Stretching Cash Flow

Over time, negative cash flows will put farm and ranch businesses, and the lifestyle of the owners, at serious risk. The following suggestions for additions to cash flow are adapted from Iowa State Extension AgDecsionmaker C3-58, Farm Financial Management: 16 Ways to Stretch Cash Flow, https://www.extension.iastate.edu/agdm/wholefarm/html/c3-58.html, written by William Edwards, retired extension ag economist.

  1. Cancel or re-negotiate leases that are unprofitable. Not all cropland is worth the same as other land. Rental rates should fit the productivity of the land. Flexible cash rents or a crop-share lease can be proposed in place of fixed cash rent.
  2. Use financial reserves. These may include savings, liquid financial assets such as stocks or bonds. However consider the taxes that may accompany selling investments.  Review current market prices and your basis to determine capital gains tax owed. 
  3. Sell current assets. Current assets include stored crops and market livestock. But don’t simply sell off market livestock that might be discounted as they are not yet finished since the discount could be too steep,
  4. Use credit reserves or unused borrowing capacity. Analyze the decision to use more debt first and have a realistic plan to repay that borrowing.
  5. Refinance debt by sing equity; lengthen repayment terms or refinancing loans with balloon payments. Here again look at the ability, if needed, to refinance the balloon payment
  6. Defer capital asset purchases. Sometimes making a purchase or leasing could reduce costs by lowering repairs that use more cash than the lease or purchase payment. Analyze carefully which strategy best reduces cash flow.
  7. Utilize FSA Guaranteed loans.
  8. Utilize FSA low interest marketing loans. Placing grain under loan can be used to pay off high interest rate loans.
  9. Increase non-farm earnings. Even if one member of the farm family is already working off the farm now, all may need to at least for a time.
  10. Decrease non-farm and family living expenditures. Set and use a family living budget. The budget needs to prioritize expenditures to those necessary such as utilities, food and health insurance. Defer expenditures such as vehicle purchases, vacations, recreation expenses and discretionary expenses.
  11. Sell assets that aren’t earning their keep. Farmland that is consistently unprofitable, machinery that costs more than custom work or assets that no longer have a use on the farm or ranch meet this definition. Consider selling them to raise cash.  Funds gained from the sale can be used in more productive manner such as paying down existing debt, or investing into an asset that will provide returns.  Capital gains tax will be owned on any business property that is sold for more than its reported basis.  For assets sold that were held longer than one year that capital gains tax rate can be 0%, 15%, or 20% depending on your taxable income and filing status. 
  12. Joint machinery ownership. This can work but communication and periodic compromise may be necessary for success.  Spending time in the beginning creating a written agreement can avoid unnecessary fallouts later on, and periodic reviews of the agreement insure that it remains relevant.
  13. Seek outside investors or lenders such as family. Think through lending to or borrowing from family. It can be a difficult situation for all involved.

Grain Marketing & COVID

Let’s state the obvious, this isn’t a typical year and we all know it. For farmers, it is a survival year. Why and what might be done to make it through to the other side of the COVID-19 pandemic? This article will discuss how to build a marketing strategy to assure that the farm continues to the next crop year.

SITUATION

            The prominent factors that are influencing our agricultural economy are also affecting the broader economy, COVID-19 and oil prices. COVID-19 has caused world oil usage to decline starting in late 2019. (Figure 1) The U.S. Energy Information Agency (EIA) projects a decline of over 25% worldwide. World production and consumption of oil stayed mostly in balance until Q4 of 2019 when COVID-19 presented and spread worldwide causing oil consumption to decline. (Figure 2) Many countries prohibited non-essential land travel and air travel dropped to very low levels. This much reduced transportation fuels usage has unbalanced supply and demand and so far, oil production levels have not dropped to reflect reductions in demand. Oil prices likely will not recover until oil stockpiles begin to decline. Since corn usage is approximately 40% to ethanol, transportation and oil are linked to corn demand and price. When the situation will change is unpredictable.

Figure 1. World Oil Usage and Forecast

Figure 2. World Oil Product vs Use

MARKETING PLANNING

This year’s corn and soybean planting is underway in the Midwest with excellent planting weather across most of the region. Planting for most should be completed on time with minimal interruptions. That leads to the possibility of a good to excellent crop if weather after planting cooperates. If most of the nation meets or exceeds their actual production history (APH), this could place greater downward pressure on grain prices. You may be able to survive an average to high yield year, even with low prices. But what if you have a yield shortfall, and grain prices do not recover? With survival in mind, let’s discuss steps in marketing planning

First, review your input expenses. Cash flow planning earlier this year probably did not consider COVID-19 impacts. Reassess that cash flow and adjust as appropriate. There are two sides to the cash flow expenses and income. Analyze each input expense to ensure you are achieving optimum, not maximum,maximum; yields based on current prices and input costs. Be certain to include cash expenses such as property taxes, lease payments, and family living.

After reassessing your input expenses, r review the potential income sources for your farm. The first source of income should be grain sales. Calculate a minimum cash price for each crop for a range of expected yields. TheseThis cash flow price should be the lowest price you need to obtain in order to pay for your input expenses. If these cash flow prices are above current or expected market prices, review costs again and make additional cuts without dramatically sacrificing yield.

Another source of income may be off-farm income. The final source of income for your farm may be U.S. government programs. However, payment each farm or ranch may receive is unknown right now. Some of these programs include the Paycheck Protection Program, the Pandemic Unemployment Assistance program and cash payments from the U.S. Department of Agriculture. Farm Bill programs, and crop insurance may also provide additional income if markets remain low.

 If no further costs can be reduced or off-farm income can be earned, make an appointment to meet with your lender to discuss what to do if higher pricing opportunities don’t seem likely. In this environment, loan consolidation, especially at low interest rates, can be an appropriate action. Shorter-term loans might be collateralized with real estate to stretch loan payments and improve cash flow.

Next, develop a written plan that includes prices at or above your cash flow price per bushel and date triggers to help you sell throughout the year. Keep yourself accountable by sharing your plan with grain buyers, family and farm partners. The minimum prices and bushels planned to be sold need to bring in as much cash as you will need for the year. Crop producers should not ignore making sales at higher prices when available, but are trying to make sure they recapture all of their cash expenses first.

Finally, implement the marketing plan and do not let emotions derail the plan. Most years prices will follow a pattern where prices peak in June or July and later prices will trend down into harvest. In this economic environment, crop producers will want to maximize income. Trying to guess when the market peaks is difficult and likely to be incorrect, and may have already done so.

CONCLUSION

            This year is shaping up to be a survival year for crop producers. Crop producers need to know at what crop price they will recapture all of the cash they will spend this year. Implementing a marketing plan to ensure that takes place is a survival strategy that can keep the farm business intact with no additional debt for a better year next year.

Sources:

  1. Use of oil—U.S. Energy Information Administration (EIA). (n.d.). Retrieved April 22, 2020, from https://www.eia.gov/energyexplained/oil-and-petroleum-products/use-of-oil.php
  2. Short-Term Energy Outlook—U.S. Energy Information Administration (EIA). (n.d.). Retrieved April 22, 2020, from https://www.eia.gov/outlooks/steo/report/global_oil.php

CARES ACT 2020

Unemployment Insurance and Farmer/Ranchers

Generally, unemployment insurance is managed by the several states of the United States (US). With each, rules are different with oversight by the US Department of Labor (DOL). The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act made changes to the unemployment coverage for workers and appropriated funds for the changes. The act tasks the US Department of Labor (DOL) with writing rules for the changes. With that, the DOL has issued an Unemployment Insurance Letter, UL No. 16-20, that begins the rulemaking process. This guidance will then be used by Nebraska to implement the CARES Act. This article reviews what is known now with future rules to clarify eligibility.

Changes to Unemployment Insurance

            Several changes were made to unemployment insurance including eligibility, length of coverage and benefits. These include:

  1. An additional $600 weekly in benefits from federal appropriations until no later than 31 July 2020
  2. Increased the length of unemployment benefits to 39 weeks.
  3. Created new temporary program, Pandemic Unemployment Assistance (PUA), which expanded eligibility. Eligible persons include self-employed, those seeking part-time employment and those with insufficient work history for benefits.

The US DOL currently has a permanent Disaster Unemployment Assistance (DUA) program. DUA makes unemployment payments during a disaster to self-employed persons. DUA includes farmers and ranchers in the definition of self-employed. DOL says PUA will be administered like DUA. So, one can expect that farmers will be eligible for PUA.

PUA Rules for Unemployment Assistance

Eligibility for PUA comes when an individual is ineligible or has exhausted regular unemployment benefits. The individual may also have to exhaust the CARES Act’s new Pandemic Emergency Unemployment Compensation (PEUC) program. The Person must be unemployed, fully or partially, unavailable or unable to work due to COVID-19. The US DOL has provided a list of situations where PUA would apply, although the list is not exhaustive. When the CARES Act created PUA, it also created a general category that leaves room for DOL to add situations not yet considered. Criteria that give someone PUA eligibility are:

  1. Individual has COVID-19
  2. Household member has COVID-19
  3. Primary caregiver of household member unable to go to a school or facility closed due to COVID-19
  4. Unable to work due to quarantine
  5. Unable to go to work due to self-quarantine
  6. Became sole income source if household head died due to COVID-19
  7. Place of employment closed due to COVID-19
  8. Quit job due to COVID-19. This criterion means that the individual has or had COVID-19
  9. Scheduled for work but could not reach the work site.
  10. Additional criteria. DOL has authority to create criteria not envisioned above.

The Nebraska Department of Labor (NE DOL) web site (https://dol.nebraska.gov/UIBenefits) has resources explaining unemployment insurance and explains how to apply for it. The web site also explains when to expect benefits to start after application which is usually no more than 21 days but may take longer due a large volume of applications. The NE DOL has received guidance on 2 of the 3 CARES benefits and is creating the programs with the guidance received. Once an individual applies for unemployment insurance, they need not apply for the $600 added benefit since it will automatically be paid. The $600 benefit will be retroactively paid to 29 March 2020. Regular unemployment benefits are not paid for weeks prior to filing, so filing as soon as possible is necessary. Self-employed, presumably farmers and ranchers, will have their applications reviewed for eligibility.

Sources:

        Farmers’ Guide to COVID-19 Relief. (2020, April 15). FLAG. http://www.flaginc.org/2020/04/farmers-guide-to-COVID-19-relief/

Official Nebraska Department of Labor | Unemployment Insurance Benefits—File Online at NEworks.nebraska.gov. (n.d.). Retrieved April 17, 2020, from https://dol.nebraska.gov/UIBenefits

Cattle Inventory Analysis: is the herd expansion done?

The US beef herd size periodically cycles through expansion and contraction with about a10 year cycle. this cycle is largely which take time to build due to the biology of cattle. The low point of the current beef cycle was 2014, following droughts in 2011 and 2012 along with high feed prices in 2013, led to large cattle herd reductions.

USDA recently released the 1 January Cattle Inventory report which confirmed the 1 July 19 preliminary cattle report. The 1 January report showed a small reduction in the US cattle inventory, down 400,000 head, but replacement numbers indicate this trend will continue. Beef replacements were 2% lower and dairy replacements were 1% lower than last year. USDA also revised downward the 1 July 19 calf crop estimate to follow the lower cow numbers.

These indicators will eventually mean fewer feedlot placements but that is not yet the case. USDA shows on 1 January that cattle on feed were 2% more than 1 year ago. In December 2019 feedlots placed 3% more cattle than 1 year ago and marketed 5 % more animals than 1 year earlier. Total cattle on feed is up 2% but the heifers on feed increased by 4%. This is another indicator that calf numbers will continue to decline and eventually rise. However one analyst suggests that 2020 prices are likely to remain close to 2019’s.

Sources:

Franken, J. “2020 Cattle Inventory—Herd Expansion Comes to an End.” farmdoc daily (10):19, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, February 3, 2020

How will the corn export market change in the next decade?

An interesting article recently published by Fabio Mattos, UNL Grain Economist, discussed changes that have happened and are likely to continue in the world’s corn export market as Brazil further develops its corn production. Mattos points out that Brazil now exports 20 million metric tons of maize up from almost no exports 20 years ago. At the same time, Brazil has increased its maize production 4X. A large part of that maize expansion has been in its safrinha or winter crop.

The safrinha crop enters the world export market at the same time that the US corn crop is exported. This pressures US corn prices and is pushing the main corn export period to February-April. Brazilian corn is produced in the country’s center-west and is impacted by poor transportation infrastructure. Mattos calculated Brazilian landed corn costs to Japan as about 15% more than US corn for 2008-2012. Soybean costs to Japan for the same period were nearly equal for Brazil and the US soybeans. Brazilian transportation cost were much higher than US, $41 per metric ton higher. Brazilian transport cost will likely decline as their infrastructure further develops. Mattos also shows that Argentina’s export policies makes its soybeans equal in cost to US soybeans for Japanese importers. If Argentina changes these policy costs, their exports would cost less and possibly undercut US soybeans.

Mattos discusses a recent soybean production area, Matopiba, increases in yield and tillable land and possible new competitive pressures on US grain exports. Matopiba is a region in Northeast Brazil, covering parts of four states, with much closer access to ocean transport thus lower transport cost to Asian Markets.

Take some time to read Fabio Mattos article and think about the implications to US corn and soybean export competitiveness if Brazilian yields increase and transport cost decline. Also think about our own transportation infrastructure, the Mississippi River locks and dams, and how it could effect US grain exports, prices and US farm profitability.

https://agecon.unl.edu/cornhusker-economics/2019/matopiba-international-grain-markets

Crop Marketing Plans with Yield Uncertainty

Robert Tigner, Nebraska Extension Educator,

Jessica Groskopf, Nebraska Extension Educator,

Cory Walters, UNL Extension Grain Economist

Due to large global ending stocks of corn (340.41 MMT) and soybeans (99.05 MMT), news of flood damage has not affected the futures price of these commodities as one might have expected it to. This is a challenge for farmers facing flood damage, as your revenue will be impacted by both lower than usual yields and possibly lower prices and cost incurred due to flooding. This article will discuss ways to write and implement a pre-harvest grain marketing plan that considers greater yield uncertainty due to flood damage.

Farmers effected by 2019’s early spring flooding are likely to have increased yield risk from changed soil characteristics, excess moisture or late planting. The following are steps for planning 2019 grain sales.

  1. Assess anticipated production – Depending the extent of the damage and the size of the farm, there are likely to be four categories of yield variation.
    1. Category 1: likely normal production – use actual production history (APH) as yield estimate.
    1. Category 2: damaged but likely or planted normally – production may be slightly reduced from APH.
    1. Category 3: damaged, late planted – production will occur, but too many variables are present to estimate production.
    1. Category 4: damaged, prevent plant – no production or crop planting is after the insurance period.

Once you have categorized the damage, estimate the total production in each category.

  • Determine the marketing percentage – The most difficult decision for flooded farmers will be the percentage of estimated production that you are going to market. Contracting more grain than you produce can result in a lower revenue if you have to pay a “buy back” fee to the elevator, or buy bushels from a neighbor to fulfill your contracts.

Remember, you do not have to sell any grain prior to harvest. However, corn and soybean prices are traditionally higher during the growing season than at harvest.  You may want to adjust your marketing percentage throughout the year as you see how your crop progresses.

Basis.  Areas impacted by the flood may offer a larger than normal basis to incentivize shipments of grain from a further distance to their elevator.  Use this to your advantage by contracting basis if the offered harvest basis is higher than the expected harvest basis.  Your basis marketing percentage will be held back by expected production. 

  • Determine the marketing contract – There are several types of contracts you can use to sell grain, some of which require delivery of the grain and others that do not. If you are less confident in your yield estimate, you may want to use options and futures hedging which provide price protection, but do not require physical delivery of the commodity.

If you are comfortable with guaranteeing delivery, you can use a forward pricing contract, hedge to arrive (HTA), minimum price contract or basis contract. These contracts are often available through your local elevator.

  • Set price targets – Given greater yield uncertainty, it is important for your pre-harvest marketing plan to set realistic price targets. If you set your price targets too high, you may miss opportunities to price grain at its seasonal high.  According to the April USDA World Agriculture Supply and Demand Estimates (WASDE) predicts cash corn prices to be $3.40 to $3.70 per bushel and cash soybean prices to be $8.35 to $8.85 per bushel.  
  • Set sales deadlines –The December corn contract and the November soybean contract have slowly been trending lower since January 1. If your early 2019 price targets have not triggered sales, you will want to set a secondary trigger in the form of deadlines to insure that some grain is sold during the growing season when prices are traditionally higher.

WASDE price estimate accuracy

A new post by Brent Gloy, agricultural economist formerly at Purdue University, compares World Agricultural Supply Demand Estimate price projections to the average marketing year price (MYA) in a post entitled “How Accurate are WASDE Price Estimates”. As Brent mentions, WASDE will begin making price projections for the year’s crop beginning in May. Those price projections will have impact on the market and on farmer’s expectations of prices received. So a natural question is “How accurate have the price projections?” The post is located at: https://ageconomists.com/2019/04/22/how-accurate-are-wasde-price-estimates/.

Gloy provides a couple of figures showing the May WASDE mid-point price compared to the MYA price. Of course, there is variation. Both corn and soybean averaged within 5% of the May WASDE midpoint price for the past 20 years. But some years were off by as much as much as 30%+.

Take some time to read Brent’s post and think about the implications of price variation. What types of year were those that have high price variability and is this year one where price variability is likely?

Observations on the Ag Economy from the Federal Reserve

On March 6, the Federal Reserve released its most recent Beige Book. The Beige Book is a compilation of comments from each of the Federal Reserve districts. The comments reflect on the economic conditions broadly as well as those in the ag sector. Below are some of the ag sector comments.

The Atlanta Federal Reserve district remarks “ag conditions mixed across the district.” Very little of the district is abnormally dry. Orange production is expected to be above last year. Cotton and rice prices have declined and both are important southern US crops. Cash prices for corn, soybeans, beef and broilers are up since November.

The Chicago Federal Reserve district says that contacts across the district report lower wheat and soybean prices. Farm incomes are expected to be lower in 2019 than 2018, anticipating lower crop yields and prices compared to 2019.

The Kansas City Federal Reserve, including Nebraska, commented that farm income declined slightly while farmland prices remained steady. Crop and livestock prices have risen slightly and could improve farm income across the district. The Beige book contains comments prior to the weather disaster of last week in Nebraska. Iowa had significant damage too, but is in the Chicago district.

The Kansas City Fed district reported higher interest rates. They also reported that farmland values are expected to decline but that demand remains high. Farmland sales volumes have increased in the district mostly in Kansas and Nebraska.

The Minneapolis Federal Reserve district reported much the same as others. One comment included concerns about trade tensions and struggles with low commodity prices.

Partial Budgeting: Making Incremental Farm Business Changes

Business owners must often make decisions about changes they are either contemplating or changes that have to be made. Many of the decisions are incremental, such as adding land, expanding or reducing an enterprise, adding an enterprise or changing how an enterprise is managed. Analyzing the whole farm impacts for these types of changes is unnecessary. The partial budget is a useful tool for farm managers when these situations arise.

A partial budget helps farm owners/managers evaluate the financial effect of incremental changes. A partial budget only includes resources that will be changed.  It does not consider the resources in the business that are left unchanged.  It is important to remember, only the change under consideration is evaluated for its ability to increase, or decrease, income in the farm business.

 

Partial Budgeting Principles

Partial budgets are based on the principle that small business changes have effects in one or more of the following areas.

  1. Increase in income
  2. Reduction or elimination of costs.
  3. Increase in some costs.
  4. Reduction or elimination of income.

The net impact of the above effects will be the positive financial changes minus the negative financial changes. A positive net indicates increased farm income due to the change while a negative net indicates the change will reduce farm income.

 

Partial Budget Components

A partial budget consists of two columns, a subtotal for each column and a grand total. The left hand column has the items that increase income while the right hand column notes those that reduce income for a farm business. Figure 1 illustrates the use of the partial budget for purchased versus raised beef replacements. The partial budget can be divided into four parts.

  • Added Income

This area is usually an estimate if a new enterprise is to be added. Use realistic yields, product quality and prices. Over-estimation may lead to incorrect decisions and possibly reduced financial performance when the change was meant to improve it. When deciding on price, use average prices from the most likely market where production is most likely to be sold. Also use average quality unless the change under consideration is meant to improve crop or livestock quality.

Income increases may come from expansion of an enterprise. If the expansion is minor, current production quantities, quality and average prices are reasonable approximations to use. But if the expansion is large, during the early production periods, lower yields and quality may result due to start-up difficulties. Take this factor in consideration when estimating income.

  • Reduced Costs

Obvious items for inclusion in the section would be crop or livestock expenses no longer incurred. These costs could be reductions or total elimination of certain expenses. Examples include seed, custom work, repairs, veterinary expense, interest expense and paid or unpaid labor. Inclusion of non-cash costs, unpaid labor and depreciation, would provide a full economic analysis but may skew the cash change analysis.

  • Additional costs

This is the first section of Column 2. Here is a list of the increased expenses due to the change being considered. Most of these will be costs of production for the new enterprise. This list may also include non-cash costs such as labor and depreciation, but if they are included, the results of the analysis will not provide the change in cash income for the management change. It might be appropriate, however, to include unpaid labor to be certain that the operator is equitably paid for his/her labor and management input. A depreciation charge, if included, will help analyze whether there is a return on the investment the operator makes.

  • Reduced Returns

This section follows ‘Additional Costs.’ These two sections are included in the same column since both reduce net income. Items to include here might be reductions in product sales, such as corn, feeder pigs, apples or milk, rental income, custom work income, or USDA payments. Another consideration here may be reductions in yields due to reduced planting or harvest timeliness. When utilizing custom operators or shared ownership of equipment, some cropping operations may not be completed in as timely a manner as desired in some years. This can reduce quality and yields that reduce farm income. Accurately estimating this factor can be difficult, however.

 

Partial Budget Summary

The summarization of the of the above four partial budget components is the last step in partial budgeting. Total each of the two factors in column 1 and write this result on the column 1 subtotal line. Repeat the process for column 2. Then take column 1 (added income/reduced cost) and subtract column 2 (increased costs/reduced income) to arrive at a projected net return from adoption of the change under consideration. A negative number, as in the example above indicates the change as considered will likely reduce whole farm income. A positive number indicates the opposite is likely to happen.

 

Conclusion

Partial budgeting can be useful in the decision process farm owners and managers use to decide on alternative uses of resources they have in their business. Partial budgeting is a systematic approach that can assist the manager in making informed decisions. But this budgeting process can only estimate possible financial impact, not assure it. Management aspects and serendipity can change the projections. Also the specific numbers used may not reflect realistic possibilities. These may result in better or poorer than expected performance. Careful assessment of possible farm changes will help prevent inaccurate projections of the change’s impact on the farm business.

 

Figure 1.

Partial Budget Example: Switch to purchased versus raising replacements

Column 1

Increased income due to change:

Column 2

Increased costs due to change:

Sell raised heifer calf: 500lb x $1.20= $600 Purchase bred heifer           $1200
   
Subtotal                                                $600 Subtotal                                 $1200
   
Reduced costs due to change: Reduced income due to change:
Pasture maintenance:                              $20  
Feed:                                                     $205  
Health, utilities, misc:                          $105                                                             $0
Subtotal                                        $930 Subtotal                                  $1200
Change in income:

(subtotal from Column 1 minus subtotal Column 2)            $930 – 1200 = (270)

 

 

 

2018 Net Farm Income Projections

Last week USDA’s Economic Research Service released 2018 Net Farm Income projections. As we all know forecasting is fraught with error. Even the best modeling or data available at the time can not accurately project the unknown. So with that in mind, U of Illinois Ag Economist Todd Kuethe reviewed the accuracy of the November Net Farm Income forecast to the official number to be released. The range of forecast from 1975 to 2017 is an over-estimation by 50% to and under estimation of about 30% with the average 2.75% below actual. Since 2000 ERS Net Farm Income projection has averaged 4.37% low. Using this latter error, Kuethe corrected the November 30 ERS income project to “$69.3 billion. This adjusted forecast is still below 2017 official estimates but reflects a more modest 8.2 percent decline.” (Kuethe, 2018) ERS’s original estimate is a decline of 12.1% to $66.3 billion. I look forward to the actual number that ERS will release in 2019 as well as many others in agriculture.

Click on the Permalink below for the full analysis.

 

Source: Kuethe, T. “Adjusting USDA’s Net Farm Income Forecast Based on Historic Performance.” farmdoc daily (8):222, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, December 5, 2018. Permalink