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Monday, September 12, 2016

What Direction will 2017 Farmlands Rents Go? Stay the Same? Up? or Down?

by David Bau, Extension Educator

Each year I put together tables listing actual farmland rental rates by county from Adult Farm Management Records.  Unfortunately farmers and landlords are starting to negotiate 2017 farmland rental rates and the last actual numbers available are for 2015 so I am forced to estimate figures for 2016 and 2017.  When I did this last year I used an estimate of a 5% decline and the actual figure came in at 5.3% decline statewide.  For 2016 I heard many times that rents were down $20 to $25 per acre, although some rents went up and some remained the same.  In table 1 below I estimated a 10% decline in 2016 from 2015.

But what direction should 2017 farmland rental rates go?  How do I determine an estimate for 2017 farmland rental rates?

Should they stay the same? 
Landlord property taxes continue to increase, while schools pass referendums that also increase taxes. If rents stay the same, a landlord’s income will go down if taxes increase and if taxes are not increasing the revenue to the landlord will remain constant, when they have grown accustomed to significant increases since 2007.

Should they go up?
Landlord expenses increase as property taxes increase and they want to pass this cost increase onto the farmer and increase the rental rate. Another example might be where there has been a long term lease in place where the rental rate has not changed for many years and this rate might be considered low today and due for an increase.

Should they go down?
Farmers have experienced decreasing corn and soybean prices since record high prices in 2012 for corn and 2013 for soybeans and current prices offered for 2017 corn and beans are below what farmers sold their grain for in 2007, when rents were $125 per acre. Average production budgets for 2017 indicate losses for farmers if rents are above $100 per acre. With the average rents in Table 1 in 2015 averaging $217 per acre, to go down to $100 per acre would be over 50% reduction in average rents.

So you could make an argument for all three scenarios, but looking at the economics for corn and soybean production in 2017 using 180 bushels per acre, yield and $3.25 price per bushel, for corn and 50 bushel yield and $9.00 price for soybeans, income would be $585 for corn per acre and $450 for soybeans. With average cost projected to be $555 for corn and $290 for soybeans before rent and labor, this would leave $30 per acre for corn and $160 per acre for soybeans to be shared between the landlord as rent and the farmer and income. This would be an average of $90 per acre to be shared.

So I projected a 7% decline in rental rates from 2016 to 2017 for figures listed in Table 1.

But from earlier examples 2017 farmland rates could go down by over 50% or increase from 2016 rates depending on the individual situations.  It will be a very challenging year for both the landlord and farmer to determine where the 2017 farmland rental rate should be.

Table 1. Average County Farmland Rental Rates from 2007 to 2017



Use Your Income Statement to Understand Your Farm's Finances


by Betty Berning, Extension Educator

I’ve written a couple articles this year and all have been related to farm finances.  I am passionate about finance and economics, but I understand that finance isn’t the most glamorous topic for most people.  Would you believe that I’ve tried very hard to make these articles as exciting as possible?!  I know, I know, they’re not very exciting! 

Having said that, finances are very important.  They are critical to a farm’s success.  Without strong finances and a solid understanding of them, one’s operation will have a difficult time surviving.  Anyone can become better at understanding finances, it just takes time and practice (repetition).

I’ve written about understanding revenue and expenses and balance sheet.  If you recall, the balance sheet is one of four financial statements.  The other three are 1.  Income statement, 2.  Statement of cash flows, and 3.  Statement of retained earnings.  For this post, I’ll focus on what an income statement is and what it tells you.

An income statement measures profitability over time.  For example, your Schedule F from your tax return is an income statement of sorts.  Your Schedule F measures your income and expenses over the past year (a period of time) and calculates what is leftover (profit).  This is considered a cash-based income statement.  Table 1 below illustrates an accrual-based income statement.  You can see the types of items that are included as income and expenses and the net farm income for the year.  The table includes accrual adjustments which give you a better picture of how much money your farm actually earned.

Table 1  Accrual Based Income Statement
Income

Crop sales
$403,588
Crop inventory change
$50,626
Livestock sales
$680,442
Livestock inventory change
-$97,475
Government payments
$48,418
Other cash farm income
$141,966
Change in accounts receivable
-$65,576
Gain or loss on hedging accounts
$4,367
Change in other assets
$1,690
Gain or loss on breeding lvst
-$923
Gross farm income
$1,167,124


Expenses

Cash operating expenses
$1,072,018
Change in prepaids and supplies
$2,815
Change in growing crops
$91
Change in accounts payable
-$9,747
Depreciation
$77,130
Interest paid
$35,471
Change in accrued interest
$2,197
Total operating expense
$1,179,975


Net farm income from operations
-$12,851
Gain or loss on capital sales
-$759
Net farm income
-$13,610
Source:  Center for Farm Financial Management, FinBin

By looking at your income statement, you can see where you are making and spending money.  Take some time to really analyze your statement.  Identify the areas where you spend the most money and the least money.  Ask yourself, where am I making the most money?  The least?  Are you surprised by your answers?  

I’d also suggest comparing your current income statement to a past income statement.  An easy way to do this is to compare your 2014 tax return to your 2015 tax return.  Or you could compare one month’s income statement to another.  For example, compare your June 2016 income statement to your May 2016 income statement.  Analyze what you see.  Notice where there are differences.  Did you spend more money on one particular expense?  Did you make more money in one time period than another?  Make sure you understand and can explain any variability you see in your income statements.

Remember the balance sheet that I wrote about last time?  Find that when you’re doing your analysis.  There are a few simple ratios you can calculate using your income statement and balance sheet.  These ratios will help you understand how efficiently your operation is running.


1.        Return on Assets (ROA):  This helps you understand how efficiently you are using your assets create profits.  Generally speaking, anything over 8% is very good.  Less than 4% indicates an opportunity to improve.  You can calculate ROA using this formula-

2.        Return on farm equity (ROE):  This ratio illustrates how much money you are making for each dollar of equity.  A ROE of over 10% is excellent; ROE of less than 3% suggests more work is needed.
The analysis described in the previous paragraphs might seem a little confusing and daunting.  I strongly encourage you to spend some time trying to do this analysis.  Dig into the numbers.  Sit with your banker or farm business management instructor.  Try to understand your numbers.

By doing this, you can begin to see where you might have opportunities to increase your revenue or decrease your expenses.  Additionally, you may be able to spot potential problem areas before they become problems and take steps to avoid them all together!  One of the keys to financial success is being proactive when opportunities and threats arise.  Finally, careful analysis of your income statement can help you budget for the future.  You can utilize your monthly or yearly income statement to estimate your revenues and expenses for the next month or year.  Again, this will allow you to be proactive in your finances.

I’ll go back to what I said at the beginning- finance isn’t the most glamorous topic, but it is critical to the success of a farm.  If you aren’t spending much time digging into your farm’s finances, start now.  Over time it will get easier and hopefully it will provide you with tools for even greater success.  

Monday, August 29, 2016

A Positive Attitude is an Asset -- Take Care of Yours and Watch Out for Others in These Challenging Economic Times

by Don Nitchie, Extension Educator

We believe the best asset that successful farm mangers have is a positive attitude – especially in the face of less profitable times.  We think a big part of this is due to fact that successful farmers are comfortable analyzing their finances and acknowledging their strengths and weaknesses. These producers recognize early warning signals from their records and analysis, so they are prepared for a potential downturn or negative situation.

Despite being proactive managers who maintain a positive attitude, everyone is experiencing some level of anxiety or stress under the current farm market conditions. As a result, you or your business partners may be more self-deprecating, critical of family members, self-doubting, or just generally feeling a higher than normal level of stress or anxiety. It is nothing to be ashamed of, but it also should not be ignored. It is important that you, as family members, friends and business partners, watch for any major attitude changes or signals of depression in both yourselves and your associates.

Having come from the historic profitability period of 2006-2012, there are more than a few folks who have not yet re-aligned their thinking to what many say is a return to the more typical, long-term competitive environment in agriculture.  Regardless, it probably feels like a dramatic decline, as the record profit period lasted longer and was higher than any in history. A positive outlook combined with a proactive management strategy will help you get through. Keep in mind that small improvements add up when dealing with some of the following stress-inducing situations associated with the current conditions:

Your Income Taxes are High. Some late career producers are trying to transition to retirement/to the next generation and are now paying some of the biggest income taxes of their lives, even in the face of low current year prices and profits. This occurs because over the years much of their profits were deferred forward and invested in farming capital assets, which now need to be liquidated or transferred. It is not fun but is a mathematical and accounting reality of a successful farming career. At best, it can be moderated by spreading the deferred tax burden over several years.

Your Financial Ratios Weakened. This is not ideal, but it is a key part of managing to have strong indicators to begin with — to serve as shock absorbers in rougher times. You, of course, need to recognize when they decline too much and determine what actions will put them back in balance. You need to measure, monitor and use these ratios to be prepared for action if needed. If you wait for someone else (your lender) to point out a problem, it might be too late and probably will limit your options to fix the problem.

Your Marketing Prices are Low. Welcome to the party. Some of the best marketers seldom get the highest price. They make numerous sales at less than the high price of the marketing year. Forget about waiting for one price and then selling it all. Everyone may luck out once in a career, but this approach leads to disaster too often. Today’s market, where prices are not often offered above breakeven, is very challenging. If you succeed in averaging a sales price in the upper half of the year, it would be extremely good. Try hard to sell increasing amounts as prices increase and do not decrease sales quantities as prices go higher — mathematically this will increase your odds of success for the year.

Your Costs are high. When prices were high, cost structures that were too high did not have as much of an impact. When prices are low, cost structures really make a difference. Can you make a difference on your cost structure? Yes, you can and our members have been adjusting. The average cost to produce an acre of corn and soybeans decreased in the SWMFBMA for both 2014 & 2015. This occurred as the result of small decreases in expenditures in each of the major inputs. If your expenditures are high in a certain category, you need to verify it is for very good reasons. You might identify expenditures where you need to reexamine if your standard practices are really paying off. Small changes can add up to big savings in average costs.

When facing today’s stressors, be mindful of your own attitude and outlook. Also, be mindful of business partners, family members and neighbors also. Encourage yourself and others to move on from past decisions or actions that were not ideal. Let it go. It is good to review and learn lessons from past experiences, but those past decisions/actions cannot be changed. Stay engaged with your family and community. Compliment yourself and others for small achievements. Take steps forward. While it is good to plan ahead, don’t over-plan or stress about the future. You can only live life and your farming career a day at a time.

If you or someone you are concerned about could use some additional help or at least some direction to available resources—the following U of M Extension Families program site has several resources listed at: http://www.extension.umn.edu/family/supportingfarm-families/


Wednesday, August 24, 2016

Does the Dairy MPP pay?

by Betty Berning
Extension Educator


In early August, the United States Department of Agriculture published the milk margin for May/June 2016 and it was $5.76.  The calculated USDA milk margin is used in the Margin Protection Program for Dairy (MPP) to determine at what levels (and if) this program will make a pay-out.
MPP is an insurance like program for dairy producers that was a product of the 2014 Farm Bill.  Dairy producers select a margin level that they’d like to protect on their milk sales.  Farmers can choose to protect margins from $4-$8/cwt.  The $4/cwt level costs $100 to cover administrative fees.  From the $4/cwt level, coverage levels increase by $0.50 increment (e.g. $4.50/cwt, $5.00/cwt, etc) to $8/cwt.  As the margin levels increase premiums also increase.
Table 1 shows the payout at each level for the May-June period.  Everyone with $6.00/cwt or more coverage received a payout.  This is the first time the program has paid at a $7.00/cwt or lower level.  There were a couple payments in 2015 at the $8.00/cwt level and a payout in Mar-pril 2016 at both the $8 and $7.50 coverage levels.  The May-June payout announcement last week is the largest in the programs two-year history.  It is indicative of the tight margins many dairy producers are experiencing. 
Table 1:  May-June MPP Pay-out at varying coverage levels
Coverage Level per cwt
Pay out for May-Jun per cwt
$4.00
$0.00
$4.50
$0.00
$5.00
$0.00
$5.50
$0.00
$6.00
$0.24
$6.50
$0.76
$7.00
$1.24
$7.50
$1.76
$8.00
$2.24
Some producers have questioned if MPP has been worth the cost of the premiums.  Let’s look at two farms:  a farm with a production history of 2,000,000 lbs (~80 cows) and a farm with a production history of 5,000,000 lbs (~220 cows).  If you recall, premiums are calculated from Tier 1 for covered production history up to 4 million pounds and from Tier 2 for covered production history exceeding 4 million pounds.  Tier 1 premiums receive a greater subsidy than do Tier 2 premiums.  In these two scenarios, we’ll assume that the farms signed up at the 90% coverage level and that they received the two annual production bumps.
Table 2:  2016 Net Gain (Loss) from MPP at varying coverage levels (2 million lb production history)
Coverage Level per cwt
Premiums
Payout
Net Gain (Loss)
$4.00
$100
$0
(-$100)
$4.50
$286
$0
(-$286)
$5.00
$566
$0
(-$566)
$5.50
$845
$0
(-$845)
$6.00
$1,125
$737
(-$388)
$6.50
$1,777
$2,289
$512
$7.00
$4,143
$3,842
(-$301)
$7.50
$5,689
$6,485
$796
$8.00
$8,949
$9,590
$641

Table 2 shows the net gain or loss using the herd with a 2,000,000 lb production history.  The far right column shows what this hypothetical farm would’ve netted out. Notice that some producers have made up the cost of their premium. Farms that opted for $6.50, $7.50, or $8/cwt coverage have come out ahead.  Farms that elected a different coverage level have not made up the cost of premiums.    What is important to note here is the amount of gains/losses.  Losses range from -$845 to gains of $796.  This is not a very wide range when we put this into the big picture of this farm’s finances.  A loss of ~$850, although not pleasant, is not insurmountable; nor does a gain of `$800 make for a banner year. 
For the bigger operation, production history of 5,000,000 lbs, look at Table 3. You can see that with the smaller premium subsidy, the losses are larger.  $6.50/cwt is the only level that has had a gain, $116, which is nominal.  $7.00/cwt experiences the greatest loss of $4,634. 
Table 3 2016 Net Gain (Loss) from MPP at varying coverage levels (5 million lb production history)
Coverage Level per cwt
Premiums
Payout
Net Gain (Loss)
$4.00
$100
$0
(-$100)
$4.50
$632
$0
(-$632)
$5.00
$1,363
$0
(-$1,363)
$5.50
$2,358
$0
(-$2,358)
$6.00
$3,319
$1,842
(-$1,477)
$6.50
$5,607
$5,723
$116
$7.00
$14,238
$9,604
(-$4,634)
$7.50
$19,071
$16,213
(-$2,858)
$8.00
$28,044
$23,976
(-$4,069)

MPP is intended to be an insurance program.  It is there for when times are economically very poor.  Just like car insurance, a payment is only made when something terrible happens.  A person doesn’t hope that car insurance will provide a payment; that means an accident has happened. 
What this analysis reveals is that this program is a relatively inexpensive insurance (under 10 cents/cwt for $6.50 coverage + administrative fees for Tier 1 coverage).  Without spending too much, a farm can ensure that if catastrophe strikes, it has some protection.  In years when things are not catastrophic, but they’re also not good, the program can provide enough of a pay out to cover the cost of premiums.
Because MPP is an insurance like program, it should be used in conjunction with other risk management tools.  This is particularly true for larger farms, as illustrated above.  MPP should not be a farm’s sole risk management tool. 
In a bad year, MPP will not save a farm.  It can provide some protection and income to help offset losses.  It will not make up for all of the loss, though.  That is where other risk management tools come in to play.  Understanding your cost of production and utilizing forward contracts and future should be utilized to lock in margins that will ensure a farm’s profitability.
MPP has been controversial at times.  We don’t know what the next Farm Bill will bring.  Perhaps changes will be made to MPP.  Perhaps not.  One thing that we do know is that careful risk management planning can help you stay ahead of the game.  
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