Farm Income Likely to Drop in 2016

USDA recently projected 2016 Net Farm Income (NFI) would be near $54.8 billion or 2.8% less than 2015. This would be the third consecutive year of income decline. this follows 2013’s record income following a year of widespread US drought. High livestock prices and hog and poultry disease problems have helped hold up NFI since 2013 but the production problems are easing. 2016 Farm Bill Price Loss Contract (PLC) payments are projected to increase 31% to $13.9 billion compared to 2015. That means just over 25% of the 2016 NFI will come from government payments. 2015 Farm Bill program payments accounted for 18.8% of NFI.

Agricultural economists at Texas A&M and the University of Missouri-Columbia have pointed to a couple of financial ratios that indicate very strong balance sheets for farms and ranches. There has been an uptick in the financial stress of farm and ranches but are still at very low rates. Factors pointing to prolonged risk though are commodity over-supplies in nearly every sector. Ethanol growth has ended unless a new blend mandate is approved and Chinese economic growth to just 4% or so, but that is nearly 3X the current US growth however. This lack of growth reduces prospects for increased consumption of agricultural commodities along with higher prices. So over the next few years, absent weather or world political problems, supplies of these commodities will likely decline to more nearly align with demand. Poultry and dairy are likely to make supply adjustments quickly. But grains, oilseeds and beef production are burdened by increased supplies during the next couple of years.

USDA did point out that expenses have declined and are likely to decline for the second consecutive year since 1986-7. “A drop in overall production expenses is forecast for 2016, cushioning the decline in cash receipts. Notably, expenses for inputs that typically are produced by the farm sector itself, including feed, as well as livestock/poultry purchases, are expected down. Also, expenses for fuels and oils are forecast down by 14.5 percent in 2016.  If realized, the expenses across each of these three categories will have fallen for 3 straight years. In contrast, hired labor costs and interest expenses are forecast to increase by $1.5 billion (5 percent) and $1.3 billion (6.8 percent), respectively, over 2015.” Source: USDA

To Store or Not to Store

Post-harvest marketing plans can be influenced by many factors. One of these is the cost of storing grain until some future date. There are several reasons to store grain including:
• Storage allows marketing plan flexibility
• Capture strengthening basics
• Capture seasonal price increases
• Manage income tax liability

There are two cost components of grain storage: fixed and variable costs. For commercial storage, people storing grain will pay a price which will include both costs, but farmer owned storage will only bear variable as cash costs when grain is stored. The aspects of thee costs include:
• Storage facility ownership cost
• Interest (opportunity cost) on owned grain
• Extra grain shrink
• Additional grain quality deterioration
• Added drying cost for long term storage

Let’s talk about storage facility ownership costs first. If grain is stored at a commercial facility, it will charge for the ownership of bins etc. On farm grain storage owners will not explicitly pay a cost for ownership of storage. Farmer owned storage may have debt financing but that doesn’t influence the annual decision to store grain. These ownership costs include depreciation, interest, repairs, taxes, and insurance (DIRTI5). In the long run these costs should be recaptured by using those grain bins to enhance grain prices.

The next set of costs, variable, are the ones that must be captured through enhanced market prices in order to make storage pay. What are the variable costs? Any repairs due to usage, broken belts, augers, drying fuel, electricity, labor and management of the grain in storage. Grain held in long term storage might be dried down to 13% moisture which adds additional drying expense and the loss of bushels to sell. Long-term storage also means the grain will have to be conditioned, aeration, for storage during winter and then again during spring to keep it in shape for sale in summer. But the largest cost of storing grain is interest on the grain while in storage. This is an opportunity cost. The grain money from grain sold could pay debts, farm and personal, be invested in a money making activity or used for family living.

Calculating all of those costs takes time but has been made much easier with a spreadsheet ( This spreadsheet presents costs as fixed, variable and total. When analyzing the storage decision, the first costs to recapture are variable costs. If monthly variable storage costs are 3 cent per bushel but the market is only offering 2 cents, the market isn’t paying enough to store. There may be occasions where the market pays 4 cents per bushel until April for instance but 2 cent after. In the latter situation a grain owner might want to store till April to capture that added grain price.

Storing grain can enhance grain revenue but the costs of storing grain must be considered when making the storage decision. There will be situations when grain storage costs more than the grain market would pay to store. Knowing those costs will allow you to profitably decide when to store and for how long. Or when not to store.

Beef Expansion Likely to Slow

Chris Hurt, Purdue University Ag Economist, recently discussed his outlook for beef profits and prices, noting that the US beef herd expansion has been very rapid. Record high beef cattle prices during 2014 and the first half of 2015 encouraged beef herd owners to hold heifers back and build cow numbers. The January 1, 2016 USDA Cattle Report showed that beef cow numbers are up 4% and cow and calf numbers up 3% year over year. The report also showed that 3% more heifers were held back to calve leading to higher expected calvings, 6%, compared to one year ago.

Feeder cattle supplies are up 4% leading to larger slaughter cattle supplies in late 2016 and 2017, probably pushing beef prices and feeder calf prices down further. 2015 beef supplies were larger than anticipated at years beginning. USDA expected that cattle available for slaughter would be down 5% but beef was actually up 1%. Where did the added beef come from? Heavier calves and higher beef imports. Beef production worldwide is growing. Beef competitors, pork and poultry, are expanding also. This expansion leads to likely 2016 finished cattle prices averaging around $125 per cwt. Feeder calf prices are now near $195 per cwt. for 550 pound calves leaving little if any profits for beef cow owners. That means beef herd expansion is likely to slow soon. It also means there will be pressure for herd owners to reduce costs. Feed prices have declined in the last several months, but at least in some areas of Nebraska grazing costs are still high compared to calf prices.

Now is the time for 2016 predictions.

This is the time of year for prognosticating. Trying to see into the future is a common feature of business and human beings. Let’s look at a couple of 2016 agricultural industry outlooks.

Wells Fargo economist Michael Swanson forecasts US grain and livestock sectors will have a “challenging environment.” A strong US dollar(USD) is contributing to that challenge. A chart Swanson uses in his forecast shows that both China and the rest of the world have lower net trade balances with the US than 2011-2014. Russia and the Ukraine currency devaluations have grain importing nations sourcing their needs from them rather than the US. Swanson sees the US beef herd sector continuing its rebuilding but with lower 2016 prices. The strong USD will pressure the chicken and pork sectors who have foreign competitors and are much more reliant on foreign exports than beef. So far, about 11% of US dairy production went to exports during 2015 but that is down from 13% in 2014. European union and New Zealand dairy sector competition will pressure US dairy prices. the EU may also become a consistent competitor now that supply control has been eliminated.

Much lower crude oil prices have many positives and negatives. Lower expenses for crop producers should come from products that use oil and natural gas as precursors. But corn prices will follow low oil prices due to ethanol’s correlation to crude oil. Lower crude oil prices will have both positive and negative effects in the broader US economy as well. These will play out in the US ag sector in uncertain ways. If the positive effects increase US GDP, they will likely strengthen demand and US farm income.

All of the foregoing leads Rabobank forecasters to increase price variability in their most recent 2016 outlook. However Rabobank’s price outlook appears to be more favorable for hog, sugar, corn and beef than Wells Fargo’s outlook. Rabobank sees price pressure in the soybean complex and wheat. Rabobank writes about increased risk in all sectors which is related to reduced oil prices, stronger USD and greater weather risk in the US.

September Milk Production Returns

September milk productions returns for my NE-IA budget improved compared to August. On the 20,000 pound budget, total feed cost annual declined by $38 and income rose by $48 for a total improvement of $86 or about $0.10 per cow per day. The improved income came from higher butterfat production and price even though protein price declined. Soybean meal price decline contributed the most to feed cost declines while corn price added a little as well. The 24,000 pound freestall budget was even better, as usual in my budget series. Feed cost do increase in the 24,000 pound budget but by only $193 while income rose $740 or about $2.02 per cow per day net compared to the 20,000 budget.

I have continued to produce tiestall budgets even though the number of tiestall dairy barns is declining rapidly. the economics of tiestall barns is pointed out in the August budget. the 20,000 pound budget breakeven price is $1.5066 per cwt. higher than freestall barns. The 24,000 tiestall budget is not as far behind freestall milk production, only 1.2946 per cwt. But of course other factors are probably causing some of the decline in tiestall, physical challenges for the humans and better cow comfort as well.

via Red Willow Farm and Ranch Management | Keeping you up to date.

Farm and Ranch Management Changes going Forward, Be Prepared!

I have always thought the ” going forward” phrase was a little pretentious. You can go backwards, meaning that you have made a conscious decision to follow production strategies that are older technologies, leading a farm/ranch on a heading or a different path which can be successful if the business plan is well thought out. However if you are on the path of the more common larger scale commodities production we think of in the Midwest US, there are likely to be opportunities for you to change the scale and organization of your operation. Danny Klinefelter, professor and Extension economist, Texas A&M University recently spoke about the changes to commodity agricultural production that he sees coming. These changes are in part due to some operations that are under financial stress but he sees these changes also coming from the demands that commodity purchasers are making on their supply chain.

We all know about companies who are asking questions about the way their food supplies are produced and sourced. Gestation crates, antibiotics, growth promotants, BST, layer cages, farm identity preservation, a wide range of small specialty cheese manufacturers, vegan and vegetarian, trans-fats, grass fed and pasture raised are just some of the topics that ag commodity suppliers are dealing with. Some will disagree with Klinefelter on where ag production is headed, but his point about the farm/ranch producer needing the best business management skills to thrive is correct. Most all farmers have high technical production skill levels but those don’t necessarily translate to profitability. Take time to read Danny’s comments. And think about where your farm/ranch is headed the next 5-10 years. Is it on a defined path or not?

Nebraska Farmland Values and Rental Rates

The 37th “Nebraska Farm Real Estate Market Highlights” report was recently released. the average all-land value was reported as $3250 per acre, down 2% from 2014. Five of the eight Nebraska Agricultural Statistics Districts had declines in land values, Northeast, East, Southeast, Central And South, while three had increases, North, Southwest and Panhandle. The last three are heavily influenced by pasture land values which have increased.

The report lists factors affecting farm and grazing land values. Beef cattle prices are adding bullishness for hay and grazing land values. Two crop factors were negative for cropland values, current crop prices and high input costs leading to losses.

Hayland prices rose 20% statewide while grazing land rose 9% for tillable land and 16% for non-tillable grazing land. Crop ground prices dropped 4 to 9% with the largest drop in dryland cropland with no irrigation potential. Also the more marginal cropland had a larger value decline than higher quality farmland.

Even though land values declined over the past year, all districts and land types are higher than 5 years ago. Nearly all districts of Nebraska and ag land use classes are double or more than 5 years ago.The Northwest Ag district had the smallest percentage change, 86%, the Southwest district had the largest percentage change, 137%, in the value of all ag lands. Hayland is 191% higher and non-tillable grazing land is 136% higher statewide.

Active farmer/ranchers continue to be the majority of buyers for ag land in Nebraska, 89%, with only 3% of ag land purchases by out of state buyers. The largest group of NE ag land sellers were estates, 42% of transactions. There was variations for both buyer and seller by ag district. Compared to 2014, four Nebraska districts had higher land sales by active farmers, North, Southwest, Northwest and Central.

2015 cash rental rates for cropland for cropland declined in all ag districts. However grazing rental rates rose from 10 to 35% Monthly pair and stocker pasture rental rates set record levels.

via Red Willow Farm and Ranch Management | Keeping you up to date.