Economic Considerations Chad Hart Assistant Professor of Economics

Economic Considerations Chad Hart Assistant Professor of Economics Extension Economist (515) 294 -9911 chart@iastate. edu

Should I Harvest the Crop? • Minimum revenue needed Variable costs for combining (fuel & repairs, or custom charge) Expected price - Extra P and K fertilizer if harvested (. 375 lb. P@$. 65, . 30 lb. K @$. 60) - Hauling ($. 15), drying ($. 20) = Net price $7. 85 - 0. 42 - 0. 35 = Breakeven yield = $15. 00 / $7. 08 = $15. 00/ac $7. 85 / bu $0. 42 / bu $0. 35 / bu $7. 08 / bu 2. 12 bu/ac

Pricing Drought-damaged Corn Silage: Short Method Standing silage (buyer harvests) – Normal silage: 1 ton = 7 x price of corn • Corn price = $7, 1 ton of silage is worth $49 – Drought-stressed silage: similar value • Less grain but more sugar in stalks – Silage with little or no grain content: 5 x price of corn • Corn price = $7, 1 ton of silage is worth $35 • Or 40% of grass hay price (adjusted for moisture level) • Harvested silage: add $5 -10 per ton – Depends on distance hauled, tonnage per acre

Pricing Corn Silage: Long Method Cost to seller • Lost income from grain sales • Lost income from stover sales or use • Added fertilizer expense for next year • Minus harvesting costs not incurred Value to buyer • Tied to price of corn and grass hay • Lower % grain decreases feed value Buyer and seller can negotiate within this range. See Ag Decision Maker decision file A 1 -65 www. extension. iastate. edu/agdm

USDA Emergency Programs

Recent Changes • USDA made some major adjustments Monday. • Opening up more CRP and WRP land for haying and grazing • Allowing changes in EQIP contracts to allow some additional grazing and watering for livestock

Haying or Grazing CRP Land • CRP acres could be hayed or grazed starting August 1. • Managed haying/grazing – One year out of three, for 90 days – Payment reduced 25% • Emergency haying/grazing – Payment reduced 10% • Must apply to FSA

Causes of Loss for Iowa Corn, 1948 -2010

Causes of Loss for Iowa Soy, 1955 -2010

Crop Insurance Coverage 2012 • About 90% of Iowa corn and soybean acres are covered by federal crop insurance • 90% of insured acres have Revenue Protection (RP), 7% have Yield Protection (YP) • YP coverage at Feb. futures price on harvest contracts (Dec. for corn, Nov. for soybean) – Corn $5. 68 / bushel – Soybeans $12. 55 / bushel • RP coverage at Oct. futures price (if higher than Feb. price)

Crop Insurance Coverage 2012 • Coverage levels: 13% of acres @ 70% 32% of acres @ 75% 34% of acres @ 80% 15% of acres @ 85% • Proven yields could be increased for yield trend in 2012 (Trend-Adjusted Yield Option) – Corn by 10 to 13 bu/acre

Example • • RP policy @ 80%, 160 bu/ac proven yield October average futures price = $7. 85 Coverage = 80% x 160 x $7. 85 = $1, 004. 80 Indemnity payment will be: – Yield > 128 bu/ac: none – Yield = 100 bu/ac: 28 bu. x $7. 85 = $219. 80 – Yield = 50 bu/ac: 78 bu. x $7. 85 = $612. 30 – Yield = 0 bu/ac: 128 bu. x $7. 85 = $1, 004. 80

Remember • Production is averaged over all acres in the insured unit • Prices could go down by October • Some acres are not insured (10%) • Some acres have low proven yields • Must continue to care for crop

Reporting Losses • Contact your crop insurance agent before you harvest or destroy the crop • Adjuster will evaluate the crop • Possibilities: – Declare total loss. Do what you want. – Partial loss. Leave it until fall and harvest. – Partial loss. Chop it and leave check rows.

Reporting Losses • File a claim within 72 hours after loss is discovered, or within 15 days after crop is harvested. • Must continue to care for crop. • If harvested, document production in usual way. • Add-on policies usually do not cover drought.

Preharvest Pricing • Futures contracts: can lift hedges if production is insufficient • Options: keep upside price potential open • Forward contracts: obligated to fulfill the contract. May have to buy extra bushels. • Crop insurance can help.

Forward Contract with Short Crop and Insurance: Example • 100 acres of corn insured at 80% of 160 bu/ac proven yield (12, 800 bushels covered) • 12, 800 bu/ac forward contracted @ $6. 50 • Guaranteed revenue is $83, 200 • Crop yields are below expectations • Local price is $8. 00 at harvest

Forward Contract with Short Crop and Insurance: Example Average yield Bushels of shortfall Forward contract revenue @ $6. 50 - Purchase of short bushels @ $8. 00 + Crop insurance payment @ $7. 85 = Total revenue 128 bu/ac None $83, 200 -$0 100 bu/ac 50 bu/ac 2, 800 $83, 200 7, 800 $83, 200 -$22, 400 -$62, 400 $0 $21, 980 $61, 230 $83, 200 $82, 780 $82, 030

Forward Contract Considerations • Crop insurance will help offset cost of buying out a contract. • But don’t contract more than you have insured (% guarantee x proven yield). • Insurance price will differ from cash price by value of the grain basis in October. • Delivery month may be later than October, buy back price could change.

Other Considerations • Rethink marketing plans • Revise cash flow budgets for 2012 and 2013 • Talk to your merchandiser & lender (no surprises) • Assess your liquidity • Get an income tax estimate • Postpone equipment purchases

Thank you for your time.