Managing Margins in 2016 and Beyond

1. Managing Margins in 2016 and Beyond Crop Advantage Series Okoboji, Iowa Jan. 6, 2016 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Alejandro Plastina Assistant Professor plastina@iastate.edu 515-294-6160

2. U.S. Corn Supply and Use Source: USDA-WAOB

3. U.S. Soybean Supply and Use Source: USDA-WAOB

4. Corn Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre Source: USDA-NASS

5. Soybean Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre Source: USDA-NASS

6. World Corn Production Source: USDA-WAOB

7. World Soybean Production Source: USDA-WAOB

8. U.S. Meat Production & Prices Source: USDA-WAOB

9. Corn Export Sales Source: USDA-FAS

10. Soybean Export Sales Source: USDA-FAS

11. Strength of the U.S. Dollar Source: Federal Reserve

12. Crude Oil Prices Sources: EIA and CME

13. Corn Grind for Ethanol

14. Current Corn Futures 3.79 3.63 3.51 Source: CME Group, 12/31/2015

15. Current Soybean Futures 8.47 8.56 8.40 Source: CME Group, 12/31/2015

16. 2015/16 Crop Margins

17. 2016/17 Crop Margins

18. Profitability analysis in Iowa: Rented Corn Acres Corn producers who rent need to finance these gaps with $ from other sources! Sources: USDA/NASS, RMA, AgDM File A1-20

19. Net Farm Income: Corn $/Acre

20. Profitability analysis in Iowa: Rented Soybean Acres Soybean producers who rent need to finance these gaps with $ from other sources! Sources: USDA/NASS, RMA, AgDM File A1-20

21. Net Farm Income: Soybeans $/Acre

22. Profitability in Perspective: Living Expenses How many acres (50% corn-50% soybeans) are needed to support $40,000 in living expenses? @ $7,900/acre (2015): 193 acres  $1.5 mil. in land value = equity 700 acres  $5.5 mil. in land value = $2.8 mil. equity Sources: USDA/NASS, RMA, AgDM File A1-20

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

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

25. Profitability analysis in Iowa: Rented Acres Sources: USDA/NASS, RMA, AgDM File A1-20

26. 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

27. 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

28. 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: Source: File A1-20, Ag Decision Maker

29. 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, ???

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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 • Projections based on: • 2015/16 USDA Price Projection: • Corn $3.65 • 2) Guaranteed Price: • Corn $5.29 • 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $64 $53 $61 $3 $39 $1

37. 2015 ARC-CO Payments per Soy Base Acre2015 yields projected with CRD yields (issued Oct 2016) State Average: $19 per base acre $8 $2 $7 • Projections based on: • 2015/16 USDA Price Projection: • Soybeans $8.90 • 2) Guaranteed Price: • Soybeans $ 12.27 • 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $39 $25 $29 $11 $36 $18

38. 2015 ARC-CO Payment Calculatorhttp://www.extension.iastate.edu/agdm/info/farmbill.html

39. 2015 PLC Payments per Corn Base Acre MYA Price $3.65 per bushel State Average: $5 per base acre $6 Yield 129.5 bu $5 Yield 125.7 bu $5 Yield 126.8 bu $5 Yield 114.7 bu $5 Yield 126.8 bu $5 Yield 126.3 bu • Projections based on: • 1) Payment Yields = CCP Yields • 2) 2015/16 MYA Prices: • Corn $ 3.65 / bushel $5 Yield 117.5 bu $5 Yield 107.2 bu $4 Yield 99.5 bu

40. 2015 PLC Payments per Soy Base Acre MYA Price $8.90 per bushel State Average: $0 per base acre $0 Yield 40.7 bu $0 Yield 38.6 bu $0 Yield 40.6 bu $0 Yield 37.0 bu $0 Yield 39.1 bu $0 Yield 40.7 bu • Projections based on: • 1) Payment Yields = CCP Yields • 2) 2015/16 USDA MYA Prices: • Soybean $ 8.90 / bushel $0 Yield 35.4 bu $0 Yield 35.5 bu $0 Yield 33.3 bu

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

42. 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/

43. Thank you for your time!Any questions?Ag Decision Maker:http://www.extension.iastate.edu/agdm/