Business and Financial

Each year, preliminary crop enterprise budgets are unveiled at the Farm Science Review which reveals our best estimates for costs and returns for the main row crops in Ohio for the upcoming year. With continued high crop prices projected for 2022 there is some optimism, however, higher costs will likely decrease profit margins to levels lower than 2021 margins.

Production costs for Ohio field crops are forecast to be higher compared to last year with higher fertilizer, seed, chemical, fuel, machinery and repair costs leading the way.

Variable costs for corn in Ohio for 2022 are projected to range from $477 to $583 per acre depending on land productivity. Variable costs for 2022 Ohio soybeans are projected to range from $266 to $302 per acre. Wheat variable expenses for 2022 are projected to range from $213 to $262 per acre. These are increases over last year of 19%, 18%, and 25% for corn, soybeans and wheat, respectively.

If the current grain prices and costs endure through next year, profit margins will likely be positive although higher costs may create losses for some producers. Grain prices currently used as assumptions in the 2022 crop enterprise budgets are $4.80/bushel for corn, $12.20/bushel for soybeans and $6.90/bushel for wheat. Projected returns above variable costs (contribution margin) range from $226 to $472 per acre for corn and $288 to $529 per acre for soybeans. Projected returns above variable costs for wheat range from $191 to $344 per acre.

Return to Land is a measure calculated to assist in land rental and purchase decision making. The measure is calculated by starting with total receipts or revenue from the crop and subtracting all expenses except the land expense. Returns to Land for Ohio corn (Total receipts minus total costs except land cost) are projected to range from $54 to $283 per acre in 2022 depending on land production capabilities. Returns to land for Ohio soybeans are expected to range from $166 to $393 per acre depending on land production capabilities. Returns to land for wheat (not including straw or double-crop returns) are projected to range from $99 per acre to $242 per acre.

Total costs projected for trend line corn production in Ohio are estimated to be $919 per acre. This includes all variable costs as well as fixed costs (or overhead if you prefer) including machinery, labor, management and land costs. Fixed machinery costs of $78 per acre include depreciation and other overhead. A land charge of $207 per acre is based on data from the Western Ohio Cropland Values and Cash Rents Survey Summary. Labor and management costs combined are calculated at $82 per acre. Details of budget assumptions and numbers can be found in footnotes included in each budget.

Total costs projected for trend line soybean production in Ohio are estimated to be $619 per acre. (Fixed machinery costs: $62 per acre, land charge: $207 per acre, labor and management costs combined: $53 per acre.)

Total costs projected for trend line wheat production in Ohio are estimated to be $541 per acre. (Fixed machinery costs: $36 per acre, land charge: $207 per acre, labor and management costs combined: $48 per acre.)

Current budget analyses indicates favorable returns for soybeans compared to corn or wheat but crop price change, harvest yields and other factors through fall and into summer of next year may change this outcome. These projections are based on OSU Extension Ohio Crop Enterprise Budgets. Newly updated Enterprise Budgets for 2022 have been completed and posted to the Farm Office website: https://farmoffice.osu.edu/farm-mgt-tools/farm-budgets

In addition to projected row crop budgets for 2022, there are newly updated forage budgets posted to our Farm Office site. These include Alfalfa Hay, Alfalfa Haylage and Corn Silage. Also recently updated are two Market Beef Budgets which include Market Beef Budget (Self-Fed) and Market Beef Budget (Bunk-Fed).

Farm Science Review is back!  OSU's Farm Office Team will be there, and we'll broadcast the next Farm Office Live from our farm office at the Review.  We can't promise we'll be able to ignore biscuits and gravy, pork tenderloins, bahama mamas, or milkshakes during Farm Office Live, but we can promise you updates on recent developments in the world of farm management and agricultural law. 

The broadcast will be on Thursday, September 23 beginning at 10 a.m.  Here's what's on the agenda:

• Carbon market programs and carbon agreements

•  Legislative update

• 2022 crop budgets

• 2020 Farm Business Analysis program results from crop farms

• Ohio cash rental rates

• Dairy Market Volatility Assistance Program

• Highlights of FSR and upcoming programs

Who's on the Farm Office Live Team? OSU experts ready to help farmers, landowners and agribusiness professionals navigate the issues we all deal with in the farm office.  Our team includes:

• Peggy Kirk Hall - Agricultural Law

• David Marrison - Farm Management 

• Dianne Shoemaker - Farm Business Analysis and Dairy Production

• Barry Ward - Farm Management and Tax 

To learn more and register for Farm Office Live, visit https://farmoffice.osu.edu/farmofficelive.  Recordings of our previous Farm Office Live webinars are also available at that site.

Did you know that the “wise old owl” saying is a myth?  Generally speaking, owls are no wiser than other birds of prey.  In fact, other bird species like crows and parrots have shown greater cognitive abilities than the owl.  An owl’s anatomy also helps dispel the myth because most of the space on an owl’s head is occupied by their large eyes, leaving little room for a brain. 

This week’s Ag Law Harvest brings you EPA bans, Ohio case law, USDA announcements, and federal case law which could make your head spin almost as far as an owl’s.  

EPA banning use of chlorpyrifos on food crops.  The EPA announced that it will stop the use of the pesticide chlorpyrifos on all food to better protect producers and consumers.  In its final rule released on Wednesday, the EPA is revoking all “tolerances” for chlorpyrifos.  Additionally, the EPA will issue a Notice of Intent to Cancel under the Federal Insecticide, Fungicide, and Rodenticide Act (“FIFRA”) to cancel all registered food uses of chlorpyrifos.  Chlorpyrifos is an insecticide used for a variety of agricultural uses, including soybeans, fruit and nut trees, broccoli, cauliflower, and other row crops, in addition to non-food uses.  The EPA’s announcement comes in response to the Ninth Circuit’s order directing the EPA to issue a final rule in response to a petition filed by opponents to the use of chlorpyrifos.  The petition requested that the EPA revoke all chlorpyrifos tolerances because those tolerances were not safe, particularly because of the potential negative effects the insecticide has on children.  For more information about chlorpyrifos and the EPA’s final rule, visit the EPA’s website.

Trusts aren’t to be used as shields.  An Ohio appeals court recently reinforced the concept that under Ohio law, trusts are not be used as a way to shield a person’s assets from creditors.  Recently, a plaintiff filed a lawsuit against a bank alleging breach of contract and conversion, among other things.  Plaintiff, an attorney and real estate developer, claimed that the bank removed money from his personal account and a trust account in violation of Ohio law and the terms of the loan agreement between the parties.  Prior to the lawsuit, plaintiff established a revocable trust for estate planning purposes and to acquire and develop real estate. This dispute arose from a $200,000 loan from the bank to the plaintiff to help establish a restaurant.  A provision of the loan agreement, known as the “Right to Setoff” provision, allowed the bank to “setoff” or effectively garnish all accounts the plaintiff had with the bank.  The setoff provision explicitly prohibited any setoff from any IRA or trust accounts “for which setoff would be prohibited by law.”  Plaintiff made all monthly payments but failed to make the final balloon payment on the loan.  Plaintiff argued that the bank broke the loan contract and violated Ohio law by taking funds from the trust account to pay off the remaining balance of the loan.  The court disagreed.  The court noted that under Ohio law, a settlor’s property in a revocable trust is subject to the claims of the settlor’s creditors.  A settlor is a person who creates or contributes property to a trust.  In this case, plaintiff was the creator, settlor, and sole beneficiary of the revocable trust.  Because of that, the court concluded the bank did not violate Ohio law when using the trust account to setoff the balance of the loan.  Additionally, the court found that the bank did not violate the terms of the loan agreement because a setoff from the trust account was not prohibited by law.  The court noted that Ohio law did not intend to allow a settlor who is also a beneficiary of the trust to use a trust as a “shield” against creditors.  Although trusts can be a useful estate planning tool, there are limits to what a trust can do, as evidenced by this case. 

Renewable fuel supporters file appeal on E15 summer sales. Corn farmers have joined forces with the biofuel industry (“Petitioners”) to ask the D.C. Circuit Court of Appeals for a new hearing on a ruling that struck down the EPA’s 2019 decision to allow year-round E15 sales.  Earlier this year, the same D.C. Circuit Court of Appeals issued an opinion that ruled the legislative text in the law supporting the biofuel mandate does not support the Trump administration’s regulatory waiver that allowed E15 to be sold during the summer months. In their petition, Petitioners argue that the D.C. Circuit Court made “significant legal errors.”  Petitioners contend that the court should rehear the case because the intent behind the nation’s biofuel mandate is better served by the sale of E15 through the summer months because it is less volatile, has less evaporative emissions, and is overall better for the environment than other fuel sources.  Petitioners also believe the court’s original decision deprives American drivers the choice of lower carbon emitting options at the gas pump.

Monsanto asks Supreme Court to review Ninth Circuit’s Roundup Decision.  In its petition to the Supreme Court of the United States Monsanto Company (“Monsanto”) asked the Supreme Court to review the $25 million decision rendered by the Ninth Circuit Court of Appeals.  In that decision, the Ninth Circuit held that the Federal Insecticide Fungicide and Rodenticide Act (“FIFRA”) did not preempt, or otherwise prevent, the plaintiff from raising California failure-to-warn claims on Roundup products and allowed plaintiff to introduce expert testimony that glyphosate causes cancer in humans.  In trial, the plaintiff argued that Monsanto violated California’s labeling requirements by not including a warning on the Roundup label that glyphosate, which is found in Roundup, causes cancer.  Monsanto argues that FIFRA expressly preempts any state law that imposes a different labeling or packaging requirement.  Under FIFRA, Monsanto argues that the EPA did not require Monsanto to include a cancer warning on its Roundup label.  Therefore, Monsanto maintains, that because California law differed from FIFRA, Monsanto was not required to follow California law when it came to labeling its Roundup product.  Secondly, the Ninth Circuit allowed plaintiff to present expert evidence that glyphosate could cause non-Hodgkin’s lymphoma in the general public and that glyphosate caused the plaintiff’s lymphoma.  Monsanto contends that the lower courts have distorted established precedent by allowing the expert testimony because the testimony is not based on generally accepted scientific principles and the scientific community has consistently found that glyphosate does not cause cancer in humans.    

USDA working to protect nation’s dairy industry.  The USDA’s Agricultural Marketing Service (“AMS”) has struck a deal with the European Union (“EU”) to satisfy the EU’s new import requirements on U.S. dairy.  The EU will require new health certificates for U.S. dairy products exported to the EU to verify that the U.S. milk used for products exported to the EU is sourced from establishments regulated under the Grade “A” Pasteurized Milk Ordinance or the USDA AMS Milk for Manufacturing Purposes.  Officials representing the U.S. Dairy Export Council and International Dairy Foods Association claim that the deal will allow U.S. producers to comply with the EU’s mandates while also satisfying the concerns within the American dairy industry.  The deal pushes back the EU’s deadline for new health certificates to January 15, 2022, to allow U.S. producers and exporters enough time to bring their products into compliance.  The USDA also announcedthat it is providing around $350 million to compensate dairy producers who lost revenue because of market disruptions due to the COVID-19 pandemic and a change to the federal pricing formula under the 2018 farm bill.  Additional details are available at the AMS Dairy Program website.

Tale as old as time.  An Ohio appeals court recently decided a dispute between neighbors about a driveway easement.  The driveway in dispute is shared by both neighbors to access their detached garages. Defendants used the driveway to access their garage and then the driveway extends past the Defendants’ garage onto Plaintiff’s property and ends at Plaintiff’s garage.  The dispute arose after Defendants built a parking pad behind their garage and used parts of the driveway they never used before to access the parking pad.  The original easement to the driveway was granted by very broad and general language in a 1918 deed, when the property was divided into two separate parcels.  In 1997, a Perpetual Easement and Maintenance Agreement (“Agreement”) was entered into by the two previous property owners.  The Agreement was much more specific than the 1918 deed and specifically showed how far the easement ran and what portions of the driveway could be used by both parties.  The 1997 Agreement did not allow for Defendants to use the portion of the driveway necessary to access their parking pad.  Plaintiffs argue that the 1997 Agreement controls the extent of the easement, whereas Defendants argue that the broad general language in the 1918 deed grants them authority to use the whole length of the driveway.  The Court found the more specific 1997 Agreement to be controlling and ruled in favor of the Plaintiffs.   The Court reasoned that the 1918 deed creates an ambiguity as to the extent of the easement and there is no way of knowing what the original driveway looked like or how it was used.  The Court concluded that the 1997 Agreement does not contradict or invalidate the 1918 deed, rather the 1997 Agreement puts specific parameters on the existing easement and does not violate any Ohio law.  The Defendants were found liable for trespass onto the Plaintiffs’ property and is expected to pay $27,500 in damages.  The lesson to be learned from all of this?  Make sure your easements are as specific and detailed as possible to ensure that all parties are in compliance with the law.

“Carbon farming” is a term that came and went about a decade ago, but it’s back and gaining traction.  Ohio farmers now have opportunities to engage in the carbon farming market and receive payments for generating “carbon credits” through farming practices that reduce carbon emissions or capture atmospheric carbon.   As with any emerging market, there are many uncertainties about the carbon market that require a cautious approach.  And as we’d expect, there are legal issues that arise with carbon farming.

Some of those legal issues center on carbon agreements--the legal instruments that document the terms of a carbon farming relationship.  Each carbon market program has its own carbon agreement, so the terms of those agreements vary from program to program.  Even so, understanding the basics of this unique legal agreement is a necessity. 

Here’s what we know at this point about carbon agreements and the legal issues they may raise.

New terminology.  Carbon markets and carbon agreements speak a new language, containing many terms we don’t ordinarily use in the agricultural arena.  The terms are not fully standardized, and their meanings may differ from one program to another.  Understanding these new terms and their legal significance to the carbon agreement relationship is important.  Common terms to know are below but check each program to clarify its definitions for these terms.

• Carbon practices.  Farming practices that have the potential to reduce carbon emissions or sequester carbon.
• Carbon sequestration.  The process of capturing and storing atmospheric carbon.
• Carbon credit.  A measurable, quantifiable unit representing a reduction of carbon dioxide emissions that can be transferred from one entity to another.  A credit typically represents one metric ton of “carbon dioxide equivalent, which is a metric that standardizes the global warming potential of all greenhouse gases by converting methane, nitrous oxide and fluorinated gases to the equivalent global warming potential of carbon dioxide.
• Carbon offset.  Using a carbon credit generated by another entity to offset the emissions of an entity that emits carbon elsewhere.
• Carbon inset.  A reduction of carbon within a specific supply chain that emits carbon, accomplished by adopting practices within that supply chain.
• Carbon registry.  An entity that oversees the registration and verification of carbon credits and offsets.
• Verification.  The process of confirming carbon reduction benefits, typically performed by a third-party that reviews the carbon practices and the accounting of carbon credits generated by the practices.
• Additionality.  Carbon reduction that results from carbon practices incentivized by the carbon agreement and that would not have occurred in the absence of the incentive.
• Permanence.  The longevity of a carbon reduction, which may be enhanced by a requirement that carbon practices remain in place over a long period of time and steps are taken to reduce the risk of reversal of the carbon reduction.
• Reversal risk.  Risk that a carbon reduction will be reversed by future actions such as changing tillage or harvesting the trees or vegetation planted to generate the carbon reduction.

Initial eligibility criteria.  Each carbon program has specific requirements for participating in the program.  Two common eligibility criteria are:

• Location.  The program may be open only to farmers in a particular geographic location, such as within a specified watershed, region, or state.
• Acreage.  A minimum acreage requirement often exists, although that can vary from 10 acres to 1,000 or more acres.  Some projects may allow adjacent landowners to aggregate to meet the minimum acreage requirement, but that can raise questions of ineligibility should one landowner leave the program.
• Land control.  If the farmer doesn’t own the land on which carbon practices will occur, an initial requirement may be to offer proof that the farmer will have legal control over the land for the period of the agreement, such as a written lease agreement or certification by the tenant farmer.

Payment.  While the goal of a carbon agreement is often to generate carbon credits to be traded in the carbon market, there are varied ways of paying a farmer for adopting the practices that create those credits.  One is a per-acre payment for the practices adopted, with the payment amount tied to the reduction of carbon resulting from the adopted practices.   Another approach incorporates the carbon market—a guaranteed payment that can increase according to market conditions.  Concerns about market transparency abound here.  Yet another method is to calculate the payment after verification and quantification by a third-party.  For each of these different approaches, the amount could be based upon a model, actual soil sampling, or a combination of the two.  Payments may be annual or every several years.  Another consideration is the form of payment, which could be cash, company credits, or “cryptocurrency”—digital money that can be used for certain purposes.  Also be aware that some carbon agreements prohibit “payment stacking,” or receiving payments for the same carbon practices from multiple private or public sources.

Acceptable carbon practices.   Carbon practices are the foundation for generating carbon credits.  An agreement might outline acceptable carbon practices a farmer must adopt as the basis for the carbon credit, such as NRCS Conservation Practices.  Alternatively, an agreement might allow flexibility in determining which carbon practices to use or could state practices that are not acceptable.  Typical carbon practices include planting cover crops, using no-till or reduced tillage practices, changing fertilizer use, rotating or diversifying crops, planting trees, and retiring land from production. 

Additionality.  Many agreements require “additionality,” which means there must be new or “additional” carbon reductions that occur because of the carbon agreement, which would not have occurred in the absence of the agreement.  On the other hand, some agreements accept past carbon practices up to a certain period of time, such as within the past two years.  This is a tricky term to navigate for farmers who have engaged in acceptable practices in the past.  An agreement may address whether those practices count toward the generation of a carbon credit or for payment purposes.

Time periods.  Two time periods might exist in an agreement.  The first is the required length of time for participation in the program, which may vary from one year to ten or more years.  The second relates to the concept of “permanence,” or long-term carbon reductions.  To ensure permanence and reduce the risk that gains in one year could be lost by changes in the next year, the agreement may require continuation of the carbon practices for a certain time period after the agreement ends, such as five or ten years.

Verification and certification.  Here’s an important question—how do we know whether the carbon practices do generate carbon reductions that translate into actual carbon credits?  Verification and certification help provide an answer.  But verification is a testy topic because there is uncertainty about how to identify and measure carbon reductions resulting from different practices on different soils in different settings.   Predictions that are based upon models are common, but there is disagreement over appropriate and accurate methodology for the models.   Some programs may also verify practices with data acquisition and on-the-ground monitoring activities and soil tests.  And it’s common to require that an independent third party verify and certify the practices and carbon credits, raising additional questions of which verifiers are acceptable.  A final concern:  who pays the costs of verification and certification?

Data rights and ownership.  The verification question naturally leads us to a host of data questions.  Data is critical to understanding and verifying carbon practices, and every agreement should include data sharing and ownership provisions.  What data must be shared, who has access to the data, how will data be used, and who owns the data are questions in need of clear answers in the agreement.

Legal remedies.  There’s always the risk that a contract will go bad in some way, whether due to non-performance, non-payment, or disputes about performance and payment.  A carbon agreement could include provisions that outline how the parties will remedy these problems.  An agreement might define circumstances that constitute a breach and the actions one party may take if breach conditions occur.  An agreement could also list reasons for withholding payment from a farmer; one concern is that insufficient data or proof of carbon reductions or carbon credit generation could be a basis for withholding payment.  There could also be penalties for early withdrawal from the program or early termination of the agreement.   It’s important to decipher any legal remedies that are contained within a carbon agreement.

We’ve heard of carbon farming before, but today it raises new uncertainties.  Caution and careful consideration of a carbon agreement should address some of those uncertainties.  Our list offers a starting point, but it’s not yet a complete list.  As we learn more about the developing carbon farming market, we’ll continue to raise and hopefully resolve the legal issues it can present.

For more information on carbon agreements, see this listing from the Ohio Soybean Council of programs available to Ohio farmers with a side-by-side comparison of those programs, and this report on How to Grow and Sell Carbon Credits in US Agriculture from Iowa State University Extension..