Big report day for USDA

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Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest USDA reports: WASDE, Annual Crop Production, and Grain Stocks.

As the market reaction shows, today’s release was a set of favorable reports. In the Annual Crop Production report, USDA ended up reducing 2020 crop plantings by roughly 200,000 acres and the national corn yield estimate by 3.8 bushels per acre. That reduced 2020 estimated corn production by 325 million bushels. Soybeans saw a similar drop, with the national yield estimate down 0.5 bushels per acre and estimated production lowered 35 million bushels. Looking at the state-level data, the corn production losses covered most of the Corn Belt, from the Dakotas to Ohio, with only the southern states (Kansas and Missouri) seeing an increase in the yield estimates. Iowa’s corn yield estimate was lowered 6 bushels, to 178 bushels per acre. For soybeans, the state-level data showed more variability, with Illinois, Missouri, and North Dakota gaining in yield, while most other states declined. Iowa’s soybean yield estimate was lowered by a bushel, to 53 bushels per acre.

The December crop stock levels came in at or below expectations. While USDA’s estimate of soybean stock levels landed well within the trade range of estimates, the corn stocks were estimated at least 250 million bushels below any of the published trade guesses. Crop usage for feed and exports has continued to chew through this year’s crop quickly.

Turning to the WASDE report, USDA bumped up 2019/20 corn feed usage by roughly 75 million bushels, which lowered 2019/20 carryout. For 2020/21, plugging in the 325 million drop in production (from the Annual Crop Production report), total supplies were lowered by 400 million bushels. To partially offset, USDA lowered expected feed (down 50 million), export (down 100 million), and ethanol (down 100 million) usage, based on higher expected prices. But that still implies a 150 million bushel decline in 2020/21 ending stock, dropping the estimated stocks to 1.55 billion, which would be the lowest level we’ve seen in several years. With all of these corn changes, USDA raised its 2020/21 season-average price estimate by 20 cents, to $4.20 per bushel. The changes to the soybean balance sheet mainly concentrated on the 2020/21 outlook. Given the smaller crop, USDA raised soybean imports by 20 million bushels, partially offsetting the yield loss. But soybean usage continues to expand. Domestic crush was raised 5 million bushels.  Exports were raised 30 million bushels. The only soybean usage category that declined was seed and residual, by 13 million. Overall, 2020/21 soybean ending stocks were lowered 35 million bushels, to 140 million bushels in total, continuing the trend of tightening over the last several reports.  USDA’s 2020/21 season-average price estimate was increased 60 cents, to $11.15 per bushel.

See presentation on latest Ag Market Outlook

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Making 2021 ARC/PLC Decisions

Contributed by Steve Johnson, Extension Farm Management Field Specialist, sdjohns@iastate.edu

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Enrollment for the Agriculture Risk Coverage (ARC) and Price Loss Coverage (PLC) program for the 2021 crop year is underway at your local USDA Farm Service Agency (FSA) office. That decision is by FSA farm number and the historical base acres of crops on that farm and tract. The signup period runs through March 15, 2021.

ARC/PLC is one of the USDA farm safety-net programs that can help producers with fluctuations in either revenue or price for certain commodity crops. These include barley, canola, large and small chickpeas, corn, crambe, flaxseed, grain sorghum, lentils, mustard seed, oats, peanuts, dry peas, rapeseed, long grain rice, medium and short-grain rice, safflower seed, seed cotton, sesame, soybeans, sunflower seed, and wheat.

Local FSA offices are encouraging producers to take time over the next few months to evaluate their program elections and enroll for the 2021 crop year. ARC provides income support payments on historical base acres when actual crop revenue declines below a specified guaranteed level. PLC provides income support payments on historical base acres when the final national average cash price for a covered commodity falls below its effective reference price. For 2021, that’s at $3.70 per bushel for corn and $8.40 per bushel for soybeans, respectively.

2021 election and enrollment

Producers can elect coverage for the 2021 crop year and enroll in crop-by-crop ARC-County (ARC-CO) or PLC. Another choice is to enroll the entire farm in the ARC-Individual (ARC-IC) program. Although election changes for 2021 are optional, enrollment (a signed contract) is required for each year of the program. If a producer has a multi-year contract on the farm and makes an election change for 2021, it will be necessary to sign a new contract.

Key to this decision will be the national average cash price outlook for the 2021-22 marketing year. That is because the final national average cash price by crop will not be known until late September 2022. It must fall below the effective reference price for a PLC payment to be triggered. Most analysts expect those national cash price projections to be roughly $4.00 per bushel for corn and $10.00 per bushel for soybeans based on larger US planted acres, normal growing conditions, and strong US export demand. Since these projected prices are above the effective reference prices, then PLC payments would not be triggered for the 2021 crop year. Based on these current projections, most producers will likely elect and enroll both their corn and soybean base acres in the ARC-CO program to increase the likelihood of triggering a payment.

ARC-CO program payments are triggered when the actual county crop revenue of a covered commodity is less than the ARC-CO guarantee for the crop. The actual county revenue and the revenue guarantee are based on county-level yield data for the base acres’ physical location of the farm and tract. ARC-CO payments are not dependent upon the planting of a covered commodity or planting of the applicable base crop on the farm. Some producers could elect the ARC-IC program that combines the entire farm’s crop base acres, perhaps noting a higher risk of yield loss for 2021. ARC-IC farm eligibility is contingent on the planting of a covered commodity.

Signup deadline is March 15

If your ARC/PLC decision is not submitted to your local FSA office by March 15, 2021, the election defaults to the current election for crops on the farm from the prior crop year. For each crop year 2022 and 2023, you can make new elections annually during those sign up periods that end March 15. Farm owners can’t enroll in either program unless they have a shared interest in the crops on their farm.

Rather than waiting until the March 15 deadline, producers are encouraged to work with their local FSA office to make their election and enrollment decisions early. This will help spread out the workload for your FSA office and allow more time to focus on any crop insurance changes for your 2021 crops. 

New crop insurance product

A new county-based crop insurance product called Enhanced Coverage Option (ECO) can be added to your traditional multi-peril crop insurance coverage beginning in 2021. Note that ECO can be purchased regardless of your base acres having been enrolled in the ARC or PLC program. The Supplemental Coverage Option (SCO) product can not be purchased unless the base acres on that farm were enrolled in the PLC program.

The ECO offers producers a choice of 90% or 95% trigger levels of county-based coverage for a portion of the underlying crop insurance policy. If you choose revenue protection, then ECO covers revenue losses. ECO provides a band of coverage between these elected levels and 86%. Expect most producers interested in buying ECO in 2021, may plan to enroll in either ARC or PLC and then buy-up their farm-level revenue protection to the 80% or 85% levels. That’s because of the subsidy levels and premiums to be paid for the underlying crop insurance products.

Educational programs on the 2021 Farm Bill sign-up decision will be offered virtually in early 2021 from ISU Extension and Outreach. Watch the Ag Decision Maker Farm Bill page for details.

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December USDA WASDE Summary

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Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest WASDE report.

The trade was hoping to receive some additional demand strengthening, but USDA’s update provided next to no changes. The December report is almost always about demand, as the corn and soybean supply numbers are rarely changed in this month’s report (saving up the changes for the “final” estimates in January). The corn numbers remained as in November, with 2020/21 ending stocks at 1.7 billion bushels and the 2020/21 marketing year average price estimate at $4 per bushel. The only demand shift in soybeans was for domestic crush, up 15 million bushels. That lowered 2020/21 ending stocks to 175 million bushels, so the market should be getting close to “pipeline” levels (stock projections that are low enough where price can rise significantly to limit usage and hold the stocks at that level, preserving a small reserve going into the next marketing year). The 2020/21 marketing year average price estimate was raised 15 cents to $10.55 per bushel.

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Income Tax Problems in 2020?

Contributed by Charles BrownExtension Farm Management Field Specialist, crbrown@iastate.edu

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Market Facilitation Payments (MFP), Coronavirus Food Assistance Program (CFAP 1 & CFAP 2), Paycheck Protection Program (PPP), Syngenta payments, ARC/PLC payments, crop insurance, etc. have pumped close to $40 billion into the US farm economy in 2020. If you are thinking of deferring any of these government payments, only crop insurance may offer the possibility of deferral. In February of 2020, the USDA was predicting a reduction in US farm income, but now is predicting growth in farm income, up to $115 billion.

This increase in government income could cause some unexpected tax consequences for some farmers this year. Even though crop and livestock prices were low for much of the year, they have now improved and coupled with government payments, farm income is looking better than expected.

If you happen to be in the group that is having a good year and may be better than expected, what can you do to manage your income and income taxes? Here are a few tips that you may use to manage your income.

Prepay expenses: This only works for cash basis taxpayers, not accrual. Some examples that you may prepay are seed, fertilizer, chemicals, feed, up to 12 months land rent that is coming due and any accrued business interest. You must have a business reason for doing so, such as to lock in a price or to insure supply. Tax avoidance is not a good business reason.

Defer income: Using deferred payment contracts for grain sales gives you a lot of flexibility. If you like the price today, you can lock the price in, but take the payment in 2021. The added flexibility is that if you are a cash basis taxpayer and find that you needed the income in 2020, you can pull the contract back into 2020 from 2021 and report the income in 2020, even though you will not receive the cash until 2021. There is a catch, you must pull back a full contract, you cannot pull back a portion of a contract. To have added flexibility you should have multiple smaller contracts and not just one large one. This allows you to have a better chance at managing your income to a level that you want. The added bonus is that this decision can be made after the end of the year.

Crop insurance also may be deferred if the payment received is due to crop damage and not price loss and you normally would have sold the majority of the crop the following year. Again, this does not work for accrual taxpayers.

Depreciation: There are several options for determining how much depreciation you want to take on new asset purchases. If you want to use accelerated methods you have available Section 179 and bonus depreciation. For 2020, the maximum Section 179 is $1,040,000. Farm machinery, grain bins, solar grids, breeding livestock, confinement buildings and field tile all qualify for Section 179. They have to be used more than 50% in the business of farming and it is an asset-by-asset decision. Section 179 cannot create a net operating loss. If you take more than allowed, the remainder will carry over to the following year. The good news is that unlike in previous years, Iowa now couples with the federal rules.

Bonus depreciation is another accelerated method of depreciation. Unlike Section 179 where you choose how many dollars you expense, with bonus depreciation, it is all or none. You expense either the full purchase price or none of it. It can be used on new or used assets and can be used on 20-year property, such as machine sheds. Bonus depreciation is a class-by-class decision. New machinery is a class life 5, so if you decide to use bonus depreciation on a new machinery purchase, all new machinery you purchased will have to use bonus depreciation. Bonus depreciation can create a net operating loss, unlike Section 179. Iowa did not couple with the federal rules on bonus depreciation, so you may reduce federal income, but not Iowa income.

Bonus depreciation also can be used by land owners receiving cash rent.

Retirement plans: Funding retirement plans will reduce federal income taxes, but not self-employment tax. Some retirement plans to consider may be traditional IRAs, 401Ks, Simplified Employee Pension Plan (SEP), Solo 401K, etc.

Charitable giving: The standard deduction for married filing jointly is $24,800 in 2020. You have to exceed this amount with your itemized deductions before it pays you to itemize. Gifting to charities is one of the itemized deductions, but many farmers do not exceed the standard deduction so their charitable giving does not create a tax deduction. Gifting grain to your favorite charity is a much better option. If you sold the grain and then gifted money to your charity, you would have to pay federal, state and self-employment taxes on the income. When you gift the grain directly to the charity, you do not get a charitable deduction, but also have no income to report and avoid the tax consequences. Ownership of the grain must be transferred to the charity before it is sold. Someone from the charity then makes the arrangement to sell the grain.

College savings plans: Contributing to 529 plans can save Iowa income taxes, but not federal taxes. A single person can contribute $3,439 per beneficiary in 2020. A husband and wife could contribute twice that amount. When the money is withdrawn and used for eligible education expenses, it is not taxed.

These are just some of the ways you can manage taxable income, but everyone’s situation is different. It is advisable to contact your personal tax preparer to determine what is best for your tax situation.

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November USDA WASDE Summary

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Chad Hart, ISU Extension Grain Marketing Economist, provides a summary of the latest WASDE report.

Compared to trade expectations, USDA lowered corn and soybean yield and production estimates and raised corn exports by more than expected. The slide in yields was across a broad swath of the country, reflecting the longer-term impacts of the drought and the extremely dry crops were brought in (yield loss due to crop moisture being below to well below average). Corn dropped 2.6 bushels per acre, knocking 215 million bushels out of total production. Soybeans dropped 1.2 bushels per acre, taking 98 million bushels out. For soybeans, the yield drop dominated the other small tweaks and the lack of adjustments to crush and exports. With the new soy stocks to use ratio now below 5%, the report provided another upward leg for the soybean market. USDA raised its 2020/21 season average to $10.40, the futures market was already at $10.60 and added roughly 30 cents today.

For corn, the yield drop was only part of the story. USDA also projected exports to rise to 2.65 billion bushels, a record. The export rise can be chalked up to a near doubling of expected corn sales to China. Most of those Chinese sales have already been made (roughly 85%), but only 15% of the targeted exports to China have been delivered at this point. 2020/21 ending stocks were lowered to 1.7 billion bushels (lowest level since 2013/14) and the USDA season-average price estimate rose to $4 per bushel. The futures market was at roughly $3.70 before the report, so for corn, USDA is already projecting continued price strengthening.

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