We have a new farm bill!



At least we have a partial farm bill in place that has the provisions that directly affect farms. I will leave the details of the legislative blunder to the news reporters.

For the most part the language of the new bill is very familiar. Terminology that was established in previous bills has continued and the majority of the programs are unchanged. It seems that law makers decided to take the easier road of extending provisions versus making whole sale changes on such a large bill. I take that as good news for the farming community.



One major addition is the ACRE program which most watchers of the bill have already heard rumblings about. I want to point out a few interesting things about this section of the new farm bill that might have been missed so far.



Some watchers have described ACRE as a windfall for farmers. Others point out that it is a big potential expense for the government. Many advocacy groups are describing this program as just the ticket for saving small family farms. I am not sure I advocate any of these views. What I do see is this program will change the way farms operate in the future.



To get a sense of the changes in the bill and the new language of ACRE, I went to the House of Representatives website which turned out to be a very good resource. There I found a side by side comparison of the 2002 bill, and the changes made by the House version and the Senate version of the new bill. It is very interesting to note that the language is very similar to the language used for crop insurance. Very similar.

ACRE is essentially revenue protection very similar to revenue based crop insurance like RA (revenue assurance) and CRC (crop revenue coverage.) The big difference seems to be that the ACRE program uses state average yields to determine revenue levels versus the county yields used for crop insurance. Prices are determined using the same price determination period as crop insurance plus a 2 year look back. It is not clear, at least to me, how the price look back will actually be calculated. We will likely have to wait for the USDA to determine the final rules. However, current price levels will certainly impact the program benefit in future years if the market were to turn lower.

At first glance, ACRE looks like free crop insurance. OK not free, you have to give up 20 percent of your direct payment potential to enter the program. This amounts to approximately $4 per acre and if the market were to move significantly lower 30 percent of the loan deficiency benefit as well.

BUT the ACRE program has so many properties similar to crop insurance that many operations will have to evaluate if spending $40 plus for individual insurance coverage will provide significantly better production protection.

When taking into consideration tighter cash flows and the realization that $40 was a year worth of profit potential just a few short years ago, many will need a good sales pitch or pressure from their lender to take on revenue crop insurance. I know. This is not what many crop insurance sales people and lenders want to hear. But spending $40 per acre with the hope that it will not cost you anything over time or that crop insurance will be a money maker is a very tough sell now. Today if that same money is put to use to expand a crop operation the return potential is 20%. There will be farms that will not use revenue crop insurance coverage with the advent of ACRE and they will potentially be at a $40 plus cost advantage to those who do.

My view is that ACRE will not be the saving grace that the advocacy groups hope it will be. Actually this provision is a huge detriment to the small farmer. By providing revenue coverage at next to no cost, many farms with the financial strength will drop traditional revenue crop insurance altogether in favor of ACRE. Smaller farmers that must carry revenue coverage to secure loans or protect assets will be at a cost disadvantage by the amount of the coverage. This additional risk of not having the individual coverage or the cost disadvantage will eventually push these farms out of business. The exact opposite of the desired effect.



Obviously, all the details of the new program have not yet been lined out. There are many things that can and will change as the USDA finalizes the rules of the ACRE program, but in the end extending the safety net makes taking risks easier for those that are in a position to capitalize on the benefits of this new program.

If you are interested in reviewing the Farm Bill closer, there is good information available at www.agriculture.house.gov/inside/Farmbill.html.

Click on the following links for a printable copy of the Newsletter and Futures Update

I thought it would be good to talk about a profit management fundamental or what some would call risk management.  When we consider what is important in marketing and profit management, price is a component of the overall measurement and management program.  Price gets all the attention and for good reason but it is only a piece of the puzzle.  We all want to better understand why or when or how much when considering price but many times these things provide more distractions than benefit.  Our primary focus needs to be profit and maximizing it.  Many times we get distracted by what could happen or what just happened and we lose track of the objective and our goals related to profit.

For this reason, I thought it appropriate to discuss a topic that is a first step in good profit management.  This topic is position and is very basic to all profit management.  Understanding your position is the foundation of good profit management and it is worthy of review.

Our position is a very important first step in profit management.  It is important to first understand we have the position and then what type of position we have.  The implications of the position then help us manage the risk that is associated with it.  If we are to start truly thinking in terms of profit, we must truly understand our position.

One of the hardest things to keep straight is implied position, open position, and actual position.   Here are some explanations.

Implied position is when a going concern (someone who expects to stay in business) considers the fact that they will have product to sell and have inputs to buy.  For clarity I am going to focus only on the product or output side but the reverse will also be true for the input side.  With an implied position there is no physical product yet but there is the assumption that the product will be produced at some time in the future.

Here is an example of an implied position.  For 2009 we plan to plant 500 acres of corn with an expected yield of approximately 200 bushels per acre.  Our implied position is 100,000 bushels long.

Implied position can change as our estimate of production changes and these changes need to be considered when determining how much we have to sell.

Actual position has to do with physical inventory, and sales.   An actual position could be unsold inventory creating an actual long position.  Or actual position could be sales that are against production that has not been harvest creating an actual short position.  When we look at actual position we may consider a basis position and a futures position separately.  We could have a futures or HTA actual position of short but not have locked the basis.  With physical inventory and a short futures position, we would have an open basis long position.

My point is not to confuse you here.  I promise.  Please stay with me.

One last position type and this is an open position.  This is really what is undone.  This type of position is created when a portion of the position has been relieved or closed and remaining portion is still open or still needs to be closed.  In the example above, an HTA was made against inventory and the basis has not been set yet.  This unpriced basis would be considered an open position.

You may be saying to yourself, Ron you sound like you are writing a textbook and I feel asleep 3 paragraphs ago.  OK maybe you have a point.  BUT my hope is that we build an understanding of the risks we are managing.  That we not just look at the price of our product but rather we look at the components of the profit and we manage these things.  My hope is that we think about what we are managing.

We can not control price but we can manage the risks and create a profit.

Ron Marshall

651-301-9185