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Wednesday, September 23, 2015

Crunching Corn and Soybean Budgets 2016

By David Bau, Extension Educator

The 2016 corn and soybean budgets look unprofitable at projected input costs and current market prices available.  For the past 10 years corn input costs have been increasing at rate of 9.8% per year while soybean input costs have been increasing at 8.5%.  From 2013 to 2014 input costs actually declined slightly from $755.44 in 2013 to $732.92 in 2014 for corn.  While soybeans increased from $451.38 in 2014 to $456.18 in 2014.  If you take 2014 figures and apply the 10 year trend of 9.8% increase for corn the 2014 numbers would increase to $804.75 in 2015 and $883.61 in 2016.   For soybeans applying 8.5% it would imply $494.95 in direct cost in 2015 and $537.03 in 2016.  Using 180 bushels corn and 50 bushels for soybeans, the price necessary to cover direct cost would be $4.91 for corn and $10.74 for soybeans.

Forward contract bids for 2016 corn and soybeans are under $3.60 and $8.80 respectively.  Farmer breakeven prices necessary to cover input costs and living expenses are in the $4.50 to $5.00 range for corn and $11.50 to $12.50 range for soybeans for 2016, which means if prices do not improve, many will have losses on 2016 crops.  This where the budget crunch comes, unless farmers are able to lower input costs or commodity prices improve dramatically to $5.00 for corn and $11.00 for soybeans.  In the 2013 and 2014 crops crop insurance provided an additional revenue source.  Crop insurance in 2015 might not pay anything if the harvest prices average close to spring prices of $4.15 for corn and $9.73 for soybeans with average to above average yields in Minnesota expected.

So what can a farmer do to try to lower their input costs?  The top input cost on both corn and soybean budget is land rents.  In 2014 FINBIN data land rent accounted for 33% of the direct input costs for corn and 52% of the direct input costs for soybeans.  In 2007 farmers in the FINBIN data base sold their corn for $3.68 and soybeans for $9.52 while land rent averaged $125.44 compared to 2014 average rent of $241.36, and the average price received were $3.93 for corn and $10.15 for soybeans.  For 2010, 2011, 2012 and 2013 average prices received were $4.68, $5.66, $6.50 and $4.45 for corn and $10.87, $11.40, $13.77 and $12.63 for soybeans.  Using price only rents should have been the highest in 2012 and have fallen since.  There is always a lag time or reaction time that takes place and that is why rents continued to in 2013 and fell only slightly in 2014.  This trend for declining rent should continue in 2015 and 2016, but will not decline as rapidly to reach the comparable prices of 2007 when average rents were $125.44.  Rental negotiations will be a struggle this year and will be a major deciding factor if a farmer will be able to coming close to breakeven in 2016.

Flexible rental agreement may be one options where both landlord and farmer share the price risk, if prices improve so does the rental payment, maybe you start with the 2007 rental rate as a base and current prices and then share 50-50 the extra revenue gained at prices above the starting point prices.  You can also have a yield component if yields are better than average in 2016.

The next highest input cost for corn in 2014 was fertilizer accounting for 22% of the costs.  If a farmer cuts this input they are also cutting yield and 60% of the yield is determined by fertility.  For Soybeans the second highest input cost is seed which accounted for 13% of the total input costs.  Seed was the third highest for corn and again cutting seed costs and seed treatment costs again will have a direct impact on yields.

Farmers need to determine their 2016 crop budgets and crunch the numbers to see where the costs will be and then what prices are needed to cover these costs and start a marketing plan to price the crops when the target prices are achieved.

Tuesday, September 22, 2015

Sequestration and the Effect on Farm Program Payments

Sequestration will likely affect farm program payments that are to be received by producers this fall. At this time, an ARC-CO payment, on corn base acres, will be $50 or more across Minnesota counties, for eligible producers. ARC-CO payments on soybean base acres are much more variable. Payments on these base acres will range from $0 to approximately $45, depending on the Minnesota County where a producer farms. But, all of these payments will likely be reduced due to sequestration.

Many producers are currently asking what sequestration is. Sequestration is a piece of 2011 legislation passed by Congress that is aimed at reducing the Federal budget deficit. Most Federal programs are affected by this reduction and USDA farm programs are no different. (Federal Crop Insurance and Conservation Reserve Payments are both exempt from sequestration though.)

The Federal Office of Management and Budget (OMB) administers sequestration and determines the annual level of reduction. It is expected that OMB will require USDA to reduce 2014 farm program payments between 6.8 and 7.3 percent. Officials believe 2014 and 2015 farm program payments will likely be reduced by 7.2 or 7.3 percent. This expected reduction will equate to approximately $4 or $5 per MN corn base acre enrolled in ARC-CO. Soybean ARC-CO payment reductions due to sequestration will be much more variable, and will range from $0 to approximately $3.50 per base acre. Producers eligible for a farm program payment of $50,000, will see this reduced to approximately $46,400, if a 7.2% sequestration is enacted.

FSA is waiting to hear from the White House and OMB as to what the actual farm program payment reduction level will be. Producers will then be informed as to the final sequestration level. At this time though, producers need to visit their county FSA office to finalize enrollment in the farm program they selected for 2014 and 2015. This paperwork needs to be completed with FSA by Sept. 30 to be eligible for any FSA related payments this fall.

Monday, September 14, 2015

Farm Program Enrollment - One Last Step

Many commodity producers thought they were done with their Farm Program signup tasks this past spring. At that time, farm operators elected either ARC or PLC for their farm commodity program on eligible farm acres. This program election process selected which program farmland was placed in for the entire 5 years of current Farm Bill.

There is one more important step that needs to be completed though by producers! Producers must enroll farmland acres in the originally elected program by September 30, 2015. This enrollment is for both the 2014 and 2015 crop years. This final step includes signing the ARC/PLC contract form, which is CCC-861 or CCC-862 at the FSA office. If this last step is not completed, then farm program payments for both of these years will not be made on affected acres – even if program payments have been earned. (Each crop year going forward, the same election process will need to be completed.)

At this time it is very important for producers to contact their local FSA office and schedule an appointment to complete the ARC/PLC enrollment. Again, this needs to be done prior to September 30th. Program payments are very likely for producers this year – especially those that have elected ARC-CO. Producers don’t want miss this important final step of the process with FSA and risk forgoing the program payment dollars on their farm.

Wednesday, September 2, 2015

Set your strategy for 2016 Margin Protection Program

by Betty Berning, Extension Educator
It's that time of year. State Fair? Well, yes, but not what I was thinking. Haying? Again, yes, but not what I was thinking! It is time to enroll in the Margin Protection Program (MPP) for 2016. The enrollment period for the 2016 MPP began on July 1, 2015 and will end on September 30, 2015. If you recall when you enrolled in MPP at the end of 2014, you signed up to participate in MPP until 2018 and need to pay a $100 administrative fee each year. You're not just paying a fee, though; this also nets you the "catastrophic" coverage of a $4.00/cwt margin. Producers who have previously enrolled will receive a 2.61% "bump" on their production history. If you haven't enrolled previously, now is an excellent time to consider if this program is a good risk management tool for your operation.
What, exactly, is MPP? MPP was part of the 2014 Farm Bill and is an "insurance-like" program. The intent of MPP is to provide farmers with margin protection during times of financial distress. MPP takes the difference between milk price and feed cost to calculate a margin. This calculation is made by USDA and is based on the All-Milk price; NASS prices for alfalfa and corn; and AMS prices for soybean meal. These prices may be different than the milk price you receive or your actual feed costs.
Producers enrolling in MPP select a margin level to insure between $4.00 and $8.00/cwt (coverage is available in $0.50 increments). They also opt to enroll a percentage of their milk, which can range from 25% to 90%. The premiums for MPP vary depending on the margin level selected and production history. Premiums are subsidized heavily to $6.50/cwt margin and climb rapidly after that. Premiums for covered production history of less than 4 million pounds are less than premiums for covered production history of greater than 4 million pounds. At $4.00/cwt coverage, there are no premiums for either group. See Table 1.

Table 1. Premium rates for MPP

Margin level protected ($/cwt)Covered production history of 4M lbsCovered production history of 4M lbs
Source: Farm Service Agency.
Now that you've had your MPP refresher, you may be wondering what coverage level you should select for this year. To help you make this decision, you can use the on-line tool found at the USDA Farm Service Agency. Click on "Dairy Margin Protection Program web tool". This tool allows you to enter your farm's production history and estimate your payments based on today's futures markets. An added feature to the tool this year is the ability to enter in your own assumptions for 2016 prices. The tool will help you determine the cost of each strategy along with payment, given today's future markets or your forecast.
I suggest looking at three options to evaluate your decision:
Option 1 is catastrophic coverage, i.e. enrolling at $4.00/cwt and paying the $100 administrative fee. While there is no cost to enroll at this level, this is "catastrophic" coverage. You will only get paid if margins are near historical lows. As I review margin data from the past 8 years, there are only a couple of times that this strategy made a payment (see Figure 1). One of those times was in 2009, which was a very difficult year financially for dairymen. This strategy is basic coverage at a very low cost.
Option 2 is a risk management strategy of enrolling at $6.50/cwt. This provides more coverage than Option 1 and it avoids the large premium increase at coverages over $7.00/cwt. Again, as I review the margin data in Figure 1, I can see MPP margins since 2007 have been $8.00 or less almost half the time. Most of the time, these margins have been in the $4.50 to $8.00/cwt range. In other words, historically Option 2 would have paid more frequently than Option 1.
Option 3 is to maximize your predicted net return. In this scenario, the on-line tool is used to predict which coverage level will provide the greatest returns. The tool will analyze both expected margin and the cost of premiums to determine your net return at varying coverage levels. You choose the greatest return. It is important to note that the tool is estimating margins based on futures markets, which are subject to change. This strategy requires more analysis than the others.
As you think about your options, talk with your banker or other trusted financial adviser about what fits best with your operations.

Figure 1. MPP margins 2007 - Present.
One last consideration, as I wrote in the beginning, MPP is intended to be an "insurance-like" program. It is there for the bad times. Just like car insurance, I may pay my premium, but I hope I don't have to use it! If MPP is not paying, it's an indication that margins are strong and dairy farmers are experiencing a time of prosperity. MPP is there to help producers navigate through the tougher times.
Don't forget to get your FSA office to make you 2016 elections by September 30, 2015!

Friday, August 28, 2015

Liquidity is Strength when Profits are Scarce, How Should it be Measured?

by Don Nitchie, Extension Educator

Liquidity has certainly become a hot topic that many people are monitoring in Agriculture with more than two years of significantly lower grain prices.  While livestock operations enjoyed strong returns in 2014 many crop only farms experienced negative returns.  Lower prices also impact the value of grain inventories held as current assets on balance sheets.  In some cases, current liabilities may have also increased as operating loans expanded after decreasing over past years of higher grain prices.

In this changing environment, we know that liquidity, or the ability of the farm business to meet its current financial obligations in the coming year is very important.  Strong liquidity also provides a business the ability to withstand short-term shocks and the flexibility to capitalize on opportunities.  But, what is the best measure of liquidity?  Frequently, the current ratio; current assets divided by current liabilities may have been used in the past to measure your liquidity.  Current assets are typically grain and marketable livestock inventories as well as some cash and prepaid inputs.  Current liabilities are typically annual operating loans and annual payments due on machinery, buildings and land loans. A ratio of 2:1 or above is good and 1.3:1 or below is considered weak.

However, while the current ratio is accurate in telling you the relationship on your balance sheet of your current assets to your current liabilities, it does not relate to your income statement and your size of business.  Many financial experts including the Farm Financial Standards Council now argue that the Working Capital to Gross Revenue measure is a much better measure of liquidity.  Working capital is equal to current assets minus current liabilities.  If Working Capital is 30% or more of Annual Gross Revenues, liquidity is considered strong.  If working capital is 10% or less of gross revenues it is considered weak.

As an example, consider a farm where the current assets are $200,000 and Current Liabilities or debt is $100,000.  This would make the current ratio 2:1, fairly strong by conventional wisdom.  The working capital of this farm is $200,000 -  $100,000 = $100,000.   If the annual gross revenue were $300,000, this means that working capital was 33% of gross revenue-strong according to guidelines.  But, if gross revenues were $1,000,000 annually the working capital would only be 10% of gross revenues and the liquidity situation would not be good.  It would be a struggle to meet current obligations.  So relating your liquidity to the size of your operation is important and should be monitored continuously.  Maintaining strong liquidity will help a farming business survive and thrive in challenging times.

Tuesday, August 4, 2015

Relationship between Corn and Bean Prices verses Land Values and Rents

By David Bau, Extension Educator

I receive many questions daily about land rents and land values and what direction they are going in the near future and long term.  Corn and soybean prices have fallen from record highs in recent years to a level that presents a challenge for farmers to generate a profit. I thought I would try to put together a chart that correlates the relationship between these three items.

I put together a list of average farmland values in Southwestern Minnesota from 1994 thru 2014 average Southern Minnesota cropland cash rental rates and average prices received by farmers for corn and soybeans sold each year.  Next I took the percentage yearly change for each and compared the results to each other in Table 1 below. The average change in land values is indicated by diamonds, the average change in Farmland Rental Rates is indicated by squares and the average change in corn and soybean prices is indicated by triangles.

Table 1.

From 1994 to 1995 all three had increases in values with corn & soybean prices increasing by an average of 32.9%, while farmland sales prices increased by 8.4% and farmland rental rates by 5.3 %.  In 1996 farmland sales prices declined by 1.3% while corn and soybean prices increased by 4.1% and rents by 7.9%.

In the last 20 years, there were seven years where corn and soybean prices were negative, while farmland sale prices and farmland rental rates were in negative territory three years.  Is there anything to learn from the chart? There is a trend between all three with corn and soybean prices the most volatile, followed by farmland values and with farmland rents more stable.  There is definitely a year or two lag in the reaction of farmland sales and rental rates following the direction in corn and soybean prices.

From 2013 to 2014 farmland sales declined by 10.7% and farmland rents declined by .9% while corn and soybean prices declined by 15.7%.  With corn and soybean prices in negative territory, this should indicate lower farmland sale prices and lower farmland rental rates unless prices go up dramatically in the near future.

Friday, July 31, 2015

Farmland Sales Decline Slightly in Minnesota in 2014

By David Bau, Extension Educator

Minnesota farmland sales for 2014 are available at Land Economics website thanks to University of Minnesota Professor Steve Taff who updated the information before his recent retirement.   Minnesota average sale price was $5,109 in 2014 down 1 percent from an average sale price of $5,165 in 2013.  The average sales price was $4,222 in 2012.  The Minnesota average for prior years was: $3,667 in 2011, $3,517 in 2010 and $3,420 in 2009.  The upward trend was broken slightly in 2014 the first decline in recent years.

Record corn and soybean prices and corresponding profits in recent years can explain the rapid rise in farmland sale prices.  Now much lower corn and soybean prices can explain the falling farmland sale prices as farmer profits have declined.  Since the June 30th crop report corn and soybean prices have moved higher but are still below the level for many farmers to reach their breakeven prices.

If you want to see what farmland sales took place in the county and township where your land located,  you can go to the Land Economics website.  Here you will find information by county or township from 1990 through 2014 at: then choosing Farmland Sales and selecting your counties you are interested in.

At this website you can find the assessors’ estimated market value data from last spring.  This lists the 2015 estimated values.  The data is provided by the Minnesota Department of Revenue staff.  Keep in mind that this represents estimates by the county assessors, not actual sales.  It can be found under the “Land Values” tab on the website.

The data can be broken down by township or by whole county and provides information on class 2a agricultural land values per acre, class 2b rural land value per acre, class 2a tillable value per acre, class 2b timber value per acre, class 2c timber value per acre, class 2a ag preserve value per acre, class 2b ag preserve value per acre, green acres market value per acre and green acres taxable value per acre.  This information is not available in each category for every county and township, but lists them when available.

I complete a survey of bare farmland sales in 14 Southwestern counties and the average sale price declined to $7,556 in 2014 from $8,466 in 2013.  This was the first average decline since 1999.

Recent reports from assessor indicate assessed values will go down in 2016.  But the assessed values and farmland sale prices are both dependent on what direction the corn and soybean prices take and if farmers are able to generate profits at the prices offered.

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