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Extension > Agricultural Business Management News > March 2014

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.

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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.

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