A3B4jncntsr Farming, Saturday, February 22, 1992
MILK
mm check
1 !l THOMAS JURCHAK
, jn Dairy Specialist
• Bp- I i Lackawanna County
SCRANTON (Lackawanna Co.) After dropping 38 cents in
December, the Minnesota-Wisconsin Price Series took another dip of 39
cents in January, dropping it to $11.71. But that’s still $1.55 better than
last year and $1.77 above the support price for manufacturing grade milk.
Cheese prices dropped another five cents but most of that came the first
two weeks of January and have held pretty steady since then.
Cheese inventories are considerably lower than a year ago and even
though sales are not great, present prices may hold until the noimal inven
tory building starts with the spring flush.
Support prices on butter and powder were tilted again by the Commod
ity Credit Corporation to favor powder.
Butter prices were dropped 11 cents to 87 cents on January 17 and pow
der prices increased six cents to 91 cents. This dropped market prices of
butter to 85 cents in January and had some impact on the M-W price but
will be more of a factor in February.
Further drops in the M-W are expected but the worst seems to be behind
us.
Cheese and powder prices are expected to stay above their support
prices and butter is about as low as it can go.
All of these changes of butter prices in the last few years to stimulate
sales have produced a butterfat differential below 10 cents and the last
time that happened was in 1976.
It's still pretty much a milk supply problem. There seems to be more
than enough in most areas including the Northeast. Without increases in
fluid sales, it has become a buyer's market, but so far the market for manu
factured dairy products is carrying the load.
However, you're on thin ice and predictions are difficult. If last year's
drought is to affect the milk supply it will have to show up soon.
And so far it hasn't shown up in Federal Order 2 with receipts in Janu
ary reaching a high not seen since 1986, and average daily deliveries per
producer setting a record for the month.
However, the full impact of a 79-cent drop in the M-W in three months
hasn't yet been reflected in farm prices so the blend price for January was
$12.97 for 3.S percent milk at the 201-210 mile zone.
That's 37 cents less than December but $1.86 better than last January.
Total milk in F. 0.2 in January was 16 million pounds or two percent
more than last year, while Class I sales were the same. It indicates that the
supply problem mentioned earlier exists here in the Northeast also.
This sends more milk to manufacturing which lowers dairy product
prices that are the basis for your milk prices.
In January, the Class I price at $14.90 was only two cents lower than
December and kept your blend price up. This will drop 77 cents to $14.13
by March so you can expect the full impact of the lower M-W by then.
For February, the Class I price will be down 38 cents to $ 14.52 and the
Class II price down 30 cents to $12.20. That makes up 56 percent of the
pool.
The Class 111 price or 44 percent of the pool will change with the M-W
for February.
With last year’s prices starting low and ending high, it's easy to say the
first half of 1992 will be better than 1991.
From January to June last year the average F. 0.2 blend price was only
$10.95 and we're starting 1992 about $2 higher, so an average of a dollar
more for the first half looks pretty safe.
It's the second half of 1992 that's difficult for the forecasters. There
have been no signs of reduction in milk supplies because of lower prices.
What we lose in cow numbers we make up in production per cow. One
Farm Prices
Looking Ahead
IRS Gives Farm Preservation Flexibility
Samuel A. Goodley Jr,
Esquire
Editor’s Note: The author is a
tax attorney practicing in Lan
caster and is the solicitor for the
Lancaster County Agricultural
Preserve Board. In addition, he
farms with his father in Chester
County.
LANCASTER (Lancaster Co.)
The combination of last year’s
drought and depressed milk prices
has increased interest in the state’s
Agricultural Conservation Ease
ment purchase program under
which farm owners can sell their
producer quits another one expands.
Adding to the forecasting problem are changes in the system already
adopted or expected this year.
The New England and Mid Atlantic F.O.S already have a new Class
in A price for milk used to make butter and powder; producer assessments
will be increasing and the M-W may be replaced to calculate the Basic
Formula Price.
If all that isn't enough, then try to predict the rate of recovery for the
national economy that will certainly affect your milk prices.
Looking Back
Now that 1991 is history, we Can look at the prices to see how they mea
sure up to the past
Last year the M-W started at $ 10.16 in January and peaked at $12.50 in
October. In 1990 it was just the opposite starting at $13.94 in January and
dropping to $10.19 in December.
In 1989 the pattern was back to a low in the spring of $ 10.98 and a high
of $14.93 in December.
This is the roller coaster that everyone talks about, but produced by
market conditions some of which you may never see in combination
again.
However, if you look at yearly averages it may be easier to see from the
top of the toller coaster.
The average M-W last year was $11.05, which seems low compared to
$12.21 in 1990 and $12.37 in 1989, but right back to the $11.03 in 1988.
The same pattern shows in your blend price in F.O. 2.
Last year it was $11.80,' falling from $13.14 and $13.10 in 1990 and
1989, but right back to the $11.87 you got in 1988.
The point is. there was something very different about 1989 and 1990
that doesn't exist any more.
The reasons were mentioned often in this letter, and many other sour
ces, in 1989, but have largely been ignored. It was a combination of a
drought in the upper Midwest which affected the milk supply in Minneso
ta and Wisconsin right where your milk prices start.
If the M-W hadn't gone to $11.93 in December 1989, or if the drought
had been any where else, you may not have seen the impact.
Adding to the short milk supply was a drop in worldwide stocks of
powder produced partly by cuts in production quotas for European com
mon market dairymen.
Powder prices in world trade went so high we cleaned out our own
suiplus stocks and powder was hard to find here at any price.
In the meantime, we had given away all of our surplus butter and cheese
in give-away programs at home. This means there were no CCC stocks to
put on the market to keep a lid on prices so they went as high as the market
would allow.
Butter prices were over $1.35 and cheese reached $1.60 a pound.
That's all behind us now and what should be considered more normal
market conditions have returned.
That roller coaster ride is now referred to as price volatility which is not
new to the dairy industry. We just hit higher peaks and lower valleys than
ever before.
Well always have seasonal changes in milk supply and certainly the
weather will be a factor, but the same pricing system that gave you the low
prices in January 1991 was the same system that pve you the high prices
of December 1989, but it was the outside forces that made the difference.
Now. if you're looking for the prices of 1989, youll have to get them on
your own and without much government money. It sounds like a job for
cooperatives or a super co-op.
development rights to the com
monwealth and/or county govern
ment for cash.
In effect, the landowner is cash
ing out on part of his farm capital
investment by permanently
restricting the use of his land to
agriculture. The receipt of the
easement proceeds by the landow
ner triggers a taxable event for
federal and state tax purposes.
Until now, a landowner receiv
ing cash for his easement likely
had a tax bill to the state and fed
eral governments to go along with
it.
A recent private letter ruling by
the Internal Revenue Service per
mits the use of a tax-deferred
exchange with a farm owner parti
cipates in the state Agricultural
Conservation Easement program
and conveys development rights
to the commonwealth and/or
county.
Under the ruling, the IRS has
decided that an Agricultural Con
servation Easement, as defined in
Pennsylvania’s Agricultural Area
Security Law, is an interest in real
property that is “likekind” to an
unencumbered fee simple interest
in another farm for purposes of
tax-deferred exchanges under sec
tion 1031 of the Internal Revenue
Code.
Although a private letter ruling
issued by the Internal Revenue
Service can be relied upon only by
the taxpayer who requested it, the
issuance of the ruling is helpful
because a fanner contemplating
an exchange utilizing the value of
his development rights can be rea
sonably certain that a similar rul
ing can be obtained on his behalf.
For the farm owner who desires
to expand his operation but is
reluctant to increase his debt load
to buy more farm ground, the rul
ing means that he can, in effect,
trade his development rights for
another farm and defer recogni
tion of gain that might occur if he
simply sold the development
rights for cash.
If the farm owner holds the
replacement farm at death, his
heirs receive % “stepped-up basis”
in the farm and the income tax
which has been deferred as a result
of the exchange is avoided
entirely.
Pennsylvania’s Tax Code does
not recognize tax-deferred
exchanges. This means that the
exchange, although tax-deferred
for federal tax purposes, will be
taxable for state tax purposes even
if there is a full exchange with no
cash received by the landowner.
The landowner need not use all
of the easement proceeds in the
exchange, that is. he can defer rec
ognition of gain on part of the
easement sale and take some cash
away from the transaction. In such
a case, the landowner will pay tax
on the lesser of the realized gain or
the net cash received.
A successful tax-deferred
exchange can be accomplished
only with careful legal documen
tation and adherence to all of the
constraints imposed by IRS
regulations.
In addition, agreements with
the state and county may need to
be modified to accommodate the
requirements for an exchange.