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Friday, December 12, 2014

Cellulosic Ethanol: Will Technical Success Bring Commercial Success?

By Douglas G. Tiffany, U of M Extension Educator, Agricultural Business Management

For the last fifteen years or so, speakers at biofuels conferences would often say that production of cellulosic ethanol would be a commercial reality in just "five more years." Issues cited for the delays ranged from needed enzyme breakthroughs leading to lower costs, the need for tougher fermenting organisms, high capital costs, and then the issues of biomass infrastructure and markets were noted. The "five years away" statement was repeated so often, it was treated as a joke. As a production economist and biofuels researcher, it is interesting and rewarding to see how this once futuristic idea is being developed.

No longer a joke, much needed R & D has occurred following federal loan guarantees that supported plant construction for the commercial production of cellulosic ethanol, which is now upon us in the Midwest. Harvest of corn stover and cobs for the 2014-15 processing season has occurred at plants owned by Dupont, Poet-DSM, and Abengoa. Each of these three production plants represents somewhat different approaches to producing biofuels from sources that previously were considered impossible.

Laboratory research and pilot studies have brought these innovators to their current position and will continue, but measurements of performance metrics will now occur based on commercial scale plants.
Internal and external reviewers will be looking for reliable operation of each of the four plants that will be necessary to guide improvements in pretreatment, fermentation, and in logistics of biomass, contracting of stover supplies and the removal of stover in a manner that is economic and sustainable in terms of soil organic carbon. The refinements of performance at production scale will set the stage for campaigns to profitably expand the numbers of plants licensed to utilize more elegant technologies to exploit alternative feedstocks.

Additional feasibility studies for potential locations with available feedstocks are likely to occur. Business models will be tweaked. Bankers will have the opportunity to tour the facilities, observe continuous operations and review pro forma budgets in determining loan terms for financing portions of the new plants.

The bankers, investors and consultants will all be considering their own SWOT analysis and discussing and considering the strengths, weaknesses, opportunities and threats associated with cellulosic ethanol. This is a great time to speculate at bit on these four factors that will determine if additional cellulosic plants will be built based on any of the three operational pilot models being built in the Midwest. Appearing below are some of my favorite factors at this time as I consider the matter:

Strengths
• The technology used has the ability to use cheap, plentiful, local feedstocks.
• Biofuels produced in this manner will have lower carbon footprints than conventional ethanol.
• Improvements in enzyme costs and pre-treatments methods have occurred and will continue.
• Mechanical harvest and logistics of corn stover systems have progressed pretty well.
• Soil stewardship is being implemented with target removal rates for particular soils.

Weaknesses
• More research and operational experience will still be needed to make the process reliable.
• Capital costs of the first plants are high (perhaps 10X dry grind ethanol) due to the long residence times needed to pretreat and then process the cellulosic feedstocks.
• Conversion of C5 sugars will at first be minor, but hold potential for more profitability.
• Markets for biomass feedstocks are undeveloped, but contracting relationships are occurring.
• It appears transformation and use of lignin in biomass remains a challenge.

Opportunities
• Success with cellulosic ethanol and advanced biofuels will herald further advances in renewable chemical production.
• Carbon footprints of the overall processes can be lowered with electricity and steam produced from residual biomass material.
• RINS values, supported by Renewable Fuels Standards, reward cellulosic and advanced biofuels.
• Interest rates are currently low.

Threats
• Weaker government support for biofuels will be very damaging to further investment in these technologies at this time.
• The return of higher interest rates could be a problem for financing cellulosic capacity of technologies lacking performance history.
• Reductions of Renewable Fuels Standards by EPA, as has happened in 2014 would be harmful.
• Cheap natural gas and the lack of carbon taxes favor conventional fossil fuels.

Numerous investors are thinking about some of the SWOT issues noted above as well as others. The three plants will have to run for a while and then try to market their investments in new technology to others, hoping to capitalize on the prize of cellulosic ethanol. The progress toward cellulosic ethanol has seemed torturous to many up to this time; however, the pace is about to quicken. There are likely to be substantial rewards for reliable technologies involving equipment, enzymes and fermenting organisms by those firms that can demonstrate or offer substantial performance guarantees for ethanol production methods that do not require starch molecules. There will be lots of excitement ahead in efforts to develop viable cellulosic ethanol businesses based on corn stover. Considerable study has occurred revealing the magnitude of corn stover supplies around the country and the potential to utilize this biofuels feedstock. How it all plays out for stover producers and investors in cellulosic ethanol plants will depend on careful consideration of SWOT factors and more hard work and thought by teams of talented people.



Monday, October 20, 2014

Managing Farm Finances in Challenging Times - Strengthen Your Cash Position

By Don Nitchie, U of M Extension Educator, Agricultural Business Management

Many business management experts agree having a strong liquidity position is very important in times of tight profit margins or to survive (hopefully short) periods of negative profit margins. What is financial liquidity? It is the ability of a business to meet current (typically within the next year) liabilities with current assets on hand. Not all current assets are the same though.

An old saying in the investment world is "cash is king". This implies the value of cash on hand in your bank account is a known amount, its price will not change tomorrow, and you can use it immediately to pay a bill, make a loan payment or as a down payment without any further action. Grain and livestock in inventory, if at market weight or market ready, are current assets and could be on your balance sheet at one price but worth something far different a few days or weeks later. So, during lean times it can be very advantageous to maintain an increased portion of your liquidity in cash - more than you have in the recent past. Dr. David Kohl, Professor Emeritus at Virginia Tech, advises to keep one year of debt payments or two months of cash expenses in cash on hand, not just at year-end but at all times.

Many of us who lived through the high interest rates of the 1970's and 80's have some aversion to having too much cash on hand, as our experience taught us to keep our money working and earning all the time. But, with rates of returns from crop farming substantially lower and bank savings rates extremely low, there is substantial value in maintaining a ready cash reserve. Having strong liquidity in uncertain times strengthens the financial sustainability of the business.

The Farm Financial Standards Council indicates the ratio of your current assets (cash in the bank, grain or livestock on hand and market ready & inventory of inputs) to your current liabilities (operating loans, accrued interest, accounts payable and annual fixed loan payments) should be no lower than 1.3. A farm business is considered very healthy if the ratio is maintained at 2.0 or greater.

The current ratio is a good measure of liquidity, but it can vary substantially through the year as sales occur, bills are paid, family living or draws occur, new loans are taken out and old loans paid off and especially as prices of unpriced grain and livestock inventory fluctuate. An analysis of 2,272 Minnesota Farms submitting their January 2014 data to FINBIN at the U of M Center for Farm Financial Management revealed that on average their liquidity as measured by their current ratio was very good, standing at 2.0. However, only 4.9% of their current assets consisted of cash and 69% was grain or livestock. If the majority of the grain or livestock was not priced, their financial strength was vulnerable to further market fluctuations. The cash held by these same farms would only cover 39% of their fixed annual debt payments and only about one month of cash expenses.

Tight profit margin years are in the foreseeable future, so it's wise to keep a higher portion of current assets in cash than has been done in recent years for the average farming operation. It is also very important, if holding more grain and livestock in inventory, to protect the price of that inventory to reduce the variability of your liquidity through the year. Even though interest earned for cash held in the bank is at record lows, that is a separate issue from holding cash for business liquidity purposes. When cash is maintained as one of your significant short-term business assets, at least the value is established and locked in for managing your liquidity. A strong liquidity position has value in strengthening the long-term viability of a farm business.


Thursday, October 2, 2014

2014 Rent Workshops: What Is a Fair Farmland Rental Agreement?

By David Bau, Extension Educator

Negotiating a fair rental agreement that satisfies the land owner and the farmer is a challenge. In these Rent Workshops, Extension Educator David Bau will provide examples, fact sheets and worksheets to determine a fair farm land rental rate for both parties.

The workshop will cover:

  • Farmland rental rate trends

  • Land values

  • Increasing input costs

  • Landlord worksheet

  • Tenant worksheet

  • Fair rent program

  • A rental rate that works

  • Flexible leases

  • Rental lease examples

  • What is a fair rental agreement?


Who should attend?

  • Landlords and farm land owners

  • Farmers and tenants

  • Agri-businesses

  • Ag professionals

Rent Workshop Schedule

11/5/14North Mankato9:30 amSouth Central College Conference Center
1920 Lee Blvd, North Mankato 56003
11/5/14St. Peter

2:00 pmCommunity Center

600 S. 5th street, St. Peter, MN 56082
11/6/14Cologne9:30 amCarver County Public Works Building
11360 Us Hwy 212, Cologne, MN  55322
11/6/14Shakopee2:00 pmScott County Law Enforcement Center
301 Fuller St. S., Shakopee, MN  55379 
11/7/14Worthington9:30 amExtension Regional Office
1527 Prairie Drive, Worthington, MN 56187
11/10/14Farmington9:30 amDakota County Extension Center Conference Room
4100 220th St. W, Farmington, MN 55024
11/10/14Northfield2:00 pmNorthfield Public Library

210 Washington Street, Northfield, MN 55057
11/13/14Le Center9:30 am4-H Building Le Sueur County Fairgrounds
Hwy 99, Le Center, MN 56057
11/13/14Lake Crystal2:00 pmAmerican Legion Post 294
County Road 20 South, Lake Crystal, MN 56055
11/14/14Alexandria9:30 amDouglas County Public Works Building
526 Willow Drive, Alexandria, MN 56308
11/14/14Alexandria1:30 pmDouglas County Public Works Building

526 Willow Drive, Alexandria, MN 56308
11/17/14Winona9:30 amWinona County Office Building Room 102B
202 W. 3rd St., Winona MN 55987
11/17/14Preston2:00 pmFillmore County Office Building
902 Houston St. NW, Preston, MN 55965
11/19/14Willmar9:30 amMid Central Research & Outreach Center
1802 18th St. NE, Willmar, MN 56201
11/19/14Madison2:00 pmLac qui Parle County Annex
422 5th Ave., Madison, MN 56256
11/20/14Winthrop9:30 amUnited Farmers Coop Main Office
705 E. 4th St., Winthrop MN 55396
11/20/14Sleepy Eye2:00 pmBrown County Extension Office
300 2nd Ave. SW, Sleepy Eye, MN 56085
11/21/14Greenwald9:30 amGreenwald Pub
310 1st Ave. N., Greenwald, MN 56335
11/21/14Foley1:30 pmMr. Jim's
840 Highway 23, Foley, MN 56329
11/24/14Caledonia9:30 amCriminal Justice Center
306 South Marshall St., Caledonia, MN 55921
11/24/14St. Charles2:00 pmSt. Charles City Hall
830 Whitewater Ave., St. Charles, MN 55972
12/1/14Marshall9:30 amLyon County Government Center
607 West Main St. Rooms 4 & 5, Marshall, MN 56258
12/1/14Pipestone2:00 p.m.Minnesota West Room 127
1314 North Hiawatha, Pipestone, MN 56164
12/3/14Jordan9:30 a.m.
Scott County Extension Office
7151 190th West, Jordan, MN 55318
12/3/14Chaska2:00 p.m.Carver County Government Center EOC
606 E. 4th St., Chaska, MN 55318
12/4/4Austin9:30 a.m.Mower County Courthouse East View Room 201
1st St. NE, Austin, MN 55912
12/4/14Albert Lea2:00 p.m.Freeborn County Government Building
411 S. Broadway, Albert Lea, MN 56007
12/5/14Morris9:30 a.m.West Central Research and Outreach Center
46352 State Hwy 329, Morris, MN 56267
12/5/14Willmar2:00 p.m.Mid Central Research & Outreach Center
1802 18th St. NE, Willmar, MN 56201
12/8/14Slayton9:30 a.m.Murray County Fairgrounds 4-H Building
3048 S. Broadway Ave., Slayton, MN 56172
12/8/14Lamberton2:00 pmSouthwest Research & Outreach Center
23669 130th St., Lamberton, MN 56152
12/9/14Hutchinson9:30 amHutchinson Event Center
1005 Hwy 15 S Plaza 15, Hutchinson, MN 55350
12/9/14Gaylord2:00 pmSibley County Courthouse Annex Basement
400 Court Ave., Gaylord, MN 55334
12/10/14Blooming Prairie9:30 amBlooming Prairie City Center
138 Hwy Ave. S., Blooming Prairie, MN 55917
12/10/14Rochester2:00 pmAuditorium UCR-Heintz Center
1926 College View Road SE, Rochester, MN 55904
12/11/14Little Falls9:30 amInitiative Foundation
405 1st Street SE, Little Falls, MN. 56345
12/11/14Browerville1:30 pmBrowerville Community Center
Main St. & W. 2nd St., Browerville, MN 56438
12/12/14Waseca9 a.m.Starfire Event Center
204 2nd Street, SW, Waseca, MN 56093
12/17/14Rochester9:30 amAuditorium UCR-Heintz Center
1926 College View Road SE, Rochester, MN 55904
12/17/14Owatonna2:00 pmSteele County Community Center
1380 S. Elm St., Owatonna, MN 55060
12/18/14Buffalo9:30 amWright County Courthouse Room 120
10 2nd St. NW Room 402, Buffalo, MN 55313
12/18/14Litchfield2:00 pmFamily Services Building

114 North Holcombe Ave. Room 200, Litchfield, MN 55355
12/19/14Olivia9:30 amRenville County Government Service Center
Rooms 116 & 117, 105 South 5th St., Olivia, MN 56272


Wednesday, October 1, 2014

Farmland Rental Rates for 2015 that Work for Both Parties

By David Bau, Extension Educator

I have completed two of 44 farmland rental workshops with most scheduled for November and December. The budgets for 2015 are ugly using current 2015 forward contract prices offered with both corn and soybean budgets in the red. Corn is negative by more than the average rent paid in 2014 and the farmer receiving no labor and management payment. The 2013 average rents in Southern Minnesota were $243 in the FINBIN database and the data provided by the Minnesota Agricultural Statistic Service in September listed the average rents as $227 per acre in 2013 and $237 in 2014.

Today's 2015 forward contract corn price is $3.27 and soybean price is $8.84. The record corn and soybean prices of recent years have significantly impacted land rents. Crop production expenses, farm profits and cropland rental rates all increased during the recent golden era of farming. Projected average input costs for 2015 based on adult farm management numbers for Southern Minnesota in the FINBIN database project to $639 for corn and $306 for soybeans before paying rent and paying no income for farmer labor and management. The numbers are in the red, using 180 bushels of corn per acre at $3.27 per bushel provides a gross income of $588.60 compared to $639 expense leave a loss of over $50 per acres before paying any rent. Using 50 bushels for soybeans at $8.84 generates $442 gross income, leaves $136 after $306 of expenses, to share between the farmer for labor and landlord for rent.

Last month I examined the last time average corn and bean prices fell compared to the previous year 2009 compared to 2008 prices to determine if land rents moved lower as commodity prices fell. The data indicated no decline in farmland rental rates, although commodity prices rebounded the next year to higher levels. Using $250 for an average rental rate, a farmer would receive no income for labor and management and have a loss of $300 per acre for corn and a loss of $114 per acre for soybeans. In a 50-50 crop rotation, the loss would average $207 per acre for the farmer.

Examining the numbers in another way, if a farmer wanted to farm for free and have no income, they could afford to pay $43 per acre rent, in a 50-50 corn soybean crop rotation. Anything over this amount would come out of the farmer's pocket. Budgets should also be impacted by new farm bill with payments if prices remain at low levels. In order for to cover rents and $60 labor charge per acre, the corn price would have to reach $5.27 and soybeans $12.32 per bushel using the projected average input costs for 2015.

So what is a fair rental agreement? Usually it is an agreement where the landlord receives a fair rental payment and the farmers receives a fair profit. In the above scenario neither the farmer nor the landlord think the numbers are fair using $43 for rent and no income for farmer. Farmland sales in Minnesota increased by over 22% from 2012 to 2013, this has caused property taxes to increase as well for landlord.

So how do you approach this troubling situation? Start by agreeing to a lower base rent up front and then add flexible components. If yield are better than average both parties should benefit. If prices improve from these harvest lows, both parties should benefit. If a farmer can maintain yields with lower input costs, both parties should benefit. These can all be components of flexible lease agreement.

The last time prices declined significantly from previous year was 2009. If prices remain at these current lower levels, how long before rents begin to decline and approach the 2009 average of $168 or the 2010 average of $169 per acre?

Make plans to attend a farmland rental workshop this fall for current numbers. Check out the Agricultural Business Management calendar for schedule of the rental workshops at: http://www.extension.umn.edu/agriculture/business/ for specific times and locations.


Record Corn and Soybean Prices Gone, Now What?

By David Bau, Extension Educator

The record corn and soybean prices of recent years now look like a memory with much lower current prices and future market prices. Crop production expenses, farm profits and cropland rental rates all increased during this golden era of farming. Since the beginning of 2014, forward contracting prices for corn and soybeans have averaged $3.98 and $10.86 respectively. On the table below, you can see these prices are well below the last few years but above the 12 year average. The first two columns indicate the average price for corn and soybeans starting with forward contract price at beginning of year and going through September 30th of the following year a 21 month period. The next two columns list the cash prices starting at harvest (October) in calendar year and going the September 30th of the following year, 12 months. The next column lists the average rate for southern Minnesota cropland rental. The last column lists the average price as a percent of $4.00 corn and $10.00 soybeans.

bau2.jpg

As the indicated in table, rents have not gone done since 2002 although increasing only $1.00 from 2010 to 2011. This was two years after prices had fallen in 2009 as only 88% of $4.00 corn and $10.00 soybeans. The ten averages were $4.04 for corn and $9.90 for soybeans. Current new crop fall of 2014 cash corn price is $3.26 and $10.11 for soybeans in Worthington and since the beginning of 2014 corn has average $3.98 and soybeans $10.86 which is an average of 104% again lower than in 2013. The last time the average price was in this range was during 2007 and 2008 when rents averaged $125 and $147 respectively.

If prices remain at these current levels, how long before rents begin to decline and approach the 2008 averages? If the 2009 price decline is an example of a timeline, it may take up to two years to see average rental rate decline. At current prices with average yields farmers on average could lose over $185 per acre on corn and make a small profit on soybeans based on the average rent of $243 listed for last year.


Wednesday, September 10, 2014

Extension launches 2014 Farm Bill dairy education seminars

09-2014-dairy.jpgUniversity of Minnesota Extension and the Farm Service Agency of the U.S. Department of Agriculture begin a series of free dairy education seminars this month to help farmers make decisions brought about by the 2014 Farm Bill.

Dairy producers have until Nov. 28 to enroll in the Dairy Margin Protection Program. Newly created by the farm bill, the program aims to reduce producers' exposure to catastrophic losses through risk management. The program is voluntary and pays producers when the difference between the national price of milk and the average cost of feed falls below a level selected by the producers.

"The farm bill creates a new opportunity for dairy producers to manage risk. These training sessions will go through various scenarios to help dairy producers make the most appropriate decisions for their operations," said Kevin Klair, University of Minnesota Extension economist and program leader at the university's Center for Farm Financial Management. "This is a new program in which we think most dairy producers should at least enroll at the minimum level and then thoroughly analyze the program and higher coverage options for their operation."

The seminars are offered at 18 locations through early November and will be led by Extension educators and FSA staff; no registration is required. Details are available here (181 K PDF).

The farm bill designates the Extension arm of land-grant universities nationwide as the education provider for producers.

Monday, September 8, 2014

Farm Bill base acre correction deadline fast approaching

In July, farm landowners received a base acre and yield commodity crop history summary letter from their Farm Service Agency (FSA) office. The summary letter lists the landowner's FSA farm planted acres for 2008 through 2012. Landowners have 60 days from the time they received the summary letter to contact the FSA office if there are any discrepancies in the data listed. This information is essential to being able to sign up for the new 2014 Farm Bill programs.

There have been instances in which the summary lists no data or the data is incorrect. If the data is missing or the data listed in the summary letter is incorrect, the landowner should contact the FSA office in the county where the land is located. If the landowner rents the land to a tenant, the tenant can contact the FSA office on the landowner's behalf. Once contacted, the FSA office staff can research and correct the base acre information for the specific FSA farm.

The 60-day deadline is required only if there are errors in the base acres listed in the summary letter. If the data listed is correct, the landowner does not have to do anything. The deadline has nothing to do with the Farm Bill provision for reallocation of base acres and updating FSA yields. Those decision deadlines have not yet been announced.

"Producers and landowners will need to make a series of decisions related to Farm Bill enrollment over the next few months. This is a first step," said Gary Hachfeld, regional Extension educator.

If landowners have questions about the base acre summary letter they received, they should contact the FSA office in the county where land is located. Staff will answer questions and assist with correcting any discrepancies that may exist in the base acre data. For additional information on the 2014 Farm Bill go to www.extension.umn.edu/agriculture/business/farm-bill/.

Friday, September 5, 2014

Limiting Losses can be an Important Grain Marketing Decision

By Don Nitchie, U of M Ag Business Management Extension Educator

We have probably all listened to stories from a neighbor who laments about having sold grain or livestock at a modest profit when a more profitable market price was available earlier or later than their selling date. We probably put on our understanding face and consoled them with some comment like; "we have all been there", "hind-sight is always 20/20" or "at least it was profitable".

Too many folks may have forgotten over the last 7-8 years of strong grain prices especially, that limiting losses in more lean times can prove to be a sound part of your marketing plans. One of the most important lessons learned from experienced, long-time professional commodity traders is that eliminating losing positions before they get worse can be as important as when to price in a increasingly profitable market. If you can do this with good self discipline you may help sustain your capital base and be there for the next opportunity. Limiting losses can prove to have contributed substantially to the long term survival of many farming operations and businesses. Nonetheless, it is very hard to do and not always fun to discuss or admit.

We know in commodity markets like corn and soybeans that market prices are always trying to get back to the industry average break-even cost of production. Sellers sell when prices are above their breakeven costs at desirable profit levels. If those profitable price levels persist, they also bid-up the cost of inputs and expand. Few people, including economists, thought grain prices would remain at the level they have, for the length of time they have, for the last several years. Despite six years of record profitability from 2006-2012 for corn on cash rented land, according to Southwest Minnesota Farm Management Association records back to 1993, there were seven years of losses and fifteen total years where profits were significantly less than $100/acre. Soybeans on cash rented land produced profits above $100/acre in six years going back to 2007, negative returns in only two years back to 1993 and profits of less than $50/acre in twelve of those years.

So for 2014, with grain prices hopefully building a bottom or floor the last several weeks, where should a producer start to take advantage of any price increases and at least limit losses on a portion of their sales? From a management standpoint, some good guidance for setting loss-limiting pricing goals is that if you can cover your variable costs and fixed payments in the short-term, (all direct costs & loan payments), you can get by for a short period of time without covering the economic costs, (non-cash), such as depreciation and unpaid labor and management. Re-check your data and costs to estimate what this number is for your operation. Living expense expectations may have to be adjusted. You may have to evaluate eliminating some capital assets that were acquired in recent years that were nice to have but, are not a necessity or did not add to efficiency and liquidate them for cash.

Above all keep communicating, stay involved socially in your community and in organizations. There is always something to learn from others even if it just perspective on life and fellowship. Things will adjust and probably improve.


Thursday, September 4, 2014

CFFM releases a new, improved web version of FairRent

Land rent negotiations are going to be very challenging this year. At current commodity prices it is going to be very important for producers to know their costs and look at options to limit downside risk. The Center for Farm Financial Management, University of Minnesota has just released a tool to help producers and landlords evaluate alternative land rental arrangements. FairRent for the Web is a new and improved web version of the FairRent desktop software that CFFM has distributed for over 20 years.

The new web version of FairRent includes the option to evaluate seven different flex lease options as well as traditional cash rent and share rental returns. Another improvement is the inclusion of crop insurance in the analysis to show how insurance limits downside risk.

FairRent is free to use. Just sign up at https://fairrent.umn.edu/ and begin creating rental plans. Also, check out FINBIN, a great source of information of crop production costs for your rental plans.


Wednesday, July 9, 2014

Aglease 101.org is a great website for landlords and farmers for lease information

By David Bau, Extension Educator

Ag Lease 101 helps both land owners and land operators learn about alternative lease arrangements and includes sample written lease agreements for several alternatives. Ag Lease 101 was created by and is maintained by the North Central Farm Management Extension Committee. More than half the cropland in the North Central Region of the United States is rented. Rental rate and leasing information is highly sought by both land owners and land operators.

AgLease101.org includes multi-state materials which help land owners and land operators discuss and resolve issues to avoid legal risk. The website also guides both land owners and land operators towards informed and equitable decisions.

Ag Lease 101 was created by a team of economists and attorneys.

Several Lease Publications are available including: Fixed and Flexible Cash Rental Arrangements For Your Farm, Crop Share Rental Arrangements For Your Farm, Pasture Rental Arrangements For Your Farm, Rental Agreements For Farm Buildings and Livestock Facilities, Purchasing and Leasing Farm Equipment and Beef Cow Rental Arrangements For Your Farm.

These documents will help farmers and landlords set up desired terms for the lease agreement.

Several interactive Leases Forms are available including: Cash Farm Lease, Crop-Share Farm Lease, Pasture Lease, Farm Building or Livestock Facility Lease, Farm Machinery Lease for Non-commercial Transactions and Livestock Rental Leases.

These forms are interactive so landlord and farmers can just fill in the blanks and print out final lease form for signatures.

Worksheets are available to help work out lease terms including: Pasture Lease Worksheets and Beef Cow Lease Worksheets.

These worksheets will help farmers and landlords determine the terms for the lease agreement.

Many leases are verbal but a written lease is important so there are no discrepancies at the end of the year in the terms of the lease.

There are several reasons why you should have a written lease for your agricultural operation. Having a written lease is a great discussion tool between land owner and land operator. A written lease provides means for dealing with the unexpected and allows you to flesh out specific details in your agreement.


Tuesday, June 17, 2014

Prevented planting? Evaluating your crop insurance options

Kent Olson, Extension Economist

Again in 2014, spring rains and flooded fields have delayed or prevented planting for many farmers in Minnesota. If farmers have multi-peril crop insurance and have not been able to plant by their crop's final planting date, they do have options.

For most of Minnesota, the final planting date for corn is May 31. For the northern counties it is May 25. 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.

If a farmer was unable to plant corn on or before May31 (in most of Minnesota) because of an insurable cause of loss, the farmer may:
• Plant corn during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date. (But planting corn in Minnesota after the middle of June is not recommended due to potential frost before harvest.)
• Plant corn after the late planting period, that is after June 25. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage. (Again, planting corn after the middle of June is not recommended in Minnesota.)
• Plant soybeans on the land intended for corn before June 25 with full insurance coverage for the soybeans (but no prevented planting payment for corn).
• Not plant a crop and receive a prevented planting payment.
• Plant a cover crop and receive a prevented planting payment.
• After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the corn.


If a farmer is unable to plant soybeans on or before June 10 in Minnesota because of an insurable loss, farmers have a similar set of options. They may:
• Plant soybeans during the 25-day late planting period with the production guarantee being reduced one percent per day for each day planting is delayed after the final planting date.
• Plant soybeans after the late planting period, that is after July 5. The insurance guarantee will be 60%--the same as the insurance guarantee provided for prevented planting coverage.
• Not plant a crop and receive a prevented planting payment.
• Plant a cover crop and receive a prevented planting payment.
• After the late planting period ends, plant the acreage to another crop (second crop) and receive a reduced prevented planting payment for the soybean.


The first step for farmers is to contact their crop insurance agent to review their policy and options before making a decision.

Farmers and their advisers can use a worksheet developed by Iowa State and adapted for Minnesota by Kent Olson to evaluate their options when prevented from planting. The worksheet also helps in the evaluation of whether to replant or not. The worksheet is available here: DelayedplantingevaluatorMinnesota2014.xls

USDA's Risk Management Agency's (RMA) information on final planting dates and other crop insurance information can be found at www.rma.usda.gov/aboutrma/fields/mn_rso/. RMA defines prevented planting as a failure to plant an insured crop with the proper equipment by the final planting date designated in the insurance policy's actuarial documents or during the late planting period, if applicable, due to an insured cause of loss that is general to the surrounding area and that prevents other producers from planting acreage with similar characteristics. More information can be found on RMA's Prevented Planting fact sheet at www.rma.usda.gov/fields/mn_rso/2013/2013preventedplanting.pdf.



Tuesday, June 10, 2014

FINBIN Database Useful Tool

By David Bau, Extension Educator

Farm production records for 2013 have been added to FINBIN website. Farmers who participate in Adult Farm Management programs across Minnesota production records are combined online at the FINBIN website. The FINBIN website found at: www.finbin.umn.edu is full of great reference information going back to 1993. At the FINBIN website, producers can examine what has been taking place with their peers or examine costs for different crops.

At the FINBIN website you are able to generate summary reports, benchmark reports and compare your farm financial results to peer group farms. Under the summary section you are able to generate reports summarizing whole farm results for financial standards, income statements, profitability measures, liquidity measures, balance sheets, statement of cash flow, crop production and marketing summary, household and personal expenses operator and labor information, nonfarm summary and detailed income statement. There are also statewide reports on several different crops and livestock enterprises. You can also generate any of these reports by county or regions if there are enough farmers to produce report where the individual farmer's data can remain anonymous. You can examine the data even further selecting tillage systems, irrigated land and organic production, sometimes on a larger region or for whole state to generate a report.

There is significant information for farmers and landlords to examine at this website. You can examine farmland rental rates by county and looking at fourteen counties in SW Minnesota there was a 10.9 percent increase from 2012 to 2013 from an average rent of $209 in 2012 to an average rent of $232 per acre. The FINBIN data allows the public to examine the various inputs costs like seed, fertilizer, chemical, etc. for various crops including corn, soybeans, hay, wheat, oats, sweet corn, peas, sunflowers, sugar beets and many more. You can also examine cost of production for many livestock operations.

Benchmark reports are the next section on FINBIN website. You can look at whole farm, crop or livestock enterprise by whole state, region or county. You can select a crop and region and generate a report listing the expenses for 2013 or prior years. If you select corn for all of Minnesota, you will see a benchmark report that lists all expenses and incomes for corn on cash rented land across the state broken down into every 10 percent groups. The benchmark report allows farmers to examine individual input cost like fertilizer and list all the costs for 2239 farms across Minnesota from the highest to lowest for expense or lowest to highest for income items.

For fertilizer the median cost is $176.08 per acre for all Minnesota corn farms on cash rented land. The report then groups all the fertilizer cost per acre listing the average for the highest 10% of the fertilizer costs per acre of $276.00 and then the next 10% in the 20% column at $235.86 all the way up to the lowest fertilizer cost of $67.18 per acre in the 100% column. These farms are all across the state and the fertilizer recommendations would vary by expected yield per acre, but this line indicates a wide range in costs from the most expensive at $276 to the lowest at $67.18. Farmers can benchmark their own fertilizer costs per acre to see how they compare. They can choose a county and closer region to see how their input costs compare to other farmers in the local area.

The third section allows for farmers to enter their own financial standard ratios and once again compare their figures to farmers across Minnesota or select a smaller closer region or county. Once again a farmer would be able to determine their own farm's financial health compared to peers.

The FINBIN website is a great resource where farmers and landlords can look at production cost for previous years and compare how their own operation compare to county, regional and statewide data.

Retirement Issues for Farmers

By David Bau, Extension Educator

The average farmer's age continues to increase and many farmers continue to farm well into their retirement years, others semi-retire and others fully retire. How does a farmer reaching retirement age know if they are ready for retirement?

When a farmer is thinking about retiring they should focus on what their goals are. Do they want to stay involved in farming operation, turn over control to next generation or become a landlord? They should also consider what lifestyle they and their spouse want to live in retirement? Do they want to be snowbirds and escape Minnesota winters, or do they want to stay close to farm and family to watch and participate in family activities.

Some basic retirement questions are:

Are you financially ready? Financial planners say you should have at least 8 times your pre-retirement income saved to help increase the odds that you won't outlive your savings during 25 years in retirement. For example, by age 35, it is suggested that you should have saved 1X your current salary, then 3X by 45, and 5X by 55. Your years in retirement and your withdrawal rate have a big impact on this factor. Some plan on living to 100 or 35 years in retirement. No more than 4% asset withdrawal rate is recommended so you do not outlive your retirement assets. But if you are a farmer with a next generation farming, you have to think on an income perspective and not asset liquidation.

What are my sources of retirement income going to be? Social Security and land rent will be a major source of your retirement income. Are you going to continue to take a withdrawal from the farm account each year? Are you going to have assets outside the farming operation to depend on or is the rental income going to be your main source of retirement income?

What are my retirement expenses going to be? Generally your income needs go down in retirement until you enter a nursing home. A general rule of thumb is 80 percent of your preretirement income will be able to maintain your lifestyle in retirement.

How is my health and do I have an affordable health care coverage available? If you semi-retire before reaching full retirement age, you will have to fund your own healthcare until Medicare kicks in and it can be very expensive. With people living longer, health-related problems can increase as you grow older.

Is my retirement lifestyle dependent on the farm income? Is your retirement income dependent on a farm draw and what is the backup plan in case of a bad year or two in farming? It might be wise to have other funds and investments to survive a couple tough years of farming.

What are you going to do with your free time? It may sound simple, but many who retire may get bored without work. Many farmers if working with extended family, can continue to maintain their working lifestyle and maybe just cut back on hours, but if you are quitting farming altogether what will you do with your new found free time?

Examine Long Term Care Options. The odds that you will spend some time in a nursing home are 50% which mean one out of two of us will spend time in a nursing home. Some will self-pay, but many will purchase long term care insurance to help offset the nursing home costs.

Do some planning before retiring to see if you have sufficient assets and income to maintain your quality of life you want in your retirement years.


Friday, June 6, 2014

Look Past Averages When Making Farm Financial Comparisons

By Don Nitchie, U of M Extension Educator, Agricultural Business Management

Most recommended farm financial benchmarks measure financial or profitability relationships. Income as it relates to expenses for instance or assets as related to liabilities. The average of a group of farms is very good at showing a trend of that group of farms in general over time. However, comparing your benchmarks relative to other producers at your stage of career and size or type of operation, maybe even more important. Although financial standards might indicate that a certain benchmark should ideally be a certain number, you may need to stretch the acceptable range for that benchmark depending on if you are earlier in your farming career or later, or possibly by the type of your operation. Below, we look at the Current Ratio measuring Liquidity from the Balance Sheet and the Net Farm Income Ratio measuring Financial Efficiency-as two examples.

Liquidity as measured by your Current Ratio. Liquidity is the ability of your farm business to meet financial obligations as they come due over the current year. The Current Ratio is the ratio of your current farm assets/current farm liabilities. Farm Financial standards suggest this number should not be below 1.1 and anything above 1.7 is a strong position.

In the Southwest Minnesota Farm Business Management Association (SWMFBMA), as an example, the average current ratio has been trending higher until 2012, reaching a high of about 3.25 in 2011. While the average remains at an extremely strong 2.7 at the end of 2013, the trend may have reversed.

SWMFBMA Current Ratio by Size; Gross Farm Income

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The table above shows the Liquidity on average of all SWMFBMA farms was strong in 2003 and was even more so in 2013. It should be noted that larger farms, (over $1 million gross income), had a lower ratio in 2003 of 1.63. In the larger group in 2013, there were 8 farms with gross incomes over $2 million who had an average current ratio of 1.95. While still very strong this was substantially less than the association average of 2.72. The category of $250,000 or less includes part-time and beginning farmers who often have off-farm income and in some cases are trading labor for machinery use or are sharing machinery. Some financial experts do advise, that over the long term, you can have excess working capital and liquidity. Keeping your capital working for you and earning profits from business operations, if production returns are good, maybe the best use of that capital. While maintaining a strong current ratio does provide a safety net for income shocks or reserves for productive asset purchases or expansion. Monitoring ratio benchmarks is all about measuring and managing a balance over time by using them to set goals and adjust.

SWMFBMA Current Ratio by Age of Operator

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The above table demonstrates what is commonly true when looking at current ratios by the age of operator. When you are early in your career and trying to become established, maybe expanding your business and maybe growing a family, you may need to run a current ratio somewhat "leaner" and keep cash working as much as possible. This leaves less room for a financial or market price shock but, if some conservative inventory valuations are used on current assets, improved selling prices and sound margin management can compensate to a point. Early in a career there are many future years yet to produce and improve or correct.

Financial Efficiency as measured by your Net Farm Income Ratio. This group of benchmarks shows how effectively your business uses assets to generate income. They show what the total effects of your production, purchasing, pricing, financing and marketing decisions are on whole farm profitability. One of these, the Net Farm Income ratio, equals Net Farm Income (profit)/Gross Farm income. It shows how much is left after all farm expenses, except unpaid labor and management, are paid. Farm financial standards suggest if only 10% or less of your Gross Income ends up as Net Farm income, you may be vulnerable. If 20% or more of your Gross income remains as Net Farm income you are financially very strong and profitable. Except for 2009, most SWMFBMA farms, in recent years, have been at or above 20% until 2013. Both selling prices and costs impact this measure as it measures whole farm profitability.

SWMFBMA Net Farm Income Ratio by Size; Gross Farm Income

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In the above table showing the net Farm Income ratio by select Gross Income categories, one can make a couple of observations. It does appear at the smaller Gross Income levels, where there are more part-time and beginning farmers; they are able to produce substantial Net Farm Income from a given amount of Gross. They may accomplish this by trading some labor for machine or other asset use, sharing machinery with others and possibly utilizing share-rent options. At the average and larger farm sizes margin management year over year probably becomes more important as significant investments are at risk. This also reduces some opportunities for windfall profits.

SWMFBMA Net Farm Income Ratio by Age of Operator

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In the above table of Net Farm Income Ratio by age of Operator, it is not so clear that there is any identifiable trend other than it was lower in 2013 for everyone. It is encouraging that in the two years selected it is fairly consistent across ages/experience of operators. Hopefully, if true across more years, there seems to be an opportunities to be profitable at all levels.

Sources; SWMFBMA 2003 and 2013 Annual Reports. Farm Financial Scorecard, 2009, University of Vermont Extension & Center for Farm Financial Management @ University of Minnesota.


Wednesday, April 30, 2014

Returns to Corn Farming and Ethanol Processing

by Doug Tiffany, U of M Extension Educator, Agricultural Business Management

As corn farmers fine-tune their equipment and head to the fields, many have concerns about the costs of production and prospects for profitable price levels. Through the winter many have crunched the numbers to determine their corn production costs, including fuels, fertilizer, herbicides, seed, depreciation, anticipated repairs on equipment and land rent. The 2013 crop season was one fraught with production uncertainty in the form of meager soil moisture and continuation of adverse weather conditions; but in the end, a huge crop of corn with price-depressing effects was produced. Over the past long winter, there have been a series of demand-supply reports that have shown increasing levels of corn exports and greater use for ethanol production, offering some increases in prices. For tenants, corn prices still hover close to costs of production, depending on land rent.

Corn markets in the winter months are tempered by the understanding that the Upper Mississippi River is frozen, stopping the flow of corn to our most important export port, New Orleans. Rail movements of corn during the winter took the 2013 corn harvest from the Midwest to the West Coast for export to Asia and to domestic poultry and livestock feeders in SE United States and other areas. Truck traffic moves corn to ethanol plants and Midwest feeders; however, beef cattle on feed are fewer than in past years due to dry pastures and high hay prices over the last few years. With the opening of the Upper Mississippi and the price dampening effects of Southern Hemisphere corn production now understood, attention of the corn trade has shifted to the corn acreage intentions and field conditions faced by Midwest corn farmers. Those two factors will be dominant from this spring to the fall harvest.

In contrast to corn farmers, feeders of livestock, both domestic and foreign, and dairy producers are rejoicing at the cheap corn prices through the winter and going forward. Another group of corn consumers are ethanol plants, who have enjoyed excellent margins since the harvest of 2010. Many corn farmers are also stockholders in ethanol plants, so this is a great time to review the history of profits for corn farmers and corn ethanol plants.

The Agricultural Marketing Research Center (AgMRC) consisting of Don Hofstrand, Robert Wisner and Ann Johanns at Iowa State University has maintained a very useful series of data on costs of production of corn in Iowa as well as modelled profits for typical ethanol plants since 2005 using farmer budgets and ethanol plant techno-economic models. Their data and analysis are regularly displayed in the Renewable Energy Newsletter.

Appearing in Figure 1 below is a graph produced by AgMRC that offers historic perspectives on profits of ethanol plants from 2005 to the present. Here one can see corn at the cost of production for the farmer, not the market price. This graph represents a period of dramatic changes in the ethanol business as that industry expanded rapidly in 2006-08 following the high profits that started at harvest time in 2005 as a consequence of Hurricane Katrina, which bottled up the Mississippi River and shut off corn exports through the Gulf of Mexico. Another effect of this natural disaster was to raise prices of ethanol and other petroleum products after damaging refineries and natural gas infrastructure on the Gulf Coast. Cheap, plentiful corn that couldn't be moved to export markets set the stage, along with for higher ethanol prices, for profits of $1.00 per gallon of ethanol produced for certain periods of time. By assuming the yield of 2.75 gallons of ethanol produced per bushel of corn, profits of $2.75 profit per bushel of corn processed resulted. However, good times rarely last for long in industries based on agricultural commodities.

Ethonol Production Tiffany article.jpg

Excellent profits between $.50 and $1.00 per gallon of ethanol remained until harvest of 2007 corn was delivered. In 2008 high ethanol prices kept ethanol plants very profitable until the financial crisis that started in the fall of 2008. Profits were zero or negative for ethanol plants from the harvest of 2008 until the harvest of 2010. Energy demand and ethanol demand were weak as the general economy staggered through this period that witnessed the bankruptcy and idling of about 10% of installed ethanol capacity in 2009. There were periods of losses in 2010 for ethanol plants before recovery to profitable levels with harvest of the 2010 crop. From the fall of 2010 until the present, margins have generally been positive for ethanol plants, with excellent returns since the harvest of the 2013 crop.

Appearing in Figure 2 is AgMRC's allocation of monthly supply chain profits for corn farmers and ethanol plants from 2005 to the present. The profits of corn farming and ethanol production run counter to each other because corn is by far the largest input in ethanol production. This modeled history shows how farmer investments in financially sound, well-managed ethanol plants can offset times of poor profits or losses in corn production, exactly as value-added enterprises are supposed to perform, overall. Profits in both corn farming and ethanol production require care at each step of each process. Corn farming requires the operator to manage weather, pest and market risks and still produce competitively priced crops. Processing of corn to ethanol requires plant management to manage substantial marketing risks in the procurement of corn and natural gas as well as the sales of ethanol and the by-product feed, distillers dried grains and solubles. Substantial efforts and vigilance are needed to monitor and coordinate performance of enzymes, yeast, centrifuges, evaporators, dryers, and distillation columns at top ethanol plants. Figure 2 confirms the historical wisdom of farmer investments in value-added enterprises that move and process their production toward the consumers.

Allocation of Ethanol Profits Tiffany article.jpg


Tuesday, April 29, 2014

Improve Your Farm Profitability in 2014 and Beyond

By Don Nitchie, U of M Extension Educator, Agricultural Business Management

The decline in median Minnesota Net Farm Incomes for 2013 from 2012 was 78% according to the Center for Farm Financial Management at the University of Minnesota. By enterprise, crop production enterprises decreased most significantly where earnings were 80% lower than in 2012. This was due to much lower inventory values of stored grain and costs that have steadily increased over the last several years. Livestock enterprises also declined significantly.

Crop prices that remained at record levels for several years while costs of production were lower but steadily increasing made for several years of record profits in crop production. Some experts would argue that a period such as we have just gone through can lead to some managers becoming too casual about managing profit margins and preparing for changing times. So, are there profits to be made when the average farm's breakeven costs are at the average market price available today?

MOVING FORWARD-TESTING FUTURE SCENARIOS; Testing the "average" 2013 farm in the Southwest Minnesota Farm Business Management Association (SWMFBMA), it appears there are significant opportunities to improve profit margins, even now. Using the income, cost and asset valuation shocks the authors applied to the average SWMFBMA farm, the financial ability to absorb these shocks is strong for the near term. Liquidity and solvency would remain in very strong positions although profitability would obviously suffer. The caution would be that for the near term on crop farms, operating expenses and term debt payments would demand an increased portion of revenues. Working capital would have to be drawn down to pay these obligations in some cases.

The last page of a new section of the annual report entitled; "The Impact of Projected Profitability and Financial Shocks" contains the results of shocks on the average 2013 farm. The last column titled "2013 Improved Margin Management" demonstrates real opportunity-what we call "good news" back home. Those calculations show that by just improving gross income by +5% (yield and/or selling prices) combined with lowering costs by -5%, together just about doubles the 2014 profitability for the average 2013 association farm. This does not imply that it is the smart choice to cut costs 5% across the board. Be strategic in your choice of which costs to take a hard look at. Those costs that you suspect have not always be returning $1 in return for the last extra $1 of expenditures-should be the first to be reduced. You may need to look hard at 4-5 or more cost items to come up with a 5% overall cost reduction. You may come up with even more. This information can be found in the full report at http://www.cffm.umn.edu/ under the "publication" tab.


Sunday, April 13, 2014

Extension releases info series on 2014 farm bill

Kent Olson, Extension Economist

MINNEAPOLIS/ST. PAUL (April 14, 2014)--A series of fact sheets on the Agricultural Act of 2014 - the farm bill - is available to help the agricultural community prepare for changes introduced by the recently passed federal legislation.

University of Minnesota Extension economist Kent Olson prepared the six-part series, which emphasizes changes in programs and rules affecting crop commodities.

"Passage of the farm bill removes uncertainty about what farm programs will be for the next five years," Olson said. "Farmers will have to make choices, but the rules are different compared to the old farm bill."

Gone are the Average Crop Revenue (ACRE) and Counter-Cyclical Program (CCP). In their place, farmers must decide between new programs: the Price Loss Coverage (PLC) or the county- or individual-based Agriculture Revenue Coverage (ARC).

The fact sheets are on Extension's web site at www.extension.umn.edu/agriculture/business/farm-bill/. They cover details on the new crops programs, including comparative information designed to help farmers choose their best option. Other information focuses on updating payment yields and reallocating base acres.

"There is also an important warning: Farmers have to act. If farmers and landowners fail to make a unanimous election of the program in which they enroll, the bill says that no payments can be made to the farm for the 2014 farm year and the farm will be deemed to have elected PLC for the 2014 through 2018 crop years," Olson notes.

The farm bill information sheets are offered through Extension's Agricultural Business Management program. Olson and his colleagues connect farmers and other industry professionals with University research-based information on farm management and marketing. More information is available at www.extension.umn.edu/agriculture/business/.

For more news from U of M Extension, visit www.extension.umn.edu/news or contact Extension Communications at extnews@umn.edu. University of Minnesota Extension is an equal opportunity educator and employer.

Friday, April 4, 2014

Hedging in Times of Production Uncertainty

Bret Oelke, Regional Extension Educator, Agricultural Business Management

With the recent concern in the swine industry about Porcine Epidemic Diarrhea Virus (PEDV) and record high futures prices for lean hogs at the Chicago Mercantile Exchange (CME), discussions have occurred about how farmers can take advantage of high prices while protecting themselves in case hogs are not be available to market. This issue is not unique to the swine industry; crop producers face the same type of scenario in a drought year. While revenue based crop insurance provides some protection in the case of crop production, livestock producers don't have the luxury of a product exactly like the crop insurance products. There are however, exchange based tools that can be used to provide price risk management without obligating delivery of live hogs as a packers' forward contract would require.

If a hog producer is interested in locking in a future price on a portion of his production he would traditionally either sell a futures contract near the anticipated deliver month or enter into a forward cash contract with a packer. In the current environment, with the risk of disease causing abnormally high mortality for a period of weeks, the producer may not be able to deliver hogs to the packer under the forward contract which in most cases is delivery obligated. Growers need to be aware of the non-delivery penalties that are written into the contract if spelled out. In some cases, the grower would be responsible for acquiring enough hogs from another source and delivering them against his contract, regardless of what has happened to the price since the contract was written. If supplies continue to be tight due to the production problems associated with disease, and the price has increased, a significant market loss would take place.

In the case where the producers used a CME futures contract to manage price risk, delivery is not obligated. Under normal circumstances the grower would sell (or go short) a futures contract and hold that contract until delivery into normal marketing channels were to take place and a cash price for the hogs was offered. At that time, the futures contract would be bought back. If the price had dropped, the grower would realize a gain in the futures market which would be added to the cash price to the marketed hogs. If the price had gone up, the grower would realize a loss in the futures market, but would have realized a higher price in the cash market which would offset the loss in the futures contract. If the hogs were not able to be delivered due to a disease outbreak, the grower could buy back the futures contract and realize a gain if the futures price for lean hogs had dropped. If, however, the futures price had increased, a potentially large loss on the futures contract would result with no offsetting gain from sales of lean hogs.

The potential for large market losses in addition to the already potentially devastating disease losses associated with a PEDV outbreak might cause many hog producers to decide not to hedge future production at record or near record futures prices for lean hogs. There is a strategy that growers can use to manage price risk with limits on the potential market price loss in the event of continued increasing prices if delivery were unable to occur. The grower could purchase put options, which are contracts that give the buyer the right, but not the obligation to sell lean hog futures at the selected strike price. The grower then has the right to sell hogs at the strike price or can allow the put option contract to expire if the price has gone up. This strategy doesn't come without a cost however. Recently July 2014 CME lean hog futures traded at $124.00 per hundred weight. An at the money put option (strike price $124.00) had a premium cost of $5.10 per hundred weight, resulting in an equivalent futures price of $118.90 per hundred weight. This is relatively expensive and may not appeal to many producers. There is another strategy that may work better for hog growers, that is to buy put options as a floor on price and holding them until the pigs have reached a stage of growth where a disease outbreak would not impact them as it would when they were younger. At this point the put options could be bought back, hopefully with a minimal loss, and a futures contract could be sold to hedge the price of the hogs to be marketed later. A packer forward cash contract could also be entered into at this time and the futures contract would be unnecessary.

In times of production uncertainty, farmers and ranchers shouldn't ignore price risk management when we have tools that allow them to manage price risk without obligating delivery in case of production losses.


Thursday, March 27, 2014

Minnesota farm incomes drop dramatically in 2013



MINNEAPOLIS/ST. PAUL (March 27, 2014)--As corn prices declined in the fall of 2013, so did farm incomes for a majority of Minnesota farms, according to a joint analysis conducted by Minnesota State Colleges and Universities (MnSCU) and University of Minnesota Extension.

Overall, net farm income was $41,899 for the median farm. That compares to $189,679 in 2012, a 78 percent decrease. While crop farm incomes plummeted due to declining commodity prices, livestock farms did not fare much better as incomes for dairy, hog and beef farms also declined.

The analysis used data from 2,063 participants in MnSCU farm business management education programs, 111 members of the Southwest Minnesota Farm Business Management Association and 41 participants working with private consultants.

"A decline from 2012 levels should not come as a big surprise. We have to remember where we came from," said Dale Nordquist, Extension economist in the University of Minnesota Center for Farm Financial Management. "2012 was a very profitable year for Minnesota farms. Land rental rates have been catching up with the increased profitability of crop production. Most crop producers were in pretty good shape to handle a down year. The question is how long will these reduced profits last?"

Dramatic drops in crop prices

Corn and soybean prices dropped dramatically. Net return per acre of corn dropped from $377 in 2012 to minus $24 in 2013. Soybeans went from $216 net return per acre in 2012 to $85 in 2013. The price of sugar beets dropped from $65 a ton to $35. Sugar beet producers lost an average of $300 per acre in the Red River Valley and west central Minnesota.

Price was not the only factor that led to reduced profits for crop producers. Yields were down due to a cold, wet spring followed by developing drought conditions in parts of the state. The statewide average yield for corn was 160 bushels per acre compared to 171 in 2012, below the ten-year average of 167 bushels. Soybean yields were down from 46 to 42 bushels per acre. Meanwhile, the cost to grow an acre of corn increased by 10 percent. Land rental rates increased by 15 percent for corn production.

"The full extent of this has not been felt by crop producers yet," said Ron Dvergsten, Farm Business Management (FBM) instructor/FBM program coordinator at Northland Community & Technical College in Thief River Falls. "Cash flow was not a problem through much of the year as producers sold 2012 crop at high prices. Most of the decrease shows up in the reduced value of inventories at the end of the year. That means cash flows for 2014 are really tight. At current prices, many producers will lose money on cash rented land in the coming year."

Feed factors reduce livestock profits
Livestock farms faced high feed costs for much of the year; feed prices did not decline substantially until harvest. While the price of milk, pork and beef were all up from the previous year, the combination of high feed costs and lower values of feed inventories reduced livestock farm profits. Milk sold for $20.34 per hundredweight compared to $19.63 in 2012. With a cost of production of $19.92, dairy farmers made 42 cents on every hundred pounds produced or about 5 cents per gallon on average. Market hog prices increased from $63 per hundred pounds in 2012 to $66 in 2013. Market beef prices increased from $122 per hundredweight in 2012 to $125 in 2013.

Prospects for livestock producers are better for the coming year. After several years of high feed costs that benefited crop producers, the tables will likely be turned in 2014.

"Prices are projected to be strong for all major livestock sectors this year," Nordquist said. "And feed costs will be much lower so livestock producers should have a very good year."

The one wildcard for pork producers is the spread of porcine epidemic diarrhea virus (PEDV). While the virus is not transferred to humans, it can be devastating to pig herds and cause severe financial consequences.

2014: Tighter margins ahead
Crop producers will see much tighter margins in 2014.

"The good thing is that most crop producers come in to the year with very strong working capital positions," Dvergsten said. "Another plus is that fertilizer prices are down. But other costs, including land rent, are projected to increase. It is likely that many crop producers will have to use some of their working capital to cover losses in the coming year."

The statewide results are compiled by the Center for Farm Financial Management into the FINBIN database which can be queried at www.finbin.umn.edu. 2013 regional reports and reports from previous years can be found on the MnSCU Farm Business Management website at www.fbm.mnscu.edu.

About this report: In farm business management programs, producers learn how to maintain, interpret and use quality business records to develop business plans, make key decisions and execute marketing plans throughout the year. The producer's personalized annual whole business and enterprise analyses, which become the "textbooks" used for making business decisions throughout the year, provided the source data for the analysis.

University of Minnesota Extension is a partnership between the university and federal, state and county governments to provide scientific knowledge and expertise to the public in food and agriculture, communities, environment, youth and families.

Minnesota State Colleges and Universities system includes 24 two-year community and technical colleges and seven state universities serving more than 430,000 students. It is the fifth-largest higher education system of its kind in the United States.

The Minnesota State Colleges and Universities system and the University of Minnesota are Equal Opportunity employers and educators. This document can be made available in alternative formats upon request.


Wednesday, March 19, 2014

Outlook for 2014 and beyond

By David Bau, Extension Educator
University of Minnesota Extension Service

Each year I complete an Operator's Cash Rent Worksheet. This examines what a farm operator can afford to pay the landlord for rent after covering the production costs and labor. For the 2014 crop, examples on the worksheet indicate production costs of $656 per acre of corn and $353 for soybeans. Compared with corn yields of 175 bushels of corn priced at $4.50 per bushel and 46 bushels of soybeans at $11.50 per bushel, a farmer would have $154 left to pay toward land costs in a 50-50 corn soybean crop rotation. Currently the 2014 new crop cash corn prices are at $4.19 for corn and $11.14 for soybeans in Worthington, applying these prices in worksheet, the rent would calculate at $118 per acre.

For farmers to pay rents above $200 per acre as is happening across much of Southern Minnesota, they will need the corresponding yields and price remain at these high levels. There are much higher rents being paid for 2014 and higher rents will necessitate commodity prices increasing to 2013 prices. Cash fall prices offered for the 2014 crop are over $2.00 lower in soybeans when you compare nearby cash prices for the 2013 beans. For corn nearby cash prices and the forward contract price offered for 2014 corn are almost the same. On top of this, Southwestern Minnesota is considered in a moderate drought. We were dry at this time last year before heavy spring rains restored subsoil moisture, so spring rains will be necessary again to produce normal yields in 2014.

Farmers in the three marketing groups I work with are challenged to implement their 2014 pre-harvest marketing plans with prices available below their breakeven prices. Historically pre-harvest marketing would be a good decision, and last year it would have work out well, but prices fell throughout the year after the revenue insurance prices were set at the end of February. The prices for November 2014 soybeans and December 2014 corn have not been at profitable price levels that would cover projected expenses since the 2013 harvest. Current prices offered are well below the breakeven prices necessary to make pre-harvest sales. If they would market their crops at current price they would be locking in a loss. The short crop in 2012 produced a long downward tail as the record 2013 corn crop came to market. Soybeans supplies are still relatively tight so 2013 soybeans prices have not fallen as dramatically and the March 2014 bean contract is close to the high price. But the November 2014 prices have steadily declined.

One year ago cash prices were above $7.00 corn and $14.50 for soybeans while the fall 2013 cash forward prices, were close to $5.00 for corn and $12.00 for soybeans. So it was hard for farmers to sell any of the 2013 crop at prices lower by $2.00 or more per bushel. At the same time 2014 corn was 10 to 15 cents lower and soybeans were 40 to 50 cents lower. With the long tail, marketing at these much lower prices would have been a good decision in hindsight.

Current prices are below prices necessary to cover 2014 input costs for corn and soybeans. The average for three marketing groups is $5.05 for corn and $12.36 for soybeans. The weather over the next few months will have a dramatic impact on prices, if we stay dry and get a smaller crop prices should go up significantly, but we receive rain and have a normal crop, prices will remain at these lower unprofitable levels.

Another worksheet I complete each year is the Landowner's Cash Rent Worksheet. For 2014, I used a value of the farmland of $7,000 and included a return of 3 percent on this value and added the cost of property taxes and liability insurance and divided by the tillable acres to determine a value of $241 per acre rent. I complete a survey of bare farmland sales for 14 southwestern Minnesota counties and in the first six months of 2013 average sales prices were $8,466. The highest sales listed were over $15,000 per acre. I utilized the Land Economics website which lists the average sales price for all agricultural land sold in 33 Southern Minnesota counties was $4,274 in 2010, $4,826 in 2011 and $5,825 in 2012. Interest rates are near all-time lows and land values are at all time highs so that is why I used a 3% rate of return.

Utilizing both of these worksheets will help determine what fair land rental rates are. Average actual cash rents reported in 14 Southern Minnesota Counties increased from $149 in 2009 to $160 in 2010 and $177 in 2011 and $209 in 2012 an increase of 18 percent from 2011 to 2012. So what will happen in 2014? Farmland rents across Minnesota increased by 18% from 2012 to 2013 in a survey completed by Minnesota Agricultural Statistic Service. For the last five years rents in Minnesota have been increasing at a rate of 10.8% each year and in Southwest Minnesota farmland rental rates increased at 12.1% per year in the FINBIN database. If you applied a 12.1% increase to 2012 Southwest average of $209, the 2013 rent would be $234. If you applied 12.1% again for 2014, the average rent would increase to $263 in 2014. The lowest average 2014 projected rent is $211 per acre in Lincoln County with the highest average of $319 in Martin County.

If a farmer wants to try to share some of risk with the landlord and not pay a large cash rent rate, a flexible agreement may be appropriate. There are many ways to determine a flexible rental agreement. The 2014 crop year has yet to be planted, but negotiations take place through the year in Minnesota and are needed to determine a fair cropland rental rate. The trend in commodity prices is that corn futures prices are below $5.00 through 2017 and decline each year for soybeans reaching a low of $10.69. For rents to continue to increase, future year commodity prices will have to increase, yields will have to increase or input costs will have to go down or some combination of these variables.

The 2014 Farm Resource Guide is available for a fee, it includes flexible rental agreement information and the worksheets referenced in this article. If you would like a copy please e-mail me at bauxx003@umn.edu or give me a call at 507-372-3900 Ext. 3906 and let me know what format (paper, cd or email) you would like to receive the Farm Resource Guide in.

Tuesday, March 4, 2014

When profit margins are tight it is time to evaluate crop input costs

By Don Nitchie, University of Minnesota Extension Educator, Ag and Business Management, March 2014.

It is important to continually evaluate production costs for crop and livestock production. With recent lower crop prices than we have seen in several years and historically high input costs, this will be much more important than ever. If you have available data to benchmark your major input costs to your peer farms, you will realize there are significant opportunities to improve your profit margin based on the variability of primary input costs from farm to farm.

Three major direct costs that have grown to make up major portions of current corn production budgets should be scrutinized if crop profit margins remain slim or negative in the next few years. There is enough variability among producers and field to field, that there are opportunities to be capitalized on. Yes, there may be a few cases were the cost data is skewed by some unique arrangement for sharing costs or not all paid for in cash but, major trends and significant variability are apparent. To illustrate this point 2012 data from FINBIN for the SW Minnesota Farm Business Management Association (SWMFBMA) is utilized. The 2013 data will be available in March, 2014.

Seed. While there are many new seed technologies and trait advantages on the market, there was significant variation from the low profit farms to the high profit farms in the SWMFBMA in 2012. These new technologies are impressive and probably some are yet to be fully proven in a production environment. Seed costs ranged from 17% over the median (middle) field for low profit farms to 24% under the median for higher profit farms representing a range of $46.00/acre. If greater seed expenses resulted in much greater cost savings, i.e. chemicals, or yield gains-then the cost difference was worth it. Under less generous profit margins, the return for each added dollar in seed cost deserves examination to see if it produces more than one dollar in added returns.

Fertilizer. There are several producers with access to ready supplies of hog manure who have reduced their commercial fertilizer costs--although we also see some producers paying for the fertilizer value of hog, dairy or beef feedlot manure. So, in some cases this may not be readily apparent in FINBIN data but, this will continue to be refined over time. Regardless, during 2012 fertilizer expenditures attributed to corn varied from a high of 49% over the median for low profit farms to 43% under the median farm, for higher profit farms. This represented a range of expenditures of $139.00/acre. Certainly fertilizer pricing opportunities vary which can greatly impact final costs per acre. In 2008-09 this was definitely the case. If ever there was a time to; soil test and only apply agronomic rates as well as consider using variable rates based on soil productivities and precision placement -the time is probably here. Again, the benefits of a practice or fertilizer technology need to outweigh the costs.

Cash Rents. Much is always written, studied and talked about on this input cost. We all have heard the stories about extremes beyond the recorded data. It is a continual challenge to achieve or maintain an adequate or expanded land base for a desired size of operation. Despite the emotions and feelings often attached to land, we do have to sometimes look hard at the cost as if it as just another input cost. In that sense, we can compare one acre to another but, to us individually at our specific location, not all acres are the same. First they vary tremendously by soil productivities, drainage, location and field efficiencies or size and shape for machine operations. With recent increases in land prices and rents, all of these productivity factors deserve a hard look on a farm by farm basis when profit margins are tight. It is understood, that some family farms will be farmed for a long time, regardless of current rental rates. However, in 2012 Rents paid varied from 73% greater than the median for low profit farms to 66% less than the median for high profit farms. This represented a range of $275.00/acre. Certainly, there are issues besides price and soil productivity often included in certain rent negotiations over several years. Hopefully, relationships do and should matter. However, economically for your cost of production and profitability situation; cash rent levels, soil productivity, drainage and location make a huge difference. For a cash rent level to remain viable it has to produce profits for the tenant and landlord over the long haul. If not and rent levels do not adjust, there will probably be a frequent turnover in tenants and maybe even owners.

Seed, Fertilizer and Rent are three major annual direct costs of corn production which vary significantly from farm to farm. This variability represents management opportunity from benchmarking comparisons. Re-visit and scrutinize your production systems, practices and the efficacy of products available and sold to you. Work hard to make each dollar spent earn more than one dollar in return. Often, it is not just scoring a "homerun" in a single big cost item or a high selling price that makes a producer successful over the long run. It is usually doing a little better in numerous cost, selling, yield and management categories. So, while you are at it, review benchmarks even beyond the big 3-5 direct input costs. You may discover several that could add up to numerous savings with no loss in production. Compare your data using FINBIN data at the Center for Farm Financial Management at the University of Minnesota.

Tuesday, February 4, 2014

An Initial Assessment of the Impact of the New Farm Bill on Crop Farmers' Decisions

Kent Olson, Extension Economist

The "Agricultural Act of 2014," commonly called the farm bill, changes many programs and rules for farmers. Farmers need to make a crucial one-time, irrevocable election under the crop commodity programs. Farmers also have an opportunity to update their base acres and their base yields.

In the sections below, I summarize the new programs and the impending decisions for Minnesota farmers based on my reading of the bill in February. However, please note that the final rules and interpretations will come from the USDA, and these may differ from my current interpretation.

What's gone!

Several previous programs are dropped in the new farm bill. Direct payments are gone (except for a declining amount for cotton growers). The ACRE and DCP programs are repealed. While the new programs may look similar to these, the rules are different: simpler in some ways, more complicated in other ways.

Choices for crop commodity programs

Under the new farm bill, crop farmers need to make a one-time, irrevocable decision to elect either the Price Loss Coverage (PLC) program or the Agricultural Risk Coverage (ARC) program. If a farmer elects the ARC program, they will need to choose between county coverage and individual farm coverage. Farmers can make the PLC and ARC-county decision crop by crop, and coverage is by individual crop. But, for the ARC individual farm coverage, all covered commodities on all the farmer's farms need to be enrolled, and coverage is for losses over all covered commodities not crop by crop.

And here's a warning. If all the producers on a farm fail to make a unanimous election of which program to enroll in, the bill says the Secretary of Agriculture may not make any payments to that farm for the 2014 crop year, and the farm will be deemed to have elected PLC for the 2015 through 2018 crop years.

Price Loss Coverage (PLC)

The Price Loss Coverage (PLC) program will make payments to farmers if a covered commodity's national average marketing year price is below its reference price (the new term instead of target price). Payments will be made on a crop by crop basis. For corn the reference price is $3.70 per bushel; for soybeans, $8.40; for wheat, $5.50. (Marketing years are October thru September for corn, September thru August for soybeans, and July thru June for wheat.) Under PLC, payments to farmers are made on the basis of the difference between the national average marketing year price and the reference price, the farmer's payment yield, and the farmer's payment acres. Farmers have a one-time opportunity to update payment yields from 93.5% of their 1998-2001 average yields to 90% of their 2009-2012 yields. If the 2009-2012 yield is 3.9% higher (0.935/0.9) than the 1998-2001 average, the best choice is probably to update. Payment acres will be 85% of either their current base acres (typically the average of their 1998-2001 acreages) or farmers can choose to reallocate their current base acre total according to their mix of crops in 2009-2012.

Agriculture Risk Coverage (ARC) - county coverage

In the Agriculture Risk Coverage (ARC) program, farmers can choose between county coverage and individual farm coverage. If either ARC option is chosen, the farm is not eligible for the Supplemental Coverage Option (SCO) under the crop insurance options in the farm bill.

In the county coverage option, crop revenue is estimated using average county yields. A payment is made if the ARC-county actual crop revenue is less than the ARC-county revenue guarantee. The ARC-county actual crop revenue is the actual county yield times the maximum of the national marketing year price or the loan rate specified in the farm bill. (The loan rate is $1.95 per bushel for corn, $5.00 for soybeans, and $2.94 for wheat.) The guarantee under the ARC-county coverage is 86% of the ARC-county benchmark revenue. The ARC-county benchmark revenue is the product of the most recent 5-year Olympic-average county yield and the most recent 5-year Olympic-average marketing year price. (The Olympic average is calculated by dropping the highest and lowest yield or price from the most recent 5-years and calculating the average based on the remaining 3 yields or prices.) Under the ARC-county choice, the payment rate per acre is the difference between the ARC-county guarantee and the actual revenue, but the payment rate cannot exceed 10% of the benchmark revenue. The ARC-county payment for a covered commodity is the ARC-county payment rate for that commodity times 85% of the farm's base acres for that commodity.

Agriculture Risk Coverage (ARC) - individual farm coverage

Within the ARC program, a farmer can choose individual farm coverage instead of county coverage (as described above). The ARC-farm coverage is based on all the covered commodities on the farm, not crop by crop.

Under ARC-farm coverage, a payment is made if the actual revenue from all covered commodities is less than the ARC-farm guarantee. The actual revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price, summed over all covered commodities and divided by the farm's planted acreage that year. The ARC-farm guarantee is 86% of the ARC-farm benchmark revenue. The ARC-farm benchmark revenue is the most recent 5-year Olympic-average of the revenue from all covered commodities weighted by the ratio of the acreage planted to a covered commodity and the total acreage of all covered commodities. The revenue for each year is determined by the farm's yield multiplied by the maximum of the national marketing year price and the crop's reference price. The ARC-farm payment rate per acre is the difference between the ARC-farm guarantee and the ARC-farm actual revenue, but the payment rate cannot exceed 10% of the ARC-farm benchmark revenue. Under the ARC individual farm coverage program, the payment for a farm is the ARC-farm payment rate for that farm times 65% of the farm's total base acres (compared to 85% for the county based coverage).

Payment and adjusted gross income (AGI) limits

The total amount of payments received, directly or indirectly, by a person or legal entity (except a joint venture or general partnership) for any crop year under the PLC and ARC programs and as marketing loan gains of loan deficiency payments (other than for peanuts) may not exceed $125,000.

A person or legal entity with a 3-year average adjusted gross income (AGI) over $900,000 is not eligible to receive any benefit from PLC and ARC programs, supplemental agricultural disaster assistance programs (for livestock and trees), marketing loan gains, loan deficiency payments, conservation programs (starting in 2015), and some other payments (from previous bills). AGI includes both farm and nonfarm income.

An early, initial assessment

The requirement to make a one-time, irrevocable election between PLC and ARC is a 5-year decision full of many uncertainties. An initial analysis for a few example farms in Minnesota shows that the ARC county coverage option is the best option for the 2014 crop year given current information. (This quick analysis does not include the option of adding SCO and other new crop insurance options starting in 2015.)

The reference prices under PLC ($3.70 for corn, $8.40 for soybeans, and $5.50 for wheat) are low compared to recent prices especially prices received in 2011 and 2012. For 2014, the markets seem to indicate a very low chance of a PLC payment for corn, a bit higher chance for soybeans, and perhaps a higher chance for wheat (but, in early February, less than 40%). The marketing years for 2015-2018 are full of more uncertainty. Unless market developments show an increase in worldwide production and thus decay in prices in the future in the weeks leading up to the as yet unannounced election deadline, the PLC option does not look like a viable option for Minnesota farmers.

The ARC individual coverage option appears less desirable due to the revenue loss being determined over all covered commodities and the payment calculated using 65% of base acres (versus 85% for the county option). A farmer will need to consider how variability in weather affects each of his or her crops differently. If the yields for different crops move together and are more variable than the county, then individual coverage may be the best choice. If crop yields do not move together and the farm's yield pattern seem to match the county yield variation pattern, then the county based ARC may be the best choice.

With so much uncertainty regarding the next 5 years (which is normal for any 5 years into the future), let's take a general view on the choice. PLC covers price drops and not yield losses. ARC covers revenue losses, that is, both price and yield changes. So, ARC is a more comprehensive program. If prices drop in a future year, this is likely due to higher total production so revenue will probably not drop as much as prices. If yields drop across a wide swath of the production area, prices will likely rise, so revenue won't drop as much as overall yields drop. If my farm and my county were to suffer a yield loss but most of the country does not suffer a yield loss, prices would likely not drop as much as my yield drops, so my revenue will drop. In this case, PLC would not make a payment, but ARC likely would make a payment. So for Minnesota, should a farmer bet on price changes or aim to protect revenue?

As the USDA finalizes the rules and with more time to fine tune these estimates and include more years as well as the SCO option starting in 2015, this initial assessment may need to be altered. But this is my view at this early date.


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