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Combinations of futures and options contracts on milk and feed were simulated to determine their influence on a representative dairy farm’s ability to meet cash flow requirements and reduce the variance of net income. Compared with the reference scenario of selling milk and procuring inputs on a monthly cash basis, the risk management activities did not result in a significant change in either the level or variance of net farm income. The results suggest that on average the current marketing procedure of monthly cash milk pricing and monthly feed purchases (and pricing) produces a strong built-in natural hedge for dairy farmers.

Anaerobic digestion allows farmers to create renewable energy and significantly reduce manure methane emissions. Methane emission reductions have the potential to be an important source of carbon dioxide offsets under cap and trade climate legislation. Estimates of the aggregate supply curve for CO2e offsets were developed based upon dairy farm data collected by the USDA/ERS Agricultural Resource and Management Survey (ARMS). The results provide insight regarding the potential for methane emission reductions and renewable energy generation on U.S. dairy farms. Offset prices in excess of $15 per ton of carbon dioxide equivalent would be required to reduce methane emissions from manure storages by 50 percent from 2005 levels.

Managing the risk associated with farming is challenging. Fortunately, farmers have a variety of risk management tools at their disposal. This series of case studies examines how crop insurance can be used to manage some of the risks faced by farmers. The examples illustrate how crop insurance purchases would impact the returns generated to a farming enterprise. While the examples cover a variety of commodities and insurance products, they do not consider every possible risk that might arise. Likewise, they do not consider all of the possible financial situations that might be experienced by a farmer. Instead, they focus on highlighting how crop insurance impacts the profitability of the farm. Companion spreadsheets are available for all of the examples so that readers can examine a wider range of scenarios than those discussed in the examples. These spreadsheets and other related materials are available for download at: http://www.agfinance.aem.cornell.edu/CropIns.html

This paper conducts a financial analysis of anaerobic digestion systems on dairy farms and describes a financial model developed for this purpose. The model is flexible and can be utilized with farm-specific data to assist in the evaluation of an anaerobic digestion system. The model is illustrated with two sources of data. The “base” case is the more flexible model and the parameters to utilize the model were developed from a wide range of resources. The second model is meant to be used in conjunction with FarmWare 3.1 which was developed and distributed by the United States Environmental Protection Agency’s AgStar Program. The analysis also explicitly incorporates the financial incentives offered under the New York State Energy Research and Development Authority’s Customer-Sited Tier Anaerobic Digester Gas-to-Electricity Program. The analysis indicates that a variety of parameters are very important in determining the economic viability of anaerobic digester projects. These key variables include the biogas energy yield, current on-farm energy use, prices paid for electricity, the price received for excess electricity generation, the ability to co-digest other waste streams, capital, and operating costs. Based upon reasonable estimates of the costs of such a project for a 1,000 cow dairy operation, it would appear that anaerobic digestion is of marginal profitability. However, there are a variety of reasonable scenarios where the profitability of the system is very attractive.

Livestock waste presents an important potential source of renewable energy. A variety of factors make the production of renewable energy from livestock waste particularly appealing. Rising energy prices, rising fertilizer prices, and incentives for renewable energy production have increased the value of outputs from livestock waste-to-energy systems. Additionally, confined animal feeding operations (CAFOs) have come under increasing regulatory scrutiny regarding waste treatment. Biogas production generally results in improved treatment of agricultural wastes thereby reducing the environmental impacts associated with CAFOs. The challenges to the development of the industry include the site specific nature of biogas production. In particular, the best sites for biogas production, large livestock operations, may not be located in areas with favorable markets for the energy produced from the system. Likewise, a variety of technologies for production are required because each potential site often has different characteristics, making a one-style fits all solution unlikely to be successful. Policy solutions aimed at market development are likely to be of great benefit to industry development

Corn ethanol plants consume large amounts of corn and their location has the potential to alter local crop prices and surrounding agricultural land values. The relationship between ethanol plant location and agricultural land prices is examined using data obtained from the Agricultural Credit Survey administered by the Federal Reserve Bank of Kansas City. The findings indicate that the portion of land price changes attributable to location is consistent with previous estimates of basis changes associated with ethanol plant location. As a result, the land markets appear to be rationally adjusting to the location of ethanol plants.

Corn ethanol plants consume large amounts of corn and their location has the potential to alter local crop prices and surrounding agricultural land values. The relationship between ethanol plant location and agricultural land prices is examined using data obtained from the Agricultural Credit Survey administered by the Federal Reserve Bank of Kansas City. The findings indicate that the portion of land price changes attributable to location is consistent with previous estimates of basis changes associated with ethanol plant location. As a result, the land markets appear to be rationally adjusting to the location of ethanol plants.

The study presents stochastic optimal control/dynamic programming (SOC/DP) to derive the optimal debt level and consumption in farm models concerning two sources of uncertainty: the return on assets and interest rate. The SOC/DP analytic framework is used to analyze the impacts of risk-reducing farm policies on farm’s financial and risk adjustments. The results show the violations of the risk-balancing concept, which theorizes that risk-reducing farm policies may lead to increases in financial leverage, total risk, and the expected returns. Also, this study examines the extent to which the estimates of the optimal debt level are biased when interest rate risk is ignored.

This paper discusses the findings of a research project that examined the potential benefits of establishing farm savings accounts for specialty crop growers1. The primary goal of the project was to determine whether farm savings accounts would provide specialty crop growers with a useful tool for managing financial risk. The project examined how various farm savings account proposals ultimately impacted the benefits that specialty crop growers would receive from the accounts.

Financial data from a panel of New York dairy farms was analyzed to examine the potential benefits of establishing federally subsidized farm savings accounts for dairy farmers. The paper examines whether farmers would have sufficient cash flow to fund the accounts, how the accounts would influence farm income variability, and how program design influences eligibility for the benefits received from the accounts.

Government subsidized farm savings accounts have gained attention as possible risk management tools. These accounts encourage farmers to set aside funds in high income years to be drawn upon in low income years. This study considers two potential savings programs, Farm and Ranch Risk Management (FARRM) accounts and Counter-Cyclical (CC) farm savings accounts. FARRM accounts use tax deferral as the primary incentive for participation and under CC accounts the government would match farmer deposits up to $5,000. This report examines the potential benefits of these accounts for New York dairy farmers. The study illustrates how the selection of different income to define eligibility will impact the potential eligibility and benefits received by the accounts. In particular, if measures do not correct for changes in farm size, the value of the accounts to commercial farmers will be greatly reduced. Although participation and benefit estimates vary by the specific net and gross income measures used to define participation and allow withdrawals, the differences were relatively small. The analysis indicates that most commercial dairy farms would be eligible to build substantial balances in the accounts. The use of net income measures as opposed to gross income measures increases the likelihood that farmers will be able to access the funds deposited in the accounts.

Loan records and lender credit risk classifications are used to examine agricultural credit risk migration. The results include estimates of the likelihood of borrowers transitioning among five credit risk tiers. The paper also examines factors that influence or predict credit risk migration and its impact on loan pricing.