March 2000
Volume 3, Issue 2
INSIDE THIS ISSUE
Should I Sell My Development Rights? - Jim Skeeles
Dairy Forward Pricing Pilot Program - Cameron Thraen
Price Outlook - Cameron Thraen
Calendar of Events
First, let's make sure we know what it means to sell development rights.
What does selling development rights mean? Most of us own real estate as fee simple. If you own your property fee simple, in general you own that property and can do with it what you wish. In other words, none of your property rights have been "officially" dolled out. However, it is common to divvy out property rights, either officially or unofficially. Property rights are officially separated when recorded as such at the courthouse. Title searches are conducted to discover any property rights that have been officially dolled out. Cash rents, crop share lease, oil and gas leasing and easements are examples where property rights have been dolled out.
The right to build on open land, or the right to develop open land can
be separated from your other property rights and given, leased or sold.
Development rights can be given, leased or sold to another individual,
to a trust that holds land rights (often called a land trust) or to a public
entity such as a park district, township, county, state or federal agency.
Can you sell your development rights?
Some farmers on the east and West Coast have had the opportunity to
sell their development rights to a public entity that holds a "conservation
easement." But no farmers in the middle of the U.S. have thus far had that
option. So, most of us, even if we wanted to, could not sell our development
rights. There has been no one to buy our development rights, even if we
were willing to sell. However, that may change for those in Medina County
this March election day! Medina County has a quarter percent property tax
on the ballot. If the tax passes, Medina County farmers will be the first
in the state of Ohio that will have the opportunity to sell their development
rights. The Medina County issue will be the first test in Ohio to
see if the public is willing to pay their tax dollars to purchase your
development rights. If the Medina County issue passes, who knows, your
county may be next.
How can you sell development rights, if you ever can?
Let's suppose the quarter percent property tax is approved in Medina
County. Farmers will then be asked to make application to sell their development
rights each year. The properties put forth on the application will then
be assessed. An offer to purchase development rights will be made for only
a portion of the properties submitted that year. It may take years before
Joe Farmer in Medina County has the opportunity to sell his development
rights. Even on the east and West Coast where development right purchase
programs have been in place for years, farmers who would like to sell their
development rights have not yet had the opportunity.
How much will development rights sell for?
Development rights will sell just as other property rights have sold, for what the market will bear. Development right purchase agencies on the east and West Coast have had more development rights offered for sale than the agencies have had dollars to purchase. Therefore, generally farmers are asked to "bid down" the purchase price so agencies can purchase more development rights per dollar.
The maximum most agencies have paid for development rights has been
the difference between the value for farming and the value for development.
Current Agriculture Use Value (CAUV) is assigned to farmland in Ohio according
to soil type and a rolling average of crop prices. CAUV is most frequently
used as the value of land for farming and can easily be obtained from the
county auditor's office. Development value is considered to be essentially
the current sale price and is best estimated by an appraiser by assigning
a value similar to that of like properties that have sold recently. If
CAUV value is $1,000 and the appraised value is $4,000 per acre, the
corresponding value of development rights would be $3,000.
Should you sell your development rights if you can?
Most farmers I have talked to will not consider selling their development rights unless the farmer and his or her heirs are able to and willing to continue farming well into the future, through future generations. So, development rights should not be sold in hopes of making a non-viable farming operation into a viable one. A one time cash infusion seldom turns an unprofitable farm into one that is profitable. If the farm isn't making money now chances are it still won't be making money after the proceeds from the sale of development rights are gone.
Once development rights are sold the right to develop or to sell for development is not available to future generations. The benefit derived by this generation may be at the expense of future generations, especially if a future generation chooses not to or is unable to continue farming. Therefore, careful evaluation needs to be done concerning the next generation's ability and willingness to continue farming. To stay in business the next generation must be better managers and more savvy businessmen or women than were the older generation. The next generation will be farming in an increasingly competitive future agriculture.
Because of the possible negative impact on future generations it is
more important that junior generation(s) be comfortable with the sale of
development rights than the senior generation. At the very least, if and
when the sale of development rights becomes possible, the senior generation
should not consider sale without conferring with the junior generation.
Dairy Forward Pricing Pilot Program
Cameron S. Thraen
Agricultural, Environmental, and Developmental Economics, The Ohio
State University
Dairy Economist, Extension Specialist
“Dairy Producers are getting real price risk management tools – slowly!"
On November 29, 1999 the President of the United States signed into law an amendment to the Agricultural Marketing Agreement Act of 1937. This amendment appears as Section 3 of H.R. 3428. H.R. 3482 is the legislation that authorized the go-ahead for the new federal orders and their respective pricing rules.
Section 3 of H.R. 3482 is titled “Dairy Forward Pricing Program.” This section requires that “Not later than 90 days after the date of enactment of this section, the Secretary of Agriculture shall establish a temporary pilot program under which milk producers and cooperatives are authorized to voluntarily enter into forward price contracts with milk handlers.”
Ninety days have passed since the signing and the proposed rules for this voluntary forward pricing program were published in the Federal Register on March 1, 2000. In this article I will review these proposed rules as they impact you the producer.
In what regard is this a “pilot” program? The term pilot applies to the time duration of the program and not to those who may or may not participate. This time period is specified to expire on December 31, 2004. All contracts entered into under the provisions of this pilot program must terminate on that date.
What is a forward contract? Simply stated a forward contract is a contractual obligation on the part of a producer to deliver a pre-specified amount and quality of milk to a buyer and the buyer’s contractual obligation to accept and pay for this milk at a pre-specified price per unit, either per pound or hundredweight. The terms of the contract must match the pricing provisions of the governing federal order. Components must be priced under those orders with Multiple Component Pricing and Skim and Butterfat must be priced under those orders with fluid pricing.
Prior to the Dairy Forward Pricing Program was forward pricing of milk prohibited? No. Dairy producers could always enter into a forward contract for milk as long as the sale met one of two conditions: (1) the milk being forward priced was not regulated under a federal milk marketing order or (2) that the buyer was a cooperative association. In the case of the cooperative association, the provision within federal milk marketing orders that treats a cooperative as a sole producer means that sales of milk from the producer to the cooperative are treated as unregulated milk.
What does the Dairy Forward Pricing Program now permit that was not permitted before the amendment to the AAA of 1937? This pilot program now explicitly allows milk that is currently regulated under a Federal Milk Marketing Order to be included in the forward contract so long as it is not used for Class I products. This means that a producer may include in the forward contract milk that will be used for Class II or lower use. This is termed “eligible milk” in the proposed Dairy Forward Pricing program.
What is “eligible milk” ? Eligible milk is defined to include the quantity of milk equal to a handler’s Class II, III and IV utilization during a given month. This amount is computed by combining all pool plants of a single handler that are regulated under a single order.
Can a handler’s total forward contract milk exceed the “eligible milk” ? Yes. This could occur under two conditions. One, the buyer’s utilization of milk in Class II, III and IV drops below the contracted amount for these classes due to market conditions, or (2) the handler is required by the Market Administrator to divert milk to Class I use under the provisions of the Federal Order and this lowers the amount available to meet the definition of “eligible milk”.
What happens if the amount of forward contract milk exceeds “eligible milk” ? If, during any month, amount of a handler’s forward contract milk exceeds the “eligible milk” and the specified contract price(s) are below the order’s minimum prices, the handler will have to designate which producer milk is “over-contract” milk. If the handler does not make this determination the Market Administrator will prorate the amount of “over-contract” milk to each producer and cooperative association having a forward contract with the handler.
Do the Pilot Program provisions stipulate how a handler is to determine which producers milk is over-contract? No. There is no language in the proposed rules that stipulate how the handler will make the determination of which producer(s) milk is “over-contract” in the event that the forward contract milk exceeds the “eligible milk”. Each producer will have to make this an important item in any signed forward contract.
In the event of “over-contracting” how will I be paid?
This is only a concern when the federal order minimum prices are above
the forward contract price(s). For those producers whose milk is
determined to be “over-contract”, they will receive the higher federal
order minimum prices for that milk. For those producers whose milk
is determined to be at-contract, they will receive the price stipulated
in the forward contract.
Will a forward contract with my handler affect the timing of my milk
check payment? No. The handler will be required to follow the
provisions for the payment to producers as stipulated in the Federal Order
language.
Will a forward contract with my handler affect the amount of payment ? Yes. Milk forward contracted will not be subject to the amount of payment provision specified under a given Federal Order regulations. The amount will be determined by the producer and handler and specified in the contract.
Are there any controversial provisions put forth as part of the Dairy Forward Pricing Pilot Program? Yes. There are three primary issues that have been raised during the comment period. First, there is a provision that the producer be afforded a three-day right to rescind any forward contract entered into with a handler. Those in favor of this provision see it as protection for the producer. Those supporting this provision take the view that producers need an “out” to protect them from “pressure” to forward contract. On the other side, those opposed to this provision view this as an unnecessary intrusion into the right to freely contract at the least and an impediment to forward contracting at the worst. This side argues that the 3-day right to rescind, rather than aiding producers will actually harm them by eliminating any interest on the part of handlers to enter into forward contracts which include Class II milk.
Second, the proposed rules limit the first contract under the pilot program to a duration not to exceed 6 months. Those in support see this as a reasonable protection for the producer unaccustomed to forward contracting and providing a reasonable time to “get the feel” of the forward contracting process. Those opposed to this provision are concerned that the very producers who need the price risk management that a forward contract provides, e.g., producers wishing to lock in prices as part of a business expansion or budgeting plan, will not be able to get the needed price protection if this proposed rule is implemented.
Third, the proposed rule includes a provision that each and every time a producer enters into a new forward contract with a handler, the handler must submit to the Market Administrator Office a signed copy of the contract along with a disclosure statement signed by the producer or cooperative representative. These documents must be in the possession of the Administrator’s Office by the 15th day of the month for which the contract begins. Those favorable to this view see this as only reasonable in that it provides the Administrator’s Office with all of the particulars of the forward contracts entered into by handler’s regulated under the order and the disclosure statement stipulates that the producer has entered into this contract voluntarily. Those opposed to this provision cite the increased amount of paperwork required on the part of producers, handlers and the Market Administrators Office.
Final Comment: With regard to the controversial issues, I am most
concerned about the 3-day right to rescind provision. After checking
with my colleagues in other grain and livestock commodities I cannot find
examples of similar provisions. My chief concern is that handlers,
faced with a number of “rescissions” at the last moment, and the added
uncertainty that this will cause, will not be willing to offer forward
contracts to producers which include regulated milk. Another possibility
is that the handler may well include a penalty fee for rescinding.
If either of these events should happen, it will take away a much needed
price risk management tool from those that need it most in today’s dairy
industry. I believe that dairy producers are well informed and savvy
businessmen and businesswomen and do not need such a provision.
Price Outlook
Cameron S. Thraen
Agricultural, Environmental, and Developmental Economics, The Ohio
State University
Dairy Economist, Extension Specialist
The Class IV market continues to be the driver for the class prices.
Cheese is now moving to government storehouses in the form of processed
cheese product. CME Class III futures contract prices continue to
trade between $9.58 for the nearby to a high of $12.62 for the October
contract. Cow numbers and cow productivity continue to keep prices
low. The USDA released its long-term rainfall report this week and
forecast a widening drought across much of the Corn Belt. Prepare
for the worst with low milk prices and high feed prices this summer.?
Here is a look at the Advanced Prices for April 2000.
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NASS Prices to Component Prices
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Compoment Prices to Class Prices
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Calendar of Events
2000 Tri-State Dairy Nutrition Conference
The 2000 Tri-State Dairy Nutrition Conference will be held April 18
and 19, 2000 at the Grand Wayne Center in Fort Wayne, Indiana. This
year’s Conference will address the areas of nutrition and animal health,
forages, and working within a dynamic economic market and with expanding
herds. A free pre-conference symposium entitled “The Right Tools
for Sound Economic Nutrition” is being sponsored by Degussa-Hülls
Corp. Pre-registration is required for both the Conference and the
pre-conference symposium. Deadline for registration is March 31,
2000. To request registration information, contact Jennifer Winkler
at (614) 688-3143 or winkler.35@osu.edu.
Pasture Management School
March 20, 27, and April 3, 2000
Contact: Dean Slates at (330) 674-3015 or Tom Noyes at (330) 264-8722
for more information.
Food and Dairy Industries Conference
April 4-5, 2000
The Ohio State University, Columbus, Ohio
Contact: Valente Alvarez at (614) 292-7765