Farm/Ranch Management Decisions Under Drought

Transcription

1 Farm/Ranch Management Decisions Under Drought Frayne Olson, PhD Crop Economist/Marketing Specialist (o) (c) NDSU Extension Service ND Agricultural Experiment Station Dept. of Agribusiness & Applied Economics STUDENT FOCUSED LAND GRANT RESEARCH UNIVERSITY

2 The following slides provide a brief overview of crop insurance, income tax and crop contract considerations under drought. Please consult the appropriate specialist regarding the specific rules and regulations before finalizing decisions.

3 Crop Insurance: Haying or Grazing of Failed Acres

4 Crop Insurance: Haying and Grazing of Failed Crops Contact your crop insurance agent and have an adjuster assigned. If you and the adjuster can agree on a yield estimate and a Release Form has been signed, you have the freedom to manage the crop as you choose.

5 Crop Insurance: Haying and Grazing of Failed Crops If a Release Form has been signed: Haying and grazing is allowed. Can harvest remaining crop or abandon. Can plant cover crop. Cover crop is not insurable, but there are exceptions. Uninsurable cover crops can be hayed or grazed at any time. Be careful about cover crop mixes, there may be rotation restrictions for 2018 plantings.

6 Crop Insurance: Haying and Grazing of Failed Crops If you and the adjuster cannot agree on a yield estimate: Wait and harvest the crop. Agree to wait and make yield estimate later. Agree to leave check strips and release remaining acres.

7 Crop Insurance: Haying and Grazing of Failed Crops Agree to leave check strips: Adjuster will determine how many check strips are needed, as well as the size and location. Farmer must maintain the check strips. Control weeds, diseases, insects, etc. Released acres can be hayed or grazed. Check strips will be adjusted or harvested to determine yield on all acres in unit. Yield estimate will be used for future APH calculations.

8 Crop Insurance: Haying and Grazing of Failed Crops Farmer ignores adjuster, does not leave check strips and hays or grazes damaged crop: Bad idea! Can hay or graze failed acres. Must pay insurance premium, but does not receive indemnity payment. Yield Guarantee is used for future APH calculations.

9 Crop Insured Price Discovery Commodity Exchange Price Provision Exchange Used Commodity Used Contract Month Projected Price Avg Daily Close Barley CBOT Corn September February 2 July 2 Harvest Price 1 Avg Daily Close Canola ICE Canola November February 3 September 3 Corn CBOT Corn December February October Soybeans CBOT Soybeans November February October Sunflower CBOT Soy Oil December February 4 October 4 Spring Wheat Durum 5 MGE HRSW September February August 1) Harvest price has upper limit of two times projected price 2) Multiplied by factor determined by RMA 3) Quotes in Canadian dollars per metric ton are converted to U.S. dollars per pound 4) Divide each settlement price by two and add one cent 5) Same as spring wheat but multiplied by a factor determined by RMA

10 Sep. MGEX Spring Wheat Futures DTN Prophet X pm

11 Federal Income Taxes: Weather Related Sales of Livestock

12 Federal Income Taxes: Livestock Sales in Drought Year 2016 Farmers Tax Guide IRS Pub. 225 Postponement vs. Forgiveness Postponing income is the objective of these regulations. Income from any livestock sold abnormally early may be postponed for tax purposes until the next (normal marketing) year. Example: Normally, you background feeder calves and sell in February. Due to drought and lack of feed, calves are sold in October. Income from the October sales can be postponed.

13 Federal Income Taxes: Livestock Sales in Drought Year Income can be postponed if: Principal business is farming or ranching (IRS def; 2/3 of gross income generated from farming). Cash method of accounting. Prove sale occurred because of drought. An area (not necessarily your county) must have been designated for federal assistance. Specific information must be attached to tax return in year of sale. Check with tax professional for details.

14 Federal Income Taxes: Livestock Sales in Drought Year Breeding, dairy, and draft livestock sales due to drought (or other perils) may be treated as Involuntary Conversion. Gain does not have to be reported if the same number and kind are repurchased by the end of the 4th full year after the drought sale. Example: Normally you cull 15 cows, but in drought year 25 cows are sold. Only the additional 10 cows are eligible and must be replaced.

15 Federal Income Taxes: Livestock Sales in Drought Year If 4 years elapse without repurchase, a 1 year extension may be filed, but is not guaranteed. If not practical to replace same type of livestock, tangible replacement property (not real estate) may be purchased. Check with your tax accountant, because other IRS provisions are complex.

16 Crop Marketing: Forward Sales Are Greater Than Production

17 Factors Impacting Alternatives Is shortfall widespread in local market or unique to you? Will impact whether there is a basis adjustment (size of adjustment) and fees charged. Is shortfall realized early in the growing season or near harvest? May impact whether there is a basis adjustment and fees charged. Have crop prices changed significantly? Increase Decrease

18 Futures or Options Based Contracts You are working directly with a broker. No requirement to deliver grain. Hold existing position(s) and recognize a hedge strategy has become a speculative strategy. Offset existing position(s) and recognize gain or loss when you choose.

19 Production Based Contracts Example: Pulse crops, sunflower, malt barley, canola, etc. Does the contract include an Act-of- God clause? If so, still need to deliver harvestable yield. May impact ability to hay or graze. If not, then the same alternatives as forward cash contract (ex. wheat, corn or soybean) will apply.

20 Delivery Based Contracts Working with elevator or processor. Grain delivery is expected. Elevator/Processor does not want to be your broker! Timing: Notify buyer as soon potential shortfall is recognized. Size and timing of shortfall may impact the alternatives available to deal with situation. You are expected to deliver production that is available.

21 Cash Forward Contract A. Deliver stored grain to fulfill shortfall. B. Buyer uses spot market cash price to cancel contract. Seller pays/receives difference between contracted price and spot price. C. Buyer uses change in futures market price to cancel contract. Seller pays/receives difference (basis in contract is used to determine price). Cancellation fees are normally charged.

22 Cash Forward Contract D. Contract is rolled forward into next cropping season. Price difference between current and forward price is incorporated into new contract. E. Next years contract price is forward futures price less contract basis. Basis may also be adjusted if significant difference between original contract basis and forward basis exist. Service fees may be deducted from new contract price (cover margin calls).

23 Futures Fixed/Hedge-to-Arrive A. Deliver stored grain to fulfill contract. B. Cancellation: Buyer offsets futures market position. Seller is charged/paid for any price difference, plus fees. C. Roll Forward: Contract is rolled into next cropping season. Price difference between current and forward futures price is applied to new contract, plus fees. Basis is open.

24 Minimum Price Contract A. Deliver stored grain to fulfill contract. B. Buyer offsets options market position. Seller is charged/paid for any premium price difference, plus fees. C. Rolling forward is possible, but may not make economic sense due to large option premiums.

25 Basis Fixed Contract A. Deliver stored grain to fulfill contract. B. Buyer purchases spot market grain to fill shortfall. Seller is charged/paid for any basis difference, plus fees. A. May be change in local basis or change in destination basis. C. Basis fixed contracts can be rolled forward, but usually at basis levels for forward delivery.

26 Questions?