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Managing Crop Margins in 2009

Managing Crop Margins in 2009. Craig A. Chase Farm Management Field Specialist. Presentation Objectives. Cost of Production Sizing up the Market Strategies/Tools for Managing Margins. Costs for 2009 . Extremely hard to predict this year Pre-paid vs. spot

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Managing Crop Margins in 2009

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  1. Managing Crop Margins in 2009 Craig A. Chase Farm Management Field Specialist

  2. Presentation Objectives • Cost of Production • Sizing up the Market • Strategies/Tools for Managing Margins

  3. Costs for 2009 • Extremely hard to predict this year • Pre-paid vs. spot • Changes in world and domestic demand • Changes due to financial crisis • New varieties and traits • Energy markets

  4. Baseline assumptions • Diesel $2.50 • N $.68, P $.90 K $.72 • LP $1.90 • Corn seed; $250 Soybeans $45/50 lb • Land; $178 $205 $232 • Yields; continuous corn 125 145 165 • Rotated corn 140 160 180 • Soybeans 45 50 55

  5. Direct Cost of Crop Production ($/A)Historical vs. 2009 Forecast 36% 19% Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.

  6. Non-Land Costs vs. Gross Revenue ($/A)Historical vs. 2009 Forecast $200/A $177/A Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.

  7. Sizing Up the Market

  8. Reluctance Toward Pre-Harvest Marketing Failure to Understand and Track Your Local Basis Lack of an Exit Strategy Holding Grain in Storage Too Long Misunderstanding Carrying Charges Develop a Marketing Plan Avoid the Five Common Mistakes in Grain Marketing?!?!

  9. Corn Futures Carry Dec. 2009 $4.52 Dec. 31 , 2008 Good carry through July: rewards on-farm storage Source: www.cbot.com December 2008.

  10. Corn Storage Costs .85 .66 .47 .54 .28 .43 .31 .20 Assumption: Corn is Valued at $4/bu - Financed @ 7% APR Source: Johnson, ISU Ext. Economics, December 2008.

  11. Corn Basis

  12. Soybean Futures Carry Nov. 2009 $10.07 Dec. 11th, 2008 Lack of carry, difficult to justify storage long-term Source: www.cbot.com December 2008.

  13. Soybean Storage Costs .93 .65 .38 .66 .47 .29 .10 Assumption: Soybeans are Valued at $9/bu - Financed @ 7% APR Source: Johnson, ISU Ext. Economics, December 2008.

  14. Soybean Basis

  15. New Crop Corn Seasonal Trend 79% Odds: Spring Price Exceeds Harvest Price Source: CBOT data compiled by the U of MN, CFFM, 2008.

  16. Corn Cash Price & Probability Forecast ’09-’10 Marketing Year $3.80/bu 65% $3.65/bu 17% $4.65/bu 18% Source: Wisner, ISU Biofuels Economist, December 2008.

  17. December 2009 Corn Futures

  18. New Crop Soybeans Seasonal Trend 68% Odds: Spring Price Exceeds Harvest Price Source: CBOT data compiled by the U of MN, CFFM, 2008.

  19. Soybean Cash Price & Probability Forecast ’09-’10 Marketing Year $7.75/bu 65% $7.45/bu 17% $8.45/bu 18% Source: Wisner, ISU Biofuels Economist, December 2008.

  20. November 2009 Soybean Futures

  21. Tools for Evaluation Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-20croprotation.xls Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xls Crop Rotation N Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls Machinery Economics http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST Flexible Rent Calculator http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-21flexiblerentanalysis.xls

  22. Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xls

  23. Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls

  24. Decision #1 • What should the crop rotation be? • What are the choices? • Are there alternative or specialty crops that are more profitable and that would fit into a rotation?

  25. http://extension.agron.iastate.edu/soilfertility/nrate.aspx

  26. Corn after SB $4.00 price $.75 N 104 pounds

  27. Corn on Corn $4.50 price $.75 N 157 pounds

  28. Decision #2 • What should the fertility program look like? • Can fertility costs be lowered without affecting yields? (over 1/3 of non-land production cost is from fertility).

  29. Machinery costs Fixed costs Variable costs Depreciation Interest Storage Insurance Repairs Labor Fuel

  30. Machinery Economics Field Operations http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST

  31. Managing Machinery Costs Combine Operations

  32. Decision #3 • Does the machinery “fit” the operation ? (not too big or too little) • Do the custom rate charges reflect the costs of the machinery? • Are there some machinery costs that can be re-evaluated (field operations)?

  33. Tenants’ Residual Computing a Cropland Cash Rental Rate http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-20croplandcashrent.xls

  34. Flexible Cash Rent Leases

  35. Decision #4 • Does the lease terms provide for some profitability? • Can I re-negotiate the lease or move it toward a flexible terms lease?

  36. Crop Insurance http://www.farmdoc.uiuc.edu/cropins/index.asp

  37. Decision #5 • Determine the right insurance product to meet your risk management needs. • Make sure you have enough insurance, but are not “over-insured”. • Look at what the insurance product does compared to the farm marketing plan. • Evaluate the new farm bill and how ACRE may affect crop insurance needs.

  38. Conclusions • Input prices have risen dramatically and will show increased volatility. • Some signs world prices have softened but not likely to be seen until current high priced stocks are used. • Take soil tests and only use what is necessary. • Evaluate seed and seeding rates carefully.

  39. Conclusions • Try for flexible lease arrangements. • Consider all the pest management options available. • Don’t simply cut back without carefully evaluating the consequences; you have to spend money to make money. • Consider all the risk management options available.

  40. Conclusions • Know your costs of production. • Make cuts and changes where they will do you the most good. • Follow a good marketing plan.

  41. Risk Management Web Sites Ag Decision Maker – ISU Extension Economics www.extension.iastate.edu/agdm Farm Doc – U of IL Extension Economics www.farmdoc.uiuc.edu Center for Farm Financial Management – U of MN www.cffm.umn.edu Corn Nitrogen Rate Calculator Calculator http://extension.agron.iastate.edu/soilfertility/nrate.aspx

  42. ISU Crop Marketing Web Sites Grain and Oilseed Market Analysis http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/ Corn and Soybean Basis (State and County) www.card.iastate.edu/ag_risk_tools Ag Econ Periodicals, Publications and Programs www.econ.iastate.edu/outreach/agriculture/ Ag Decision Maker (Crop Updates/ Publications Decision Tools) http://www.extension.iastate.edu/agdm

  43. Questions….. Any questions or comments? Thank You for This Opportunity! NOTE: This presentation can be found at http://www.extension.iastate.edu/agdm/fieldstaff/ cchase.html Craig A. Chase Farm Management Field Specialist 720 7th Avenue SW Tripoli, IA 50676 (319) 882-4275 cchase@iastate.edu

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