Managing Margins in 2016 and Beyond

1. Managing Margins in 2016 and Beyond Crop Advantage Series Moline, Illinois Jan. 29, 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 year Units: Bushels/acre Source: USDA-NASS

5. Soybean Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last year 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 3.78 3.66 3.55 Source: CME Group, 1/28/2016

15. Current Soybean Futures 8.61 8.39 8.36 Source: CME Group, 1/28/2016

16. 2015/16 Crop Margins

17. 2016/17 Crop Margins

18. Iowa Corn Prices vs. Costs

19. 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

20. Net Farm Income: Corn $/Acre

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? @ $7,600/acre (2016): 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

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

24. 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

25. 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

26. 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

27. 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, ???

28. 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

29. 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

30. 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

31. 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

32. 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

33. 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

34. 2015/16 ARC-CO Payment Calculatorhttp://www.extension.iastate.edu/agdm/info/farmbill.html

35. 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/

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