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.

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.

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

2019 Nebraska Crop Income Projections

As the 2018 harvest finishes across Nebraska, it is time to think about next year. Nebraska Extension releases 78 crop budgets near the end of each year to help farmers plan financially for the coming growing season. This article will use the 2019 budgets to project returns for the 2019 corn, soybean, wheat and milo crops. The analysis will not include farm commodity program payments because a new or extended Farm Bill has not been passed by congress. This article will demonstrate a three-step projection method (Yield Estimate, Commodity Price Projection, Direct Cost and Overhead) to highlight how one can do their own crop income projection.

Step 1

The first step in the analysis is to decide what yield to use in the financial projections. The best approximation for future yield is to use either trend line yield for a state or Actual Production History (APH) for a farm. For Nebraska, the average corn yield would be 185 bushels per acre (bpa), soybeans 58, wheat 47 and milo 92 based on the past four year state average yields. National Agricultural Statistics Service (NASS) makes available data to calculate the state average yield. https://www.nass.usda.gov/Quick_Stats/Lite/index.php  A Nebraska Extension Cropwatch article charted the Nebraska state trend-line yields using NASS data https://cropwatch.unl.edu/2018/soybean-and-corn-yield-and-acreage-trends. Of course, many irrigated corn yields will be in excess of 200 bpa so the calculations will use average and 240 bpa for irrigated corn. In this case, APH can be used to project yield.

Step 2

The second step in projecting revenue is to decide on price to calculate revenue. Gross revenue (yield times price) is just as difficult to project accurately, but we can use prices now offered for 2019 crop sales. The revenue projection will use prices offered for forward contract sales at harvest 2019. These are listed in Table 1 below.

Table 1: 2019 Harvest Prices, Red Cloud NE, Cooperative Producers Inc., 30 October 19

Crop Price Sale Month
Corn $3.55 October 2019
Soybean $7.70 October 2019
Milo $3.35 October 2019
Wheat $4.60 July 2019

 

Step 3

Table 2 below calculates projected return to land and management using several 2019 Nebraska Extension Budgets, the third step. The return to land and management calculation is the residual income available to pay for use of land and to pay the operator that produces the crop.

Table 2: 2019 Projected Crop Income

Categories, Income, Expense Corn, Irr, 240 Bu, No Till Corn, 185 bu, No Till Corn, western dryland, No Till Soybeans, Irr, 60 bu, Milo, 105 Bu Wheat, 55 Bu
Yield per Acre 240 185 110 60 105 55
Price per Bu $3.55 $3.55 $3.55 $7.70 $3.35 $4.60
Gross Crop Revenue $852.00 $656.75 $390.50 $462.00 $351.75 $253.00
Seed $110.00 $75.00 $62.00 $56.00 $12.40 $27.00
Fertilizer $115.00 $74.00 $63.00 $0.00 $46.00 $54.00
Crop Protection $75.00 $52.00 $53.00 $33.00 $62.00 $11.00
Hauling $26.00 $21.00 $14.00 $7.00 $11.00 $7.00
Storage $29.00 $22.00 $15.00 $8.00 $13.00 $7.00
Drying $14.00 $10.00 $0.00 $0.00 $0.00 $0.00
Scouting $9.00 $9.00 $9.00 $7.00 $7.00 $7.00
Crop Insurance $25.00 $24.00 $17.00 $25.00 $9.00 $11.00
Total Direct Costs $403.00 $287.00 $233.00 $136.00 $160.40 $124.00
Mach lease/hire $10.00 $19.00 $7.00 $30.00 $2.00
Machine repairs $27.75 $20.00 $18.00 $36.00 $22.00 $11.00
Fuel & oil $55.00 $8.00 $7.00 $58.00 $13.00 $6.00
Mach Deprec $40.00 $30.00 $42.00 $39.00 $39.00 $33.00
Labor $20.00 $20.00 $10.00 $18.00 $17.00 $6.00
Total Power Cost $152.75 $97.00 $84.00 $181.00 $93.00 $56.00
Total Overhead* $102.00 $96.00 $62.00 $102.00 $35.00 $42.00
Total Production Costs $657.75 $480.00 $379.00 $419.00 $288.40 $222.00
Return to Operator & Land $194.25 $176.75 $11.50 $43.00 $63.35 $31.00
* Includes Property Taxes.

 

The calculations in Table 2 are best estimates taking into account current price offers and a Nebraska Extension survey of crop production costs. Projected returns range from $11.50 per acre for dryland corn to $194.55 per acre for irrigated corn. But, what if 2019 harvest prices end up near those we have for the 2018 crop. Table 3 below calculates returns to land and management in that case.

Table 3: 2019 Projected Crop Income, low harvest prices

   
Categories, Income, Expense Corn,Irr, 240 Bu, No Till   Corn, 185 bu, No Till Corn, western dryland, No Till Soybeans, Irr, 60 bu, Milo, 105 Bu Wheat, 55 Bu
Yield per Acre 240   185 110 60 105 55
Price per Bu $3.20   $3.20 $3.20 $7.40 $3.02 $4.42
Gross Crop Revenue $768.00   $592.0 $352.00 $444.00 $317.1 $243.1
 
Seed $110.00   $75.00 $62.00 $56.00 $12.40 $27.00
Fertilizer $115.00   $74.00 $63.00 $0.00 $46.00 $54.00
Crop Protection $75.00   $52.00 $53.00 $33.00 $62.00 $11.00
Hauling $26.00   $21.00 $14.00 $7.00 $11.00 $7.00
Storage $29.00   $22.00 $15.00 $8.00 $13.00 $7.00
Drying $14.00   $10.00 $0.00 $0.00 $0.00 $0.00
Scouting $9.00   $9.00 $9.00 $7.00 $7.00 $7.00
Crop Insurance $25.00   $24.00 $17.00 $25.00 $9.00 $11.00
Total Direct Costs $403.00   $287.0 $233.00 $136.00 $160.40 $124.00
 
Mach lease/hire $10.00   $19.00 $7.00 $30.00 $2.00
Machine repairs $27.75   $20.00 $18.00 $36.00 $22.00 $11.00
Fuel & oil $55.00   $8.00 $7.00 $58.00 $13.00 $6.00
Mach Deprec $40.00   $30.00 $42.00 $39.00 $39.00 $33.00
Labor $20.00   $20.00 $10.00 $18.00 $17.00 $6.00
Total Power Cost $152.75   $97.00 $84.00 $181.00 $93.00 $56.00
 
Total Overhead* $102.00   $96.00 $62.00 $102.00 $35.00 $42.00
 
Total Production Costs $657.75   $480.0 $379.00 $419.00 $288.4 $222.0
 
Return to Operator & Land $110.25   $112.0 -$27.00 $25.00 $28.70 $21.10
 
 
* Includes Property Taxes.  

 

Some crops in Table 3 show very low returns to land ownership and to the farmer producing the crop. In the case of dryland corn, negative returns. The Return to Operator and Land calculation is after property taxes are paid. This calculation then is the amount left to pay for land ownership and the operators labor and management. News reports indicate fertilizer and fuel costs likely to be higher in 2019 compared to 2018. Fuel prices began to rise in summer 2018 and fertilizer prices followed the same timeline. Seed corn prices are the same or slightly lower than 2018 with herbicide and insecticide prices a mixed bag. The input survey conducted in the 2019 Nebraska Extension budgets preparation confirmed the above observations lending credence to this analysis.  https://cropwatch.unl.edu/budgets

Summary

The take away from this analysis is three-fold. Risk management is an important factor for 2019 income. Risk management would incorporate crop insurance and a marketing plan that captures prices now offered on at least a significant portion of 2019 crops. A second part to the risk management plan will be to lock in crop production costs so that farmers can make estimates of 2019 crop costs. Working with and communicating with landlords about the financial picture is a best practice for farmers. Tenants may want to change rental contracts to a flexible lease. Landlords will appreciate the desire to move to that type lease if they have a full understanding of the financial projections. Third, these projections are the first step in cash flow planning for 2019. Cash flow planning allows farmers to communicate with their lender before the 2019 crop year and helps in the lending and production decisions.

 

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.

 

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

 

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.