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Extension > Agricultural Business Management News > August 2016

Monday, August 29, 2016

A Positive Attitude is an Asset -- Take Care of Yours and Watch Out for Others in These Challenging Economic Times

by Don Nitchie, Extension Educator

We believe the best asset that successful farm mangers have is a positive attitude – especially in the face of less profitable times.  We think a big part of this is due to fact that successful farmers are comfortable analyzing their finances and acknowledging their strengths and weaknesses. These producers recognize early warning signals from their records and analysis, so they are prepared for a potential downturn or negative situation.

Despite being proactive managers who maintain a positive attitude, everyone is experiencing some level of anxiety or stress under the current farm market conditions. As a result, you or your business partners may be more self-deprecating, critical of family members, self-doubting, or just generally feeling a higher than normal level of stress or anxiety. It is nothing to be ashamed of, but it also should not be ignored. It is important that you, as family members, friends and business partners, watch for any major attitude changes or signals of depression in both yourselves and your associates.

Having come from the historic profitability period of 2006-2012, there are more than a few folks who have not yet re-aligned their thinking to what many say is a return to the more typical, long-term competitive environment in agriculture.  Regardless, it probably feels like a dramatic decline, as the record profit period lasted longer and was higher than any in history. A positive outlook combined with a proactive management strategy will help you get through. Keep in mind that small improvements add up when dealing with some of the following stress-inducing situations associated with the current conditions:

Your Income Taxes are High. Some late career producers are trying to transition to retirement/to the next generation and are now paying some of the biggest income taxes of their lives, even in the face of low current year prices and profits. This occurs because over the years much of their profits were deferred forward and invested in farming capital assets, which now need to be liquidated or transferred. It is not fun but is a mathematical and accounting reality of a successful farming career. At best, it can be moderated by spreading the deferred tax burden over several years.

Your Financial Ratios Weakened. This is not ideal, but it is a key part of managing to have strong indicators to begin with — to serve as shock absorbers in rougher times. You, of course, need to recognize when they decline too much and determine what actions will put them back in balance. You need to measure, monitor and use these ratios to be prepared for action if needed. If you wait for someone else (your lender) to point out a problem, it might be too late and probably will limit your options to fix the problem.

Your Marketing Prices are Low. Welcome to the party. Some of the best marketers seldom get the highest price. They make numerous sales at less than the high price of the marketing year. Forget about waiting for one price and then selling it all. Everyone may luck out once in a career, but this approach leads to disaster too often. Today’s market, where prices are not often offered above breakeven, is very challenging. If you succeed in averaging a sales price in the upper half of the year, it would be extremely good. Try hard to sell increasing amounts as prices increase and do not decrease sales quantities as prices go higher — mathematically this will increase your odds of success for the year.

Your Costs are high. When prices were high, cost structures that were too high did not have as much of an impact. When prices are low, cost structures really make a difference. Can you make a difference on your cost structure? Yes, you can and our members have been adjusting. The average cost to produce an acre of corn and soybeans decreased in the SWMFBMA for both 2014 & 2015. This occurred as the result of small decreases in expenditures in each of the major inputs. If your expenditures are high in a certain category, you need to verify it is for very good reasons. You might identify expenditures where you need to reexamine if your standard practices are really paying off. Small changes can add up to big savings in average costs.

When facing today’s stressors, be mindful of your own attitude and outlook. Also, be mindful of business partners, family members and neighbors also. Encourage yourself and others to move on from past decisions or actions that were not ideal. Let it go. It is good to review and learn lessons from past experiences, but those past decisions/actions cannot be changed. Stay engaged with your family and community. Compliment yourself and others for small achievements. Take steps forward. While it is good to plan ahead, don’t over-plan or stress about the future. You can only live life and your farming career a day at a time.

If you or someone you are concerned about could use some additional help or at least some direction to available resources—the following U of M Extension Families program site has several resources listed at: http://www.extension.umn.edu/family/supportingfarm-families/


Wednesday, August 24, 2016

Does the Dairy MPP pay?

by Betty Berning
Extension Educator


In early August, the United States Department of Agriculture published the milk margin for May/June 2016 and it was $5.76.  The calculated USDA milk margin is used in the Margin Protection Program for Dairy (MPP) to determine at what levels (and if) this program will make a pay-out.
MPP is an insurance like program for dairy producers that was a product of the 2014 Farm Bill.  Dairy producers select a margin level that they’d like to protect on their milk sales.  Farmers can choose to protect margins from $4-$8/cwt.  The $4/cwt level costs $100 to cover administrative fees.  From the $4/cwt level, coverage levels increase by $0.50 increment (e.g. $4.50/cwt, $5.00/cwt, etc) to $8/cwt.  As the margin levels increase premiums also increase.
Table 1 shows the payout at each level for the May-June period.  Everyone with $6.00/cwt or more coverage received a payout.  This is the first time the program has paid at a $7.00/cwt or lower level.  There were a couple payments in 2015 at the $8.00/cwt level and a payout in Mar-pril 2016 at both the $8 and $7.50 coverage levels.  The May-June payout announcement last week is the largest in the programs two-year history.  It is indicative of the tight margins many dairy producers are experiencing. 
Table 1:  May-June MPP Pay-out at varying coverage levels
Coverage Level per cwt
Pay out for May-Jun per cwt
$4.00
$0.00
$4.50
$0.00
$5.00
$0.00
$5.50
$0.00
$6.00
$0.24
$6.50
$0.76
$7.00
$1.24
$7.50
$1.76
$8.00
$2.24
Some producers have questioned if MPP has been worth the cost of the premiums.  Let’s look at two farms:  a farm with a production history of 2,000,000 lbs (~80 cows) and a farm with a production history of 5,000,000 lbs (~220 cows).  If you recall, premiums are calculated from Tier 1 for covered production history up to 4 million pounds and from Tier 2 for covered production history exceeding 4 million pounds.  Tier 1 premiums receive a greater subsidy than do Tier 2 premiums.  In these two scenarios, we’ll assume that the farms signed up at the 90% coverage level and that they received the two annual production bumps.
Table 2:  2016 Net Gain (Loss) from MPP at varying coverage levels (2 million lb production history)
Coverage Level per cwt
Premiums
Payout
Net Gain (Loss)
$4.00
$100
$0
(-$100)
$4.50
$286
$0
(-$286)
$5.00
$566
$0
(-$566)
$5.50
$845
$0
(-$845)
$6.00
$1,125
$737
(-$388)
$6.50
$1,777
$2,289
$512
$7.00
$4,143
$3,842
(-$301)
$7.50
$5,689
$6,485
$796
$8.00
$8,949
$9,590
$641

Table 2 shows the net gain or loss using the herd with a 2,000,000 lb production history.  The far right column shows what this hypothetical farm would’ve netted out. Notice that some producers have made up the cost of their premium. Farms that opted for $6.50, $7.50, or $8/cwt coverage have come out ahead.  Farms that elected a different coverage level have not made up the cost of premiums.    What is important to note here is the amount of gains/losses.  Losses range from -$845 to gains of $796.  This is not a very wide range when we put this into the big picture of this farm’s finances.  A loss of ~$850, although not pleasant, is not insurmountable; nor does a gain of `$800 make for a banner year. 
For the bigger operation, production history of 5,000,000 lbs, look at Table 3. You can see that with the smaller premium subsidy, the losses are larger.  $6.50/cwt is the only level that has had a gain, $116, which is nominal.  $7.00/cwt experiences the greatest loss of $4,634. 
Table 3 2016 Net Gain (Loss) from MPP at varying coverage levels (5 million lb production history)
Coverage Level per cwt
Premiums
Payout
Net Gain (Loss)
$4.00
$100
$0
(-$100)
$4.50
$632
$0
(-$632)
$5.00
$1,363
$0
(-$1,363)
$5.50
$2,358
$0
(-$2,358)
$6.00
$3,319
$1,842
(-$1,477)
$6.50
$5,607
$5,723
$116
$7.00
$14,238
$9,604
(-$4,634)
$7.50
$19,071
$16,213
(-$2,858)
$8.00
$28,044
$23,976
(-$4,069)

MPP is intended to be an insurance program.  It is there for when times are economically very poor.  Just like car insurance, a payment is only made when something terrible happens.  A person doesn’t hope that car insurance will provide a payment; that means an accident has happened. 
What this analysis reveals is that this program is a relatively inexpensive insurance (under 10 cents/cwt for $6.50 coverage + administrative fees for Tier 1 coverage).  Without spending too much, a farm can ensure that if catastrophe strikes, it has some protection.  In years when things are not catastrophic, but they’re also not good, the program can provide enough of a pay out to cover the cost of premiums.
Because MPP is an insurance like program, it should be used in conjunction with other risk management tools.  This is particularly true for larger farms, as illustrated above.  MPP should not be a farm’s sole risk management tool. 
In a bad year, MPP will not save a farm.  It can provide some protection and income to help offset losses.  It will not make up for all of the loss, though.  That is where other risk management tools come in to play.  Understanding your cost of production and utilizing forward contracts and future should be utilized to lock in margins that will ensure a farm’s profitability.
MPP has been controversial at times.  We don’t know what the next Farm Bill will bring.  Perhaps changes will be made to MPP.  Perhaps not.  One thing that we do know is that careful risk management planning can help you stay ahead of the game.  

Thursday, August 18, 2016

NW Minnesota Ag Lender's Conference


By:  Pauline Van Nurden, Extension Educator

University of Minnesota Extension is hosting an Ag Lender’s Conference in Northwestern Minnesota on September 21, 2016. The event will be held at the Youngquist Auditorium on the University of Minnesota Crookston Campus. The conference will focus on farm financial trends for Minnesota producers and will also have an emphasis on the sugar beet industry. Registration will begin at 9 am, with the conference convening from 9:30 am to 3:30 pm.

Keynote speaker for the day will be Dale Nordquist, Extension Economist and Associate Director of the Center for Farm Financial Management at the University of Minnesota. His presentation will focus on financial trends of MN producers. Also joining the program will be Ron Wirtz, Outreach Director for the Federal Reserve Bank of Minneapolis, and Joe Hastings and Tyler Grove with American Crystal Sugar Company. Afternoon breakout sessions will include farm tax implications of a challenging economy, a crop research update, and additional farm management perspectives.

We encourage lenders and other agricultural professionals to register today. Early bird registration of $65 is available until Sept. 14th. After that time registration cost will increase to $80. Registration can be completed in three ways:

Online: $60 – Save $5! Visit z.umn.edu/NWLenderReg to register online.

Mail to: University of Minnesota Extension, Willmar Regional Office
              1802 18th St. NE
              Willmar, MN 56201

Call: (320) 235-0726, ext. 2001

For more information on the conference visit z.umn.edu/NWLendersConf. Feel free to contact Nathan Hulinsky at huli0013@umn.edu or (218) 236-2009 or Pauline Van Nurden at pvanurd@umn.edu or (320) 235-0726, ext 2008 with questions.

Tuesday, August 16, 2016

Tips for working with your lender

by Betty Berning, Extension Educator


One of my first jobs out of college was as an agricultural loan officer in Northwest Wisconsin.  I really enjoyed working with producers to help them achieve their business and personal goals!   This job was my training ground to understanding the inner-workings of a business.  Sure, I had learned about business in lectures and textbooks, but it was as a lender that I really learned how a business works.  I also saw how successful farms worked with their lenders and I’d like to share a few of those observations with you.

Tell your lender about large purchases. 
I can think of a few occasions where I was visiting with a customer about financing a new piece of equipment or renewing a line of credit.  Everything would look really good and I would leave the farm thinking, “great, this will be easy to get done.”  And then… they would call to tell me that they’d forgotten about a few pieces of equipment or land that they’d purchased the previous year.  Yikes.  It would completely change the picture on their debt load and cash flow.  The “easy” deal was no longer easy and the rosy financial picture was not so rosy. 

It is important to let your lender know about purchases as they happen.  They can update your balance sheet and counsel you on its impact to your cash flow.  That is not to say you must finance every purchase with your main lender, but it is important to let them know what’s going on.  By doing that, they can let you know if they foresee any problems in the future and avoid surprises.

Pay down your line of credit.
Every year, you should try to pay down your line of credit.  The line of credit is intended to finance the materials you need for planting (and other daily expenses) and should be paid down as you receive income for those expenses (sales of crop or milk).  Think of it like a credit card.  Sometimes you may need to use it, but you want to pay it down quickly. 

If you never pay it down, you will need to keep asking for increases.  At a certain point, your line of credit may become unmanageable.   My advice- Keep on top of it!  Pay it down as you are able.  If you sell crops, pay down the line of credit, then spend money on other items.

Do not purchase capital assets (tractors, equipment, etc.)  with your line of credit.
It is so easy to see a piece of equipment at an auction, buy it, and then use your line of credit to finance it.  Your line of credit is available and easily accessible, you save a trip to the bank, so it seems like a win/win.  Don’t do it!  Your line of credit is for short-term expenses like I mentioned in the previous point.  Just like you wouldn’t put a car on your credit card, you don’t want to put a tractor on your line of credit.  Put it on a term note so that you still have money available in your line of credit for the short-term expenses.  A term note will also ensure that the tractor gets paid for over it depreciable life.

Do not sell the collateral on your loan without paying down your loan.
Know what items are collateral.  If you sell them, pay down the loan.  This may seem like common sense, but once or twice a farm would tell me that they’d sold a tractor and I would see that there was a loan on that tractor.  The proceeds from the sale of the tractor had been spent, so we had to restructure debt to ensure the loan was properly collateralized.  It was stressful for everyone.  If you sell something and you have a loan against it, be sure to use the proceeds to pay down the loan.  If you are selling the item because you need cash, talk to your lender- there may be other solutions.

Talk to your lender if you’re experiencing financial distress. 

Finally, be proactive.  If you are having problems or can see that things aren’t cash flowing, talk to your lender.  Nobody likes surprises.  Your lender wants to help you be successful.  By staying ahead of problems, you can create a plan to prevent little problems from becoming big problems.  

Friday, August 12, 2016

Surviving Low Corn and Soybean Prices

By David Bau, Extension Educator

For the past few years corn and soybean prices have risen and fallen deeply.  Current corn price starts with a 2 in front, something not seen since 2006 as indicated on Table 1 below.  While 2016 soybean prices start with an 8 something not experienced since 2007.   Prices started in 2005 with an average soybean price of $5.80 and an average corn price of $1.68.  These prices increased significantly to a high for soybeans in 2013 at $13.99 and $6.83 for corn in 2012. With soybean price more than doubling and corn prices quadrupling. In 2015 soybeans prices are almost $5.00 off the high and corn is over $3.00 less per bushel a dramatic and quick change.

Table 1. Worthington Average Cash Prices for Corn and Soybeans


Meanwhile, during this same time frame, soybean input costs increased from $267.36 per acre on average in southern Minnesota to a high in 2014 of $538.91 per acre in Table 2. These figures are from the farmers records in the adult farm management programs reported in the FINBIN data base.   If you divide these costs by the average yields you determine the cost per bushel listed in the third column.  Even with record corn yields in 2015 the cost per bushel was $3.83 per bushel produced compared with an average cash price of $3.48 as difference of 35ȼ or a loss of $71.61 per acre on average.  Soybeans fared better with an average cost per bushel of $8.66 in 2015 with the average price at $9.06 or a potential profit of 40ȼ per bushel or $23.76 per acre.


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