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Wednesday, May 23, 2018

Managing Farm Profit Margins - The 5% Club Update

By Don Nitchie, Extension Educator

A single 5% improvement may be easy to overlook, but you should not take this small improvement for granted. Increasing revenue 5% while also decreasing costs 5% can have a big impact on your bottom line.  We have studied the potential impact this can have on a Southwest Minnesota Farm Business management Association average farm in 2017.

The table below compares actual outcomes for the average Southwest Minnesota Farm Business Management Association farm in 2017, to the projected 2018 results for the average association farm if it joins “The 5% Club”. Our analysis of “The 5% Club” compares farm performance if the average association farm improves gross revenues by 5% and lowers operating costs by 5% over 2017 for 2018.

It is impressive how just these small changes result in Net Farm Income of an average farm doubling and Term Debt Repayment Capacity improves from 1.3 in 2017 to 2.3 in 2018.  In 2016, the same 5% changes would have almost tripled Net Farm Income for the average farm. Therefore, small changes have a BIG impact on your bottom line. Attention to the correct details can make a real difference.


Is it possible to achieve a 5% improvement in gross revenue?  Probably. Do a little better than average on selling prices, yields or a little of both. Be willing to sell portions of your production when profitable pricing opportunities are available. Do not hold out for the highest price and avoid selling all your production in a few large portions. Make the basic math work in your favor. Try to sell increasing quantities if a market is moving higher and a greater quantity first as a market moves lower. Any price should always be evaluated relative to YOUR projected cost of production instead of on the latest price forecast.

Is it possible to lower costs by 5%? Probably. Being more effective with expenditures on inputs is one of the real keys. Getting the most revenue possible for each dollar spent on herbicides, pesticides, seed, fertilizer, and feed is very important. You do not necessarily want to try to cut expenses 5% across the board. Be strategic and critically examine which of those expenditures may not be adding to production efficiency at current expenditure levels.

Sharpen your production management and marketing skills. Be a student of current production technology research and methods. Discard products and methods that seem to only have great advertising and cost money with little proof of effectiveness. Know where your costs are relative to competitors using your benchmarking reports.  Focus in on costs that seem out of line, and seriously examine the products or practices behind those costs. Also, celebrate the things you have done well.

Successful managers do more little things just a little better rather than doing one thing really well. It pays off when profits are scarce! Strive to join “The 5% Club” in 2018.

Prevented Planted Insurance Coverage Dates

By David Bau, Extension Educator

Heavy spring rains resulting in flooded fields have delayed planting for many farmers in southern Minnesota.  Many of these farmers will have to decide what to do when the final planting dates of May 31 for corn and June 10th for soybeans.

The USDA’s Federal Crop Insurance Corp. policies have prevented planting provisions for payment if planting cannot occur before the final planting date.  There are also options to plant after the final planting date, but with reduced insurance coverage.

For most of Minnesota, the final planting date for corn is May 31. It is May 25 for northern counties.  The final planting date for soybeans in Minnesota is June 10. The late planting period extends for 25 days after the crop's final planting date at this point the insurance coverage is reduced to 55% for corn and 60% for soybeans.

University of Minnesota Extension agriculture business management educators have posted extensive information regarding prevented and delayed planting on their website. (Link: z.umn.edu/prevplant18)

Additional resources are available for farmers and their advisers.  A worksheet developed by Iowa State University and adapted for Minnesota by Extension economists Robert Craven and Kent Olson, to evaluate their options when prevented from planting. The worksheet also helps evaluate whether to replant or not. The worksheet template is available online. (Link: z.umn.edu/3i80)
  • Additional information and details regarding federal crop insurance rules and guidelines can be found on USDA's RMA website.
  • For agronomic information related to crops, late planting and the effect on yields, late planting rates and maturities, cover crops and more, visit the University of Minnesota Extension Crops website. (Link: www.extension.umn.edu/agriculture/crops)
  • Search the early summer hail and flooding page for fact sheets specific to your situation. (Link: www.extension.umn.edu/agriculture/crops/hail-and-flooding)

Tuesday, May 22, 2018

Dairy MPP - Strategies for MY Farm

By Nathan J. Hulinsky, Extension Educator

MPP

Dairy Margin Protection Program (MPP) was enacted in the Agricultural Act of 2014 (2014 Farm Bill). The program was an insurance mechanism for dairy producers to protect milk price/feed cost margin by selecting a coverage level from $4.00 to $8.00/cwt. Also producers need to select coverage percentage between 25% and 90% of annual pounds produced. The program initially had mixed results with most farmers only receiving enough payments to cover their enrolment fees. In April 2018 The Bipartisan Act of 2018 was passed, making changes to the MPP payment structure, resulting in better benefits to most dairy farmers.

Changes to MPP

  • Calculations are monthly, instead of bi-monthly of margins. 
  • Pounds of milk covered increased in Tier 1 to 5 million pounds/year, from 4.
  • Premium rates reduced significantly.
  • Certain groups, beginning, limited resource, disadvantaged, or military veteran farmers may qualify for administrative fees. 
  • Must re-enroll by June 1, 2018.


Payment Structure
Table 1 shows the dollar amount per hundred weight for the different coverage levels.  Tier 1 has been changed from 4 Million pounds to 5 Million pounds and the premiums have been reduced. 


Table 2 shows the expected returns based on 1 Million or 3 Million pounds of milk sold annually and based on either 70% or 90% covered. One can see from the table that the $8.00 and $7.50 coverage level at either 70% or 90% has a positive expected return for both 1 Million and 3 Million pounds. 
The chart below shows the same information as Table 2.  For the 1 Million and 3 Million pounds producers has a positive Expected Return at 70% and 90%.


To be Eligible
  • Produce and commercially market milk from cows located in the United States.
  • Provide proof of milk production at the time of registration.
  • Not be enrolled in the Risk Management Agency's Livestock Gross Margin for Dairy program (LGM-Dairy).

Additional Resources
Contact your local USDA FSA office to enroll and to ask further questions.





Tuesday, May 8, 2018

Outlook 2018 for Corn and Soybean Crops

By David Bau, Extension Educator

With heavy April snowfall farmers are just getting started planting their 2018 crops with hopes of good yields and good prices.  There has been plenty of spring moisture and now the cropping season will take off in full swing when the soil dries out.  Farmers have been blessed with three years in a row of above average crops. Will 2018 continue the trend?  The good yields helped many farmers survive the low prices and small profits the past couple of years. In Southern Minnesota corn farmers in the Adult Farm Management programs have averaged losses on corn production since 2014, while they were able to generate small profits on soybean from 2014 through 2016 turning to a loss in 2017.

Cash crop prices for 2018 corn are at $3.70 and soybean prices are $9.60 depending on local basis. These prices are 30ȼ better than a year ago for corn and 70ȼ higher for soybeans. December corn futures rallied 25ȼ from the April low price and soybeans futures have increased 60ȼ. Farmers in my marketing groups have worked on their 2018 budgets and determined their average breakeven prices of $3.85 for corn and $10.60 for soybeans. With current prices offered for 2018 corn and soybeans below 2018 breakeven prices farmer will again be facing a smaller profit year unless prices continue to rise.

Farmers will be examining their farm expenses to determine ways to lower costs. Rents are the largest expense accounting for 40% of soybean crop expenses and 33% of corn expenses. The next largest is fertilizer, followed by seed, chemicals and repairs and hired labor. The challenge is to lower input costs without sacrificing yield. Yield may also be lowered by a later planting date this year.

Farmers need to be alert for opportunities if the markets rally close to the prices necessary to lock in profits. Farmer need to develop a marketing plan with target prices beginning close to their individual breakeven prices and stair step their way up to higher price targets. Decision dates should be added to determine if prices are high enough to lock in prices available at the time. The high in corn prices usually occurs in May, with historically higher than average prices for both corn and soybeans from April through June. This time period would be a good time to set marketing decision dates. With the prices improving, farmers should look at marketing part of their 2018 crop.

If the target prices are not met and on decision dates have passed with too low of price to market any grain, farmers need to add default dates to force sales, especially for those bushels that the farmer will not have on farm storage space at harvest time. Hopefully 2018 will be another year with good yields which also help lower the breakeven prices. With prices currently below the breakeven prices necessary, 2018 will be another with smaller profits for Minnesota corn and soybean farmers.

Friday, April 6, 2018

Thinking About Joining a Marketing Group

By David Bau, Extension Educator

Marketing groups and clubs have been in existence for many years and give farmers the opportunity to share and discuss marketing ideas and strategies. I have worked with several groups since 1999 and currently meet with four groups. Most groups consist of 10 to 20 member farms and meet 12 to 20 times per year for 90 to 120 minutes. Local sponsors are involved in promoting, developing and managing these groups.

Marketing groups are ongoing group training and discussion sessions focused on marketing methods, tools, issues, conditions, and trends. The sessions include formal teaching with research based materials from the University of Minnesota, and other credible sources along with discussion facilitated by Regional Extension Educators. Each group formulates a pre-harvest and post-harvest marketing plan that is used to benchmark individual marketing performance.

Typical members of marketing clubs are commodity grain and livestock producers of any size and the agricultural professionals that support them. Each farm pays a fee to cover the cost of materials, travel, technology and other costs associated with operating and managing these groups.

History
Marketing clubs have a long history in the Midwestern United States and have seen resurgence in Minnesota as a direct result of the University of Minnesota’s Master Marketer and Winning the Game programs.  Agricultural Business Management educators have been teaching at, facilitating and organizing marketing clubs for over 18 years.

Location
Clubs that are managed and facilitated by Ag Business Management Educators and their local partners are located in Southwestern. Current U of M Marketing Groups are located in Brown County (Sleepy Eye), Murray County (Slayton), and Wanda.

Benefits
From 2004 through 2015, farmers in these marketing groups averaged 5 cents per corn bushel marketed better than the average price received by their peers, (farmers in southern Minnesota adult farm management programs) and 24 cents per soybean bushels. This would translate into a total benefit on 88,300 bushels of corn sold and 20,200 bushels of soybeans sold each year per farm. A total of $9,263 per farm per year more income than their peers. The total per farm over 12 years would be $111,156. For all 55 farms that total increased revenue above their peers would total $6,113,580.

The average farm earns 20-30 cents per bushel (including gov’t payments). Just 10 cents more per bushel could increase net income by 33-50%!  Great marketing is not finding the high price. It’s finding an extra 10-20 cents per bushel with a solid plan that avoids mistakes.

A survey of Mature Marketing Clubs in Minnesota (62 groups and 173 surveys returned) showed these results. 155 reported positive impacts on their operation due to attending marketing group sessions. The reported a 163% improvement in the use of marketing plans with an average increase of income per operation of $20,401 per year. Those surveyed also made these comments:
  • The marketing club is another excellent source of information on market trends and analysis.  Sharing ideas is probably the best information I receive from the meetings.  
  • Marketing is a continual learning experience. It only ends when you exit production agriculture. A person could not take in too much information. I would like to see the marketing club stressed to more Ag producers.
  • This has been, and continues to be a very positive experience. Discussing issues at hand, strategies and plans helps me to make decisions and /or write my marketing plan. Also gives me the courage to make decisions otherwise I have a tendency to procrastinate. 
University of Minnesota Extension has been conducting several marketing groups across Minnesota. Educators facilitate meetings where producers discuss current marketing issues and develop a marketing plan for their farms.  Farmers attend regular, at least monthly, meetings to develop and enhance their commodity marketing plans for an annual fee.

If you would like to join one of my existing groups or thinking about starting your own, just send me an e-mail at bauxx003@umn.edu or give me a call at 507-372-3900 ext. 3906. I would be glad to come to an organizational or informational start up meeting.

Monday, March 5, 2018

Beginning Farmer Tax Credit

By David Bau, Extension Educator

In May 2017 a new tax credit for Minnesota beginning farmers became available.  The new law provides tax credits for the rent or sale of farm land or a variety of farm assets to beginning farmers.  Agricultural Assets include: land, livestock, facilities, buildings and machinery used for farming in Minnesota.

To qualify as a beginning farmer you must be entering or entered farming within the last 10 years.  You must provide a majority of the labor and management for farm located in Minnesota.
Have adequate experience and knowledge for type of farming you are engaged in.  Be able to provide positive projected earnings statements.  You are not directly related to owner of the agricultural asset.  Have a net worth that does not exceed current limit of $800,000.

The beginning farmer will need to participate in an approved financial management program.  Costs of this program may also be eligible for a tax credit for 3 years for maximum of $1,500 per year.

Credit to the agricultural asset owner include: 5% of the lesser of the sale price or fair market value of the agricultural asset up to a maximum of $32,000, 10% of gross rental income in each of the first three years of a rental agreement up to maximum of $7,000 per year, 15% of the cash equivalent of the gross rental income for the first three years of a share rent agreement up to a maximum of $10,000 per year.

The asset owner can claim only one of the above credits in any given tax year up to the maximum stated.

The Rural Finance Authority is administering the tax credit by certifying beginning farmers, assisting beginning farmers in locating an eligible financial management program in their area and certifying that owners of agricultural assets are eligible for the tax credit. 

This is a first come first served initiative.  The maximum amount available in 2018 is $5 million, increasing to $6 million in 2019 and remains at this level through  the 2023 tax year.

The asset owner may be an individual, trust, or a qualified pass-through entity.


For more information contact Rural Finance Authority by phone at 651-201-6004 or by email at www.mda.state.mn.us.

Monday, February 19, 2018

To Rent or Not to Rent??

By David Bau, Extension Educator

Farmland rental rates have remained high even though grain prices have gone down significantly.  As grain prices rose farmland rental rates were slow to increase. When grain prices started to fall in 2013, farmland rental rates started to decline, but at a much slower pace than grain prices.

The average cash prices for corn and soybeans in 2012 in Worthington were $6.82 for corn and $12.64 for soybeans.  The average price of corn declined each year since while soybean prices peaked with an average price of $13.99 in 2013. From 2012 through 2016, corn prices declined by 54.5% and soybean prices by 27% , while average rents paid by southern Minnesota in adult farm management programs declined from a peak of $243.47 in 2013 to $226.85 in 2016 or 7%.  Corn and soybean prices declined by an average of 41% and if this was applied to 2013 average rental rates the average rate in 2016 would calculate to $143.65.

Many rents are still above $200, $250 and higher.  If I use $250 rental rate and total cost of production estimate for 2018 of $760 per acre for corn and $530 for soybeans.  Using expected yields of 200 bushels per acre for corn and 55 bushels per acre for soybeans the cost per bushel calculates break evens of $3.80 for corn and $9.64 for soybeans.  Current 2018 cash bids are $3.25 for corn and $9.30 for soybeans, both below the breakeven prices necessary above.

Why would a farm rent land for $250 per acre or higher next year?  The farmer has to ask the question to rent or not to rent?  What are some reasons to rent with a potential loss forecast?  Farmers are optimists and they are always hoping for better prices, and prices could increase to cover their costs.  Farmers need to maintain their size to generate sufficient income to cover their living expenses and equate their equipment with the farm size.  Once a rental parcel is lost, it is hard to ever get back into the operation and if the farm size shrinks, it might fall to a level where the farmer will have to look for ways other than farming to provide for their living expenses.  Other job opportunities are limited in rural communities.

With the projected prices producing negative income from renting why should the farm say no?  If the farmer has good records, they know every parcel of land and which has great potential each year to produce an exceptional crop and which parcels are subject to drought with lighter soils and which will drowned out due to water holes with poor drainage.  These poorer parcels should be the first to go.  If this reduces your farmed acres too much, examine ways to utilize your equipment differently, through custom work, or sharing equipment with a similar sized farmer.

For farmers who decide not to rent, they may determine farming can no longer provide for them a living wage and they will need to find a new occupation.

Many landlords have been slow to lower rents due to good yields the past three years.  Many look at their high property taxes and land values and think rents should reflect this.  Rents account for 1/3 of the costs on corn and 2/5 of costs for soybeans and if a farmer is unable to negotiate a lower rent that will be a major factor in having to say no.

Over 1200 farmers in southern Minnesota in the Adult Farm Management programs have lost money on cash rented corn ground since 2014 and looks like this will hold true for 2017 and 2018 and as farmers have been unable to pay back operating loans with these losses, many will be getting a no from their banker if the profitability numbers don’t improve and that will be a decision not to rent they did not want to make.

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