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Monday, April 25, 2016

Strategies for managing your farm's profitability

By Betty Berning, Extension Educator

One of the most common questions I receive from dairy farmers is, “What is the price of milk going to do?”  A close runner-up is, “What should I do given the current milk price?”  Finally, in times like this, the question is often, “When will it get better?”

There are no easy answers to any of these questions.  I always joke that I don’t have a crystal ball and I am not omniscient.  And while the price of milk certainly matters, which is revenue, so does a farmer’s cost of production, or expenses.  

First, I’d like to address the question of “What is the price of milk going to do?”  Two things establish a price: supply and demand.  Simply put, if I supply the market with more product than it is demanding, prices fall.  If I produce less than the market demands, my price increases.  Supply and demand are dynamic, which means they can change.  For example, if dairy exports increase, this causes demand for dairy to increase.  Similarly, if there is poor weather in Ireland and feedstuffs are in short supply, milk supply may drop, and price may increase.

So what is driving the market right now?  Just like I mentioned above, supply and demand drive markets.  In 2015, China imported less dairy products and this drove markets lower.  Chinese imports have picked up in 2016 and it remains to be seen if this trend will continue for the duration of this year.  Additionally, milk supplies have been strong both domestically and internationally. With demand down and supply increasing, this causes prices to drop. You may be thinking, “Does this mean farms need to go out of business in order to regulate supply and demand?”  Not necessarily.  That’s only one side of the equation.  If China, or anywhere else for that matter, continues to consume more dairy products, then demand will balance out the supply.  And often times it is an adjustment of both supply and demand to bring prices back to equilibrium.
 
Now I’d like to turn the question of “What should I do?”  First and foremost, know your cost of production.  That is, how much money does it take for you to make a hundredweight of milk? Carefully examine your expenses.  Are there areas where you are overspending?  Are there surprises in your budget?  Do you have some “nice to have” items that you might be able to cut?  You can use FinBin data (found at www.finbin.umn.edu) to compare other farms’ costs to your own.  Sometimes comparing your operation to another can provide new ideas or opportunities.  Be sure to cut costs wisely.  Cutting feed costs or other items associated with a cow’s milk production will lead to a decrease in your income! 

Second, be sure to talk to your lender, if you have one.  Make sure you are on the same page.  Your lender can be a very important partner in managing costs.  There may be an opportunity to restructure debt or adjust payments.

Third, look for ways to maximize your assets.  Are you breeding cows back quickly?  Do you have equipment that you could rent out or share with another producers?  What are you doing to ensure optimal cow health?

Finally, create a risk management plan.  There may not be much you can do about today’s milk price, but risk management is a way for you to proactively manage your future milk price.  If you know your cost of production, you can determine your “break even” milk price.  This becomes your price floor or minimum price you’ll accept for your milk. You can create a plan for how you will market your milk in future months based on this “break even” price.   Additionally, you can go a step further and also lock in prices for your feed and energy inputs.  Risk management is NOT about beating the markets.  It IS about creating a plan that allows you to escape some of the volatility that exists in the dairy markets.  Furthermore, it allows you to establish a margin level that works on your farm, so you can ensure profitability.

To answer my last question, “when will it get better?”, I will say it’s hard to know.  It comes down to- you guessed it- supply and demand.  A drought and hot temperatures in the US could cause milk supply to decline and push prices back up.  Likewise, continued renewed buying from Asian markets could cause demand to surge.  Conversely, strong European production or a decline in demand from overseas markets could cause low prices to stay longer.  It is important to take a little time each day or week to read up on market factors and understand what is driving supply and demand for dairy.  


Times of low prices are not easy for any dairy farmer.  Take it one day at a time.  Do your best to proactively manage your finances.  It won’t change the milk price, but it will give you some control and hopefully options to help you survive in difficult times.

Friday, April 8, 2016

Trends in Farmland Rental Rates

By David Bau, Extension Educator

Recently I attended a meeting discussing the results of Southwest Minnesota Adult Farm Management in 2015. The numbers indicated the declining profits even with excellent yields in 2015. The group of farmers average rents declined by 6.7% from 2014 to 2015. Rents declined from an average of $239 in 2014 to an average of $223 in 2015. The compares to USDA rent figures published in September 2015 by the Minnesota Agricultural Statistic Service stating Minnesota statewide average rent declined by 2.7 percent from $185 in 2014 to $180 in 2015.

So what will happen with rents in 2016? The trend should again be down with both corn and soybean prices continuing to be lower than the previous year as indicated on chart below. Average prices for corn and soybean in Worthington, Minnesota for 2006 through 2015 are listed along with the first three months for 2016. This compared to the average rents for 14 counties in SW Minnesota including Brown, Cottonwood, Jackson, Lincoln, Lyon, Martin, Murray, Nicollet, Nobles, Pipestone, Redwood, Rock, Sibley and Watonwan.


The table shows the dramatic increase in corn and soybean prices from 2006 through 2013 and then declines every year since. Starting at left of table column two lists average cash price for corn, column three lists the percent of the price compared to 2007, column 4 is the yearly average soybean price, column 5 is price as percent of 2007 price. Column 6 is the average rent in 14 SW Minnesota counties, column 7 is the percent compared to 2007 rents, and column 8 listed the average of the corn and soybean price percentages.

Examining columns 7 and 8, average cash prices for corn and soybeans as a percent of 2007 peaked in 2012 and has been declining since while rents have followed the price trends with a two year lag before they started declining in 2015. Column 9 indicates what average rents would be using 2007 corn and soybean prices as a benchmark and applying the percent change to 2007 to determine an average rental rate.  As you can see, rents would be much lower than current projected rents for 2016 and rents since 2007 with only 2011 rents estimated higher than actual average rents in column 6.

There are several factors that determine rental rates beyond corn and soybean prices such as contract length, property taxes, market place competition, and previous year’s profitability. With corn and soybeans as the major crops grown in Minnesota, as these commodity prices change has a direct and dramatic effect on profits, rate of return to land and rents. 

Monday, March 7, 2016

Trends in Farmland Sales, Rental Rates and Net Farm Incomes

By David Bau, Extension Educator

Recently I was asked to compare trends in Southwestern Minnesota Land Sales to average Farmland Rental Rates and SW Adult Farm Management average Net Farm Income for corn and soybeans. I was able to go back to 1993 for all three trends. The average farmland sales price is from nine counties in SW Minnesota including: Cottonwood, Jackson, Lincoln, Martin, Murray, Nobles, Pipestone, Rock and Watonwan Counties. The average rental rates come from average rents paid by farmers in the SW Adult Farm Management program. The average net income for corn and beans included government payments and was also from SW Minnesota Adult Farm Management program. Chart 1 below show the trends for Farmland Sales, Rental Rates and Net Farm Income for corn and soybeans from 1993 through 2014.

Chart 1. Comparison of SW Minnesota Average Farmland Sale Price verses Rents and Net Income


Wednesday, February 10, 2016

A Special Day for Women in Agriculture


By: Pauline Van Nurden, Extension Educator

There is still time to register for the first ever Women in Agriculture Conference!

This event will be hosted by University of Minnesota Extension. The day promises to provide an outstanding line up of speakers and breakout sessions. And, there will be ample opportunity for networking with other Women in Agriculture.

Tuesday, February 9, 2016

Marketing Plan Price Objectives for 2015 & 2016

By David Bau, Extension Educator

Normally farmers set their target prices in their marketing plans starting at breakeven and move higher. Farmers are determining their 2016 input costs at this time.  Lining up seed, making plans for weed and pest control, and since fall have applied or purchase fertilizer for 2016 and negotiated a rental rate.  These costs have increased at an annual rate of 9.8% per year for corn and 8.5% for soybeans for the past ten years.  Using these percentages the average 2016 corn and soybean input costs would project to $939 per acre for corn and $581 for soybeans.  Current cash prices for 2016 corn are $3.45 and soybeans $8.25.

Using yields of 180 bushels per acre for corn and 50 bushels for soybean cash would generate gross incomes of $621 for corn and $412.50 for soybeans.  This would project significant losses and the need to determine where to cut costs.  If a farmer could get input costs down to $800 per acre for corn and $500 for soybeans, this would translate to $4.44 breakeven price for corn and $10.00 for soybeans in 2016.  If a marketing plan started at these prices, the farmer would not have sold any crops yet.

In order to achieve a breakeven price at current prices available, input costs would have match the gross income of $621 for corn and $412.50 for soybeans.  A decrease from $847 average per acre input costs for corn in 2014 and $529 for soybeans.  This translates into a cut in costs by $226 per acre for corn (27% lower) and $116.50 for soybeans (22% lower).  Average corn ARC County payments are projected to average under $50 per base acre, this translates into 21cents per bushel, lowering breakeven to $4.23 per bushel.  The majority of counties will receive no government payment for soybeans in 2016.

Tuesday, January 19, 2016

Southwestern Minnesota Farmland Values Decline 8 Percent in 2015

By David Bau, Extension Educator

At the end of each year for the last twenty-one years, a survey has been conducted of farm land sales in fourteen southwestern Minnesota counties. Land values had been on a steadily increasing until 2014.  The survey reports bare farm land sales to non-related parties for the first six months of each year.  After reaching record high prices in 2013, the upward trend was broken as prices declined in 2014.  This trend continued in 2015.  Data collected in this survey is available at the county extension offices in Chippewa, Cottonwood, Jackson, Lac qui Parle, Lincoln, Lyon, Martin, Murray, Nobles, Pipestone, Redwood, Rock, Watonwan and Yellow Medicine Counties.  This year the decline across the fourteen counties averaged 8.3%.  Average land values had not declined since 1996 when the average SW Minnesota land prices were $1,175 per acre in 1995 to a high in 2013 to $8,466 then declined in 2014 and again to $6,929 in 2015.

Data from these counties indicate prices decreased from an average of $7,556 in 2014 to $6,929 in 2015 or a decrease of 8.3%.  This is only the second percent decrease as far back as this data has been collect since 1995.  In 2013 was the largest year to year increase of 35.6%.  Farmland prices decreased in ten counties and while increased in four counties including Chippewa, Lac qui Parle, Nobles and Rock from 2014 to 2015.  There was a lot of variability in the numbers from 2014 to 2015.  The largest increase was in Rock County with an increase of 19.2% while Cottonwood experienced the largest decrease of 27.2% for the sales that met the bare farmland to non-related party transaction.

Farm Resource Guide Available

By David Bau, Extension Educator

The Farm Resource Guide for 2016 is now available upon request at many University of Minnesota Extension County offices across the state.  It includes a variety of very useful farm business management information.  The front of the Guide has the most frequently requested information on Custom Rates, Rental Rates for various ag commodity, forages, bins and buildings, Farmland Sales and Rents and Pasture Rental rates.  There are lease forms for Cash Rent and Share Rent arrangements.  There is flexible rental arrangement information.  Marketing information including the cash price probabilities for cash corn and soybeans for Worthington, Minnesota, since 1974. Information from the Southwest Farm Business Management Association includes trends in costs, family living and net worth changes.  At the end of the Guide is a section on Feedlot Rule Highlights and information on Manure Agreement and Easements, including examples of Manure Spreading Lease and Land Application Agreement forms.

Included are the average cash prices for corn and soybeans to use as a benchmark along with statewide listing by county of the last five year average yields for corn and soybeans.  Statewide cropland rental information is available for counties with significant farm numbers in Adult Farm Management. Farmland sales information is available for all counties across Minnesota.  A second study lists bare farmland sales from 14 counties in southwest Minnesota.  There are many pages of information and forms which would be of benefit to the entire state including: custom rates; lease forms; commodity price probabilities for corn, soybeans, alfalfa hay, straw, grass hay, hogs and cattle.

This Resource Guide is available for a $25 fee plus postage and sales tax if you would like to have your own copy.  I can provide you the information in your preferred format: (e-mail cost $25 plus sales tax, CD cost $28.50 or hard copy cost $30.00).  The small $25 fee will help fund continued Extension efforts in Agricultural Business Management and will allow me to continue with the project and update the Resource Guide for 2017.  

If you would like your own copy of the Farm Resource Guide, please e-mail me at bauxx003@umn.edu or give me a call at 507-372-3900 ext. 3906 and let me know what form you would like to receive the Farm Resource Guide in.  I will send out the materials and an invoice as soon as possible.  I hope you find the Resource Guide useful and would welcome your feedback on what you would like to see included in next year’s Guide.

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