Pocket Change

ACRE Program a must for Southern Plains Wheat Farmers

2009-08-07T06:27:00.000-07:00

Only a week left to sign-up for the Average Crop Revenue Election program (ACRE) established in the 2008 farm legislation. A combination of low average state yields and drop in price has occurred at a perfect time for producers to take advantage of the new program. For the discussion below I am going to discuss a 1000 acre farm with 1000 acres of wheat base, planting 1000 acres of wheat. The average yield of this farm is 35 bushels/acre.

A producer can sign up each farm (identifiable by a unique farm number) in either the old DCP program or the new ACRE program. Failing to elect the new ACRE program will cause producers to default to the DCP program.

The DCP program has three components, the Direct Payment(DP), the Counter Cyclical Payment (CCP) and the Loan Deficiency Payment (LDP). The DP is paid on the historical (Base) yield for the farm at the Congressionally set price of $0.52/bushel on 83.3% of the base acres. This is paid regardless of any cropping decision by producers but the total payment is limited to $40,000. Our farm would receive a DP of $15,161.

The CCP is paid on the historical production (base yield times base acres) at a rate equal to the Target Price (set by Congress) minus the DP minus the season average Price. This year the CCP would be $3.92/bushel TP - $.52/bushel DP - $5.50 (estimate). Thus our farm would receive no CCP.

The LDP is another animal altogether. The LDP is based on the Price Support Loan Rate that has been used since the 1930s as a tool to support farm prices. The purpose of the loan rate is to assist with "orderly markets". That is the loan rate (LR) provides a mechanism for producers to obtain money for their crop for a maximum of 9 months without actually selling the crop. This loan is a non recourse loan, a loan that does not have to be paid back provided the commodity that was used as collateral for the loan is forfeited as payment for the loan. Because producers typically have an operating note that is required to be paid at harvest, the LR allows the producer to obtain a loan from the government to forgo selling the crop at harvest. Obviously, if all producers sold at harvest the price would be temporarily depressed. If the producer believes that he can sell his crop at more than the LR he can reclaim possession of the commodity, pay interest and storage costs to the government, and sell the commodity.

When price was frequently less than the loan rate stocks piled up and became a problem for the government (increased costs) and producer (lower prices). To eliminate the build up of stocks the government offered an LDP. When market price was less than the loan rate producers could sell the commodity and receive a payment that was the difference between the loan rate and the market price. The current price support loan rate is $2.80 per bushel. Because market price greatly exceeds the loan rate our farm would receive no LDP.

Expectations over the next four years are that under the DCP our farm would receive only the DP of $15,161 or $60,952 (there is a slight increase in DP in year four as the eligible acreage increases from 83.3% to 85%).

The new ACRE program is much more complicated than the DCP. You can visit http://www.agecon.okstate.edu/agpolicy/index.asp?type=resources&subtype=Papers to get specific details. Basically the new program is a revenue assurance program. Unlike the DCP that paid when price fell below some target the ACRE program pays when actual revenue falls below a target revenue. The target revenue is the five year Olympic average of state yields (benchmark yield) times the two year average of the national season average price (benchmark price). The benchmark yield is 31 bushels and actual yield is 21. The benchmark price is $6.55 and the actual (estimated) is $5.50. Thus, the benchmark revenue is $203.50 and the actual revenue is $115.50. A formula determines the difference between benchmark and actual and for our farm this difference, the ACRE payment, is $52.53 per acre.

However, to be eligible to receive the ACRE payment you must be enrolled in the program for the remainder of the current farm legislation (through 2012, four years) and give up 20% of your DP ($3.03 per acre). For our farm the loss of DP over four years to enroll in the ACRE program is $12.12.

Thus, the net ACRE payment for our farm over four years is $101.29 compared to $60.95 for the DCP, a net difference of more than $40 per acre.

Economic Recovery?

2009-08-05T15:37:00.001-07:00

I will provide a series on the economy, where we are headed and when we will get there. This is the first of the series.

The press continues to state the economic recovery is underway and if they can convince the public half the battle will be won. The Index of leading Indicators has been positive for the last three months and this has led to forecasts that we have “turned the corner”.

The economy will not recover, that is the economy we are used to, until consumers start to increase consumption. One question might be will we have an economy in the future based on consumer spending or do we want one. Another question is, what is the other half of the battle.

First let’s talk about the other half of the battle. The economy will not recover until current inventories, particularly of housing and autos, begins to decline and return to a “normal” level. The normal level prior to the current economic collapse was 50-60 days of inventory. Housing is now at 72 days and declining and autos are over 90 days but declining as well. At the end of the fourth quarter in 2006 nearly 2.5% of all single family dwelling were uninhabited.

These levels of inventory were higher than we should probably like given that they came with a growth that was propelled by substandard credit. The optimal inventory may be in the 30-45 day level (less than 1% inventory). Thus we are a long way from “turning the corner” on the economy as the housing industry and auto industry will not begin to add employees until the amount of inventory declines to a point that will stimulate increased output. In many industries rehiring won’t occur until the inventory become negative. That is, when you order a good and are told it will be backordered. When a sufficient number of backorders pile up the manufacturer will add more employees to meet the steady inventory decline. The economy won’t recover to pre-crash levels until employment reaches pre-crash levels and these newly hired employees pay off past debt and return to typical levels of consumption. This can be easily seen as many months (if not years) away.

Because of the build-up of enormous inventory industrial capacity has fallen off a ledge. Again we see two problems. The growth in economic activity during the last growth period, especially as seen in the equities market (investment in industrial capacity), did not translate into a proportionate increase in capacity. Apparently the money was wasted on large salaries and inflationary expectations. But we are now approaching almost 40% excess industrial capacity. The optimum level estimated by the Federal Reserve is 18.7%. Thus, the economy must not only stop the declining capacity utilization (increasing excess capacity), but also recapture over 20% of the unused capacity.

Returning to the first question, do we want Americans to return to previous levels of consumption. Isn’t what got us into this mess in the first place? Simply Yes, if they can afford it. But consumer debt is at record levels (although it has been declining for several months). From 1945 to 1985 consumer debt increased by $0.5 trillion. Between 1985 and 1997 it double to $1 trillion and by January of 2007 it reached $2.5 trillion. We were spending money we didn’t have. And, we may have to pay down $1 trillion or more before we can go on a similar spending spree again, provided we can borrow the money.

Let Them Eat Horse!

2009-07-03T10:10:00.001-07:00

I have little doubt that the title alone is shocking to many people. I would ask that you consider the facts about to be presented before you revolt.

In a battle that has gone on for more than two decades, proponents of saving horses from slaughter for meat won a major victory in the fall of 2007. The U.S. 7th Circuit Court of Appeals in Chicago ruled that the Illinois Horse Meat Act doesn't violate the U.S. Constitution and the last horse slaughter plant in the United States closed it’s doors (Cavel International v. Madigan, 07-2658, U.S. 7th Circuit Court of Appeals, Chicago).

In his arguments for upholding the law U.S. Circuit Judge Richard Posner wrote, ``Even if no horses live longer as a result of the new law, a state is permitted, within reason, to express disgust at what people do with the dead, whether dead human beings or dead animals''.
The Humane Society of America, pleased at the outcome noted that, ``The court has slammed the doors of the last horse slaughter plant in the country, to the great relief of the citizens of Illinois and horse advocates everywhere.''

Cavel, based in DeKalb, Illinois, processed 60,000 horses a year, exporting all of the meat. Belgium imports the most U.S. horse meat, with more than 5.5 million pounds (2.5 million kilograms) last year. France was second with 3.62 million pounds, followed by Russia at 2.72 million pounds. The Cavel plant had operated for 20 years, generated $20 million in annual revenue and employed about 60 people.

The case was appealed (Cavel International v. Madigan, 07-2658, U.S. 7th Circuit Court of Appeals - Chicago). Ruling against Cavel Int., Fifth Circuit Court of Appeals Judge Fortunato Benavides wrote, ``The lone cowboy riding his horse on a Texas trail is a cinematic icon. Not once in memory did the cowboy eat his horse.''

The decision ended a two year battle over the change in a state of Illinois law that forced the closing of Cavel International in Dekalb, Illinois following similar occurrences in other states. The Cavel Int. plant in Dekalb was the last place for horse owners to send their horses for slaughter.

The debate over the management of wild horses on Federal lands and the disposition of thousands of privately owned animals has raged for decades and has been one of little reason and considerable emotion. Congressman Nick Rahall (D-WV) noted in the debate over the Restoring Our American Mustangs (ROAM) Act.” The bill was designed to expand the public lands available to wild horses.

In the 109th Congress the Virgie S. Arden American Horse Slaughter Prevention Act (S. 1915) was introduced to amend the Horse Protection Act to prohibit the shipping, transporting, moving, delivering, receiving, possessing, purchasing, selling, or donation of horses and other equines to be slaughtered for human consumption, and for other purposes. It is customary when submitting a report on a committee's legislative action to the full House to describe for the benefit of Members and to document the legislative history, a summary of the purpose and need for the legislation under consideration. In the case of H.R. 503, the minority wrote that “this was a particularly challenging task since the purpose appears to be nothing more than ameliorating the emotional tirade of the extreme animal rights movement; and the need is, well to be blunt, there simply is no need for this legislation.”

“H.R. 503, if adopted, would amend the Horse Protection Act to prohibit the shipping, transporting, moving, delivering, receiving, processing, purchasing, selling, or donation of horses and other equines to be slaughtered for human consumption, and for other purposes. Note that the Congressional proponents do not seem to have a problem if the horse is slaughtered and disposed of in a landfill, or if the meat from the horse is used in animal feed. They only seem to be focused on outlawing the cultural and ethnic practice prevalent in communities in the United States and around the world of consuming horsemeat.”

The measure in the 109th Congress failed but, in the 110th Congress Representative David Obey introduced an amendment (HR-1105) to the Appropriations bill to Prohibit funds from being used to inspect horses for slaughter purposes(Sec. 739). In an act of open defiance against Congress and the expressed will of the American public, the US Dept. of Agriculture (USDA) has filed in the Federal Register Vol. 71, No. 26 a scheme that will circumvent, and in fact nullify, Congress' ban on horse slaughter for human consumption. The USDA appears to be swayed more by the influence of three foreign slaughter plant operators than by Acts of Congress.
Secretary of Agriculture, Mike Johanns changed a rule to allow slaughter plants to pay for their own inspections and continue the slaughter of horses. This act was in clear opposition to Congress. With this change, a plant could hire inspectors and process horses provided the state has no laws prohibiting the action (as in the case of Illinois).

In a new affront on the prohibition of horse slaughter, a new state law in Montana would allow investor-owned horse slaughterhouses. The law limits potential legal action against such investors. While Montana is the first state to permit horse slaughtering plants to operate, a number of other states, including Georgia, Kentucky, New Mexico, Nevada, Texas, Washington and Tennessee, are considering introducing legislation in support of the horse industry. And in Oklahoma the first of it kind legislation preempted the any actions by animal rights groups to adverse impact animal agriculture and many states have begun to look at this law.

This is a lot of legislative action over a prolonged period over one issue. As stated earlier the debate is emotional while the problem is more measurable. The annual number of horses slaughtered in the US dropped from over 300,000 in the 1990s to less than 50,000 in 2003, with no special infrastructure needed to absorb the thousands of "unwanted" horses that were not slaughtered. Horses are being kept longer, sold to others, humanely euthanized, or donated to retirement and rescue facilities. As horse slaughter facilities have been legislated out of existence horse numbers have continued to increase. An unknown number of horses are now being warehoused in feed yards and private ranches displacing cattle. More importantly the horse population can be likened to the invasive species of thistle (eg. Canadian, bull, musk) that is overpopulating America’s farm and rangeland. While this plant has done immeasurable damage to native flora and fauna, the beautiful flower of the plant has begun to be adorned by the general public reducing the call for programs to remove it from the landscape.

The horse showed up on this continent more than 5 centuries ago and is an invasive species. Because it was easily domesticated as a work animal it was not hunted and thus allowed to compete with other native species such as buffalo elk, deer, goat and antelope for the same food and space, but without the hunting pressure faced by the other animals. Without limits on the number of these animals allowed to roam the western public ranges they will eventually push out other species, overpopulating the range and destroying fragile ecosystems. As of December 2007, approximately 45,000 horses had been shipped to Mexico, compared to the 11,000 shipped in 2006. That’s a 310% increase in the number of horses shipped to Mexico to be slaughtered for human consumption.

In addition, horse owners now have no options for disposing of angry, irritable, lame or old horses other than to allow them to die and bury them on their premises, “Not everyone sees the after affects of the Horse Slaughter Law like we do,” explained Andrea Soliz, director of the Amarillo-Panhandle Humane Society. “Most people, who invest in livestock, invest in them for work purposes. When an animal could no longer work, they were usually sent to the slaughter house. Now there’s nowhere to send them. “They’re put out to pasture . . . That’s not a good thing if you’re an old horse that doesn’t have any teeth.” Janna Steele, who has worked 17 years as a certified cruelty investigator, agreed.

Given the high volume of American horses slaughtered annually when the U.S. processors were open, a spike in U.S. equine exports to Mexico was expected once they closed. According to the Department of Agriculture, a total of 138,206 American horses were processed in 2006. Of those, 102,260 were sent to U.S. facilities, 24,866 to Canadian facilities, and 11,080 to Mexican facilities.

The USDA estimated that 35,000 horses were sent to Canada and 70,000 to Mexico for slaughter in 2007—about a 41 and 600 percent increase respectively from the year before. Horse slaughter opponents are trying to shut down the industry in Canada with a version of the American Horse Slaughter Prevention Act. An estimated 6.9 million horses exist currently in America and one can quickly do the math at how of population growth if harvest is restricted. Without getting entwined in the emotional arguments over eating horses, differentiating wild horses from other wild herbivores as a source of meat is difficult. Eventually, without continued harvest of these animals to control populations we will be faced with a situation of continued expansion of areas devoted to the horses, reduction in other species, or starvation of either or both. What we need is a rationale policy for wild horses similar to that for other game species.

Cap and Trade

2009-06-29T06:01:00.000-07:00

In 1993/94 the President Clinton proposed a BTU tax as a means to achieve energy independence and promote innovation in the energy sector. The energy and agriculture industries and states heavily dependent on either or both lobbied hard against the BTU tax and were successful. Being in the thick of the debate and providing the economic analysis of the impacts of the proposed BTU tax on agriculture I can assure you that agriculture would have been adversely affected by the tax. The reason for the adverse impact, an impact larger than all other industries, is simply that agriculture is unable to pass on marginal increases in production costs. Typically, when a tax is placed on an industry the cost of that tax is born by both the producer and the consumer. How much of the tax is paid by the consumer and how much by the producer depends on the degree of willingness the consumer has to pay for the good (elasticity of demand) and the degree of willingness the producer has to sell the good (elasticity of supply). The greater the degree of willingness the greater the percentage of the tax paid. The BTU tax was defeated.

Fast forward to 2009 and the house has just passed the American Clean Energy and Security Act of 2009 (H.R. 2454) as a means of "creating clean energy jobs, achieving energy independence, reducing global warming pollution and transitioning to a clean energy economy.
The house passed the bill 219 -212, but the agricultural committee defeated the bill 31-15 even after the committee won major concessions for agriculture.

The major agricultural concessions included the change in oversight of agricultural emissions from EPA to USDA and the inclusion of agricultural offsets. Because some agricultural practices produce net carbon sequestration (reduction of CO2), these practices may be used to offset the emissions of those emitters forced to purchase credits. Because the emitters will now be able to purchase either the government credits or agricultural offsets, the price/cost of the CO2 emission reduction should decline. And, there will be a positive incentive for agricultural producers to shift to practices that sequester carbon if net returns increase from the resulting change. For agriculture there is a cost of moving to these carbon sequestration practices and thus the price they receive for the offset must exceed that cost for farmers to make the change.

The White House maintains that $650 billion will be raised through the selling of credits to CO2 emitters. The simplified mechanics are that all the large (point source) CO2 emitters will be given so many credits but will have to bid for the government held credits or install new technology to reduce CO2 emissions. The emitters will bid up the price of the credits until the cost of the credit exceeds the cost of the new technology (or shut down). While not categorically a tax, the cost of the credit will again be paid by the consumer and producer of energy based on the elasticity of supply and demand. Since most of the large energy producers are local monopolists (only one seller of the good), the consumer will be forced to pay whatever the price to receive the energy required.

Whatever the cost of the legislation to the end consumer, the result initially will be a reduction in GDP. The increased cost of purchasing the same amount of energy will necessarily reduce the amount of disposable income available for other goods and services and thus reduce to total amount of goods and services demanded and produced. However, if the $650 billion that the government raises through the selling of credits is used in the development and manufacture of other goods and services then GDP could be expanded. Whether a net increase or decrease in GDP occurs will depend on the relative economy-wide multipliers (linkage to all other industries) associated with the lost personal consumption from the increased energy cost and the gain in income resulting from the expenditures of the government credit collections.

The larger question may be what the cost of the global warming is to the economy and whether this legislation will reduce that cost. If global warming is responsible for higher food prices as a result of more crop disasters, higher insurance costs due to more severe and more frequent adverse weather (tornado's, hurricanes, hail storms, floods, droughts, etc), than a reduction in global warming may reduce these costs and these savings could be used to offset the cost of the credits.

From an analytical point of view, this legislation is one more non-marginal change in an economy already overwhelmed by non-marginal changes. New farm legislation, new banking legislation, TARP, new bio-energy legislation to name a few have induced changes in the way we do business that will take years to completely play out. All of this uncertainty is straining our system and is certainly straining the ability of analysts to estimate the likely impact.

The Goals of the Humane Society

2009-06-11T14:28:00.000-07:00

I think it is encouraging that members of the general public have taken an interest in understanding where their food comes from. Now they need to focus on why it comes from there.

The passing of proposition 2 in California is the culmination of years of work by the Humane Society of the United States (HSUS). The purpose of the HSUS is to eliminate the use of animals for food in the humane diet. Like most groups that have figured out how to win at the game of politics in this country, HSUS is committed to working endlessly, for as long as it takes, by chipping away at the current agricultural production technology. By throwing all of their resources at marginal changes they both become more likely to succeed and less likely to have an excess disruption on the food supply.

Proposition two banned the practice of crowded pens for laying hens. The current practice of reducing the space available to the hens during egg production enables more of the feed to be directly converted to eggs. Further, the labor required to collect the eggs is reduced as eggs are mechanically collected rather than through the hunt and search method of old. The increased feed efficiency and reduced labor costs have enabled eggs to remain as a competitive protein source in America and enables each American to consume an average of roughly 260 eggs per year.

A change in this practice of egg production in California will increase costs of production and will increase the cost of California eggs in the market. The lower cost of egg production in surrounding states will cause a reduction or elimination of egg production in California and an increase elsewhere. This is exactly the result that many in the “sustainability” movement argue against. Now more food will be transported larger distances, over all costs will increase and prices in both California and the exporting states will rise. Egg production will be less efficient, prices will rise and consumption will drop.

At the margin the event will be minor in most peoples’ lives and shrugged off as nuisance. But, as HSUS goes after concentrated feeding operations in poultry, swine and cattle the combined effect of each of these marginal changes will be enormous for the American farmer and consumer. We currently consume and average of roughly 225 pounds of meat products per year. Absent this meat consumption, meeting the nutrition requirements for specific amino acids, vitamins and minerals will be almost impossible for the majority of Americans even with major changes in lifestyles.

The persistent attacks by HSUS play to people’s perception of animal “rights” but do little to educate people on why agricultural production practices have become as they are. The short answer is that current agricultural production technology, developed in our best universities, has been the solution to America’s demand for safe, abundant and cheap food. We can do it differently, but it may not be as abundant or cheap.

The per capita expenditures on food as a percent of disposable income in America are the lowest of any country in the world. At less than 10% the next closest would be the European countries with nearly 18% of their disposable income spent on food. In African countries, where animal agriculture follows the pastoral practices of ancient times, food is as high as 80% of disposable income, hunger and starvation are widespread and meat is considered a luxury.

Should America move to less efficient meat production our food expenditures as a per cent of disposable income would increase crowding out other expenditures and reducing overall GDP. Thus, while the HSUS movement may seem like a minor inconvenience, the reality is that their end position would have a dramatic impact on our current culture. I won’t argue whether this is good or bad, whether the reduced economic activity is worth the well-being obtained from the perception that somehow animals are happier if we are nicer to them before we consume them or don’t consume them at all. I think it is important that people who vote with the HSUS and those who don’t vote at all understand the goal of the HSUS and the implications of obtaining these goals.

2009-05-05T04:24:00.000-07:00

Here we are, at the end of another Semester. For 16 weeks students have been popping in asking, "Are you busy". Of course not, I have nothing to do, but decided to come to my office and wait here hoping that a student would come seeking help.

Or even better, "are we doing anything important in class today?" as a prelude to some excuse why they can't make it to class. Nope, not today. Today we will take a break from the search for knowledge to honor your absence. We will likely even have a moment of silence for you.

And the quite inconsequential, "did I miss anything in class while I was gone?"

For 16 long weeks I have listened to students whine about too much work, tests that don't have obvious answers, homework that is too much or too hard, etc etc. And now, in that final moment before the final grade is posted to the registrar's office to record one's effort and intellect into posterity, comes the best question of all, "Is there anything that I can do to improve my grade?"

This is the point every year where I come into complete understanding with how carnage is perpetrated by someone that simply snaps. I have been offered cash bribes, sexual favors, alcohol, and numerous other items including a trip overseas (that might have included all the aforementioned) in exchange for the sought after grade.

Students have attempted to persuade me that I am responsible for their failure to graduate, get a job, get married, and any number of other failings. Some argue that there was a good reason for their poor performance that I should overlook because they are better students than their grade demonstrates.So let's just cut to the chase here. Following Randy Pausch's example let me just tell all students what faculty want to tell you at this moment. If you are a student listen and pay attention.

I worked very hard all semester trying to engage you because I feel that the material I am teaching is important for you to understand. The material is the sum of my education and nearly 30 years of experience. You paid to obtain an education and have the opportunity to do so. Each course provides an opportunity to learn new concepts and life experiences from someone that has been there. Engage the opportunity.

Stop whining and don't spend any effort developing excuses. I have heard them all and there is not one that matters. I show up every class and give it my best shot. If you don't come, miss an assignment or test, are not prepared for class that is your problem not mine. I provide the opportunity but you must seize it. If you need help my door is open, but 15 minutes before the exam or an assignment is due I am not likely to be very cordial.

The reason public education works is that we can all learn from each other. If you have a question or wish to argue a point, do so in class so others (even the instructor) can learn from your insights. Engage the opportunity. The years spent in college are likely to be some of the best of your life. Enjoy them. Focus on what you can learn while you are there, in each class, each day. Every missed class is a missed opportunity.