2013 Journal of the ASFMRA

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2013 Letter from the Editor/Editorial Committee [June 11, 2013]

Approximately twenty papers were submitted to the ASFMRA Editorial Committee for consideration of publication in our 2013 Journal. This collection of papers provided our Committee with a wide assortment of topics to review and evaluate for your reading pleasure. Read the entire letter.

Construction and Operating Costs for Whitetail Deer Farms

By Eric A. DeVuyst

Commercial whitetail deer farming is a growing industry in the U.S. The size of operations ranges from a few head to hundreds. Management ranges from small, part-time farmers to professionally-managed operations. There is, however, a lack of published information documenting investment costs, operating costs, cash flow, and profitability of whitetail deer enterprises. This article provides that information. Based on interviews with the Board of Directors for Whitetails of Oklahoma, small and mid-sized farms are modeled, providing construction and operating costs for both. Projected cash flow budgets and net present values under various sale price assumptions are also reported. The likelihood of profitability is directly tied to the sale price of bucks. At prices less than $2,750 for a smaller-sized farms and $3,000 for mid-sized farms, profitability is highly unlikely. (Vol. 76, No. 1, Pp 1-18)

Financing Herd Rebuilding After the 2011 Drought

By Damona Doye, Roger Sahs, Derrell Peel, Eric A. DeVuyst

The drought of 2011 forced many cow-calf producers in the U.S. Southern Plains to liquidate cow herds. Rebuilding cow herds poses financial challenges for many, perhaps most, producers. While liquidation strategies varied between individuals, producers who completely liquidated breeding herds will likely face significant cash flow challenges to rebuilding. Here, we develop and analyze three rebuilding strategies, including slow-rebuilding using summer stockers, fast-rebuilding by purchasing bred cows or cow-calf pairs, and cow leasing with heifer retention. Our analyses indicate that rebuilding appears to be financially feasible for producers with healthy pre-drought financial positions. (Vol 76, No. 1, Pp 19-38)

The Perfect Storm: A Case Study Illustrating How a Series of Events Led One Farm Operator to Develop a Risk Management Plan that Includes a Lender’s Perspective

By Freddie L. Barnard, Elizabeth A. Yeager

Large capital requirements needed for many agricultural businesses to operate result in many relying on borrowed funds. Fixed repayment commitments combined with a leveraged financial condition and volatile commodity prices result in increased emphasis on managing risks. Deterioration in the financial condition of an agricultural business is used to illustrate development of a risk management plan by a farm manager and his lender. The case study approach is used to initiate discussion, generate ideas from readers, and provide an example that can be used by those who teach farm management, risk management, and/or financial management.
(Vol. 76, No. 1, Pp 39-53)

Impact of Rainfall, Sales Method, and Time on Land Prices

By Steve Stephens, Bryan Schurle

Land prices in Western Kansas are analyzed using regression to estimate the influence of rainfall, sales method, and time of sale. The estimates from regression indicate that land prices decreased about $27 for each range that was farther west which can be converted to about $75 per inch of average rainfall. In addition, the influence of method of sale (private sale or auction) is estimated along with the impact of time of sale. Auction sales prices are approximately $100 higher per acre than private sales, and prices have been increasing by about $10 per month. Regression is shown to be a very useful tool to support adjustments in appraisals for several different factors that influence land prices. (Vol. 76, No. 1, Pp 1-7)

Land Prices During Periods of Rapid Change

By Bryan Schurle, Allen M. Featherstone, Christine A. Wilson, Dylan Crosson

Accurate information on land values is a consequential concern when prices are changing rapidly. This study compares USDA data and sales data from 1971-2011. While the land prices from these series move in similar patterns, there are periods of substantial differences. These periods show a pattern where differences are larger when prices are changing rapidly, and where USDA prices lag sales data prices. The spread in prices in sales data is also examined. While the standard deviation of prices in a year is higher when prices are higher, the coefficient of variation, which measures relative variability, is very stable.  (Vol. 76, No 1, Pp 61-73)

Repayment Capacity Sensitivity Analysis Using Purdue Farm Financial Analysis Spreadsheet

By Freddie L. Barnard, Elizabeth A. Yeager, Alan Miller

Many agricultural producers purchased capital items the past few years and some used borrowed funds to finance the purchase. The principal payments on those term loans are paid from net farm income. This paper discusses the sensitivity of farm loan repayment capacity to changes in the gross revenue and operating expenses that determine net farm income. Sensitivity analysis is conducted using the Purdue Farm Financial Analysis Spreadsheet. The sensitivity analysis and application of the updated program are illustrated using a case study. (Vol. 76. No 1, Pp 88-99)

New Features Added to the Purdue Farm Financial Analysis Spreadsheet

By Freddie L. Barnard, Elizabeth A. Yeager, Alan Miller

The Purdue Farm Financial Analysis Spreadsheet originally introduced in 1998 has been updated to include the additional financial measures recommended by the Farm Financial Standards Council; EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), working capital to gross revenue ratio, capital debt repayment capacity and replacement margin, and the replacement margin coverage ratio. Also, an additional worksheet was added that calculates break-even at the farm level using the traditional fixed and variable classification of costs, as well as a second breakeven amount that includes principal payments on term loans, loss carryover amounts and replacement amounts for capital, such as machinery and equipment. (Vol. 76. No. 1, Pp 74-87)

Factors Influencing Beef Reproductive Technology Adoption

By Lisa M. Elliott, Joe L. Parcell, David J. Patterson, Michael F. Smith, Scott E. Poock

Adopting technologies such as artificial insemination, and the associated improvements in beef herd genetics better position livestock producers to meet anticipated demand increases for high-quality beef. If we examine the factors that influence technology adoption, then we will be better able to envision the producer operations of the future. This research examines Missouri cow-calf producer survey data to determine the impact that producer, operation, and management characteristics; production risk; and location have on the adoption of reproductive technologies regionally. Binary choice models are estimated to assess adoption of artificial insemination and estrus synchronization (AIES). (Vol. 76, No. 1, Pp 100-119)

Farmland versus Alternative Investments Before and After the 2008 Financial Crisis

By Todd H. Kuethe, Nicholas Walsh, Jennifer Ifft

The years following the 2008 financial crisis have been marked by general economic malaise, yet the period has been relatively prosperous for the agricultural sector. As a result, many investors have recognized the potential for farmland as an investment alternative. This study compares farmland’s risk and return to those of competing investment alternatives. Farmland is shown to be an attractive investment alternative with relatively high mean returns, low variability, low correlation with financial markets, and strength relative to other investments following the 2008 financial crisis. (Vol. 76, No. 1, Pp 120-131)

Kansas Farmers Interest and Preferences for Growing Cellulosic Bioenergy Crops

By Jason E. Fewell, Melissa K. Lynes, Jeffery R. Williams, Jason S. Bergtold

A survey was administered to determine Kansas farmers’ willingness to grow crops for biofuel. The primary purpose of the survey was to assess farmers’ willingness to produce biomass for cellulosic bioenergy in the forms of a value added crop, an annual energy crop, and a perennial energy crop under a favorable contractual arrangement, as well as to determine reasons they would or would not grow a bioenergy crop under a contract. Results show that net returns and contract length were the most important characteristics influencing farmers’ willingness to produce cellulosic bioenergy crops. (Vol. 76, No. 1, Pp 132-153)

Sharing Financial Risk through Flexible Farm Lease Agreements

By William M. Edwards and Chad E. Hart

A simulation model representing a north central U.S. corn and soybean farm was used to estimate the degree of financial risk borne by the tenant and the landlord under 10 different types of flexible cash leases. Probability distributions for yields, prices, and production costs were incorporated. Measures of risk included standard deviation of profits, probability of loss, and 10th percentile value at risk. A profit sharing lease that included rent adjustments for all three variables shifted the most risk from the tenant to the landowner, and reduced the tenant’s probability of incurring an economic loss from 51 percent to 37 percent. (Vol. 76, No. 1, Pp 154-166)

Forage Options and Drought Risk: A South Dakota Case Study

By Md Rezwanul Parvez, Scott Fausti, Thandi Nleya, Patricia Johnson, Kenneth Olsen, John Rickertsen

In the Northern Great Plains region, crop and livestock producers view forage crop production as an important component of their farm management system. During periods of increased drought risk, alternative annual forage crops may provide producers with a risk reducing alternative to traditional forage crops.  An alternative forage crop production study (20 varieties) was conducted by South Dakota State University over a three year period (2008-2010). Three management decision criteria options were used to evaluate the economic value and economic risk associated with the production of spring and summer annual forage crops (Expected Value, Max-Min, and Minimum Coefficient of Variation).  Empirical findings suggest that producer risk management goals and how the alternative forage crop will be used (grazing versus cash crop) should play a role in crop variety selection. We recommend planting both spring and summer varieties to provide diversification during periods of increased drought risk. (Vol. 76, No 1, Pp 167-184)

Economics of Precision Agricultural Technologies Across the Great Plains

By Craig M. Smith, Kevin C. Dhuyvetter, Terry L. Kastens, Dietrich L. Kastens, Logan M. Smith

Precision agricultural technologies, such as guidance systems and automatic section controllers, have given farmers the ability to more effectively apply crop inputs such as fertilizer, pesticides, and seed. More efficient use of inputs often can be translated into higher yields and/or lower costs, but the costs and benefits likely vary across regions. Our research incorporates over 500 real-world cropland fields from farms in Colorado, Kansas, and Nebraska to help answer the research question: What are the economics of investing in guidance systems and automatic section controllers for sprayers, and how do these vary across different regions of the Great Plains? (Vol. 76, No. 1, Pp 185-206)

Simulating Returns to Alternative Crop Mixes in Northeastern Louisiana

By Michael Deliberto, Micahel Salassi, Kurt Guidry

Rising production costs and volatility in commodity prices have forced agricultural producers to diversify their farm acreage as a means of increasing farm profitability. A financial farm-level simulation model is constructed to examine net returns over total variable production costs per rotational acre for a representative corn, cotton, and soybean farming operation located in the Mississippi River delta region of Louisiana. Results indicate that a predominant corn followed by a corn-soybean crop mix generates the highest net returns above variable costs to the producer when harvest month futures prices are considered with respect to simulated input parameters and expected yields. (Vol. 76, No 1, Pp 207-224)

Measuring Economies of Size with Expense Ratios

By Michael Langemeier

This paper examines the relationship between three expense ratios: total expense ratio; adjusted total expense ratio; and economic total expense ratio; and discusses economies of size for a sample of Kansas farms. The total expense ratio and the adjusted total expense ratios, though commonly used to examine financial efficiency, are not as good of indicators of economies of size as the economic total expense ratio which includes opportunity costs on unpaid operator and family labor, and farm equity. Using the economic total expense ratio, cost per dollar of value of farm production for farms with an average value of farm production greater than $1,000,000 was 52 percent and 29 percent lower than it was for farms with an average value of farm production less than $100,000, and for farms with an average value of farm production between $100,000 to $250,000, respectively. Results confirm previous literature that indicated long-run cost curves for production agriculture are L-shaped. (Vol. 76, No. 1, Pp 225-238)

The Connection Between Cash Rents and Land Values

By Gregory Ibendahl, Terry Griffin

The last few years have seen big increases in land values. Cash rents have also increased but perhaps at a slower rate than land values. This paper examines the ratio of land values to cash rents to determine how cash rents have changed in relation to land value changes. This ratio is important because it helps indicate whether cash rents are a cost effective way of controlling farmland relative to purchasing the land. Results indicate cash rents lag behind changes in land prices when land prices are increasing but not when land prices are decreasing. However, this relationship does not always hold. (Vol. 76, No. 1, Pp 239-247)

Alternative Retention and Marketing Strategies for Cull Beef Cows

By Kellie Curry Raper, Zakou Amadou, Jon Biermacher, Billy Cook, Devlon Ford, and Clement E. Ward

Cull cows are a revenue source that gets relatively little attention for cow-calf producers with respect to marketing strategy. This three-year study compares alternative marketing strategies with the traditional practice of marketing spring-calving cull cows in the fall immediately after weaning. Cull cows were randomly assigned to either a pasture or low-cost dry-lot feeding program. Results favor the lower cost, pasture-based feeding program with spring marketing over fall marketing. Low-cost maintenance coupled with seasonal increases in slaughter cow prices beyond culling combined to increase net returns for retaining and feeding cows on native pasture for about a three-month period. (Vol. 76, No. 1, Pp 248-267)

The Impact of Revenues and Costs on the Relative Returns of Illinois Grain Farms

By Nicholas Paulson

Factors and characteristics associated with farm profitability are of considerable interest to farm operators, farm managers, and researchers. This paper uses farm financial records from the Illinois Farm Business Management Association from 1995 to 2011 to classify grain farms into performance groups based on management returns. Performance groups are defined both on an annual basis and over two different five-year periods. The relative contributions of revenues and various cost categories to the differences in returns earned by the performance groups are quantified. Results show that farms in the high performance group tend to have both higher revenues and lower costs across all categories. Significant portions of the differences in revenues are attributed to variation in revenues and power, labor, and land costs. Power and labor costs are particularly important in determining performance, both in individual years and over time. This analysis provides an update to the literature on factors affecting farm profitability, and allows for comparison of the relative importance of these factors over 17 years with extended periods of both high and low farm incomes and returns. (Vol. 76, No. 1, Pp 268-281)

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