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Strive to Improve Crop Risk Management

As we enter another growing season with grain outlook unchanged, efficiency is paramount. That’s the bottom line carried away by the attendees at GrowingOn® meetings this past winter, here are a few of the key points.

Low- and High-Cost Producers: Income Comparison

A comparison of net farm income for two years, 2012 versus 2016, was based on records from 8,000 actual U.S. farms using the FinBin program at the University of Minnesota. It clearly demonstrates how results vary by farm size using annual gross farm sales when the top 20 percent of farms are compared with the bottom 20 percent.

In 2012, nearly all farms, regardless of farm size, had positive net farm incomes at near all-time record high levels. The low 20 percent of operations were near or above breakeven in 2012. However, the top 20 percent of farms were netting five to eight times as much as the bottom 20 percent.

The difference was more significant in 2016. The top 20 percent made money, but only about one-fourth to one-half of their 2012 net farm income. Positive returns for the most efficient farms hit $363,000 at $1 million in gross farm sales and more than $566,000 for those above gross farm sales of $2 million. By comparison, the bottom 20 percent of all sizes of farms lost money. The bigger the farm, the worse the picture was in this bottom category; net farm income plummeted to more than $156,000 in the red at $1 million in gross farm sales and to a loss of more than $316,000 at $2 million gross farm sales.

net farm income comparison

“Size and efficiency amplify the effects of being a low-cost producer,” according to Steven Johnson, the farm management specialist with Iowa State University Extension who helps lead GrowingOn. “That’s why it is important to get better before getting bigger.”

Presenters from Frontier Farm Credit highlighted how changes to various factors affect cost of production and breakeven. “When producers think about reducing costs, saving on inputs is the first thing they think of,” said Tony Jesina, senior vice president – related services. “But some customers are finding significant savings when they examine their machinery line up and identify equipment they don’t get real value from. It’s also important to consider other sources of income and possibly benefits such as health insurance, a major expense for many farm families.”

Frontier Farm Credit also highlighted how Revenue Protection (RP) crop insurance buffers losses and preserves working capital when crop revenue drops below the guarantee. “This can be as important as getting your unit cost of production down,” Jesina said.

Traits of Top Producers

Top producers are proactive, making incremental improvements, lowering cash rent, reducing input costs, keeping family living expenses at modest levels, employing sound financial management and using a “systems approach,” Johnson said. Capturing additional revenue through higher crop prices by utilizing a sound marketing plan is a great way to improve the bottom line since it does not risk lowering yields the way cutting inputs might.

The illustration below depicts some of the savings Johnson called out in his presentation. While the exact numbers will vary by operation and geography, the point is to set a target appropriate to your operation and to seek improvement in each area.

managing 2018 crop costsJohnson built on the Marty Merchandiser case study from GrowingOn 2017, showing the steps Marty has taken on his Iowa farm to improve his finances at a time when his net worth and working capital have slipped due to lower land values and a purchase of an adjoining 80 acres at $8,000/acre. Marty has actively managed crop costs and family living expenses, reducing his budgeted cost of production to $3.43 for corn and $9.11 for soybeans. Larger actual yields lowered those breakevens to $3.32 and $8.47, respectively.

Marty used 85 percent RP to underpin his pre-harvest hedges and hedged-to-arrive contracts to local ethanol plants. With scale-in incremental sales, Marty’s projected cash corn price was $3.96/bu. on 70 percent of his APH bushels, guaranteeing revenue of $619/acre on winter deliveries. He stored remaining bushels, planning to wait for basis to narrow and to use a variety of marketing tools to capture higher futures prices in late winter and spring.

The result: His operation remains profitable, with $85,000 net income estimated for 2017.

Johnson advised attendees to focus on improving both old- and new-crop marketing. Pre-harvest market on weather rallies in the late winter and especially the spring months. For bushels stored unpriced beyond harvest, understanding your basis trends, futures carry and your cost of ownership can pay off in several ways, Johnson said. Limit commercial storage costs and don’t store longer on-farm than the market will justify. Separate basis from the futures price to improve your net revenue by as much as 20¢/bu. on corn and 50¢/bu. on soybeans, depending on local cash bids.

GrowingOn is one of the opportunities the Association offers customers to learn how to manage the financial and business needs of today’s agricultural operations. Find more resources and information at frontierfarmcredit.com. Click to view the association and Johnson’s presentations and videos.

Balance Sheet Changes May Bail Out Cash Flow

In today’s agriculture economy, “creative financing” means looking beyond cash flow to put your operation on better footing.

We have developed case studies examining three actual farm operations, all solvent (a positive net worth) but with liquidity problems (insufficient working capital and, in some cases, negative net cash income). Instead of focusing on variable costs, the producers restructured loans, unloaded underperforming assets and applied other “creative” solutions to liquidity problems.

Steve Johnson, farm and agriculture business management specialist with Iowa State University Extension, is presenting the case studies at our free GrowingOn® 2016 meetings scheduled for February 29 in Emporia and March 1 in Seneca and Ottawa. Larry Landholder is one of the featured producers.

Larry owns 1,500 acres and rents 500. His operation is solvent, with net worth of $4.5 million, including $2.5 million in land equity. Net farm income for 2015 was positive at $64,000. However, Larry lacks working capital, which is negative $77,000 ($34/acre), and has two machinery loans with annual payments of $138,000 and one real estate loan payment of $95,000 a year. Suppose Larry trims his input costs by $35/acre. That boosts his income by $70,000 — certainly an improvement. But Larry still can’t meet his machinery payment and he risks reduced yields. And what about next year?

Instead, looking at his strong balance sheet, he could use equity in his land for a new $130,000, 10-year loan to pay off a machinery loan. A new 20-year loan for $800,000 on real estate equity would allow him to pay off the other machinery loan, pay down his operating loan and strengthen his cash position. As the simplified table below shows, working capital would jump from minus $77,000 to $414,000. And while real estate payments would rise from $95,000 a year to $180,000 a year, machinery payments would drop from $138,000 annually to zero. Netted out, that’s $53,000 a year less in debt payments.

Financial categories Status Quo Solution
Working capital -$77,000 $414,000
Machinery/equip. payments (princ + int) $138,000 $0
Real estate payments (princ + int) $95,000 $180,000
On a per acre basis
Working capital per acre -$38 $200
Machinery payment per acre $69 $0
Real estate payment per acre $63 $120

We invite you to attend one of our GrowingOn meetings in eastern Kansas to learn more about how Larry Landowner and other producers are managing fixed cost to better position their operations for success in today’s challenging agricultural economy.