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

 

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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.

 

Federal Reserve Beige Book Comments

Periodically the Federal Reserve releases the Beige Book or more formally ‘Commentary on Current Economic Conditions by Federal Reserve District. This book summarizes the comments by Federal Reserve member banks relating to various economic sectors including Agriculture. These comments don’t provide any data but do help to understand trends or new conditions to follow.  You can read the book here: https://www.federalreserve.gov/monetarypolicy/beige-book-default.htm.

Let’s look at some of the comments about agriculture.

Chicago: “The outlook for crop income was unchanged through April and early May despite wet weather slowing planting in much of the District.” Chicago also reported some cold weather damage to some fields. Some dairy operations in Wisconsin had to find new milk buyers when Canada restricted ultra-filtered milk importations. Incomes for hog and cattle improved as prices rose.

 

St Louis: “Agriculture conditions deteriorated significantly due to flooding across the District”. Flooding across the region had hampered planting with cotton being farthest behind in planting progress.

 

Minneapolis: “District agricultural conditions remained weak since the previous report because of continued low commodity prices.” The district noted that planting was slowed by mid-May rains but that planting progress was on a par with the 5-year average.

 

Kansas City: “Persistently weak farm income continued to weigh on the District’s farm economy and agricultural credit conditions. Soybeans prices were lower than one year ago but soybeans remained profitable at current prices. Bankers in the western region of the district were expecting much lower farm income than those in the eastern part of the district. Wild fires devastated parts of the district and reduced cattle and wheat incomes.

 

Source: 31 May 2017 Beige Book, Federal Reserve System

Do You Know Your Costs

Farm and Ranch income continues to be a concern for many involved in agriculture. Some indicators I have observed include recently closed machinery dealer locations, landowner concerns for rental rates and land taxes as well as 2017 crop production costs projections. The last, estimated crop production costs, are not your costs. The same is true of cow-calf costs as well. To improve cost control, farmers and ranchers must know what it costs to produce calves or grains. Another very important use of cost of production calculation is to manage crop and livestock marketing. UNL has both crop and beef production budgets which users can download. These are located at:

http://cropwatch.unl.edu/budgets

http://agecon.unl.edu/publications/cattle-budgets

One way to use these budgets is to calculate two cost of production, full and cash flow. A cash flow cost of production (COP) is useful when planning or marketing crops. For instance, what if a local grain buyer offered a minimum price contract for corn at $2.99 per bushel. Is that a price a farmer can live with? If the cash Flow COP is calculated to be $2.45/bushel, the producer knows that with the $2.99 minimum price he or she will be able to pay the bills and then some. But if the cash flow COP is $3.07/bushel some costs need to be cut or higher yields obtained at the same total cost. Or maybe both. A cash flow COP production includes all of the out of pocket production costs, the portion of family living the farm or ranch must pay, scheduled debt payments and all taxes.

Full cost of production is also an important cost to know. In the long run, say more than 5 years, all costs must be recaptured to stay in business. These costs include all cash costs plus investment in machinery, land, breeding livestock and unpaid labor. The UNL crop and beef systems budgets calculate both of these costs. Use these budgets to manage your own operation.

Federal Reserve Releases Ag Economy Observations

18 January the Federal reserve released its January 2017 Beige Book which included commentary on current US agricultural industry conditions. Each Federal Reserve district included comments about their district’s ag industry. Some of those comments are below.

Conditions were reported as somewhat variable in the Richmond district depending on whether hurricane Matthew hit farming areas. Conditions across the southeastern US were difficult in many areas due to a growing season drought. Poor pasture conditions caused stress for livestock producers. Some were feeding corn that might otherwise be sold. Rains did occur that brought relief late last year for the southeastern US. The Chicago district reported very good yields and some modest decline in input costs. The livestock sector saw increased prices. Much the same was reported in the Kansas City district as well as Minneapolis. These districts reported “weaker loan repayment rates than in prior years”. Cash flow is reported to be tighter and income lower is compared to prior years. Winter wheat plantings were reported to be 95% complete but little snow was present as of 1 Jan 17 for insulation of the crop. Record yields were reported in the Dallas district. Cotton yields were very good which pushed prices below or near breakeven. But cotton economics are better than wheat economics. In the San Francisco district, dairy economics have improved but investment in dairy is weak due to CA milk prices versus the Midwest milk prices.

More comments can be read from the news report below.

https://farmpolicynews.illinois.edu/2017/01/federal-reserve-observations-ag-economy-january-17/

Cash Flow Planning for 2017

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Planning is a common activity for farm and ranch managers and operators. It includes crop rotations, when to wean, when to sell crops or calves and when to take an LDP. All of those activities inevitably lead to cash and income. “Cash Flow Statements”can be used to plan an agricultural business’ need for borrowing, when to make payments for various expenses or when to make crop and calf sales.

A statement of cash flows summarizes cash inflows and outflows for a specific time period. It can be used to project, pro forma, future cash flows or to summarize past cash flows. Cash inflows include product sales or sales of capital items but also borrowing and investing. Cash outflows include loan payments, supplier payments, machinery lease payments, land rent payments, taxes and family living draw. The size of all these matter but so do the timing of the cash flows. A proforma cash flow statement allows the farm and ranch manager to set up lines of credit, plan crop sales, plan vacations, project tax payments and even which crops to plant. The statement of cash flows is usually done either quarterly or monthly.

Proforma cash flows can be prepared either by:

  1. use last years actual cash flows to project the coming year’s cash flows.
  2. project the coming year’s cash flows from each farm enterprise with details about probable prices, yields, expenses, family living draw, property taxes, income and social security taxes.

The first method is quicker but unless it is adjusted for crop price and yield variation, changes in input costs, changes to debt servicing, likely changes to tax liability and changes to family living it may be too far off the mark. Many farmers already calculate costs and returns for their crops or calves. These are called enterprise budgets and can be used to build a cash flow using the second method. This second method also allows the user to mix enterprises as needed to increase profitability and increase positive cash flow.

Many tools are available to help with cash flow development. Nebraska Extension will soon publish the “2017 Crop Budgets” at http://cropwatch.unl.edu/budgets. Right now the 2016 budgets are up. Iowa State University Extension has an article further explaining cash flow budgeting and two Excel spreadsheets to help with the process at http://www.extension.iastate.edu/agdm/wholefarm/html/c3-14.html. Oklahoma State University has a paper form for cash flow budgeting, http://agecon.okstate.edu/annie/files/F-751%20Cash%20Flow.pdf. The University of Minnesota has an online workshop about cash flow at http://ifsam.cffm.umn.edu/StatementCashFlows/Default.aspx?SectionID=5 to help you further understand cash flow planning. Nebraska Extension also has a web video that helps explain Cash Flow Planning at https://vimeo.com/188871642.

 

Communicating with Lenders: Suggestions for Farmers & Ranchers

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The last few years have been tough for many farmers, feeders and ranchers due to a cost-price squeeze. I reviewed the 2015 Nebraska Farm Business INC financial standards measures. Average 2015 Net Farm Income was $51,293 which doesn’t sound terrible until you get deeper into the numbers. The farms are broken into 10 equal groups, deciles, ranked by Net Farm Income. The bottom four deciles of farms were unprofitable with the lowest decile averaging -$109,508 net farm income. At the beginning of 2016, the bottom three deciles had negative working capital with the lowest decile averaging -$244,880. The numbers above and the current cost-price squeeze will probably worsen the financial position of additional farms and ranches. Fortunately equity has increased for many farms and ranches and that can be used to shore up current lending needs. Communicating with lenders  will be an important activity over the next months. Here are suggestions for that conversation’s success.

  • Always be upfront about the exact situation, sooner rather than later. Be frank about what your financials are but don’t talk with the lender constantly.
  • Make sure that all your financial documents are accurate. Include all machinery leases or outside lending listed on the correct financial documents. Consider producing a farm and personal balance sheet including credit cards on the balance sheet.
  • Do your own cash flow projections for 2017 now. A cash flow projections allows you to discuss your needs with your lender. The process of making a cash flow projection can be very illuminating to operators. The cash flow projection can guide marketing plans as well. Update the cash flow periodically during the growing season and share the update with your lender.
  • Explore marketing plans, write one and implement it. Again marketing plans should be flexible as new information comes forward. Again share your marketing plan with your lender.

The foregoing suggestions show a borrower that is proactive and forward-looking which is a very positive asset that lenders want to see. Be proactive!