Minding Ag's Business

Surviving the Great Moderation

Oil billionaire T. Boone Pickens likes to say his career forces him to be an optimist: Geologists drill too many dry holes, he explains. That attitude places him in good company with farmers.

In agriculture, worry about breakevens prior to planting tends to be the norm. In the last 100 years, U.S. agriculture experienced only four periods of "flush" profit margins--World War I, 1946, 1973-1978 and 2006-2012, economists at Purdue's Center for Commercial Agriculture say. More recently, losses were forecast 15 out of the last 25 years from 1991 to 2015, prior to planting, economist Brent Gloy and Purdue University colleagues write in a recent essay https://www.agecon.purdue.edu/…

What's different about the current outlook is the magnitude of the potential 2015 wreck is the biggest in that quarter century, the Purdue economists add. By their early 2015 budget calculations average-quality Indiana farmland is projecting a loss ranging from $156 to $317 per acre. "The declines in commodity prices have not been met with subsequent reductions in costs, creating the potential for a very serious margin squeeze," they write.

That jibes with Farm Credit System lenders in the upper Midwest who are prepping for losses $150/acre on corn and $70 to $80/acre on soybeans with normal yields. What's more, they want borrowers to consider what several back-to-back disasters might do to their creditworthiness and to take pre-emptive action now.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

Studying cycles shows that "the better times have been a lot shorter than the downsides," said Purdue Economist Chris Hurt in a recent webinar. Typically that's seven to 10 "fat" years, sometimes followed by 20 lean years.

"I don't want to sound so bearish, but it adds a note of caution," Hurt said. He characterizes the current correction as a "moderation," not a bust. But the world's farmers have added about 8% more acres in this last boomlet, plus irrigation, tiling and other yield enhancements. End-users will need to sop up a bit of oversupply to get things back in balance.

You've already heard the preachers advise counter measures in some of my previous posts (subscribers see "Farm Defensively" on the Farm Business page). The list includes beefing up your working capital to 25% to 30% of revenue, not the normal 15% to 20%; restructuring debt, such as converting 10-year mortgages to 20 and locking in fixed rates; curbing your living expenses; and attacking your production costs.

Input negotiations are getting to a serious stage right now. A 2,500-acre Iowa producer attending the Executive Program for Agricultural Producers in Austin, Texas, this week tells me he just saved $20,000 by switching to a new chemical dealer this season. A sore point with him is that his normal fertilizer retailer hasn't dropped nitrogen prices in line with corn, so he'll wait until just before he needs anhydrous to get bids from four suppliers this spring, with the lowest bidder winning all of his business.

Negotiating with landowners and suppliers will take on new urgency this year, Hurt says.

Typically there's a 0.65 correlation between a drop in corn prices and nitrogen, but that adjustment takes six to nine months, Hurt says. A shift to soybeans from corn will require less nitrogen, but some growers may rethink application rates. "If cash is tight, we can go below maintenance applications for P and K for some time, just like we did in 2009," Hurt adds.

Landowners may or may not be receptive to price adjustments, depending on how generous operators were in sharing profits from the "fat" years. But since cash rent accounts for 28% of total production costs on average--about $1.35/bu. alone in Indiana-- it's worth asking for relief, Purdue's advisers say. If you can't win a adjustment for 2015, at least you've set the stage for 2016 should the negative market outlook continue.

"If you pay too much (for rent and inputs), you're behind the power curve before you even enter the field," Hurt says. On the other hand, losing rental ground will only increase your machinery overhead, so no one walks away from a lease lightly. "At least cover your variable costs," he says. "Then it becomes a game of who has the power to stay in there and not take cuts." Good luck to the optimists.

Where else can you cut to get to breakeven in 2015?

Follow me on Twitter@MarciaZTaylor

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .

Marcia Taylor
1/8/2015 | 3:37 PM CST
My pen pals tell me I should have emphasized better marketing as a strategy to help growers dig out of potential losses in 2015. USDA cash corn price is only $3.40 at the moment. Seasonal rallies could help, but remember the market doesn't always care what it costs a producer to raise a crop. In 2013, low-cost 20% of Minnesota growers needed $3.88, but the high cost needed $5.77.
Raymond Simpkins
1/6/2015 | 8:01 AM CST
Thats what greed and selfishness will get you.Drive up the cost of land higher and see where that gets you.When land prices hit levels that were unsubstanable at $6.00 corn, Lets run them higher.Great thinking right?Nobody can farm at breakeven prices long, with the cost of everyday things being what they are. Try paying for 2 kids college tuitions, our insurances and autos. Don't leave you much, and we farm debt free.So guys with lots of debt won't be farming long at losses or breakeven.