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Extension > Agricultural Business Management News > September 2015

Wednesday, September 23, 2015

Crunching Corn and Soybean Budgets 2016

By David Bau, Extension Educator

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

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

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

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

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

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

Tuesday, September 22, 2015

Sequestration and the Effect on Farm Program Payments

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

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

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

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

Monday, September 14, 2015

Farm Program Enrollment - One Last Step

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

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

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

Wednesday, September 2, 2015

Set your strategy for 2016 Margin Protection Program

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

Table 1. Premium rates for MPP

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

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