Buckeye Dairy News: VOLUME 24: ISSUE 5
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Milk Prices, Costs of Nutrients, Margins, and Comparison of Feedstuffs Prices
April F. White, Graduate Research Associate, Department of Animal Sciences, The Ohio State University
Milk Prices
In the last issue, the Class III futures for August and September were $20.67/cwt and $20.21/cwt, respectively. Class III milk closing price for August was $20.10/cwt, with protein and butterfat prices at $2.14/lb and $3.40/lb respectively. The component price for protein is reduced from the July issue, and butterfat price continues to increase alongside demand as the holidays approach. This issue, the Class III future for October is $21.95/cwt, and the November future is $20.92/cwt.
Updated Corn Silage Price
A new corn silage price used throughout this article was calculated this month as corn silage harvest winds down across Ohio. This year’s approximate price for normal corn silage (32 to 38% dry matter), based on a $6.70/bu corn grain price at end of day September 28, 2022, is $71.81/ton. Due to the increased December corn futures this year, corn silage has once again increased in value by ~$11/ton compared to 2021 season ($60.71/ton). However, based on its nutritive value, home grown corn silage continues to be a bargain feed in dairy cattle rations.
Nutrient prices
It can be helpful to compare the prices in Table 1 to the 5-year averages. Since the July issue, the price of metabolizable protein (MP) has increased by about 17% alongside a 22% decrease in the price of net energy for lactation (NEL). The current price of NEL and MP are about 15 and 30% higher than the 5-year averages ($0.08/Mcal and $0.41/lb, respectively). These nutrient costs continue to reflect recent trends in ingredient costs, largely following swings in the cost of protein and energy ingredients.
To estimate profitability at these nutrient prices, the Cow-Jones Index was used for average US cows weighing 1500 lb and producing milk with 3.9% fat and 3.2% protein. For the September issue, the income over nutrient cost (IONC) for cows milking 70 lb/day and 85 lb/day is about $11.52 and $12.12/cwt, respectively. Both estimates are likely to be profitable. As a word of caution, these estimates of IONC do not account for the cost of replacements or dry cows, or for profitability changes related to culling cows.
Table 1. Prices of dairy nutrients for Ohio dairy farms, September 23, 2022.
Economic Value of Feeds
Results of the Sesame analysis for central Ohio on September 23, 2022 are presented in Table 2. Detailed results for all 26 feed commodities are reported. The lower and upper limits mark the 75% confidence range for the predicted (break-even) prices. Feeds in the “Appraisal Set” were those for which we didn’t have a local price or were adjusted to reflect their true (“Corrected”) value in a lactating diet. One must remember that SESAME™ compares all commodities at one specific point in time. Thus, the results do not imply that the bargain feeds are cheap on a historical basis. Feeds for which a price was not reported were added to the appraisal set this issue.
Table 2. Actual, breakeven (predicted) and 75% confidence limits of 26 feed commodities used on Ohio dairy farms, September 23, 2022.
For convenience, Table 3 summarizes the economic classification of feeds according to their outcome in the SESAME™ analysis. Feedstuffs that have gone up in price based on current nutrient values, or in other words moved a column to the right since the last issue, are in oversized text. Conversely, feedstuffs that have moved to the left (i.e., decreased in value) are undersized text. These shifts (i.e., feeds moving columns to the left or right) in price are only temporary changes relative to other feedstuffs within the last two months and do not reflect historical prices. Feeds added to the appraisal set were removed from this table.
Table 3. Partitioning of feedstuffs in Ohio, September 23, 2022.
Bargains At Breakeven Overpriced Alfalfa hay - 40% NDF 48% Soybean meal Mechanically extracted canola meal Feather meal Soybean meal - expeller Whole, roasted soybeans Corn silage Wheat bran Soybean hulls
Distillers dried grains Gluten meal 44% Soybean meal Gluten feed Whole cottonseed Solvent extracted canola meal Meat meal Blood meal Corn, ground, dry 41% Cottonseed meal
Hominy Wheat middlings As coined by Dr. St-Pierre, I must remind the readers that these results do not mean that you can formulate a balanced diet using only feeds in the “bargains” column. Feeds in the “bargains” column offer a savings opportunity, and their usage should be maximized within the limits of a properly balanced diet. In addition, prices within a commodity type can vary considerably because of quality differences as well as non-nutritional value added by some suppliers in the form of nutritional services, blending, terms of credit, etc. Also, there are reasons that a feed might be a very good fit in your feeding program while not appearing in the “bargains” column. For example, your nutritionist might be using some molasses in your rations for reasons other than its NEL and MP contents.
Appendix
For those of you who use the 5-nutrient group values (i.e., replace MP by rumen degradable protein and digestible rumen undegradable protein), see Table 4.
Table 4. Prices of dairy nutrients using the 5-nutrient solution for Ohio dairy farms, September 23, 2022.
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Ohio Laws Governing Manure and Mud on Roadways
Chris Zoller, Extension Educator, Agriculture and Natural Resources, Tuscarawas County; and Peggy Hall, Extension Agriculture and Resource Law Program, Ohio State University Extension
Fall brings an increase in farm equipment traveling roadways to harvest crops, haul grain, and transport silage from fields to the farm. This is also a time when tractors and manure spreaders are used to apply nutrients to harvested fields. During these operations, it is not uncommon to find mud or manure spilled on roadways.
An Iowa State University Extension survey found that transportation issues accounted for 28% of manure spills. A similar study in Wisconsin determined that 30% of manure spills were attributed to transportation issues. While these happen unintentionally, they do pose potential hazards to the environment and motoring public.
Ohio Law
An Ohio traffic law (https://codes.ohio.gov/ohio-revised-code/section-4511.74) addresses “placing injurious materials” on roadways. The law states in Ohio Revised Code (ORC) Section 4511.74 that: “No person shall place or knowingly drop upon any part of a highway, lane, road, street, or alley any tacks, bottles, wire, glass, nails, or other articles which may damage or injure any person, vehicle, streetcar, trackless trolley, or animal traveling along or upon such highway, except such substances that may be placed upon the roadway by proper authority for the repair or construction thereof.” This provision has been applied to cases involving mud, manure, and even grass clippings left on roads, with enforcement by local law officials. A violation is a first-degree misdemeanor that can lead to no more than $1,000 in fines as well as jail time.
Another section of Ohio law, ORC 5589.10 (https://codes.ohio.gov/ohio-revised-code/section-5589.10), also provides criminal penalties and states that “No person shall dig up, remove, excavate, or place any earth or mud upon any portion of any public highway or build a fence upon the same without authority to do so.” A violation of this section can lead to a fourth-degree misdemeanor charge with a maximum fine of $250 and jail time.
In addition, mud or manure on the roadway may result in property damage, injury, or death to people or damage to vehicles on the road. Harmed parties may bring a negligence claim and seek compensation for their personal and property damage. There was an Ohio case several years ago involving wet manure on the road that was determined to be the cause of an accident, and the farm operator was held liable under a negligence claim brought by the harmed party. Unfortunately, a person suffered physical injuries and the operator suffered a financial loss—all due to the failure to properly manage the manure on the roadway.
Your Responsibilities
The best advice to avoid problems is to practice good manure and equipment management. Do not overfill tankers or spreaders, ensure that hoses are properly attached, and inspect equipment for leakages. Maintain field access points to minimize tracking mud onto the roadway. Be aware of the roads you travel and whether your operations are leaving mud or manure on the roadways. If you are, you have a responsibility to remove it to prevent environmental damage and an accident. Where necessary, place safety cones or other warnings around the area until it’s cleared. If you rely on employees to haul manure or move equipment on roadways, train your employees to follow these practices. And if you receive a call from a local official or law enforcement or a complaint from a resident, act quickly to meet your responsibilities for keeping mud and manure off the roadway.
OSU Extension Resources
Ohio State University Extension has several resources if you are interested in more information related to this topic. We encourage you to visit:
- OSU Extension Ag and Resource Law Program: Roadway & Equipment Law https://farmoffice.osu.edu/our-library/roadway-and-equipment-law
- OSU Extension Ag Safety Program https://agsafety.osu.edu/
References
Manure Spills: What You Need to Know and Environmental Consequences, North Dakota State University Extension, https://www.ag.ndsu.edu/publications/environment-natural-resources/manure-spills-what-you-need-to-know-and-environmental-consequences
Manure Spill Prevention & Management: https://extension.umn.edu/manure-management/manure-spill-prevention
Ohio Laws and Administrative Rules, Section 4511.74: https://codes.ohio.gov/ohio-revised-code/section-4511.74
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Assessing Milk Price and Risk Management for 2023
Jason Hartschuh, Extension Educator, Agriculture and Natural Resources, Crawford County, Ohio State University Extension
With harvest well under way to feed the cows for 2023, it is important to make sure we are assessing what the 2023 milk price may be and how to manage the risk of a milk price downturn. Talking to input suppliers for commodity/feed crops, it appears that prices may be higher in 2023 to produce feed. This makes it very important to manage the milk price risk for 2023. The September USDA World Agricultural Supply and Demand Estimates (WASDE) report has both the 2022 and 2023 all milk price forecast being up from the previous month. The current 2022 all milk price forecast is $25.45/cwt, while the 2023 all milk price is less at $22.70/cwt. The increased price was due to slower growth in cow numbers than was originally projected. This may mean a tighter margin year ahead for 2023 as crop input costs increase, while all milk price decreases. When doing your 2023 budgets this fall, it may be best to consider what milk price floor you can protect along with the USDA price forecast.
The two most common risk management tools used in Ohio are the Dairy Margin Coverage (DMC) program and the Dairy Revenue Protection (DRP) program. The DMC program covers the margin between the DMC calculated feed price and the All Milk price. The table below shows what the prices were that went into the 2022 DMC calculation so far and the resulting margin. The greatest margin was in May at $12.51/cwt and has declined to $9.92/cwt in July. If USDA’s milk price forecast is accurate, this may lead to margins falling above the upper DMC margin of $9.50/cwt. Comparing your feed cost over the first 7 months of 2022 to the final feed cost for DMC each month can help you asses the protection that the DMC program can provide for your operation.
Month
Corn ($/bu)
Premium Alfalfa Hay ($/ton)
Soybean Meal ($/ton)
All Milk ($/cwt)
Final Feed Costs for DMC($/cwt)
Milk Margin Above Feed Costs for DMC($/cwt)
January
5.57
262.00
421.21
24.20
12.66
11.54
February
6.10
266.00
480.96
24.70
13.72
10.98
March
6.56
269.00
493.98
25.90
14.35
11.55
April
7.08
271.00
476.70
27.10
14.81
12.29
May
7.26
274.00
441.28
27.30
14.79
12.51
June
7.37
277.00
445.93
26.90
14.98
11.92
July
7.25
333.00
467.87
25.70
15.78
9.92
The second subsidized program to consider is the DRP, which can be used to set a floor under your milk price at your cost of production or lock in a profit if one is available on the Chicago Mercantile Exchange (CME). The DRP is managed through USDA-RMA by working with your local crop insurance agency. DRP has many more individual decisions, including being by the quarter instead of for an entire year and the option to cover as much or as little milk as you would want. DRP coverage contracts can be purchased after the close of trading each day. While it is recommended that you study milk futures and don’t cover your entire year’s production at the same time. If you had covered all of your 2023 production on Monday, September 26th using Class III coverage, your average covered Class III price would have been $19.20/cwt with a premium of $0.5790/cwt, making your coverage after marketing $18.62/cwt. Class IV prices have continued to be above Class III. If Class IV coverage was chosen, the 2023 average would have been $20.16/cwt with a premium cost of $0.701/cwt for a coverage after marketing of $19.45/cwt. While it is very possible that the high for each quarter of 2023 has not happened yet. If contracts had been purchased at the current high point, 2023 Class III coverage after premiums would give you protection at $19.44/cwt, and for Class IV, the coverage would have been $19.89/cwt. As a point of reference, Quarter 1 maximum prices so far were reached in April and June of 2022.
Besides trading futures and options as a method of risk management, you may also want to discuss with your processor if forward contracts are available. While forward contracting is straight forward, it is much more complicated with milk than grain since Class I fluid milk cannot be forward contracted. On the other hand, if you sell into a Class III market, your processor or cooperative has the option to offer forward contrasts. While 2023 does not currently appear to have as much profit potential as 2022, through careful management of your expenses a profit can still be achieved. Utilizing these risk management tools can help determine what milk price to use as you plan your 2023 budgets.
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USDA ERS Dairy Outlook: September 2022
Chris Zoller, Extension Educator, Agriculture and Natural Resources, Tuscarawas County, Ohio State University Extension
The United States Department of Agriculture Economic Research Service (USDA ERS) released its Livestock, Dairy, and Poultry Outlook on September 16. This article will summarize the dairy outlook. To read the complete report, please visit this link: https://downloads.usda.library.cornell.edu/usda-esmis/files/g445cd121/9w033934q/5138kq43q/LDP-M-339.pdf.
The National Agricultural Statistics Service (NASS) reported July milk production of 19.140 billion pounds produced by an average of 9.416 million head of dairy cattle. July milk production per cow averaged 2,033 pounds.
The all-milk price in July was reported at $25.70/cwt, $1.20 lower than June but $7.90 above July 2021. Alfalfa hay in July was $31/ton higher than in June and $70/ton higher compared to June 2021, coming in at $276/ton. The milk-feed ratio has been declining since February 2022. While the January to June 2022 all-milk price increased, it was more than offset by the increase in feed prices.
Dairy Forecast: 2022
The average number of cows has been reduced to 9.4 million head, but average production per cow came in higher at 24,075 lb/year. Reduced cow numbers and even production per cow, the milk production forecast has been reduced 0.3 billion to 226.5 billion pounds.
Type
Projected Price for 2022
Class III
$21.65/cwt
Class IV
$24.45/cwt
All-milk
$25.45/cwt
Dairy Forecast: 2023
USDA ERS is expecting the rate of growth in cow numbers to slow. For 2023, they are projecting 9,415 million head – a reduction of 20,000 head. Milk per cow in 2023 is forecasted to be unchanged at 24,300 lb/cow and total milk production revised at 0.4 billion pounds lower to 228.8 billion pounds.
Type
Projected Price for 2023
Class III
$19.70/cwt
Class IV
$20.85/cwt
All-milk
$22.70/cwt
Planning Ahead
Planning and budgeting are always important, and continued uncertainty makes these tasks even more critical. Most inputs will likely increase in cost compared to 2022 and USDA is currently projecting a decline in milk price. I encourage you to utilize OSU Extension Enterprise Budgets (https://farmoffice.osu.edu/farm-management/enterprise-budgets), meet with your veterinarian, consultants, and Extension Educator to critically evaluate the need for each input.
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Preparing Equipment for Corn Silage Harvest
Chris Zoller, Extension Educator, Agriculture and Natural Resources, Tuscarawas County and Jason Hartschuh, Extension Educator, Agriculture and Natural Resources, Crawford County, Ohio State University Extension
Corn silage is a critical ingredient in rations fed to dairy cattle, and in just a few weeks, the harvesting process will begin. Making high-quality corn silage is time sensitive and breakdowns can be costly. A breakdown in the field can lead to delayed harvest and lower quality silage, resulting in poor milk production and animal performance. Now is the time to be reviewing, servicing, and preparing equipment used in the silage harvest process so that down time doesn’t decrease your silage quality.
Inspection
All parts of your forage harvester must be inspected from front to back. The machine was likely cleaned at the end of the last harvest. If not, now is the time to give it a thorough cleaning. Check the condition and tension of belts. Are there any that are worn, loose, or cracked? If so, adjust the tension or replace with new ones. Refer to the owner’s manual for areas to lubricate. If an auto lube system is on the machine, check each line and bearing that is lubricated to be sure it is working properly. Did rodents damage any wiring over the winter storage period? If so, make necessary repairs. While going over the machine, attempt to wiggle any shaft at the bearing. Once belts and bearings are inspected and lubrication is complete, run the machine at a low speed to check moving parts, gauges, and listen for anything that doesn’t sound correct – slipping belts, worn bearings, etc.
Check engine oil, brake fluid, gearboxes, and any other fluids. Are there seals or hoses that are cracked, leaking, and in need of replacement? If safety shields and guards were removed for some reason, make sure they are replaced to provide protection from injury or death. Check the fire extinguisher to be sure it’s still functional. Machines should carry two fire extinguishers, one that is an ABC dry chemical and another that is a water cannon with foaming agent. Check lights, back-up beepers, and condition of the slow-moving vehicle (SMV) emblem. Clean and/or replace any of these items that need attention.
Be sure to inspect wear parts and consider if they have enough hard surface left for the season. For knives, the minimum is 3 mm. Adjusting the cutter bar and knives prior to corn silage harvest so that the cutter bar has its full adjustment range can save on in-season hassles. Checking knife torque prior to harvest is also recommended so that no knives come loose during harvest, causing costly internal damage to the machine. On the corn head, inspect the cleaners so that weeds don’t wrap around the header.
Kernel processor operation is critical to making high quality corn silage. While the true inspection of kernel processing score comes during harvest, each time you change hybrids, a proper inspection will keep the processor working through the season. Roll spacing, tooth sharpness, and springs should be inspected. Springs can weaken over time and develop cracks that lead to critical failure in-season. The roll gap should be between 2 to 3 mm depending on the processor design. A nickel is 1.95 mm thick and older processors should leave marks in the nickel. While newer, more aggressive systems should brush a dime off, a nickel/dime stack or feeler gauges can be used to check if rolls are the proper gap. Check multiple areas across the rolls for wear. The in-season inspection of kernel processors is done with a water separation or visual inspection of a 1-quart sample of silage. Both methods look for the number of whole kernels, with a criterion that no more than one whole kernel is present in the sample. The water method uses a 5-gallon bucket to float most of the fodder off the sample to make kernel separation easier. Once fodder is removed, sort kernels looking for any that are not nicked by the processor.
Checking Other Equipment
Besides the harvester, thoroughly inspect and service all other equipment used for harvest, as each plays a critical role in keeping harvest on time. For equipment running on the road, determine whether all brakes, lights, and mirrors are in working order. Lastly, before pulling a silage wagon or trailer on the road, ask yourself if the truck or tractor can, if necessary, stop the load quickly. Just because a machine can move a load does not mean it should.
Have a safe and successful harvest.
Sources:
Getting Ready for Corn Silage Harvest, Cornell University, https://blogs.cornell.edu/nwny-dairy-livestock-field-crops/2020/09/11/getting-ready-for-harvesting-corn-silage/(This article originally appeared in the Farm & Dairy Newspaper)
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Corn Silage Price Calculation
Dr. Seungki Lee, Agricultural Economist and Assistant Professor, Department of Agricultural, Environmental, and Development Economics, The Ohio State University
View article at this link: Corn Silage Price Calculation
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Preparing Your Dairy Herd for the Fall Football Season
Dr. Dwight Roseler, Adjunct Professor, Department of Animal Sciences, The Ohio State University and Dairy Nutrition Specialist, Purina Animal Nutrition, Great Lakes Dairy
Cows love cooler weather and good forage. Just like an effective football coach, you must prepare and coach your herd to perform properly in the fall and prepare the cow herd to win each game. Corn silage harvest is in the rearview mirror for most Midwest dairy farms, and the best coaches prepare their cow herd, facilities (weight room), and staff to prepare for top performance. The fall season can be difficult on your cow herd and negatively affect milk production if the herd is not prepared. Shorter day length, lingering summer heat, cow fertility, hoof quality, bird infestations, and new corn silage are among factors to prepare.
Day Length
The most consistent research response many university and farm data in the northern U.S. has been the response in milk production to long day lighting. An added 4 to 6 lb/day of milk per cow occurs when 18 hours are provided. Lighting intensity must be a minimum of 20 footcandles across the entire barn along with 6 hours of darkness or red light. Lights need to be cleaned yearly or upgraded to gain the benefit for the cows.
Feed Changes
2022 corn silage across Ohio has higher starch, lower neutral detergent fiber (NDF) corrected to an organic matter basis (NDFom) and similar NDF 30 hr digestion compared to 2021 corn silage. Initial rumen starch Kd will be lower but increase with fermentation time. These trends will vary by county. Feeding corn silage that is 60 days fermented or longer is ideal to allow rumen starch and fiber Kd to increase and fermentation to stabilize. Nutrition clients successful in feeding new corn silage without production decline take great care in proper corn hybrid selection (floury), in season plant care (fungicide, plant health), effective kernel chop processing score (>77), rumen starch Kd (20%), and ration formulation [NDF digestibility (NDFd) >60, effective undigested NDF (eUNDF), buffer, etc.] Diet additives need to be altered from summer to properly prepare for fall [Diflourobenzonon (DBZ), dietary cation-anion difference (DCAD), buffer, minerals, passage rate, enzyme, etc.).
Lingering effect of summer heat
Summer heat and humidity in the Midwest will have a lingering effect on the cows. Cows that peaked in the summer can have lower body condition repletion due to intake and priority of nutrient demand to milk production. As day length shortens, the cow body condition repletion will shift more energy to body condition and less towards milk production. Lower fertility from summer heat results in lower quality embryos and lower fertility of summer bred cows. In addition, longer days open can increase herd days in milk and reduce overall herd production. Cows that stand excessive hours due to heat stress will have poor quality hoof tissue and more potential lameness. Update diets and intensify reproductive focus and hoof trimming to maintain proper herd performance.
Fall health challenges
As birds mount their annual flocking, they are drawn to indoor feeding and nesting areas in dairy barns. Birds can transmit disease, dysentery, consume grain from TMR, and reduce performance. In some herds, fall can result in more confined and unclean calving pens and poor air quality. This can result in more metritis, mastitis, and respiratory health challenges. These health challenges can illicit an immune response that can reduce milk production, possibly with severe challenges by 8 lb/day of milk per cow. Feed treatment options are available, some experimental, to reduce health and performance challenges in your herd. Discuss options with your nutritionist.
Do not overlook the obvious
There are many factors unrelated to the fall season that affect milk production. The ABC of air, bunk, and comfort always need to be part of a winning team. Coach up your cow team this fall for a winning season and Go Bucks.
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Fall Manure Application and Cover Crops
Glen Arnold, Extension Field Specialist, Manure Management, Ohio State University
Corn silage harvest completion is the start of serious manure application efforts by dairy operations across Ohio. For some producers, manure application will continue through soybean and corn harvest this fall. The field application of manure, milking parlor water, outdoor lot runoff, and silage leachate is a necessary part of dairy farming. Manure transport and application is a significant expense on dairy farms and can easily approach $125 to 150/cow annually.
To best capture the nutrients, manure should be incorporated during application or as soon as possible afterwards. Livestock producers should also consider using cover crops to capture more of the manure nutrients, especially the nitrogen, and to also prevent soil erosion. Another benefit of cover crops that overwinter is the uptake of nitrogen early in the spring when fields are not yet suitable for traffic in March and April.
The most common cover crops used with livestock manure are cereal rye, wheat, and oats. However, farmers have also used radishes, clover, annual ryegrass, Sudan grass, or almost anything they are comfortable growing. If a farmer is participating in the H2Ohio program, be sure to work with your Soil and Water Conservation District to be certain your cover crop mixture meets the requirement to live through the winter months.
A cover crop that is excellent at recycling nitrogen is wheat. Like cereal rye, wheat germinates at low soil temperatures, overwinters, and is an easy cover crop to control the following spring or become a forage crop as wheatlage. It will capture large amounts of the available nitrogen from fall applied livestock manure. Dairy producers can spur growth with one or two applications of manure as the wheat grows next spring.
Cereal rye is the most commonly planted cool-season grass for capturing excess nitrogen. Because rye overwinters, research has shown it can capture and hold 25 to 50 lb/acre of nitrogen, in the organic form as roots and plant tissue. It germinates at lower temperatures than oats so it may be planted later, but less nitrogen will be recycled the later in the fall the rye is seeded. This is another cover crop that could be used as a forage crop in the spring.
Oats are sometimes used as a cover crop in the fall and need to be planted soon after silage harvest. Drilling oats improves germination and growth before frost. Some farmers in northwest Ohio have had great success surface seeding oats and incorporating with shallow tillage.
Cover crops can help livestock farmers recapture manure nutrients and conserve soil by reducing erosion. Livestock producers should consider Best Management Practices when applying manure. The goal should be to combine nutrient recovery and to protect water quality. Manure application rules in Ohio are influenced by watershed location. Check with your local Soil & Water Conservation District about the most current rules in your area.
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Use 2022 Profitability As a Catalyst for Retirement Savings
David Marrison, Professor and OSU Extension Educator, Coshocton County, Ohio State University Extension
Typically as we move into the final quarter of the year, farm managers will start to examine their financial records in order to estimate the potential net farm income for the year and make plans on how to avoid the proverbial ”tax-man.”
All indications point to positive income returns to the dairy sector for 2022. The September WASDE (World Agricultural Supply and Demand Estimates) released on September 12 forecasted the 2022 all milk price at $25.45/cwt and estimates the 2023 all milk price at $22.70/ cwt. The remainder of the year looks favorable due to the shrinking U.S. dairy herd and increasing demand for dairy products.
Additionally, operations may have seen increased revenue due to cash grain sales, in spite of rising input costs. So, if 2022 is looking profitable, what can I do to reduce my income tax obligation? For many farm managers, it typically means prepaying expenses for the upcoming year or by investing in buildings, machinery, and equipment.
While these strategies all are useful as tax mitigation strategies, I would remind you that it is not a bad thing to have a profitable year and to pay taxes. As an added bonus, earning income and paying self-employment taxes as a farm manager has an impact on future social security retirement benefits.
For many farmers, social security will make up a sizable portion of their eventual retirement income. To qualify for future benefits under Social Security, an individual must earn 40 quarters or 10 years of wages or net profits. For 2022, the minimum earnings per quarter is $1,510. Individuals can earn up to four credits per year, making the total minimum earnings equivalent to $6,040 for 2022. Getting to 40 credits makes you eligible for benefits, but how much you will receive for retirement benefits is based on your 35 highest years of earnings. If you pay in at the minimum level, your social security retirement will be minimal. In high profitability years, managers should maximize the wages or profit that is subject to social security tax (to help with 35 high year average).
According to the Social Security Administration, the average (2022) social security income per month for a retired worker is $1,657 or $2,753 for a couple. If a retired couple has a family living of $60,000, then social security provides only 55% or $33,036 of the needed retirement income. So, this leads to the question, how will you make up the remaining amount needed for retirement and account for inflation?
So, if this year has been profitable for you, I would challenge you to examine ways to invest into retirement for you and your employees. In fact, many would contend the best investment you can make for the junior partner of a farming operation is by putting money in their retirement account, early and often. In a time when labor wage inflation is increasing, having a retirement plan as part of your compensation package is also an excellent employee benefit.
It is recommended that farmers work with a financial planner who specializes in retirement planning to discuss options. The following is offered as a primer on retirement planning options:
Individual Retirement Options- Individuals can invest after-tax dollars into certificates of deposits, bonds, stocks, and mutual funds which could serve as income sources for retirement. Individuals can also make contributions to a traditional or Roth individual retirement account (IRA) to help fund their retirement years. Let’s take a closer look at the IRAs:
Traditional IRA- With a traditional IRA, individuals contribute pre- or after-tax dollars and the money grows tax-deferred. The 2022 contribution limit is $6,000 unless the individual is over the age of 50. If over the age of 50, the individual can contribute up to $7,000. Individuals need over $6,000 of earned income to be eligible to contribute to a traditional IRA. There are phase out limitations if the individual is eligible to participate in an employer retirement plan. Withdrawals are subject to penalty if withdrawn before 59.5 years old. Minimum distributions are required once an owner is 72 years old (70.5 if you reached this age by 1/1/2020). Withdrawals are taxed as current income. A person’s yearly IRA contribution may qualify for a deduction on the individual’s tax form.
Roth IRA- A Roth IRA is an Individual Retirement Account to which you contribute after-tax dollars. While there are no current-year tax benefits, the contributions and earnings can grow tax-free, and can be withdrawn tax and penalty-free after age 59½ and after the account has been open for five years. The 2022 contribution limit is $6,000 unless the individual is over the age of 50. If over the age of 50, the individual can contribute up to $7,000. There are no required minimum distributions.
Business Retirement Options- Several vehicles exist for small businesses to use to help build retirement for both owners and employees. Let’s take a quick look at a few business options for retirements.
Savings Incentive Match Plan for Employees (SIMPLE) IRA- Simple IRAs are for businesses with under 100 employees. These plans allow for an employee to defer up to $14,000 of wages with an additional $3,000 if the person is over the age of 50. The employer must match the employee’s contribution (dollar for dollar) up to 3% or make a nonelective contribution of 2% of the employee’s compensation. Income taxes are paid upon distribution. These IRAs can fund retirement for both owners and employees.
401(k) Plan- 401(k) plans allow for the elective deferral of up to $20,500 ($27,000 for over 50) of salary. Employers can match 5%, 10%, 20%, or more to bring total contributions to $61,000. The employee’s deferral is limited to 100% of their wages. Employers have the option of adding Roth 401(k)s. It should be noted the percentage match that is made for a contributing owner must be the same for qualified employees.
Solo-401(k)- These 401(k) plans are for farm sole proprietorship. These plans are for a one-person business that has no full-time W-2 employees. Spouses can also contribute if they work for the business. The overall contribution limit is $61,000 for 2022 ($20,500 employee and $40,500 as employer).
Simplified Employee Pension Plan (SEP)- These plans allow for employers to set aside retirement for themselves and their employees. Employer contributes an equal percentage for all employees up to 25% of their pay limited to $61,000 in 2022. The percentage for employees has to match what is contributed for the owner. Employer contribution for employees is tax deductible. Employers do not have to make contributions every year, allowing the business some flexibility based on business conditions.
Retirement Contribution Limits
< 50 years old
> 50 years old
Regular IRA
$6,000
$7,000
Roth IRA
$6,000
$7,000
SIMPLE IRA
$14,000
$17,000
401(k) Elective Deferral
$20,500
$27,000
Overall 401(k) Contributions (Employee + Employer)
$61,000
$67,500
SEP Contributions for employee (up to 25% of wages)
$61,000
$61,000
SEP Contributions for self-employed individual
$61,000
$61,000
More information about retirement choices for small businesses can be found at: https://www.irs.gov/pub/irs-pdf/p3998.pdf and more information about the different type of retirement plans can be found at: https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans
Other Retirement Sources: Besides social security benefits and individual and business retirement accounts, farm managers can also explore other options for income to fund their retirement years. Some of these options can be found below:
- Earnings from work while “retired”
- Rental of land, facilities & machinery
- Sale of land, facilities & machinery
- Crop share lease arrangements
- Spouse’s retirement program
- Off-farm pensions plans
- Saving accounts
- Dividends from investments
- Sale of stocks & bonds
- Sale of personal assets & collectibles
- Sale of personal residence (downsizing)
- Off-farm rental properties
- Reducing expenses
- Consulting agreements
- Loans from life insurance
- My kids will provide support!
Summary: Increased profits may be realized by dairy farms in 2022. As we enter the last quarter of the year, it is recommended that farm managers crunch their financial numbers to determine whether funding retirement accounts would be a sound and wise investment for their operation. Managers are encouraged to seek professional council from financial professionals in analyzing the pros, cons, and risk of individual retirement options.
Sources:
World Agricultural Supply and Demand Estimates, WASDE 628. September 12, 2022. Access at: https://www.usda.gov/oce/commodity/wasde/wasde0922.pdf
Choosing a Retirement Solution for Your Small Business. Source: https://www.irs.gov/pub/irs-pdf/p3998.pdf
Publication 560 – Retirement Plans for Small Businesses. Access at: https://www.irs.gov/pub/irs-pdf/p560.pdf
Publication 225 – Farmers Tax Guide. Access at: https://www.irs.gov/pub/irs-pdf/p225.pdf
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A Farm Advisory Team Can Help You Succeed
Chris Zoller, Extension Educator, Agriculture and Natural Resources, Tuscarawas County, Ohio State University Extension
Managing all the complexities of a dairy farm is no easy task. Weather, animal nutrition and health, crop variety selection, managing people, and monitoring financial performance are just a few of the items that add to the complexity. Fortunately, there are several people available as a team of advisors to help you address the challenges and contribute to your success.
Farm Advisory Team
You likely are meeting and working with many of the potential team members already, just on an individual basis. Your veterinarian, nutritionist, agronomist, lender, attorney, and Extension Educator are a few of these people. Each brings their own set of knowledge, skills, and experience to the table to analyze, diagnose, and provide recommendations to address challenges and the direction of your farm.
Initial Planning
Before assembling your advisory team, develop a list of questions, issues, or concerns you want assistance and guidance from your team members. Divide the list into immediate, short-term (less than one year), medium-term (one to five years), and long-term (greater than five years) goals or issues you wish to address.
If you’ve never done it before, completing a Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis of your farm business may be beneficial. This analysis can help guide discussion and direction.
This is also a time to consider who would be a good person to be the facilitator of the team. A good facilitator supports the use of teams, is a good listener, can work with groups, and is well organized. The role of the facilitator is to guide discussion, keep the team focused on their task, and communicate accomplishments and expectations. The facilitator may also assist with periodic check-ins to monitor progress.
Getting Started
Forming the advisory team is not difficult. Again, you are already working in some capacity with each potential team member. The goal here is to bring all the members together at the same time.
After you have developed your list of goals and completed your SWOT Analysis, now it’s time to invite team members. A phone call or personal visit with each member is suggested. This allows you to discuss your reason(s) for inviting them, what you hope to accomplish, gauge their level of interest, discuss time commitment, and identify potential meeting dates and times. A call or face-to-face visit with the person who you identify as the facilitator is important. This person is key to the success of the team and needs to understand their role and expectations.
First Meeting
A written agenda is strongly encouraged. This helps everyone see the task at hand and keeps the team focused and on track.
Begin the first meeting with an introduction of members, including their role. While most may think they have a good understanding, a brief overview of your farm operation gets everyone on the same page. Describe farm size, cow numbers, animal housing, etc.
Following introductions, share with the team your SWOT Analysis and the concerns you’ve identified previously. Allow members to review, digest, and react to these. The beauty of an advisory team is that each member will approach an issue from a different perspective and provide possible solutions that others might not have otherwise considered. Remember…two heads are better than one. The facilitator will take notes and lead much of the discussion among members.
Wrapping Up
As the established ending time approaches, the facilitator needs to summarize the discussion, reference notes they have taken, and identify next steps. The next steps include the date, time, and location for the future meetings and tasks to complete (along with the person responsible). These should be sent to all team members. Depending upon the complexity and number of topics you wish to address with the team, the frequency of meetings may vary. I believe you should meet with your advisory team at least once a year.
Summary
Farm advisory teams can bring together those with diverse knowledge and skills all focused on your long-term success. Devote time to completing a SWOT Analysis, developing your goals and areas of concern, and invite team members to join you.
If you have questions about advisory teams, I encourage you to consult the resources listed below. Your local Extension Educator is a great resource to help you navigate the process.
Sources
An Advisory Team Approach to Your Farm Management, ResearchGate, https://www.researchgate.net/publication/273124170_An_Advisory_Team_Approach_to_Your_Farm_Management
Conducting a SWOT Analysis of Your Agricultural Business, Ohio State University Extension, https://ohioline.osu.edu/factsheet/anr-42
Dairy Advisory Teams Tools for Facilitators, Penn State University Extension, https://extension.psu.edu/dairy-advisory-team-tools-for-facilitators
What are Dairy Advisory Teams? Penn State University Extension, https://extension.psu.edu/what-are-dairy-advisory-teams
(Originally published in Farm and Dairy, September 22, 2022)