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

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?

Ways to Stretch Cash Flow

Post authored by: Robert Tigner, Ag Systems Economics Extension Educator, Austin Duerfeldt, Ag Systems Economics Extension Educator, both with Nebraska Extension

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.

 

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)

 

 

 

New Farm/Ranch Employee Intake

As has been said many times, “You can’t make a first impression twice.” And the same goes for bringing in a new employee into a farm or ranch. A good practice is to follow a Standard Operating Procedure (SOP) for the new employee orientation. Let’s look at a suggested SOP for new employees.

 

  • Background and overview of the farm or ranch: The new employee can benefit from an understanding of the full operation of the farm or ranch. The layout of the farm or ranch, the introduction of the new employee to current employees and all the management. This is a good time to discuss the history and goals of the farm or ranch. In the future an employee can then make suggestions for changes or improvements to the farm or ranch based on their understanding of the goals of the farm or ranch.
  • Employment policies: All farms and ranches can benefit from an employee policy document. The process of developing one forces the farm or ranch to think through issues they may have to deal with at some time. The policies document also assures that all employees are treated equitably. Intake or orientation is the time to introduce the new employee to the farm policies.
  • Introductions: Introduce the new employee to current employees and suppliers. During these introductions, the current employees should be told what responsibilities that the new employee will have and what the chain of command will be. This helps everyone understand the roles and responsibilities of all the employees and eases the new employee into the farm operations. An organizational chart helps here.
  • Job Duties: During the hiring process, the new employee will certainly have a basic understanding of what the new job will entail. But now is the time for the employer to get into more specifics of the job responsibilities. But also this can be the time when more extensive training can begin. Even though the new employee will likely have a number of the skills the employer sought, he or she won’t know the specific way your operation does something. This training period will set the employee up for success and contribute to the farm or ranch operation.

 

Mentoring should also be considered as part of the intake process for a new employee. The mentor provides training and a sounding board for the new employee. The mentor can also be the person who helps the employee become part of the work and social network at the farm or ranch. That networking can improve job efficiency and effectiveness.

 

New employee orientation should be consistent. This means the same person should conduct orientation of all employees and should follow a standard procedure. Write down the process to assure all of the aspects of orientation take place. The procedure development should include key farm and ranch personnel thus providing buy-in on the orientation process. If any documents are to be given to the new employee, have them ready for the new employee when he or she arrives for their first day of the new job. This presents a professional image to the new employee and starts the new job off on the right foot.