Federal Reserve Releases Ag Economy Observations

18 January the Federal reserve released its January 2017 Beige Book which included commentary on current US agricultural industry conditions. Each Federal Reserve district included comments about their district’s ag industry. Some of those comments are below.

Conditions were reported as somewhat variable in the Richmond district depending on whether hurricane Matthew hit farming areas. Conditions across the southeastern US were difficult in many areas due to a growing season drought. Poor pasture conditions caused stress for livestock producers. Some were feeding corn that might otherwise be sold. Rains did occur that brought relief late last year for the southeastern US. The Chicago district reported very good yields and some modest decline in input costs. The livestock sector saw increased prices. Much the same was reported in the Kansas City district as well as Minneapolis. These districts reported “weaker loan repayment rates than in prior years”. Cash flow is reported to be tighter and income lower is compared to prior years. Winter wheat plantings were reported to be 95% complete but little snow was present as of 1 Jan 17 for insulation of the crop. Record yields were reported in the Dallas district. Cotton yields were very good which pushed prices below or near breakeven. But cotton economics are better than wheat economics. In the San Francisco district, dairy economics have improved but investment in dairy is weak due to CA milk prices versus the Midwest milk prices.

More comments can be read from the news report below.

https://farmpolicynews.illinois.edu/2017/01/federal-reserve-observations-ag-economy-january-17/

Cash Flow Planning for 2017

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Planning is a common activity for farm and ranch managers and operators. It includes crop rotations, when to wean, when to sell crops or calves and when to take an LDP. All of those activities inevitably lead to cash and income. “Cash Flow Statements”can be used to plan an agricultural business’ need for borrowing, when to make payments for various expenses or when to make crop and calf sales.

A statement of cash flows summarizes cash inflows and outflows for a specific time period. It can be used to project, pro forma, future cash flows or to summarize past cash flows. Cash inflows include product sales or sales of capital items but also borrowing and investing. Cash outflows include loan payments, supplier payments, machinery lease payments, land rent payments, taxes and family living draw. The size of all these matter but so do the timing of the cash flows. A proforma cash flow statement allows the farm and ranch manager to set up lines of credit, plan crop sales, plan vacations, project tax payments and even which crops to plant. The statement of cash flows is usually done either quarterly or monthly.

Proforma cash flows can be prepared either by:

  1. use last years actual cash flows to project the coming year’s cash flows.
  2. project the coming year’s cash flows from each farm enterprise with details about probable prices, yields, expenses, family living draw, property taxes, income and social security taxes.

The first method is quicker but unless it is adjusted for crop price and yield variation, changes in input costs, changes to debt servicing, likely changes to tax liability and changes to family living it may be too far off the mark. Many farmers already calculate costs and returns for their crops or calves. These are called enterprise budgets and can be used to build a cash flow using the second method. This second method also allows the user to mix enterprises as needed to increase profitability and increase positive cash flow.

Many tools are available to help with cash flow development. Nebraska Extension will soon publish the “2017 Crop Budgets” at http://cropwatch.unl.edu/budgets. Right now the 2016 budgets are up. Iowa State University Extension has an article further explaining cash flow budgeting and two Excel spreadsheets to help with the process at http://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html. Oklahoma State University has a paper form for cash flow budgeting, http://agecon.okstate.edu/annie/files/F-751%20Cash%20Flow.pdf. The University of Minnesota has an online workshop about cash flow at http://ifsam.cffm.umn.edu/StatementCashFlows/Default.aspx?SectionID=5 to help you further understand cash flow planning. Nebraska Extension also has a web video that helps explain Cash Flow Planning at https://vimeo.com/188871642.

 

Communicating with Lenders: Suggestions for Farmers & Ranchers

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The last few years have been tough for many farmers, feeders and ranchers due to a cost-price squeeze. I reviewed the 2015 Nebraska Farm Business INC financial standards measures. Average 2015 Net Farm Income was $51,293 which doesn’t sound terrible until you get deeper into the numbers. The farms are broken into 10 equal groups, deciles, ranked by Net Farm Income. The bottom four deciles of farms were unprofitable with the lowest decile averaging -$109,508 net farm income. At the beginning of 2016, the bottom three deciles had negative working capital with the lowest decile averaging -$244,880. The numbers above and the current cost-price squeeze will probably worsen the financial position of additional farms and ranches. Fortunately equity has increased for many farms and ranches and that can be used to shore up current lending needs. Communicating with lenders  will be an important activity over the next months. Here are suggestions for that conversation’s success.

  • Always be upfront about the exact situation, sooner rather than later. Be frank about what your financials are but don’t talk with the lender constantly.
  • Make sure that all your financial documents are accurate. Include all machinery leases or outside lending listed on the correct financial documents. Consider producing a farm and personal balance sheet including credit cards on the balance sheet.
  • Do your own cash flow projections for 2017 now. A cash flow projections allows you to discuss your needs with your lender. The process of making a cash flow projection can be very illuminating to operators. The cash flow projection can guide marketing plans as well. Update the cash flow periodically during the growing season and share the update with your lender.
  • Explore marketing plans, write one and implement it. Again marketing plans should be flexible as new information comes forward. Again share your marketing plan with your lender.

The foregoing suggestions show a borrower that is proactive and forward-looking which is a very positive asset that lenders want to see. Be proactive!

October Crop Production Report

The October 12 Crop Production report had a negative reaction in the grains market just after its release but the markets have rebounded since. Let’s take a deeper look at the numbers that what was covered in the initial news reports.

Planted corn acreage was updated in 10 objective yield states (IL, IA, KS, MN, NE, OH, SD, WI). The changes increased acreage by 0.3% from the previous report and +7.5% from last year. Corn yield was lowered by 1 bu/acre nationally or -0.6%. Total productions was lowered 0.2% from the previous report, however corn production is still projected at +10.7% from last year. total production is projected at 15.1 billion bushels which would be 900 million bushels higher than the largest corn crop in 2014. Seven new record yields are projected, including Iowa and Illinois where about half of the US corn crop is produced. The US yield, 173.4 bu/ acre would be a record as well Nebraska’s corn yield is projected to be  181 bu/acre which is 3 bu lower than the previous report.

Soybean acreage was updated as well in the October WASDE report but the change was less than +0.1% compared to September’s report. The expected soybean acreage is 1.6% higher than last year. The big change was in projected yield, 1.6% higher than the previous report and 7.1% more than last year. The 2016 US soybean yield is projected at 51.4bu/acre and would be a record. The higher yield comes from much better pod set than in other years.All of this yields to a record high total soybean production of 4.27 billion bu, 314 million bu more than the highest production.Eleven states are expected to have record yields including Nebraska, 61, bu/acre.

Late Season Corn Disease: time to scout!

Reports are coming forward of various disease problems in this year’s corn crop. Some of these diseases include ear rot, anthracnose and stalk rots. Wet warm late season weather can increase the possibility of stalk and ear diseases and worsen any already present. Now is the time to scout fields to determine which may have problems. Farmers may decide to harvest fields with stalk rot earlier to avoid loss. They may also look for varieties that are more resistant to stalk rots when buying next year’s seed, especially in fields that have a history of problems.

Several links are included below which cover current year disease reports in the Corn Belt as well as background on ways to identify and manage the problems.

http://cropwatch.unl.edu/stalk-and-ear-rot-diseases-developing-early-few-fields

http://cropwatch.unl.edu/plantdisease/corn/bacterial-stalk-rot

http://cropwatch.unl.edu/plantdisease/corn/fusarium-stalk-rot

http://crops.extension.iastate.edu/cropnews/2016/09/scout-now-ear-rots

SAMPLE AND TEST HAY BEFORE WINTER FEEDING

How will you know how much protein and energy your cows will get when you start feeding your hay and silage?  Or how much supplement to feed?  Find out by following instructions for sampling and testing.

Correct sampling techniques, followed by lab tests of forage quality, are necessary for cattle producers who want to get the most value from their forages and profit from their animals.

Maybe the most important step in sampling hay, and sometimes the most difficult step, is deciding which bales and stacks should be included in each sample.  Ideally, each sample should include only bales that were produced under nearly identical conditions.

Obviously, the place to start grouping is to separate different types of hay, like alfalfa or CRP or corn stalk or meadow hay.  But each cutting of hay probably is different from the other cuttings also, so there is another separation.  And no two fields or meadows are ever exactly the same, especially if they were cut more than two days apart, so that makes another grouping.  And what if part of the field was rained on before it was baled?  The hay made without rain damage probably will be different from hay with rain damage.

After you’ve made all these separations, which could result in quite a few groups of similar bales, then and only then are you ready to sample.  From each group gather a dozen or more cores from different bales or stacks and combine them into one sample.  Be sure to use a good hay probe that can core into at least one foot of the bale.

Finally, send these samples to a certified lab for tests of energy content and protein, maybe nitrates, and any other nutrients of interest to you.

Then use this information to feed your cattle as profitably as possible.

Bruce Anderson, U of Nebraska Forage Specialist

 

Refinancing the Farm or Ranch

Situation

One of the concerns that has become obvious to many in agriculture is the rapid reduction in working capital the past few months. Operating loans for 2016 may not be paid off after harvest, especially with the rapid decline in grain prices since mid-June 2016. Refinancing or rolling forward the remainder of the operating loan is going to be an option for many farms and ranches. A lender may ask for more collateral to do the roll however or indicate there is enough to cover the additional debt. But rolling operating notes forward is a warning sign for farm and ranch operators. Why?

The incomplete payment of a current operating loan reflects a problem that farmers have experienced during the current growing season, a severe cost price squeeze. Simply rolling the debt to the next year and collateralizing it with machinery or land or cattle does not address the underlying cause. Not addressing the problem can lead to future outstanding operating loans and more debt to carry in the future. The remedy is to address the current cash flow problem.

Cash Flow Shortfall Solutions

There appears to be three cost areas that farmers and ranchers must address. Cash Rent rates are the first to deal with as these are being determined at this time. At least for the medium term, grain prices are not going to increase significantly above current numbers unless some dramatic occurrence takes place, e.g. a drought or a war. So cash rental rates need to match the income reality of the next few years.

Family living draw has increased in farm country since the ethanol boom began in 2006. In Nebraska, farm family living draw, not including taxes, doubled from 2004 to 2013 which was its peak. Since than in each of 2014 and 2015 family living draw declined by 4%. Some family living costs have increased since than which are hard to reduce such as health care and insurance and college costs. But family living will need to decline or added debt will be incurred without additional income.

Crop input costs must also be considered as well. This is the season when suppliers begin to offer pre-payment and booking incentives. How much have those prices declined since last year? Reports I have gathered indicate not much certainly compared to income from corn and soybeans. Farmers will need to indicate to suppliers their unwillingness to pay those prices before input prices are likely to drop. Don’t let emotion drive your input decision either. Products are available claiming better control or availability of an input. Farmers and ranchers should request unbiased research that shows a positive cost-benefit to the use of any input. With that research, they can analyze whether to use and how much of a product to use. Testimonials are not useful to make that cost-benefit analysis.

And then income can also be managed. Have a marketing plan and implement that plan. Of course farmers should not follow it blindly if some new information comes out which changes supply–demand of grains. At that point adjust the marketing plan. Robert Wisner, retired Iowa State University grains economist, related some of his research from more than a decade ago which showed that US corn farmers sold two-thirds of corn at a price less than the marketing year average price. Michael Swanson, Wells Fargo Chief Agricultural Economist, made the same point recently. Minnesota farmers sold the 2015 corn crop 6 cents per bushels less than the Minnesota average corn price. Most likely emotion drove farmers to wait for higher prices and eventually sell at below average prices. Following a marketing plan removes some of the emotion and can lead to more predictable income.

Summary

A proactive approach to managing the current cost-price squeeze dilemma is the way forward to improve sustainability. Farm and ranch managers have some control of the costs and income they can expect from their farm or ranch. Careful cost control, using marginal analysis, in all areas of production must be implemented first to improve cash flow. Marketing plans can have the effect of removing emotion from the selling decision and thus avoiding poor decision-making. Farms and ranches with high leverage are most at risk in the next few years and will need careful management to pull through. After those strategies are implemented, rolling current operating loans forward has a much better chance of being successful.

References:

Schnitkey, G. “The Danger of Refinancing.” farmdoc daily (6):164, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 30, 2016.

Swanson, M. “ True Farmers Never Sell a Rally.” https://wholesale.wf.com/food_for_thought/true-farmers-never-sell-a-rally/?contact-type=e&elqTrackId=dcac80eb4e684bc8977eb3b76e2bddad&elq=86e73390d8bc4e2d8c04ac217725a456&elqaid=9465&elqat=1&elqCampaignId=6120, Accessed 1 Sept 2016.