Approximately twenty papers were submitted to the ASFMRA Editorial Committee for consideration of publication in our 2014 Journal. This collection of papers provided our Committee with a wide assortment of topics to review and evaluate for your reading pleasure.
By Norman L. Dalsted & Eric A. Peterson
When the 2001 Economic Growth and Tax Relief Reconciliation Act expired in 2010, Congress extended the law through the end of the year 2012 and increased the estate tax exemption. The American Taxpayer Relief Act of 2013 raised the exemption and made it permanent. However, without careful planning for large estates, taxation could still jeopardize the continuity and financial well-being of many family businesses, and threaten the financial well-being of many Americans.
This article outlines key elements necessary to ensure an estate planning process is successful.
By Archie Flanders, Bobby Coats, and Carter Dunn
Arkansas cotton acreage has followed declining trends in U.S. acreage during the latter years of the previous decade. In Arkansas, the primary crops competing for cotton acreage are corn, soybeans, and rice. Farm managers and land owners are interested in optimizing long-term financial returns while capitalizing on short-term opportunities in acreage allocations. Long-term acreage allocations are mostly due to soil characteristics and crop rotation considerations that determine suitability for crops. Short-term acreage allocations are responses to economic considerations related to commodity prices and production costs. Results indicate consistent long-term acreage responses with a shift in response magnitude between cotton and rotation crops. The shift in magnitude is attributable to relative relationships among commodity prices that were less favorable to cotton for the period beginning in 2007.
By Christopher N. Boyer, Andrew P. Griffith, Roland K. Roberts, Hubert J. Savoy, and Brian G. Leib
Accumulation of nitrates in hay can be toxic to cattle, and managing nitrate levels in hay production could be costly. We determine the price premium a hay producer needs to receive for cattle-safe, low-nitrate hay to continued managing nitrate levels. Profit-maximizing nitrogen rates were determined for two bermudagrass hay producers—one who manages nitrate levels and one who does not manage nitrate levels. The hay producer who manages nitrates applies 56 lb./acre less nitrogen than the producer who does not manages nitrates, and would need to receive a price premium of $9.12/ton for low-nitrate hay to breakeven.
By Elizabeth A. Yeager & Freddie L. Barnard
Volatile net farm incomes and potential for higher interest rates has strengthened the importance of managing liquidity. This paper evaluates the effectiveness of increasing liquidity levels as a means of reducing repayment risk for agricultural firms. Using a base case farming operation and three interest rate scenarios, eight potential changes in the operating situation, and two leverage levels, it was found increasing the level of liquidity was an effective means of reducing repayment risk. The management practice was found to be more effective for offsetting the adverse effects of increasing interest rates and operating expenses than for decreasing gross farm revenue and increasing leverage levels.
By Freddie L. Barnard & Elizabeth A. Yeager
Real returns to farm operators have been at the highest level since 1973. However, indications from the USDA and Federal Open Market Committee are that returns are not projected to remain at those levels and interest rates will rise in the next decade. This paper evaluates the potential impact on repayment risk of three interest rates, three levels of leverage, and eight deviations from a base situation. Results indicate as the level of leverage and interest rate increased, the business became more susceptible to repayment risk, but even at moderate interest rates, increasing levels of leverage should be viewed with caution.
By J. Ross Pruitt, Joshua D. Detre, and Paul M. Darby
This case study uses current dynamics in the U.S. beef cattle industry to illustrate the use of financial analysis tools such as net present value in making investment decisions. Two problems face the livestock producer in this case study: 1) should the producer purchase replacement females or keep existing unbred females; and 2) should the producer expand his operation in terms of both land and cows. Students are asked to estimate a net present value (NPV) for both investment decisions. These NPVs should account for risk as prices in the beef cattle sector are anything but certain.
By Samuel M. Funk & Jason S. Bergtold
This paper analyzes the cost efficiency impacts of adopting biotechnology-enhanced soybean varieties for a set of Kansas farms from 1993 to 2011 using cost indices estimated from linear programming techniques. The cost efficiency indices are then coupled with survey data about the adoption of biotechnology-enhanced soybean varieties to provide a comparative analysis over time and across different quartiles of the sample. Results indicate that cost efficiency is not likely to decline on average with the adoption of these soybean varieties, but may increase for more efficient farms through a number of different benefits associated with adoption.
By S. Aaron Smith, Michael P. Popp, Dirk Philipp, Kenneth P. Coffey, Edward E. Gbur, and T. Greg Montgomery
Results from a three-year study at University of Arkansas’ Southeast Research and Extension Center in Monticello, Arkansas were used to examine partial returns (PR) from stocker cattle grazing bermudagrass pastures overseeded with ryegrass and crimson clover, white clover, or crimson and white clover in two grazing seasons. The study revealed that at current fertilizer and seed prices, the control pasture, overseeded with ryegrass and fertilized with commercial nitrogen, provided higher PR than pastures overseeded with clovers and ryegrass. Furthermore, the study revealed current nitrogen fertilizer prices would have to more than double for producers to achieve greater PR with clovers.
By Daniel Keeton, Michael Popp, and S. Aaron Smith
This research models net return and greenhouse gas emissions (GHG) implications of bull genetics on cow-calf operations using conditions reflective of Arkansas farms. Operation-specific details for a representative farm are described and impacts of bull selection on net returns for the entire operation as well as on a per cow basis are calculated. Further, the analysis highlights situations where bull selection could be both profitable and used to mitigate GHG emissions. Results suggest that profitability changes as a result of bull selection were larger than the associated change in GHG emissions. Modeled results indicated that genetic selections that increase birthing difficulty are economically detrimental and increase GHG emissions per pound of beef sold. Finally, changes in breed driven hide color price premiums are relatively consistent over time.
By Pilja P. Vitale, Francis M. Epplin, Kristopher L. Giles, Norman C. Elliott, Paul A. Burgener, and Sean P. Keenan
Historically, the vast majority of cropland in the western Great Plains was either seeded to continuous monoculture wheat or was in a wheat-fallow rotation. The objective of this paper is to determine the combined effects of crop diversity and tillage systems on wheat grain yield and net returns for farms in the traditional wheat region of the western Great Plains. Farm level data were obtained for four crop production seasons. Crop diversity was relatively more important to system economics than the type of tillage used. Net returns per acre were greater on farms that included a diversified cropping system.
By Kenneth H. Burdine & Greg Halich
Monte-Carlo simulation was used to examine net payouts, defined as indemnities received minus premiums paid, to producers purchasing Livestock Risk Protection (LRP) Insurance for Feeder Cattle. Actual policies were utilized that included various purchase dates, coverage levels, and premiums from fall 2007 to spring 2013. Net payouts were estimated for time periods typical of both summer grazing and winter backgrounding at various expected price risk levels. Results suggest that expected net payouts generally became positive when producers perceived a 10 percent chance of a $15 per cwt price decrease. Results also suggested expected net payouts were higher for insurance purchased in the fall than in the spring.
By Florence A. Becot, David S. Conner, Jane M. Kolodinsky, V. Ernesto Méndez
Farmers must earn revenues that both cover costs and provide adequate returns. The goal of this research was to understand how diversified farmers measure their cost of production and determine prices. We conducted in-depth interviews of diversified Vermont farmers and used the constant comparative method to analyze the data. Farmers and their operations, the process of measuring the cost of production and pricing, farmers’ decision-making process, and tradeoffs in the face of uncertainty are described and analyzed. This study’s findings contribute to current discussions of farmer decision making by developing practical implications for important, but difficult tasks.
By Bill Wilson, Bryan Schurle, Mykel Taylor, Allen Featherstone, and Gregg Ibendahl
Appraisers use puritan sales to estimate the ratio of prices for different types of land. However, puritan sales may be hard to find in areas where parcels contain upland, bottomland, meadow, pasture, irrigation, recreational land, and CRP. This paper uses regression to identify the value of different land types from sales that have a mixture of types.
A second issue is adjusting values for time. Regression can be used to calculate a time adjustment. However, there are major modeling decisions that need to be made to make sure that the model fits the price adjustments occurring in the market.
By Michael R. Langemeier & Gregg Ibendahl
This paper examined crop machinery investment and cost benchmarks for a sample of Kansas farms. Crop machinery benchmarks varied widely among the farms. On average, crop machinery investment and cost were $227 and $82, respectively. Crop machinery investment and cost were significantly correlated with the interest and depreciation expense ratios, the asset turnover ratio, percent acres owned, and net machinery purchases. Crop machinery cost was also significantly correlated with crop intensity (harvested acres/crop acres). As with most machinery issues, a balance between controlling crop machinery investment and cost, and timeliness needs to be reached. This paper points out the importance of controlling investment and cost rather than investment and the cost.
By Lawrence L. Falconer, Timothy W. Walker, and James W. Richardson
Producers are beginning to be provided the opportunity to participate in incentive programs to reduce application rates of fertilizer. This paper demonstrates three methods of arriving at a recommendation on program participation. Two methods employ commonly used production functions and economic optimization techniques. The economic evaluation of this decision is relatively difficult using these traditional methods. The third technique employs Monte Carlo simulation to include risk analysis in the program participation decision utilizing commonly available software. This method allows a greater level of information to be presented in a more straightforward manner to decision makers.
By Michael R. Langemeier, Elizabeth A. Yeager, and Dan O’Brien
This paper examined the relationship between cost efficiency and feed grain production in Kansas. Using data from 2002 to 2011, corn production was significant and positively related to cost efficiency in eastern and western Kansas; while grain sorghum production was significant and positively related to cost efficiency in central Kansas.
By Gregg Ibendahl & Michael R. Langemeier
Agriculture has seen several periods of both high and low farmer profitability. This has resulted in at least some farmers leaving agriculture because of financial difficulty. Other farmers, however, have managed to survive the bust periods of agriculture and are still farming today. This paper uses a 40-year dataset of farm financial data from the Kansas Farm Management Association (KFMA) to compare those farms that have been in the program the entire 40-year timeframe to the remaining farms in the dataset to determine if those long-term farms have any different financial characteristics that have helped them survive long-term. Results indicate that the long-term farms have put more of their profits back into the farm resulting in higher levels of equity and lower levels of debt.
By Nick Paulson & Gary Schnitkey
Both farmland values and rental rates have seen significant increases over the past few crop years. The increase in land values, in particular, has members of the agricultural and outside investment communities concerned over the potential for a significant decline in land values and the resulting impacts on the profitability and viability of farm operations. This uses data on land values, rental rates, crop revenues, and interest rates in Illinois from various sources to analyze historical relationships among these factors. The data suggest that current land values are supported by both commodity and interest rate market fundamentals. However, uncertainty over future commodity prices and interest rates results in a wide range for potential land values in both the short- and long-terms. Farm operators, landowners, professional farm managers, and investors need to be aware of and carefully consider these factors in valuation farmland and setting appropriate rental rates and contract designs.
By Archie Flanders
Commodity programs for agriculture are intended to provide farm income stability and maintain desirable efficiencies that derive from market based outcomes. A measure of economic efficiency is producer response to market signals. This research measures acreage response of Arkansas field crops that are associated with changes in the U.S. stocks-to-use ratio. Results of this analysis indicate that stocks-to-use is a significant determinant of acreage decisions in Arkansas. The results of the current research indicate that agricultural policies historically establishing price floors have not undermined market response to supply and demand conditions.
By G.D. Swanepoel, J.C Hadrich, and C.G. Goemans
Hedonic price analysis is applied to farmland sales in Phillips County, CO to examine trends in farmland values across
different land types from 1999-2012. Results demonstrate that irrigated acres resulted in the highest farmland value while well depth decreased this value. The marginal value of an acre foot of water on irrigated farmland ranged from $3-$36 depending on well depth and the discount rate used. This highlights the potential long-term negative impacts that lowering groundwater tables have on
agricultural enterprises that rely on wells for irrigation.
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