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.

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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

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.

 

2019 Seed, Fertilizer and Chemical Costs: What do we know now?

Here I am discussing 2019 and in my area, we haven’t yet cut 2018 wheat. Am I thinking too far ahead? I don’t think so when looking at 2018 and 2019 corn prices. As of this writing, Dec 19 corn is trading at $3.96 with Dec 18 corn 23 cents lower. Those aren’t prices I like, but those are the prices I currently have to live with. On the other side of profit is cost. If my variable costs decline in 2019, maybe $4 corn can make me money. If variable costs don’t decline in 2019, I would rather know that now than one year from now.

Gary Schnitkey, University of Illinois Agricultural Economist, recently reviewed seed, fertilizer and chemical cost trends, both long run and short run. The trends do not portend declines in variable costs for farmers. Seed cost appears to have flattened and are likely to be the same as 2017 and 2018. Fertilizer prices rose beginning in late 2017, leading to farmers who bought 2018 fertilizer late with higher costs than those who bought early. So a reasonable fertilizer forecast is that 2019 fertilizer costs might be slightly higher than 2017 and about the same as 2018. Chemical costs, however, are likely to be higher, not due to price but due to usage. Increasingly resistant weeds are showing up in farmer’s fields, and thus more product or new products are used to control weeds.

Source: Schnitkey

From its peak in 2013, seed, fertilizer and chemical costs declined from $373 to $323 in 2017. That decline was due entirely to lower fertilizer prices. Anhydrous ammonia declined $370/ton. Diammonium phosphate dropped $186 from 2013 to 2017 although during 2018 it has risen by nearly $50/ton. Other fertilizer prices have also risen since mid-2017. All nitrogen prices have increased while potash has remained flat.

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

Source: Fertilizer Outlook: http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765

That brings us to planning for 2019 crops. Using current trends, it seems reasonable for farmers to plan for slightly higher pesticide, seed and fertilizer costs for 2019. This means crop marketing will be a significant management activity for grain produced in 2019. A question all farmers might ask is whether to start marketing 2019 corn or soybeans now.  And with current oil price trends, farmers should probably consider pre-paying for fertilizer as well. The past two years, fertilizer prices have been lower in the fall preceding planting.

Sources:

Fertilizer Outlook – Fertilizer costs rise despite weak crop prices, Accessed 27 June 2018, http://www.farmfutures.com/story-weekly-fertilizer-review-0-30765.

Schnitkey, G. “Historic Fertilizer, Seed, and Chemical Costs with 2019 Projections.” farmdoc daily (8):102, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, June 5, 2018.

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.

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.