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.