphorous fertilizer prices. These pressures signal continued higher prices for the 2007 crop production year with the price for P 2 O 5 expected to average $0.3125 per pound. (This equates to a MAP price of around $325/ton).

Potassium (K 2 0)

Although world potash production continues to increase, demand has increased at a faster pace. Demand in growth areas such as Asia and South America have contributed heavily to price increases in farm-gate potash. Potash prices increased 51% from 2004 to 2006. Potash prices for the 2007 crop year are expected to remain at these high levels and average $0.205 per pound. (K 2 O price of $0.205 per pound equals Potash (White) at $250/ton.)

Land and Rents

Cropland values in Ohio have increased 9.9% and 9.5% the last two years. There is a mixed bag of evidence at this point suggesting on one hand land prices will increase at these high rates, and on the other hand that land markets may cool “a bit” from the rates of increase that we've seen the last 2 years. Higher commodity crop prices coupled with somewhat lower input prices (due to much lower N prices) signal continued strong increases in land values. Higher interest rates together with a stronger securities market and a cooler housing market signal a trend towards a slowdown in the rates of cropland value increases. My projection is for land values to continue to increase, but only at a 5% rate for 2007.

Cash rents in Ohio increased 4.9% in 2006 and indicators suggest similar increases for 2007. Landowners hesitant to negotiate for higher rental rates due to past poor crop years, low commodity crop prices and/or high fuel and fertilizer prices may now seek higher rates with the run-up in crop prices and lower nitrogen costs projected for 2007. Projections are for 2007 Ohio cash rental rates to increase 5% over 2006.

Seed and Crop Protection Chemicals

Seed company data indicates price for 2007 to be 2-4% higher among similarly traited seed. This is a fairly nominal amount and one not out of the ordinary. However, the “real world” increase to the farmer's seed bill may be much more than 2-4%. Whether producers choose to switch to “traited” seed or are “forced” to select “traited” seed to plant the latest genetics from a given seed company, the result is the same; much higher seed costs per acre. Farmers should carefully consider the need for these seed traits by evaluating University as well as company research. Increases in gross revenues for many Ohio row crops projected for 2007 may allow producers to easily absorb these seed cost increases, but farmers should still carefully consider the need for the traits. Increases of $20-25 per acre may not be uncommon as producers switch from a “non-traited” to a “traited” hybrid or variety.

Crop protection chemicals prices have remained fairly flat over the last 2 years and several products have seen price decreases due to the prevalence of generic products in the marketplace. Continued high prices of petroleum products (main ingredients in many crop protection chemicals) will pressure prices to move somewhat higher. Increases of 2.5% for the total basket of crop protection chemical are predicted for 2007.

Farm Labor

At first glance, farm wages may be expected to increase nominally at a 3% rate over 2006, but expected higher margins for crop producers in 2007 (and possibly beyond) may allow for (and employees may request) better compensation packages for farm employees. Livestock producers facing tighter margins may not have the same ability to offer cost-of-living (or possibly any) wage increases in 2007. Employers offering health insurance should continue to see health insurance premiums increase by 10% or more per year depending on the product and company.

“Corn after Corn” or Soybeans?

Many producers are trying to decide if planting some additional corn in 2007 will result in higher net profit. Will “corn after corn” net more than the more common rotation of “soybeans after corn”? This corn-soybean rotation has many advantages, but the recent surge in corn prices has many producers looking closely at the “corn after corn” scenario.

See last months article “Thinking of ‘Corn after Corn'? Pencil It Out First!” for a more detailed discussion on this topic.

A simple method to compare the two choices is to calculate the contribution margins of each alternative: “Corn after Corn (or 2 nd Year Corn)” and “Soybeans after Corn”. The “Contribution Margin” is simply gross receipts minus variable costs. Below is my latest comparative analysis of the two scenarios. Your numbers will vary from these, so be sure to analyze this decision based on your yield, price and cost projections.

My brief (and rough) estimates of the present “Contribution Margin's” (or what's left to pay land, machinery and labor/management) of 2nd Year Corn versus Soybeans. The following table shows gross receipts minus variable (or operating) expenses. Caution: Your relative yields and direct payments may vary considerably from those listed. Be sure to pencil your own numbers out!

Is this “advantage enough to offset probable higher fixed costs for corn? Higher labor and machinery costs for producing an acre of conventional corn versus an acre of no-till “glyphosate resistant” soybeans may require more of an advantage for corn when comparing their “contribution margins. So do we need an even higher '07 fall delivery corn price (relative to soybean prices)? Pencil it out!

See my recently updated powerpoint presentation on “Inputs Outlook” at:

http://aede.osu.edu/programs/outlook/2006-07/presentations/Inputs-OSU-06.pdf

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OSU Extension Conducting Wage and Benefit Survey
Chris Zoller, Extension Educator, ANR/CD Tuscarawas County

and Barry Ward, Leader Production Business Management, OSU Extension

Extension professionals are often asked by farmers what others are paying their employees for particular jobs. This is a difficult question to answer because we don’t have this type of information readily available, especially for Ohio. In an attempt to collect data to answer questions many employers have about this topic, OSU Extension is conducting a “Wages and Benefits for Farm Employees Survey” of farm employers across Ohio who have full or part-time employees. If you have employees (other than immediate family members) please follow the link to the survey. All survey data will remain anonymous and distributed only in a summary format. If we receive enough completed surveys we will attempt to generate regional summaries of the data.

The survey is somewhat lengthy, but you do not have to complete every column. Please go to: http://aede.osu.edu/Programs/FarmManagement/FarmWageSurvey.pdf to print and complete the survey. You may also contact your local OSU Extension office for a copy of the survey. Your participation in this project is greatly appreciated and will be of great value to farmers across Ohio.

Completed surveys should be returned to Barry Ward, Leader, Department of AEDE, 2120 Fyffe Road, Columbus, Ohio 43210-1067. Please return completed surveys no later than March 31, 2007.

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Domestic Production Activities Deduction

Donald J. Breece Ph.D., Farm Management Specialist, OSU Extension

 
George Patrick and Bruce Erickson, Purdue University Agricultural Economics, have written an outstanding article on domestic production activities and how it is on of many tax changes that will affect farm business.  In the recent Top Farmer Crop Workshop Newsletter (December, 2006), Patrick and Ericson write, "The domestic production activities deduction is intended to create incentives for greater employment . . . a farming family with qualified production activity income of $80,000 could qualify for $4800 deduction . . ."  Read the full article here:

http://ohioagmanager.osu.edu/resources/TFCW12_2006.pdf

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Agri-Business Retention and Expansion Roundtable Calendar

Jill Clark, Interim Director, Center for Farmland Policy Innovation

 
Join OSU's Center for Farmland Policy Innovation and Business Retention and Expansion Initiative for our next roundtable series addressing strategies local leaders can implement to retain and expand their local agricultural sector.

The purpose of the roundtables is to give local leaders interested in strengthening local agriculture the opportunity for small group learning from a topical expert and peer-to-peer exchanges. Local leaders in farmland protection (county commissioners, township trustees, planning and zoning officials, land trust leaders, etc.) are invited to participate in the discussion of this agricultural economic development topic.

These roundtables are free of charge. However, seating is limited
(15-20) and an RSVP is required. All roundtables are held from 4pm-6pm.
Dates, local hosts and locations for this roundtable are as follows:

Tuesday, February 6, 2007
Host - OSU Extension Medina County
120 West Washington St.
Medina, Ohio 44256

Thursday, February 8, 2007
Host - OSU Extension Muskingum County
225 Underwood St.
Zanesville, Ohio 43701

Thursday, February 15, 2007
Host - OSU Extension Allen County
3900 Campus Dr.
Lima, Ohio 45804

To RSVP or for more information, please call the Center for Farmland Policy Innovation at: 614.247.6479, e-mail cffpi@osu.edu, or visit our web site http://cffpi.osu.edu.

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Transition Planning Workshops Planned for Ohio

David Marrison, Extension Educator, Ashtabula County

OSU Extension is pleased to announce that four “Building For the Successful Transition of Your Agricultural Business” workshops will be held across the State of Ohio during January, February, and March 2007. Each of these two-day workshops is designed to help family businesses develop a transition plan for their family business. The sessions will challenge you to examine your business to the core and to actively plan for the future. These sessions will help farm families come together to develop a plan for the farm's future, discover ways to increase family communication, plan for retirement, and learn strategies for transferring management skills and the farm's assets from one generation to the next. These workshops are made possible by a grant received from the North Central Risk Management Education Center .

The program dates and locations are:

January 23 & 24 (Carroll County)  

Carrollton Days-Inn         

1111 Canton Road         

Carrollton , Ohio 44615       

January 25 & February 7 (Henry County)

Northwest State Community College

22600 State Route 34

Archbold , Ohio 43502

February 26 & 27 ( Pickaway County )   

Deer Creek Resort         

22300 State Park Road 20   

Mt Sterling , Ohio 43143       

February 27 & March 6 ( Marion County)

All Occasion Catering

989 Waldo Delaware Road

Waldo , Ohio 43356

All sessions will be held from 9:00 a.m. to 4:30 pm. A special evening program is being developed for the sessions in Carroll and Pickaway Counties . The registration fee for attending the two-day workshop will be $75 for the first member of a family and $50 for each additional family member attending. Registration includes workshop notebook, refreshments and lunch for both sessions.

Registration brochures can be obtained by calling the Extension Center at Lima at 419-422-6106 or by accessing the registration flyer at:

http://ohioagmanager.osu.edu/resources/RME Grant Flier 2.pdf

For specific details about the workshops, contact the Ashtabula County Extension office at 440-576-9008.

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Readers can subscribe electronically to this newsletter by sending an e-mail message to: ohioagmanager-on@ag.osu.edu. A successful subscription message will receive by an automatic reply from the listserv. Contact your local Ohio State University Extension Office or e-mail dmarrison@ag.osu.edu if you have problems subscribing.

Ohio Ag Manager Team Leaders: Chris Bruynis & David Marrison

Web Page Managers: David Marrison & Andy Kleinschmidt

Information presented above and where trade names are used, they are supplied with the understanding that no discrimination is intended and no endorsement by Ohio State University Extension is implied.

All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.

Issued in furtherance of Cooperative Extension work, Acts of May 8 and June 30, 1914, in cooperation with the U.S. Department of Agriculture, Keith L. Smith, Director, Ohio State University Extension.

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TDD # 1 (800) 589-8292 (Ohio only) or (614) 292-1868