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Volume 11, Number 11 - November 2005

This Month in Ag Connection

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Nitrogen Sources and a Changing Fertilizer Industry

On June 27, 2005 the following news release was issued:

"CALGARY, Alberta -- Agrium Inc. (TSX and NYSE: AGU) announced today it will discontinue production and sales of agricultural grade ammonium nitrate. This decision was made as part of our ongoing process to optimize returns from our base business and to reduce potential exposure related to security concerns."
Truck Sprayer

Who is Agrium and how does this impact my Central Missouri operation? Agrium Inc. is a leading global producer and marketer of agricultural nutrients and one of the last ammonium nitrate producers for agricultural use. With Agrium moving out of the ammonium nitrate business, forage producers must look to other products to fill the role of ammonium nitrate. Substitute products will include: urea, nitrogen solutions and ammonium sulfate.

Ammonium sulfate is generating lots of activity at fertilizer wholesaler warehouses. Like any product it has its pluses and minuses. A new urea product on the market is Agrium's ESN. ESN is a polymer coated urea that acts as a controlled release product. The technology is not new. The commercial horticulture and turf industries have used similar materials for years. What's new is finding cost efficient materials and the proper in season release strategy for northern and southern markets.

Bottom line is that there are acceptable alternatives. More information will be available in future newsletter issues. Also, look for information at this winter's meetings.

(Author: Rich Hoormann, Agronomy Specialist)

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Drought, Hurricanes, and Prices: Bad News for Missouri Farms?

Missouri hay and crop losses, due to summer drought conditions, are expected to total near $450 million. Especially hard hit were the Central and Northeastern portions of the state where severe drought conditions occurred. USDA projections of 57 bushels per acre (bpa) corn yields in Northeast Missouri represent only 43% of the 5 year average of 132 bpa.

In spite of the drought in the heart of the Corn Belt, total U.S. crop production is better than most expected. USDA estimates the second largest corn and the third largest soybean crops ever, leading to increased ending stocks and lower prices. This situation produces a "worst case scenario" for many Missouri producers with low yields combined with low prices! This scenario, coupled with higher energy and other input costs, is likely to produce negative cash margins for some crop producers, especially for those in Central and Northeast Missouri.

Hurricanes Katrina and Rita added to the drought related problems for Missouri farmers. Transportation delays coupled with higher fuel prices, caused barge and rail rates to increase dramatically. This contributed to plummeting cash grain prices, resulting in a much weaker than normal basis for grains and soybeans.

Transportation problems and higher fuel and fertilizer costs have created concerns about fertilizer availability. Higher natural gas prices had already led to the shut-down or closing of many domestic nitrogen plants, leading to a greater dependence on fertilizer imports. Increased world fertilizer demand along with transportation problems has increased concern about spring product availability, making it difficult for dealers to forecast inventory availability.

What can farmers do? At this point choices are limited. Weak basis and futures market carry (price premium for distant month futures contracts) suggest avoiding grain sales at current cash prices. Most Missouri counties have received disaster declarations, providing potential eligibility for a variety of government loan and tax provisions. Congress is considering and may enact other agriculture disaster programs. Adjusting cropping plans, managing input costs, and tighter financial management may be necessary as producers look ahead to 2006.

Perhaps, a better question might be: What should farmers have done? This production season illustrates the importance of risk management plans. Crop insurance could have been used to reduce production risk and it was possible to make new crop sales when December corn futures were $2.50 or higher and November soybean futures were above $7.00. Risk management tools, coupled with price support loan provisions and the ability to store grain, provided opportunities to lessen the negative impacts of disappointing production and low prices.

(Author: Melvin Brees, Agriculture Economist, UMC-FAPRI)

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Saving Energy on the Farm

Not since the seventies and eighties have we seen the interest we have now in ways to save energy. All of us have probably given some thought to how we might reduce costs with our vehicles, our homes or on the farm. Some materials were developed in the 80's for our use and now is the time to reuse those materials.

Checklists for the farm sector were developed by the National Food and Energy Council in 1983 are still pertinent today.

Some quick, low-cost strategies included in the checklists are:

In the Home:

  1. Check heating systems to be sure they are operating efficiently.
  2. Change/clean filters on heating and cooling systems regularly.
  3. Turn down the thermostat.
  4. Seal up leaks in the home.
  5. Add insulation to the attic if needed. We would recommend an R-value of at least 30.

In Farm Buildings:

  1. Check heating systems.
  2. Lower thermostats.
  3. In livestock buildings, don't over-ventilate. Ventilation causes the largest heat loss in livestock buildings. Ventilation is needed to create a healthy environment for livestock. Excessive ventilation can greatly increase heating costs. Zone heating for young animals is more efficient than heating the whole building.
  4. Seal leaks in buildings and insulate them. Insulation won't pay as much in livestock buildings as in homes because of the need to ventilate livestock buildings.

For Cropping Operations:

  1. Keep motorized equipment in good working order.
  2. Match the size of your tractor with the size of your implements. It will cost more to run a tractor that is over-powered for the job. In a situation where the tractor is not heavily loaded, you can improve fuel economy by reducing the engine RPM up to twenty percent and shift to a higher gear. This will work if the tractor is operated at 75% of power (RPM) or less.
  3. Eliminate any unnecessary trips across the field. Recreational tillage is out now.
  4. Make sure your grain drying fans and heaters are working properly.
  5. Don't over-dry grain.
  6. Evaluate your fertilizer needs. Use a soil test to determine proper levels of fertilizer.

In the longer term, you can add more energy efficient heating systems, re-construct buildings, and purchase energy efficient equipment. You can also consider alternative fuels. For these changes carefully consider the economics of the alternative.

(Author: Don Day, Natural Resource Engineer)

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Taxation Tidbits: Domestic Production Deduction - Devil in the Details

The Job Creation Tax Act that was passed late last year was filled with lots of tax "presents", something for just about everybody. One of these presents is the "Domestic Production Activities Deduction". The "domestic production deduction" for 2005 can provide a deduction equal to the lesser of:

As indicated in the April 2005 Ag Connection newsletter: the details were still being "ironed-out". This article addresses the "net income from qualified production activities" and "wages paid" factors.

For the majority of farmers, "net income from qualified production activities" will be the net income reported on the Schedule F of their tax return. Qualifying production activities include: cultivating soil, raising livestock and fish, as well as storage, handling and other processing of agricultural products. However, transportation activities are excluded. Other excluded income items are: custom hire income, gains from sale of land, machinery and equipment. Additionally, sale proceeds from animals purchased for breeding, draft and dairy are excluded.

Safe Harbor: Taxpayers who have less than 5% of their gross receipts from non-qualifying items can treat all of their production receipts as qualifying receipts.

The other limiting factor for many farmers will be the "50% of Form W-2 wages paid". IRS Notice 2005-14 excludes the following wages from being considered in the calculation of "wages paid":

The "50% of wages paid" limit will provide a difficult hurdle for many farmers conducting business as sole proprietors and partnerships. This new wrinkle makes prior year-end tax planning even more important.

(Author: Parman R. Green, Ag Business Mgmt. Specialist)

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Bottom Line Tidbits: Roth 401(k) - Roth IRA on Steroids

The need for personal retirement planning and investing is increasingly capturing the attention of Americans - it's about time! Roth IRAs, a relatively new investment option, has been a retirement vehicle since 1997. Roth IRAs can offer several advantages for individuals or couples with adjusted income less than $95,000 and $150,000, respectively. For the 2005 tax year the maximum contribution amount is $4,000 ($4,500 if age 50 or older). For 2006 the Roth IRA contribution limit will be $4,000 or $5,000 if age 50 or older. Beginning in 2006 workers will have an opportunity to participate in a super-sized Roth retirement vehicle - a 401(k) Roth. Here is how the 401(k) Roth is super-charged - there is no maximum income limit as there is with the Roth IRA and the annual contribution limit for 2006 is $15,000 or $20,000 if age 50 or older.

Roth accounts foster the tax-free growth of investment funds while providing more flexible withdrawal rules. While Roth IRAs and the new 401(k) offer some attractive features, they will not always be the best investment vehicle for everyone in every situation.

Some of the interesting features of Roth IRAs and the 401(k) Roth are:

The Roth accounts can be excellent vehicles for accumulating retirement funds. The longer the time period the Roth is held - the better. In fact, Roth accounts would be excellent assets to be "passed on" to the surviving spouse and/or other heirs. This is due to the extended potential compounding time period without any federal income tax liability in your hands and that of your heirs and because Roth accounts will not be considered income in respect of decedent (as with most traditional IRA and pension accounts).

In addition to employees, this new 401(k) Roth could be an excellent retirement vehicle for farmers and other business owners. Many business owners invest nearly all of their disposable income into the growing their business - only to realize as they enter their late 50's and 60's that they have limited funds stashed away for retirement (unless they are willing to sell their business). If you like the concept of the Roth IRA - opting to super-size with the 401(k) Roth could be an excellent vehicle for enhancing your retirement funding.

(Author: Parman R. Green, Ag Business Mgmt. Specialist)

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Publishing Information

Ag Connection is published monthly for Central Missouri Region producers and is supported by University of Missouri Extension, the Commercial Agriculture program, the Missouri Agricultural Experiment Station and the MU College of Agriculture, Food and Natural Resources. Managing Editor: Kent Shannon.