Managing Margins in 2016 and Beyond

1. Managing Margins in 2016 and Beyond Crop Advantage Series Mason City, Iowa Jan. 15, 2016 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Alejandro Plastina Assistant Professor plastina@iastate.edu 515-294-6160

2. Iowa Corn Prices vs. Costs

3. 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

4. Net Farm Income: Corn $/Acre

5. 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

6. Net Farm Income: Soybeans $/Acre

7. Profitability in Perspective: Living Expenses How many acres (50% corn-50% soybeans) are needed to support $40,000 in living expenses? @ $7,600/acre (2015): 193 acres  $1.47 mil. in land value = equity 700 acres  $5.32 mil. in land value = $2.7 mil. equity Sources: USDA/NASS, RMA, AgDM File A1-20

8. Cost of Corn Production in Iowa – 2016Corn following corn AgDM File A1-20

9. Cost of Corn Production in Iowa – 2016Corn following soybeans AgDM File A1-20

10. Cost of Corn Production in Iowa – 2016Soybeans following corn AgDM File A1-20

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

12. 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

13. 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

14. 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

15. 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, ???

16. 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 2.75 bu/acre @ $3.60/bu, GO AHEAD! Otherwise, NO GO. • Switch to seeds with fewer traits (+crop management)? Net savings $25/acre. If yield  smaller than 6.95 bu/acre @ $3.60/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

17. 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

18. 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

19. 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

20. 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

21. Strategies:9. Know your ARC/PLC Payments • Payments vary widely across counties and programs • No PLC payments in 2014. Small payments likely in corn base acres in 2015. • If any 2014 ARC-CO Payments, use to cash flow • Corn: higher yields in 2015 (except CRDs 8 & 9), and lower 5-y OA yields (except for CRDs 5, 8, 9). Lower ARC-CO payments (except for CRDs 8 & 9) even with lower prices. • Soybeans: higher yields in 2015 (except for CRDs 4 & 7), but higher 5-y OA yields (except for CRDs 1, 2 , 7). Higher ARC-CO payments (except for CRDs 1-3). Source: Iowa Farm Bureau Federation

22. 2015 ARC-CO Payments per Corn Base Acre (issued Oct 2016) State Average: $43 per base acre $68 Y 185.3; OAY 170.8 $51 Y 194.1; OAY 168.6 $63 Y 186.5; OAY 167.8 • Projections based on: • 2015/16 USDA Price Projection: • Corn $3.60 • 2) Guaranteed Price: • Corn $5.29 • 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $49 Y 188.4 ; OAY 164.3 $38 Y 192.8; OAY 163.8 $56 Y 187.9; OAY 167.2 $20 Y 173.2; OAY 134.5 $37 Y 174.2; OAY 150.6 $5 Y 162.9; OAY 117.0

23. 2015 ARC-CO Payments per Soy Base Acre2015 yields projected with CRD yields (issued Oct 2016) State Average: $19 per base acre $1 Y 58.6; OAY 47.0 $9 Y 60.4; OAY 50.5 $8 Y 60.1; OAY 50.9 • Projections based on: • 2015/16 USDA Price Projection: • Soybeans $8.80 • 2) Guaranteed Price: • Soybeans $ 12.27 • 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $27 Y 56.1; OAY 50.0 $28 Y 58.4; OAY 52.1 $37 Y 52.8; OAY 48.7 $19 Y 47.1; OAY 41.3 $12 Y 54.5; OAY 45.8 $34 Y 48.9; OAY 46.4

24. 2015 ARC-CO Payment Calculatorhttp://www.extension.iastate.edu/agdm/info/farmbill.html

25. 2015 PLC Payments per Corn Base Acre MYA Price $3.60 per bushel State Average: $10 per base acre $10 Yield 129.5 bu $10 Yield 125.7 bu $10 Yield 126.8 bu $9 Yield 114.7 bu $10 Yield 126.8 bu $10 Yield 126.3 bu • Projections based on: • 1) Payment Yields = CCP Yields • 2) 2015/16 MYA Prices: • Corn $ 3.60 / bushel $9 Yield 117.5 bu $8 Yield 107.2 bu $8 Yield 99.5 bu

26. 2015 PLC Payments per Soy Base Acre MYA Price $8.80 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 $ 8.80 / bushel $0 Yield 35.4 bu $0 Yield 35.5 bu $0 Yield 33.3 bu

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

28. 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/

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