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Extension > Agricultural Business Management News > April 2016

Monday, April 25, 2016

Strategies for managing your farm's profitability

By Betty Berning, Extension Educator

One of the most common questions I receive from dairy farmers is, “What is the price of milk going to do?”  A close runner-up is, “What should I do given the current milk price?”  Finally, in times like this, the question is often, “When will it get better?”

There are no easy answers to any of these questions.  I always joke that I don’t have a crystal ball and I am not omniscient.  And while the price of milk certainly matters, which is revenue, so does a farmer’s cost of production, or expenses.  

First, I’d like to address the question of “What is the price of milk going to do?”  Two things establish a price: supply and demand.  Simply put, if I supply the market with more product than it is demanding, prices fall.  If I produce less than the market demands, my price increases.  Supply and demand are dynamic, which means they can change.  For example, if dairy exports increase, this causes demand for dairy to increase.  Similarly, if there is poor weather in Ireland and feedstuffs are in short supply, milk supply may drop, and price may increase.

So what is driving the market right now?  Just like I mentioned above, supply and demand drive markets.  In 2015, China imported less dairy products and this drove markets lower.  Chinese imports have picked up in 2016 and it remains to be seen if this trend will continue for the duration of this year.  Additionally, milk supplies have been strong both domestically and internationally. With demand down and supply increasing, this causes prices to drop. You may be thinking, “Does this mean farms need to go out of business in order to regulate supply and demand?”  Not necessarily.  That’s only one side of the equation.  If China, or anywhere else for that matter, continues to consume more dairy products, then demand will balance out the supply.  And often times it is an adjustment of both supply and demand to bring prices back to equilibrium.
 
Now I’d like to turn the question of “What should I do?”  First and foremost, know your cost of production.  That is, how much money does it take for you to make a hundredweight of milk? Carefully examine your expenses.  Are there areas where you are overspending?  Are there surprises in your budget?  Do you have some “nice to have” items that you might be able to cut?  You can use FinBin data (found at www.finbin.umn.edu) to compare other farms’ costs to your own.  Sometimes comparing your operation to another can provide new ideas or opportunities.  Be sure to cut costs wisely.  Cutting feed costs or other items associated with a cow’s milk production will lead to a decrease in your income! 

Second, be sure to talk to your lender, if you have one.  Make sure you are on the same page.  Your lender can be a very important partner in managing costs.  There may be an opportunity to restructure debt or adjust payments.

Third, look for ways to maximize your assets.  Are you breeding cows back quickly?  Do you have equipment that you could rent out or share with another producers?  What are you doing to ensure optimal cow health?

Finally, create a risk management plan.  There may not be much you can do about today’s milk price, but risk management is a way for you to proactively manage your future milk price.  If you know your cost of production, you can determine your “break even” milk price.  This becomes your price floor or minimum price you’ll accept for your milk. You can create a plan for how you will market your milk in future months based on this “break even” price.   Additionally, you can go a step further and also lock in prices for your feed and energy inputs.  Risk management is NOT about beating the markets.  It IS about creating a plan that allows you to escape some of the volatility that exists in the dairy markets.  Furthermore, it allows you to establish a margin level that works on your farm, so you can ensure profitability.

To answer my last question, “when will it get better?”, I will say it’s hard to know.  It comes down to- you guessed it- supply and demand.  A drought and hot temperatures in the US could cause milk supply to decline and push prices back up.  Likewise, continued renewed buying from Asian markets could cause demand to surge.  Conversely, strong European production or a decline in demand from overseas markets could cause low prices to stay longer.  It is important to take a little time each day or week to read up on market factors and understand what is driving supply and demand for dairy.  


Times of low prices are not easy for any dairy farmer.  Take it one day at a time.  Do your best to proactively manage your finances.  It won’t change the milk price, but it will give you some control and hopefully options to help you survive in difficult times.

Friday, April 8, 2016

Trends in Farmland Rental Rates

By David Bau, Extension Educator

Recently I attended a meeting discussing the results of Southwest Minnesota Adult Farm Management in 2015. The numbers indicated the declining profits even with excellent yields in 2015. The group of farmers average rents declined by 6.7% from 2014 to 2015. Rents declined from an average of $239 in 2014 to an average of $223 in 2015. The compares to USDA rent figures published in September 2015 by the Minnesota Agricultural Statistic Service stating Minnesota statewide average rent declined by 2.7 percent from $185 in 2014 to $180 in 2015.

So what will happen with rents in 2016? The trend should again be down with both corn and soybean prices continuing to be lower than the previous year as indicated on chart below. Average prices for corn and soybean in Worthington, Minnesota for 2006 through 2015 are listed along with the first three months for 2016. This compared to the average rents for 14 counties in SW Minnesota including Brown, Cottonwood, Jackson, Lincoln, Lyon, Martin, Murray, Nicollet, Nobles, Pipestone, Redwood, Rock, Sibley and Watonwan.


The table shows the dramatic increase in corn and soybean prices from 2006 through 2013 and then declines every year since. Starting at left of table column two lists average cash price for corn, column three lists the percent of the price compared to 2007, column 4 is the yearly average soybean price, column 5 is price as percent of 2007 price. Column 6 is the average rent in 14 SW Minnesota counties, column 7 is the percent compared to 2007 rents, and column 8 listed the average of the corn and soybean price percentages.

Examining columns 7 and 8, average cash prices for corn and soybeans as a percent of 2007 peaked in 2012 and has been declining since while rents have followed the price trends with a two year lag before they started declining in 2015. Column 9 indicates what average rents would be using 2007 corn and soybean prices as a benchmark and applying the percent change to 2007 to determine an average rental rate.  As you can see, rents would be much lower than current projected rents for 2016 and rents since 2007 with only 2011 rents estimated higher than actual average rents in column 6.

There are several factors that determine rental rates beyond corn and soybean prices such as contract length, property taxes, market place competition, and previous year’s profitability. With corn and soybeans as the major crops grown in Minnesota, as these commodity prices change has a direct and dramatic effect on profits, rate of return to land and rents. 

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