Farm Income Likely to Drop in 2016

USDA recently projected 2016 Net Farm Income (NFI) would be near $54.8 billion or 2.8% less than 2015. This would be the third consecutive year of income decline. this follows 2013’s record income following a year of widespread US drought. High livestock prices and hog and poultry disease problems have helped hold up NFI since 2013 but the production problems are easing. 2016 Farm Bill Price Loss Contract (PLC) payments are projected to increase 31% to $13.9 billion compared to 2015. That means just over 25% of the 2016 NFI will come from government payments. 2015 Farm Bill program payments accounted for 18.8% of NFI.

Agricultural economists at Texas A&M and the University of Missouri-Columbia have pointed to a couple of financial ratios that indicate very strong balance sheets for farms and ranches. There has been an uptick in the financial stress of farm and ranches but are still at very low rates. Factors pointing to prolonged risk though are commodity over-supplies in nearly every sector. Ethanol growth has ended unless a new blend mandate is approved and Chinese economic growth to just 4% or so, but that is nearly 3X the current US growth however. This lack of growth reduces prospects for increased consumption of agricultural commodities along with higher prices. So over the next few years, absent weather or world political problems, supplies of these commodities will likely decline to more nearly align with demand. Poultry and dairy are likely to make supply adjustments quickly. But grains, oilseeds and beef production are burdened by increased supplies during the next couple of years.

USDA did point out that expenses have declined and are likely to decline for the second consecutive year since 1986-7. “A drop in overall production expenses is forecast for 2016, cushioning the decline in cash receipts. Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock/poultry purchases, are expected down. Also, expenses for fuels and oils are forecast down by 14.5 percent in 2016.  If realized, the expenses across each of these three categories will have fallen for 3 straight years. In contrast, hired labor costs and interest expenses are forecast to increase by $1.5 billion (5 percent) and $1.3 billion (6.8 percent), respectively, over 2015.” Source: USDA

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To Store or Not to Store

Post-harvest marketing plans can be influenced by many factors. One of these is the cost of storing grain until some future date. There are several reasons to store grain including:
• Storage allows marketing plan flexibility
• Capture strengthening basics
• Capture seasonal price increases
• Manage income tax liability

There are two cost components of grain storage: fixed and variable costs. For commercial storage, people storing grain will pay a price which will include both costs, but farmer owned storage will only bear variable as cash costs when grain is stored. The aspects of thee costs include:
• Storage facility ownership cost
• Interest (opportunity cost) on owned grain
• Extra grain shrink
• Additional grain quality deterioration
• Added drying cost for long term storage

Let’s talk about storage facility ownership costs first. If grain is stored at a commercial facility, it will charge for the ownership of bins etc. On farm grain storage owners will not explicitly pay a cost for ownership of storage. Farmer owned storage may have debt financing but that doesn’t influence the annual decision to store grain. These ownership costs include depreciation, interest, repairs, taxes, and insurance (DIRTI5). In the long run these costs should be recaptured by using those grain bins to enhance grain prices.

The next set of costs, variable, are the ones that must be captured through enhanced market prices in order to make storage pay. What are the variable costs? Any repairs due to usage, broken belts, augers, drying fuel, electricity, labor and management of the grain in storage. Grain held in long term storage might be dried down to 13% moisture which adds additional drying expense and the loss of bushels to sell. Long-term storage also means the grain will have to be conditioned, aeration, for storage during winter and then again during spring to keep it in shape for sale in summer. But the largest cost of storing grain is interest on the grain while in storage. This is an opportunity cost. The grain money from grain sold could pay debts, farm and personal, be invested in a money making activity or used for family living.

Calculating all of those costs takes time but has been made much easier with a spreadsheet (http://www.agmanager.info/marketing/decisions/On-farm%20storage.xls). This spreadsheet presents costs as fixed, variable and total. When analyzing the storage decision, the first costs to recapture are variable costs. If monthly variable storage costs are 3 cent per bushel but the market is only offering 2 cents, the market isn’t paying enough to store. There may be occasions where the market pays 4 cents per bushel until April for instance but 2 cent after. In the latter situation a grain owner might want to store till April to capture that added grain price.

Storing grain can enhance grain revenue but the costs of storing grain must be considered when making the storage decision. There will be situations when grain storage costs more than the grain market would pay to store. Knowing those costs will allow you to profitably decide when to store and for how long. Or when not to store.

Beef Expansion Likely to Slow

Chris Hurt, Purdue University Ag Economist, recently discussed his outlook for beef profits and prices, noting that the US beef herd expansion has been very rapid. Record high beef cattle prices during 2014 and the first half of 2015 encouraged beef herd owners to hold heifers back and build cow numbers. The January 1, 2016 USDA Cattle Report showed that beef cow numbers are up 4% and cow and calf numbers up 3% year over year. The report also showed that 3% more heifers were held back to calve leading to higher expected calvings, 6%, compared to one year ago.

Feeder cattle supplies are up 4% leading to larger slaughter cattle supplies in late 2016 and 2017, probably pushing beef prices and feeder calf prices down further. 2015 beef supplies were larger than anticipated at years beginning. USDA expected that cattle available for slaughter would be down 5% but beef was actually up 1%. Where did the added beef come from? Heavier calves and higher beef imports. Beef production worldwide is growing. Beef competitors, pork and poultry, are expanding also. This expansion leads to likely 2016 finished cattle prices averaging around $125 per cwt. Feeder calf prices are now near $195 per cwt. for 550 pound calves leaving little if any profits for beef cow owners. That means beef herd expansion is likely to slow soon. It also means there will be pressure for herd owners to reduce costs. Feed prices have declined in the last several months, but at least in some areas of Nebraska grazing costs are still high compared to calf prices.