2019 Seed, Fertilizer and Chemical Costs: What do we know now?

Here I am discussing 2019 and in my area, we haven’t yet cut 2018 wheat. Am I thinking too far ahead? I don’t think so when looking at 2018 and 2019 corn prices. As of this writing, Dec 19 corn is trading at $3.96 with Dec 18 corn 23 cents lower. Those aren’t prices I like, but those are the prices I currently have to live with. On the other side of profit is cost. If my variable costs decline in 2019, maybe $4 corn can make me money. If variable costs don’t decline in 2019, I would rather know that now than one year from now.

Gary Schnitkey, University of Illinois Agricultural Economist, recently reviewed seed, fertilizer and chemical cost trends, both long run and short run. The trends do not portend declines in variable costs for farmers. Seed cost appears to have flattened and are likely to be the same as 2017 and 2018. Fertilizer prices rose beginning in late 2017, leading to farmers who bought 2018 fertilizer late with higher costs than those who bought early. So a reasonable fertilizer forecast is that 2019 fertilizer costs might be slightly higher than 2017 and about the same as 2018. Chemical costs, however, are likely to be higher, not due to price but due to usage. Increasingly resistant weeds are showing up in farmer’s fields, and thus more product or new products are used to control weeds.

costs

Source: Schnitkey

From its peak in 2013, seed, fertilizer and chemical costs declined from $373 to $323 in 2017. That decline was due entirely to lower fertilizer prices. Anhydrous ammonia declined $370/ton. Diammonium phosphate dropped $186 from 2013 to 2017 although during 2018 it has risen by nearly $50/ton. Other fertilizer prices have also risen since mid-2017. All nitrogen prices have increased while potash has remained flat.

urea

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

potash

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

That brings us to planning for 2019 crops. Using current trends, it seems reasonable for farmers to plan for slightly higher pesticide, seed and fertilizer costs for 2019. This means crop marketing will be a significant management activity for grain produced in 2019. A question all farmers might ask is whether to start marketing 2019 corn or soybeans now.  And with current oil price trends, farmers should probably consider pre-paying for fertilizer as well. The past two years, fertilizer prices have been lower in the fall preceding planting.

Sources:

Fertilizer Outlook – Fertilizer costs rise despite weak crop prices, Accessed 27 June 2018, http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765.

Schnitkey, G. “Historic Fertilizer, Seed, and Chemical Costs with 2019 Projections.” farmdoc daily (8):102, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2018.

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New Farm/Ranch Employee Intake

As has been said many times, “You can’t make a first impression twice.” And the same goes for bringing in a new employee into a farm or ranch. A good practice is to follow a Standard Operating Procedure (SOP) for the new employee orientation. Let’s look at a suggested SOP for new employees.

 

  • Background and overview of the farm or ranch: The new employee can benefit from an understanding of the full operation of the farm or ranch. The layout of the farm or ranch, the introduction of the new employee to current employees and all the management. This is a good time to discuss the history and goals of the farm or ranch. In the future an employee can then make suggestions for changes or improvements to the farm or ranch based on their understanding of the goals of the farm or ranch.
  • Employment policies: All farms and ranches can benefit from an employee policy document. The process of developing one forces the farm or ranch to think through issues they may have to deal with at some time. The policies document also assures that all employees are treated equitably. Intake or orientation is the time to introduce the new employee to the farm policies.
  • Introductions: Introduce the new employee to current employees and suppliers. During these introductions, the current employees should be told what responsibilities that the new employee will have and what the chain of command will be. This helps everyone understand the roles and responsibilities of all the employees and eases the new employee into the farm operations. An organizational chart helps here.
  • Job Duties: During the hiring process, the new employee will certainly have a basic understanding of what the new job will entail. But now is the time for the employer to get into more specifics of the job responsibilities. But also this can be the time when more extensive training can begin. Even though the new employee will likely have a number of the skills the employer sought, he or she won’t know the specific way your operation does something. This training period will set the employee up for success and contribute to the farm or ranch operation.

 

Mentoring should also be considered as part of the intake process for a new employee. The mentor provides training and a sounding board for the new employee. The mentor can also be the person who helps the employee become part of the work and social network at the farm or ranch. That networking can improve job efficiency and effectiveness.

 

New employee orientation should be consistent. This means the same person should conduct orientation of all employees and should follow a standard procedure. Write down the process to assure all of the aspects of orientation take place. The procedure development should include key farm and ranch personnel thus providing buy-in on the orientation process. If any documents are to be given to the new employee, have them ready for the new employee when he or she arrives for their first day of the new job. This presents a professional image to the new employee and starts the new job off on the right foot.

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.

 

 

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