Marketing Chance?

[Red Steele]

Seems like very few years don't allow the middle of the road marketing guy, the guy with average yields and average input costs, to hit his breakeven, and this year is shaping up like that, too. I figured my costs and came up with about $4.50 for corn for the 2014 crop, and $11.25 for the soybeans, and we are probably just a bullish week away from hitting those prices. Not sure if the week will be the next, or sometime in May, but the majority of the producers will be given an opportunity to stay afloat.

Now the guy that wants to hang on for $5 corn and $15 soybeans may not fare so well this year.

[Hobbyfarmer]

Farm Defensively

By Marcia Zarley Taylor
DTN Executive Editor

CHICAGO (DTN) -- Buckle up your safety belts. Crop producers will need to drive defensively in 2015.

It's still early in the new-crop season. True, 2015 corn prices have climbed more than 70 cents since bottoming in late September. There's even a chance corn futures could spike as high as $5.20 by midsummer, if weather scares and demand tweak markets just right, DTN's Senior Analyst Darin Newsom told the DTN/Progressive Farmer Ag Summit earlier this month.

Despite that potential, growers with debt still face a worrisome scenario in the year ahead. Cash rents haven't budged much, fertilizers still hover above year-ago levels and seed discounts haven't materialized. When spring crop insurance guarantees set for most states March 1, they aren't likely to cover cost of production, land-grant universities forecast. So the uncomfortable discussions with farm lenders this winter may focus on minimizing losses, not necessarily showing a profit in 2015.

When AgStar Financial's Jim Moriarty advises audiences of Midwest corn and soybean producers, he urges them to prepare for two to three years of tough markets ahead. He points out that USDA's gloomy five-year season average cash price outlook for corn through 2018-19 runs a mere $3.51 per bushel.

(Updated USDA forecasts released this week peg 2015-crop season-average cash corn prices at $3.40 per bushel, wheat at $5.00 and soybeans at $8.50 -- all pretty much below cost of production for many growers.)

At normal yields on a typical Minnesota farm in AgStar's upper Midwest territory, that scenario could burn through $165,000 in losses for every 500 acres of corn, Moriarty said.

"Burn rates" at that velocity will leave lenders requiring more comfort. Instead of the normal $200-per-acre working capital levels that sufficed for corn growers in the past, Moriarty thinks $400 to $600 per acre might be necessary to withstand back-to-back losses. That could be a special hardship for operations that have experienced rapid growth in recent years, or younger operations that have not acquired much equity yet. On the other hand, established operations will benefit from holding enough cash to capitalize on opportunities when they occur.

"It may take several years to get costs back in line with prices or for supply and demand to rebalance," Moriarty said. "There's no need to overreact, but proactive financial management is important. It's always best to plan from a position of strength."

GET 'ER DONE

One starting point is to winnow cost of production. Based on 2013 farm financial records, the high-cost 20% of farm operators in southern Minnesota needed $5.77 to breakeven on corn, according to Bob Craven director of the Center for Farm Financial Management at the University of Minnesota. In contrast, the low-cost 20% needed only $3.88 per bushel, including land costs.

By Craven's calculations, the low-cost producers "could almost make money" if corn prices come close to $4 in 2015, not counting any potential government payment from the new Average Crop Revenue (ACR) program. On the other hand, high-cost producers in his sample face red ink under almost all scenarios, he said.

Accurate cost assessment is crucial, he added. Operators who use the cash method of accounting for tax purposes -- instead of accrual accounting -- may have a distorted view of their profits. Over a five-year period, the difference between Schedule F incomes and accrual net incomes can vary about 66%, he said. Buying more farm equipment at year-end to avoid paying taxes on a cash basis is the wrong answer if you've had an accrual loss.

Fortunately, many operators are entering this down cycle healthier than at any time in their careers, giving them opportunity to refinance or restructure debt with favorable terms, said Farm Credit Services of America CEO Doug Stark. Farmland values remain near all-time historic highs. For three consecutive years, between 2010 and 2012, Iowa operations earned $2-per-bushel profit margins averaging over $350 per acre, he noted.

"Those are extraordinary margins, and this was average," Stark said. "It wasn't uncommon to see farmers with $500-per-acre net margins back then."

That's equity that might be deployed now. For example, it's still possible to refinance equipment where you have significant equity in five to seven year, fixed-rate loans at 3.9%. Surprisingly, mortgage rates have also tumbled in the last few months, giving those with real estate ownership a chance to lock in 20-year mortgages around 5% and freeing up cash to cover rainy day funds. Working capital is the first shock absorber for volatile markets, so making sure you have enough provides security in uncertain times.

"Do it now after two or three years of profits," Stark said. "If you come in to a lender's office after two or three years of losses, you'll be having a different conversation... There's a cost to holding liquidity short term, but look where you might be three to five years from now."

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Wow, cash accounting operators paying cash to purchase equip are going to be in trouble?  

Guess I need to get my head out of that dark place it must be..

Not one mention of farmers that are debt free and operating out of their hip pocket. Must be an insignificant number. Maybe just off the radar due to not having turn in the borrower's chair?.

[sw363535]

Hobby maybe Farming without significant debt are the farms that do not need his advice.

[Shaggy98]

Farming and operating within ones means has become so far off the beaten path that those of us that are still able to do it are nearly nonexistent therefore we get no social acceptance because we are just to conservative to have a future.  I've got my 2015 crops already paid for and most of my 2014 crop still on hand.  Looks like I'll be around for at least 2016.  Until proven otherwise, I still operate on the principles of "Cash is King".

[sw363535]

Mostly we have to keep in mind that this guy gets paid to talk to bankers.  And bankers don't spend much worry time on the guys operating from their own savings accounts.

But Shaggy you make me wonder what % of total production requires no borrowing.

I guess there is no way to know since an owner who can invest his assets in a 10% return investment, will be wise to borrow 5% operating capital and leave his money where it is.

Maybe it really points out that good bankers just worry a lot.  🙂

[Shaggy98]

_____________________________________________________________

sw363535 wrote:

But Shaggy you make me wonder what % of total production requires no borrowing.

__________________________________________________________

SW, I bet the results of that question would be alarming.  Just a sign of the times to be socially accepted to "Keep up with the Jones".

[kyu2852570]

Shaggy I'm not sure you are on the same level as say a normal full time irrigated farmer. You talk like you are so better off by having no debt but having like 700 acres of dry land and what one third is fallow and another third is wheat and another third is milo and you are debt free...which on operating equates to what? $35,000 - $50,000 to put in your crop in and see it to harvest? Not really saying much if you and your wife both have $100k/yr jobs I'm an irrigated farmer that requires over $1,000,000 just in inputs for my crop plus $millions of machery. My wife and I are solely employed by the farm. We had a great year in 2014 and made lots of money which is the goal. And my equipment is not extravagant! I refuse to hire anything done as that is way to expensive for my pencil

[wrightcattle]

Demand Function levels in the 5.25 to 6 range for corn, 17+ for beans, 10 to 11 for wheat, $245 cwt for cattle etc in 2015.

i figure consumers want farmers to make some dough too.

[Shaggy98]

I'm not sure if you are complimenting me or treating me like an alley cat, but I'll play like it is a compliment.  If you and your family are able to work fulltime on your farm consider yourself lucky.  I'd love to be able to do that, but the way I was handed the keys to my farm were a little blunt and I wasn't prepared at the time.  The death of my granddad and my dad within a very short time frame took a 3 generation operation to a single generation very rapidly.  Before that time there wasn't enough work load for all three of us so I held off the farm employment and was very fortunate to land a job that was very, very good for this area.  My wife finding an equally rewarding job as well was just icing on the cake.  I will one day be a fulltime farmer just as my predecessors were but I've got a golden opportunity to build my operation debt free the way I want it while maintaining off the farm employment.  If I need to hire a few spraying and haying operations to be certain they get done in a timely fashion, well so be it.  Don't kid yourself if you think I like hiring outside labor, but sometimes it is just necessary.

Yes our operations are light years apart, but all inputs and revenue generated are relevant to each of our operations.

[Shaggy98]

SW, during the winter months I speak to my banker nearly every day, 4 days a week at least.  The local bank is just 1/2 block up the street from the post office.  Just a small town value I guess.  Any way, we rarely discuss money.  We're usually talking about last nights game and how many points his kids scored or how many rebounds my son had.  Unless it's Friday morning of course, then were all business since that is sale day at the livestock barn 14 miles up the road.