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Make Adjustments Now to Optimize 2019 Profitability

We recently sponsored a webinar “Sorting Through the Implications of a Wet, Slow Spring,” featuring Agriculture Economic Insights co-founders Brent Gloy and David Widmar. Below we summarize the steps they outlined for adjusting to planting and market changes.

Even if your operation hasn’t been directly impacted, this year’s slow, wet spring has changed prospects for 2019, and your initial profitability projections likely are outdated. It’s time to reassess where you are financially and make adjustments where needed to optimize your marketing results in 2019.

Start by writing a summary of what has happened on your farm, said David Widmar: “What got planted, what didn’t? What lessons did you learn from this year? What would you do differently?”

This exercise is a good investment of your time, Widmar said, because it helps you think through the decisions you ultimately make and also serves as a reminder of timing — your thinking at the time and how the wet spring played out.

Now move onto the critical task of updating your operating budget, something that should be a standard, annual activity, said Brent Gloy. Compare what you planned to spend for seed, fertilizer, crop protection, etc. and what you actually paid. Make per-acre adjustments based on actual acreage. Combined with updated yield projections, you can reassess your break-even price per bushel.

“Some people may be in a good place now,” Gloy said. “Prices certainly have improved and maybe their crop is looking pretty good. If you have the chance to make some money this year, you want to take advantage of it and replenish some of your working capital.”

If you have a prevented-planting claim, ask your crop insurance officer to help you figure what your payment will be, Widmar recommended.

“This income can affect the minimum, or target, price you’ll need for your production,” he said.

With an adjusted breakeven as a starting place, review and update your marketing plans. Much has changed over the course of the spring, and expectations for marketing opportunities need to adjust as well, Widmar said. Corn and soybean prices, for example, rallied about $1 per bushel in the face of repeated delays and the corn stocks-to-use tightened from ample at 17% to a possible need for rationing at 12%.

 

corn december futures

CORN May June

Change

Acres planted (mil.) 92.8 89.8 -3
Acres harvested (mil.) 85.4 82.4 -3
Yield (bu./A) 176 166 -10
Begin stocks (bil.) 2.095 2.195 +.10
Production (bil.) 15.03 13.680 -1.35
Imports (mil.) 35 50 +15
Total supply (bil.) 17.160 15.925 -1.235
Total use (bil.) 14.675 14.250 -.425
End stocks (bil.) 2.485 1.675 -.81
Stocks/use 17% 12% -5 percentage points

 

Among the questions to ask yourself: Have you locked in some higher prices? Did the priced percentage of your expected crop change much with your acreage and expected yield? Do you need to sell less or more — or change the tool you use for pricing to allow for more uncertainty?

You now are ready to update your financial projections. In addition to cash-flow and income statements, it is important to update balance sheet projections, Widmar said. USDA estimates producers’ working capital has decreased 25% in the past few years and has reached a critical point at the national level. When there is a crop loss like many producers are experiencing, working capital can further erode, although crop insurance can help mitigate the impact.

Gloy urges producers to use their updated information to have constructive conversations with trusted advisors. Lenders and grain marketers can take a lot of the emotion out of the situation because they likely are less emotionally involved, he said.

“They may have ideas about how you can improve your outcome this year,” he said. “And in any case, you can avoid surprises later.”

 

Harvest photo

Knowing Your Cost Of Production Can Lead To Sound Management Decisions

Knowing your cost of production has always been important. But in today’s agricultural environment, it is imperative to your viability and financial success. Your cost of production is the foundation to a good marketing plan and to buying the right level of crop insurance coverage.

It also helps you determine where you might need to make adjustments to reduce costs and identify opportunities to grow your business.

The scenario of “Joe Farmer” helps illustrate the power of knowing your cost of production. Producers who understand their costs will be in a better position heading into 2018 – and will be well prepared for discussions with their Frontier Farm Credit financial officer and crop insurance agent.

Meet Joe Farmer

Joe is an farmer with 1,000 acres evenly split between  soybeans and corn. He owns 250 of the acres, with an annual land payment of $100,000. Rent on the remaining land averages $300 an acre. His actual production history is 190 bu/acre for corn and 55 for beans.

Joe farms full time while his wife works off the farm earning $30,000 a year and benefits. They spend $80,000 a year on family living expenses. Their next largest cost is an annual farm machinery payment of $75,000.

The cost-of-production worksheet, located at the bottom of this article, gives Joe a better understanding of his operation. (All numbers are hypothetical and do not reflect the actual range of expenses and diversity of production found from one operation to the next.)

Focus on Costs You Can Control

Based on Joe’s current situation, the operation’s break-even costs per bushel are $4.03 for corn and $10.20 for soybeans. These are, of course, higher than current market prices. So what’s Joe to do?

One option is to work on reducing variable costs – and the good news is that fertilizer and other variable costs have inched down in price.

However, fixed costs are the main factors that separate high-, medium- and low-cost operators. The big three fixed expenses include land – cash rent and/or principal and interest payments on owned acres – machinery and equipment and family living. By lowering these costs, you can improve your operation’s overall cost structure.

Adjusting fixed costs is a smart strategy that will benefit every producer. For some, it will help them survive the low prices. For others, it will position them to take advantage of opportunities. If your fixed costs are high, work with your lender to identify strategies that will make you more competitive. The pace of adjustment is critical.

Joe addressed his fixed costs by re-amortizing his land loan to reduce the annual payment to $70,000, renegotiating cash rent to an average of $280 an acre and trimming $10,000 from family living.

VARIABLE COSTS Corn Soybeans LAND COSTS
Seed $110.00 $35.00 Land Payment per Acre $400
Fertilizer $100.00 $0.00 Tax Payment per Acre $20
Lime $0.00 $0.00 Average Cash Rent per Acre $300
Herbicide $35.00 $20.00 Average Land Cost per Acre $330
Insecticide $15.00 $10.00
Irrigation Costs $0.00 $0.00
Insurance Premium $12.50 $9.00 OTHER COSTS / REVENUE
Miscellaneous $5.00 $5.00 Annual Machinery Payments $75,000
Fuel / Repairs $20.00 $20.00 Machinery Payment per Acre $75
Custom Farming Charges $0.00 $0.00 Annual Family Living Expense $80,000
Drying $0.00 $0.00 Family Living Expense per Acre $80
Storage $8.00 $4.00 Off Farm Income / Other $30,000
Transportation $5.00 $3.00 Off Farm Income per Acre $30
Labor $0.00 $0.00 Combined Cost Impact per Acre $125
TOTAL $310.50 $106.00

Improving Profitability

Joe’s understanding of his cost of production allowed him to make adjustments that improve his chances at profitability. Here is a before-and-after comparison of Joe’s cost of production. Talk with your financial officer to discuss options for addressing fixed and variable costs in your operation.

Before Corn Soybeans After Corn Soybeans
Cost of Production per Acre $765.50 $561.00 Cost of Production per Acre $715.50 $511.00
Breakeven per Bushel $4.03 $10.20 Breakeven per Bushel $3.77 $9.29

Apply Marketing Tools to Capture Profits

Corn and soybeans futures reached two-year highs in recent weeks as part of a broader surge in commodity prices. July 2016 corn futures, for example, climbed to $4.07 and currently are at $3.96. Soybean futures are bouncing between $10.60 and $10.90. Not accounting for basis, this is well ahead USDA’s cash price forecasts of $3.60 for corn and $8.85 for beans for the 2015/16 crop year.

Market rallies in today’s low-price environment are critical windows of opportunity for producers positioned to take advantage of them. While many will speculate on the how long and how high a rally will last, good marketers understand that locking in a profit requires applying some tried-and-true rules to their marketing:

  • Know your breakevens. The closer to the penny, the better. Otherwise, you are throwing darts at an unknown target.
  • Identify your desired profit per acre or profit per bushel to establish your profit target. This takes away the emotion that often enters marketing decisions.
  • Remember that marketing isn’t a one-time decision. By selling your crop in increments — up to your crop insurance guarantee – you reduce some of the emotion of marketing.

Price changes offer good opportunities to review your farm’s profit potential. Once the crop is in the ground, update costs as well. We offer Manage Profits to help you understand and identify market opportunities. Manage Profits, which is free to customers through AgriPoint®, has all of the basic components to manage risk in production agriculture.

This easy-to-use tool allows you to manage crop and livestock production, track marketing progress, crop insurance, generate profitability reports and stress test the business with what-if scenarios. The what-if analyses involve plugging several variables into an operation’s current plan to see how one or multiple changes, including futures prices, affect profitability.

To learn more about Manage Profits, log into or enroll in AgriPoint. Click on Manage Profits. There, you will find an informational video to get you started. Click on “Help” in the upper left hand corner for a user guide with step-by-step instructions. Contact your local Frontier Farm Credit office for further assistance.