Characteristics of Financially Resilient Farms

What they mean for Nebraska Farms

During the last 10 years, the economic environment that US farms faced has been extremely variable. During the 2009-2012 period incomes and net returns increased with a peak occurring in 2013-14. Production costs rose with the increasing income and began to decline in 2013, however not as rapidly as revenue declined. Farm profitability declined due to the narrowing margins for grain production. The question for farmers is “what management strategies to follow that consistently produce profits?”

First let’s look at what works for some real farms. Paulson & Lattz, agricultural economists at the U of Illinois, have used Illinois farm data to separate Illinois farms into profitability cohorts, thirds, as well as time periods 2010-12, higher prices, and 2014-16, lower prices. They found a few management strategies that consistently produce higher returns.

The High Profit farms produced more gross revenue per acre than either of the other two groups through a combination of slightly higher yields and price per bushel for corn and soybeans. Both yields and prices were 5-7% higher. None of the farms strove for the highest possible yield but rather the most profitable yield. During the 2010-12 time period the high 1/3 farm group had $112 more return to land and operator than the middle 1/3 group.  High profit farms had nearly the same per acre direct costs of production as the middle 1/3 farms in 201-12 but $6 less in 2014-16 and lower per acre machinery costs, depreciation and repairs, $17 lower in 2010-12 and $10 lower in 2014-2016. High profit 1/3 farms had lower per acre overhead costs too, $8 less in 2010-12 and $18 less in 2012-16.

The relative importance of revenue versus costs for higher profits also varied during the two time periods. For the higher profit 1/3 farms higher revenues contributed more during 2010-2012 and lower costs contributed more to higher returns in 2014-16 compared to the other farms in the comparison.

Thus the “Take Home Message” from this data set is twofold. Capturing higher revenue during times of rising commodity prices is more important than managing costs. However farm operators must not lock in costs during these good times that can’t be reduced when prices decline. During times of declining commodity prices, controlling costs is more important.

Now that we are in the period of tight profits and cash flow, here are some suggestions for managing in the tough economic environment:

  1. Cost control: Evaluate inputs to ensure there is a positive return to their use. For instance, soybean seeding rates might be reduced with little change in yield but much lower cost. Review nitrogen (N) application rates to ensure you are using the correct rates and not adding insurance N. Look for feed sources that are less costly and provide the same nutrients. Can you work with neighbors to jointly buy inputs like seed to get discounts? Would it be cheaper for you to hire some one to plant or combine those fields a long way from the main operation? Is some of your rented ground no longer worth the cost?
  2. Renegotiate cash rent rates: This can be hard to do since property taxes have risen of late but one way to manage this negotiation is to include flexible lease provisions in case of high yields or prices.
  3. Reduce capital spending: Most farmers have already done this. But if the purchase reduces costs it may be a good purchase. Otherwise repair machinery.
  4. Reduce family living: Family living rose during the good times in Ag but now family budgets should be reviewed. The nice to have items will likely be dropped in favor of the must haves such as health insurance. Review cell phone plans, satellite TV, the Sirius subscription and any automatic payments.
  5. Increase revenues: If you have unused or minimal use assets, such as the extra semi, consider renting them to someone else. Make sure you capture all variable costs first and some or all fixed costs of the asset.
  6. Increase non-farm income: many spouses already work off-farm to get benefits, health insurance, but everyone in the farm operation may have to do so too.

Some of the above suggestions could take some very serious conversations and open communication within farm families, but the viability of the farm is at stake. The farm must be able to pay its own way and provide family living.

Sources:

Foster K., Boehlje M., “Managing in Times of Financial Stress.” Purdue Extension, https://mdc.itap.purdue.edu/item.asp?itemID=8744, accessed 29 Jan 2018.

Lattz, D. “IFES 2017: Habits of Financially Resilient Farms – Continued.” farmdoc daily, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, January 24, 2018.

 

 

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Farm Income Outlook Update

Courtney Cowley, Kansas City Federal Reserve (10th District) Economist, recently published an assessment of the current ag income environment as well as the risks ag income faces. Cowley suggested that near term ag income prospects are stable for now.

2014, 2015, 2016 showed steep US farm income declines compared to 2013, but the decline seems to have stopped. 2017 farm income is forecast to have been 3% higher than 2016, but this increase would still be 18% below the 47 year long run average. Banker’s expectations of future income decline are much lower, about 1/2 of the 2016 peak.

Cowley identified one major risk to future farm income which is the large inventories of corn and soybeans although wheat inventories are large as well. The corn stocks-to-use ratio has been increasing since 2013 from about 8% to nearly 17% for 2017. Most of this increase is due to above trend line yields for the past 3 years. The soybean stocks-to-use ratio was flat till 2015 and has doubled since. The large US crops of corn and soybeans have made exports a critical factor to support US crop prices. As that importance has increased, the US share of world wide corn, soybean and wheat exports has steadily declined since 1977. This decline comes due to competition from Brazil, Russia, Australia and increasingly Argentina. Another risk is the trade relationship the US has through NAFTA with Mexico and Canada. Both have increased ag trade with the US by about 2.5X for 2017. Thus NAFTA renegotiation is probably critical. A third risk to 10th District ag income is cattle profitability since about 50% of 10th District ag income comes from cattle production.

Ag income appears to have stabilized for now, but some risks are still present. Larger grain stocks along with increased cattle inventories might pressure ag income and farm/ranch profits. Continued large crop and cattle inventories will force reductions in farm/ranch costs. Many costs have already declined but land costs have remained sticky. Thus land rental rates and values are likely to continue a slow decline.

Source: Cox, C, “As Winter Looms, Key Risks Keep Ag Outlook Cool”, https://www.kansascityfed.org/research/agriculture/agoutlook/articles/key-risks-keep-ag-outlook-cool, accessed 19 Jan 2018.

 

USDA Livestock and Dairy Outlook

Yesterday USDA released the most recent first half 2018 price and production forecast for meat, milk and eggs. The summary of the projections is in Figure 1 below. USDA is generally projecting increased meat, milk and egg production for first half 2018. Only lamb production is projected lower due to a smaller 2017 sheep flock in the US. While higher production of livestock and livestock products leads to likely lower prices, USDA is projecting a steep rise in egg prices during early 2018 compared to 2017.

Egg prices have been influenced by larger egg exports, up 15% during October. Most of the growth has been to Asia. USDA points out that egg prices have reached the highest level since the 2015 and the avian influenza aftermath. US 2017 per capita intake of egg and egg products, termed disappearance, is 7% higher than the 2010-14 average (Figure 2). The 2015 avian influenza reduced egg production and profit margins encouraged more egg production during 2016 which then reduced profits from low egg prices (Figure 3). The low egg prices may have encouraged market demand.

Dairy product prices are likely to decline during the first 6 months of 2018 due to increasing stocks of some milk products as well as reduced domestic use of dairy products occurs. Use of all milk products on a milk fat basis is up only 0.6 year over year (YOY) but is -0.3% on a skim solids basis YOY. The most recent Penn State University Dairy Outlook points out the large European (EU) dairy supplies as one of the bearish factors in future milk prices. The EU is the largest exporter of milk powder. Last year the EU sold 50% more milk power than the US. Cropp and Stephenson from the University of Wisconsin pointed out last month that both the EU and New Zealand are having stronger milk production years. These two will compete with the US for dairy export markets. USDA is projecting 2018 Class III milk prices between $15.30 and $16.10. With declining Midwest milk premiums, basis, milk prices in the region are likely be more like 2015 than the past year (Figure 4).

There is much more in the 18 Dec 2017 USDA outlook. I have only hit some of the highlights.

Figure 1.

Livestock outlook-1

Figure 2.

Eggs

Figure 3

Eggs1

Figure 4

Sources:

Dairy Outlook, December 2017, Pennsylvania State University, https://extension.psu.edu/dairy-outlook-december-2017

Livestock, Dairy and Poultry Outlook, Economic Research Service USDA, http://usda.mannlib.cornell.edu/MannUsda/viewDocumentInfo.do?documentID=1350

Program on Dairy Markets and Policy, https://dairymarkets.org/Tools/MilkPrices.html

 

5-Year Price Projection Analysis Released

Corn and Soybean prices have been low during the last 3 marketing years compared to 2011-2013. The past 3 marketing years have had corn average $3.70, $3.61, $3.36 respectively. Gary Schnitkey and Todd Hubbs, U of Illinois Ag Economists reviewed the 5-year price projections for corn and soybeans as well as the past 5 years corn and soybeans price history in an article recently, link below. The corn price projections range from a low of $3.20 to a high of $3.96 over the next 5 years. Soybean prices are projected to range from a low of $9.07 to a high of $9.87. If these price ranges are accurate, cash rental rates are likely to decline somewhat. Budgeting, crop marketing plans and good tenant-land owner communications are imperative for the next few years.

http://www.prairiefarmer.com/marketing/5-year-outlook-think-350-corn-950-beans?NL=FP-004&Issue=FP-004_20171025_FP-004_721&sfvc4enews=42&cl=article_2_b&utm_rid=CPG02000002272178&utm_campaign=21836&utm_medium=email&elq2=35cfc47a74324f0997f79ed6ecc9efa8

 

Crop Marketing Workshops Offered

Two grain marketing workshops will be offered at several sites across Southwest Nebraska starting in November to help grain producers minimize losses during this time of low prices.

A complimentary lunch is provided at each location. Workshops are funded by the Nebraska Corn Board and limited to 40 participants.

In the workshop Introduction to Futures and Options, Nebraska Extension educators will present strategies for using futures and options to protect farmers from adverse market movements.

In the workshop Developing Grain Marketing Plans, Nebraska Extension educators will discuss how to develop a written marketing plan and understanding basis and carrying charges, using location-and commodity-specific information.

Both workshops feature the Marketing in a New Era simulator and the Grain Marketing Plan smartphone application.

Register by visiting http://go.unl.edu/marketingworkshops or calling the contact for site.

Grain Marketing: Introduction to Futures and Options
 
Site Date Time Location Contact, Phone
McCook Nov. 6 10 a.m. – 3 p.m. Red Willow Cnty Fairgrounds
1400 West 5th St.
Robert Tigner, (308) 345-3390
Holdrege Nov. 21 10 a.m. – 3 p.m. Phelps Cnty Ext Office
1308 Second St.
Robert Tigner, (308) 345-3390

 

 

Grain Marketing: Developing Grain Marketing Plans

Site Date Time Location Contact, Phone
Imperial Nov. 9 10 a.m. – 3 p.m. Lied Library, 703 Broadway Robert Tigner (308) 345-3390
North Platte Nov. 20 10 a.m. – 3 p.m. West Central REC Robert Tigner (308) 345-3390
Hays Center Nov. 29 10 a.m. – 3 p.m. Hayes Cnty Fairgrounds Robert Tigner (308) 345-3390

 

USDA Farm Income Forecast

USDA’s Net Farm Income (NFI) forecast is an oft-cited number that many in the policy arena will use. It can be found in the media as well. The statistic is first reported in February with two more updates during the year. A final number is released in February the following year. USDA just released a NFI update. Let’s look at how good the estimates really are.

Three Illinois Ag Economists published an analysis of the accuracy of the USDA NFI estimate. The initial February estimate, 1975-2015, tends to under-estimate realized NFI by 8.7%. Just looking at the economist’s chart does not appear to give any indication why or under what conditions might cause USDA to under estimate NFI. The August revision is better at estimating net farm income, only 3.7% under-estimation. Simply counting the occurrence of under-estimation shows that 80% of the time USDA’s August estimate is below the final. USDA revises its NFI estimate in November but is off by 4.4%.

So what is the take away with this simple analysis? The February NFI estimate can off by a significant amount to the downside and has over-estimated NFI 9 of the last 40 years. The August estimate isn’t too far off since most of the growing season is past, planted acres are known and price information is better understood. There is still some production risk, but not much. So even though USDA is currently forecasting a rise in NFI, $11.2 billion or 12.6% year over year (YOY), there is a good probability it will go higher. On the negative side, USDA is projecting median and average farm income to be negative. If we go a little deeper into the USDA data, the negative income is most likely a result of residential farmers rather than farms as a principal occupation. Residential farms are projected to average -$634, Intermediate farms $6218 and Commercial farms $254,220. Definitions of the farm types are below. In 2017 it will take about 500 acres of irrigated corn, or 730 acres of soybeans, or about 1625 fat hogs or about 235 fed cattle to meet the $350,000 gross sales.

NFI

Source: Kuethe, Hubbs, Sanders, Farmdoc Daily, (7):156.

The definitions of the farm types are:

  • Residence farms: Farms with less than $350,000 in gross cash farm income and where the principal operator is either retired or has a primary occupation other than farming.
  • Intermediate farms: Farms with less than $350,000 in gross cash farm income and a principal operator whose primary occupation is farming.
  • Commercial farms: Farms with $350,000 or more gross cash farm income and nonfamily farms.

Sources:

Kuethe, T., T. Hubbs, and D. Sanders. “Interpreting USDA’s Net Farm Income Forecast.” farmdoc daily (7):156, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, August 25, 2017.

USDA. “Farm Household Income and Characteristics”, https://www.ers.usda.gov/data-products/farm-household-income-and-characteristics/farm-household-income-and-characteristics/#Farm%20Household%20Income%20Forecast, accessed 31 August, 2017.

 

What is Better Financially for College Grads, Rural or Urban Living

Two articles came across my desk last week that made me think about where college grads might choose to live and work. There are several factors that make up that decision and we will look at the financial one.The first article was from USDA discussing which location, rural or urban, workers are paid higher wages and the other from Cornell discusses farm worker living costs and wages. So where is it better financially for young people to work?

I bring up finances because some times people forget that aspect of the decision to take a job. One person I worked with learned that lesson the hard way. He had a job and owned a house in LaCrosse WI which is on the Mississippi River. He was offered and accepted a job in his same field in Chicago with a good pay raise. But he forgot to check into living costs in Chicago first. He quickly found out that housing costs quickly ate up all and more of his higher salary  living in Chicago and that he could not afford the same size and kind of house in Chicago as LaCrosse. He wound up worse off moving to the big city. Grout and Ifft found something similar. Grout and Ifft looked at several of the 48 states comparing average farm worker wage to cost of living. Crop worker wages rose in nearly all of the states studied from $1-2 per hour from 2012 to 2016. In California, wages rose by about $2 per hour but was below the rural cost of living all of 2012-2016. Washington state had the opposite situation in place where average wage was as much as about $4 per hour above the rural living cost in 2012. In Florida and Texas living costs and wages for farm workers were nearly equal for the same time period. For these states, crop workers would be better off financially moving to Washington state. In the analysis, other states that paid more than cost of living included Idaho, Utah, Wisconsin and Michigan. But the Grout and Ifft analysis only looked at farm workers and not ag professionals.

The USDA analysis showed 2015 median earnings for those without a high school diploma rural or urban employees earn nearly the same amount. Urban high school diploma holders earned $2088 more than rural workers and urban bachelor’s degree holders earned $10,534 more than rural workers. Urban graduate degree holders earned $18,150 more than rural counterparts.

Depending on where one lives in an urban area they might be better or worse off financially than rural people. One web site, Sperlings Best Places (http://www.bestplaces.net/) allows one to compare cost of living and salaries from one city to another. Using median bachelor’s degree salaries from the USDA study, $41030, comparing McCook to Lincoln, NE a person would need to earn $2955 more in Lincoln for the same living costs. Doing the same for Denver is much worse. A salary would have to be $19,729 more to have the same living standards in Denver. The biggest difference in both cases is the cost of housing. Transportation, food and health care costs are a little higher in McCook than Denver but housing is almost 3X higher in Denver.

Of course there are certain advantages to living in more urban areas, restaurants, museums, concerts skiing, mountains, but McCook is only 5 hours away from all of that.And there are advantages to living in McCook, a lot less traffic, family, free concerts, easy access to hunting areas, better schools often as wells as less crime. Those offered a job in an urban area should fully consider the costs and benefits of that job. If the urban job is chosen, negotiate for a salary high enough that it pays for the higher costs of living in urban locations.

Sources:

Mare, Alexander, Urban Areas Offer higher Earnings for Workers With More Education, https://www.ers.usda.gov/amber-waves/2017/july/urban-areas-offer-higher-earnings-for-workers-with-more-education/ July 2017, accessed 7 August 2017.

Grout, T. and J. Ifft. “Higher Wages Don’t Always Mean a Higher Standard of Living: Rural Cost-of-Living and Farmworker Wages.” farmdoc daily (7):136, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, July 27, 2017.

Sperlings Best Places, Cost of Living, http://www.bestplaces.net/cost-of-living/, Accessed 7 Aug, 2017.