Extension and Outreach/Department of Economics Managing Margins in 2016 and Beyond Crop Advantage...

Extension and Outreach/Department of Economics

Managing Margins in 2016 and Beyond

Crop Advantage SeriesOkoboji, IowaJan. 6, 2016

Alejandro PlastinaAssistant Professor

[email protected]

Chad HartAssociate [email protected]

515-294-9911


U.S. Corn Supply and Use2012 2013 2014 2015 2015 Δ

Area Planted (mil. acres) 97.3 95.4 90.6 88.4 0

Yield (bu./acre) 123.1 158.1 171.0 169.3 0Production (mil. bu.) 10,755 13,829 14,216 13,654 0Beg. Stocks (mil. bu.) 989 821 1,232 1,731 0

Imports (mil. bu.) 160 36 32 30 0Total Supply (mil. bu.) 11,904 14,686 15,479 15,415 0Feed & Residual (mil. bu.) 4,315 5,040 5,315 5,300 0Ethanol (mil. bu.) 4,641 5,124 5,209 5,200 25

Food, Seed, & Other (mil. bu.) 1,397 1,369 1,359 1,380 0Exports (mil. bu.) 730 1,920 1,864 1,750 -50Total Use (mil. bu.) 11,083 13,454 13,748 13,630 -25Ending Stocks (mil. bu.) 821 1,232 1,731 1,785 25

Season-Average Price ($/bu.) 6.89 4.46 3.70 3.65 0

Source: USDA-WAOB


U.S. Soybean Supply and Use2012 2013 2014 2015 2015 Δ

Area Planted (mil. acres) 77.2 76.8 83.3 83.2 0Yield (bu./acre) 40.0 44.0 47.5 48.3 0Production (mil. bu.) 3,042 3,358 3,927 3,981 0

Beg. Stocks (mil. bu.) 169 141 92 191 0Imports (mil. bu.) 41 72 33 30 0Total Supply (mil. bu.) 3,252 3,570 4,052 4,203 0

Crush (mil. bu.) 1,689 1,734 1,873 1,890 0Seed & Residual (mil. bu.) 105 107 145 133 0Exports (mil. bu.) 1,317 1,638 1,843 1,715 0Total Use (mil. bu.) 3,111 3,478 3,861 3,738 0

Ending Stocks (mil. bu.) 141 92 191 465 0Season-Average Price ($/bu.) 14.40 13.00 10.10 8.90 0

Source: USDA-WAOB


Corn Yield Estimate

Top: 2015 Estimated YieldsBottom: Change from last monthUnits: Bushels/acre

Source: USDA-NASS


Soybean Yield Estimate

Source: USDA-NASS

Top: 2015 Estimated YieldsBottom: Change from last monthUnits: Bushels/acre


World Corn Production

Source: USDA-WAOB


World Soybean Production

Source: USDA-WAOB


U.S. Meat Production & Prices

Source: USDA-WAOB


Corn Export Sales

Source: USDA-FAS


Soybean Export Sales

Source: USDA-FAS


Strength of the U.S. Dollar

Source: Federal Reserve


Crude Oil Prices

Sources: EIA and CME


Corn Grind for Ethanol


Current Corn Futures

Source: CME Group, 12/31/2015

3.51

3.63

3.79


Current Soybean Futures

Source: CME Group, 12/31/2015

8.56 8.40 8.47


2015/16 Crop Margins


2016/17 Crop Margins


Profitability analysis in Iowa: Rented Corn Acres

Units 2012 2013 2014 2015fa. State Yield Bu/Ac 137 164 178 189b. Iowa Farm Price $/Bu 6.92 4.49 3.70 3.65c. Crop Revenue (=axb) $/Ac 948 736 659 690d. Average Crop Insurance Payment $/Ac 123 132 83 n/ae. Income from Crop (=c+d) $/Ac 1071 868 742 690f. Average State Cash Rent $/Ac 252 270 260 246g. Average Non-land Production Cost $/Ac 517 513 495 499h. Total Production Cost (=f+g) $/Ac 769 783 755 745i. Net Farm Income from Corn (=e-h) $/Ac 302 85 -13 -55

Sources: USDA/NASS, RMA, AgDM File A1-20

Corn producers who rent need to finance these gaps with $ from other sources!

j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac 179 -47 -96 -55


Net Farm Income: Corn$/Acre


Profitability analysis in Iowa: Rented Soybean Acres

Units 2012 2013 2014 2015fa. State Yield Bu/Ac 45.0 45.5 51.5 56.0b. Iowa Farm Price $/Bu 14.40 13.10 9.96 8.90c. Crop Revenue (=axb) $/Ac 648 596 513 498d. Average Crop Insurance Payment $/Ac 27 25 26 n/ae. Income from Crop (=c+d) $/Ac 675 621 539 498f. Average State Cash Rent $/Ac 252 270 260 246g. Average Non-land Production Cost $/Ac 288 272 270 275h. Total Production Cost (=f+g) $/Ac 540 542 530 521i. Net Farm Income from Soy (=e-h) $/Ac 135 79 9 -23


Soybean producers who rent need to finance these gaps with $ from other sources!

j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac 108 54 -17 -23


Net Farm Income: Soybeans$/Acre


Profitability in Perspective: Living Expenses

How many acres (50% corn-50% soybeans) are needed to support $40,000 in living expenses?

2012 2013 2014 2015

100% Rented Acres 183 487 Not Possible!

Not Possible!

Fully Owned Acres 85 114 155 193

Half-Owned Acres 125 198 371 700

@ $7,900/acre (2015): 193 acres $1.5 mil. in land value = equity700 acres $5.5 mil. in land value = $2.8 mil. equity



What can happen in 2016?Corn Profits: Dollars per Rented Acre

2016 Revenue compared to 2015-10% -5% 0% +5% +10%

2016Cost of Production compared to 2015

+10% -199 -164 -130 -95 -61+5% -161 -127 -92 -58 -230% -124 -90 -55 -21 14-5% -87 -52 -18 17 51

-10% -50 -15 19 54 88


What can happen in 2016?Soybean Profits: Dollars per Rented Acre

2016 Revenue compared to 2015-10% -5% 0% +5% +10%

2016Cost of Production compared to 2015

+10% -125 -100 -75 -50 -25+5% -98 -74 -49 -24 10% -72 -48 -23 2 27-5% -46 -21 3 28 53

-10% -20 5 30 54 79


CORN SOYBEANS

Units 2015f 2016f Change 2015f 2016f Change

a. State Yield Bu/Ac 189 177 -6% 56 50 -11%

b. Iowa Farm Price $/Bu 3.65 3.79 +4% 8.90 8.47 -5%

e. Income from Crop (=axb) $/Ac 690 671 -3% 498 424 -15%

f. Average State Cash Rent $/Ac 246 239 -3% 246 239 -3%

g. Average Non-land Production Cost $/Ac 499 461 -8% 275 267 -3%

h. Total Production Cost (=f+g) $/Ac 745 700 -6% 521 506 -3%

j. Net Farm Income w/o Crop Ins. (=e-h) $/Ac -55 -29 -23 -82

Profitability analysis in Iowa: Rented Acres



9 Strategies to manage margins

• Major concern: cash flow / liquidity• Solvency hit, but still strong:

– Declining land values in Iowa– Declining machinery values

• Long term problem strategy for 2-3 years


Strategies:1. Protect your working capital

• Revise recent asset purchases • Revise share of rented land • Revise scale of operation and fixed costs

over next 2-3 years• Manage taxes: visit with tax advisor

– Deferred payment contracts– S179– Carry back operating losses to obtain tax refunds


Strategies:2. Avoid cash shortages

• Plan for operating losses (renters)• Secure operating loan/emergency loan terms• Be very careful with new capital expenditures• Maintain cash reserves and operating credit

lines:Cash Costs / Acre Soy after

cornCorn after

soyCorn after

cornNon-land (excl. labor) $185-$200 $320-$385 $360-$425

Land $225-$300 $225-$300 $225-$300

All Cash Costs $410-$500 $545-$685 $585-$725

Source: File A1-20, Ag Decision Maker


Strategies:3. Diversify Income

• Add or don’t lose non-farm income• Consider alternative sources of revenue with

your assets: custom work, snow removal, truck driving in fall & winter, ???


Strategies:4. Revise production costs

• Revise production plans, especially for rented land (renegotiate land rent?)

• Can you make changes that generate savings that offset reductions in revenue?

N 20 lbs per acre? Savings $10. If yield smaller than 2.7 bu/acre @ $3.65/bu, GO AHEAD! Otherwise, NO GO.

• Switch to seeds with fewer traits (+crop management)? Net savings $25/acre. If yield smaller than 6.8 bu/acre @ $3.65/bu, GO AHEAD! Otherwise, NO GO.

• Seek volume discounts in seeds, chemicals, etc.• Visit with agronomist: update your production skills, evaluate

how to control costs


Strategies:5. Actively Manage Risks

• Know your break-even prices• Design a marketing plan with price and date

targets and stick to it• Lock-in margins whenever possible• Revise crop insurance (Explore ways to

maintain protection while lowering costs)• Revise use of forward contracts & crop

insurance to finance inputs


Strategies:6. Revise family living expenses

• Revise family living expenditures:– Vacation plans– House remodeling plans– Truck purchase

193 fully owned acres to afford $40,000 in living expenses

340 fully owned acres to afford $70,000 in living expenses


Strategies:7. Secure repayment capacity

• Short repayment schedules reduce cash flow vs. long repayment schedules

• Try to extend repayment schedules on equipment & real estate loans (low interest rates)

• Work a plan with your lender(s) for 2016-2017


Strategies:8. Revise Growth Strategy

Depending on your growth stage:•Offload unproductive assets •Downsize •Slow down growth•Beginning farmers: wait to buy land•Align short term needs with long term growth goals


Strategies:9. Know your ARC/PLC Payments

• Payments vary widely across counties and programs• If any 2014 ARC-CO Payments, use to cash flow• Corn: 2015 corn yields similar to 2014 yields. ARC-CO

payments similar too.• Soy: 2015 corn yields different from 2014 yields. ARC-

CO payments different too: Higher payments for central and southern counties and lower payments for northern counties.

• No PLC payments in 2014. Small payments likely in corn base acres in 2015.

Source: Iowa Farm Bureau Federation


2015 ARC-CO Payments per Corn Base Acre2015 yields projected with CRD yields

(issued Oct 2016)

State Average:$49 per base

acre$72 $71 $70

$64 $53 $61

$39 $1 $3

Projections based on:1)2015/16 USDA Price Projection:Corn $3.652) Guaranteed Price:Corn $5.293) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield


2015 ARC-CO Payments per Soy Base Acre2015 yields projected with CRD yields

(issued Oct 2016)


acre$8 $2 $7

$39 $25 $29

$36 $18 $11

Projections based on:1)2015/16 USDA Price Projection:Soybeans $8.902) Guaranteed Price:Soybeans $ 12.273) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield


2015 ARC-CO Payment Calculatorhttp://www.extension.iastate.edu/agdm/info/farmbill.html


2015 PLC Payments per Corn Base Acre MYA Price $3.65 per bushel


acre

Projections based on:1) Payment Yields = CCP Yields

2) 2015/16 MYA Prices:Corn $ 3.65 / bushel

$5Yield 126.8 bu

$6Yield 129.5 bu

$5Yield 125.7 bu

$5Yield 114.7 bu

$5Yield 126.8 bu

$5Yield 126.3 bu

$5Yield 107.2 bu

$4Yield 99.5 bu

$5Yield 117.5 bu


2015 PLC Payments per Soy Base Acre MYA Price $8.90 per bushel


acre

Projections based on:1) Payment Yields = CCP Yields

2) 2015/16 USDA MYA Prices:Soybean $ 8.90 / bushel

$0Yield 40.7 bu

$0Yield 38.6 bu

$0Yield 40.6 bu

$0Yield 37.0 bu

$0Yield 39.1 bu

$0Yield 40.7 bu

$0Yield 35.5 bu

$0Yield 33.3 bu

$0Yield 35.4 bu


PLC Payment Calculatorhttp://www.extension.iastate.edu/agdm/info/farmbill.html


Summary

• Expect low to negative margins in 2016• Visit with:Agronomist – control costs?Lender – refinance, lower payments?Tax advisor – refunds from previous years?Crop insurance agent – change coverage?• Use resources @ Ag Decision Maker:

http://www.extension.iastate.edu/agdm/


Thank you for your time!

Any questions?

Ag Decision Maker:http://www.extension.iastate.edu/agdm/

Extension and Outreach/Department of Economics Managing Margins in 2016 and Beyond Crop Advantage...

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