Minding Ag's Business

Failure to Economize

Don't expect much farmer economizing in production costs in 2015, but it's not for lack of trying. Yes they can knock a few bucks off here and there, but not the hundreds of dollars of gross income that have vanished per corn and soybean acre since 2012.

If grain farmers I interviewed at Texas A&M's TEPAP program in Austin, Texas, this week are typical, most have failed to win meaningful concessions on rent, fertilizer, seed or even chemicals. If they haven't pre-priced much of their 2015 crop, they are anxiously bracing for one of the biggest one-year losses in their careers.

TEPAP, short for The Executive Program for Agricultural Producers, attracted a sell-out crowd of about 200 growers from dozens of states, Canada, Australia and Brazil. Between MBA-level courses on finance, accounting and labor management, attendees swapped stories on where and how to trim expenses in 2015 without cutting yield.

"The biggest item that could have had an impact is cash rent, and landowners pushed that off the table," says Greg from Minnesota. He says he had been quick to deliver bonuses to landowners in the good years with the hope the courtesy might be reversed in years like 2015, but only one of his owners agreed to a $25/acre cut, just a drop in the bucket when losses could easily bleed $150 to $300/acre.

"Another said that's just how it goes in farming. He compared our markets to the $5 billion drop in crude oil prices," Greg says. "I wanted to say, yeah, but Exxon is just making less money, not losing it. This is real." Other attendees report a few landowners were willing to reconsider rental rates in March, should the commodity price outlook fail to improve.

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But input budgets are getting set in stone this month, and dollars might not add up. Someone paying a modest $245/acre rent on 175-bu. corn ground will need $5.11 corn to cover all costs and a $60/acre return for labor and management, according to Bob Craven, director of the University of Minnesota's Center for Farm Financial Management. Sure, seasonal rallies can help, but Dec 2015 corn futures are only running about $4.17 at the moment, and that's after a nice price spike since Oct. 1. USDA expects 2015 season-average cash corn prices to run only $3.40.

A northeastern Kansas producer's family owns most of its land, but still needs to shave costs to get to breakeven, he tells me. "So far seed suppliers haven't cut deals but know we're shopping around. They need to deliver a benefit when corn is $4 not $7," he says. One idea some attendees discussed is for growers to band together to buy 5,000 or more units of seed together, commanding more discounts than five 1,000 unit purchases would accrue.

Mark of northern Ohio has been more successful managing the expectations of his nearly three dozen landowners. Prior to 2010 he wrote a simple one-page flex lease that shared a portion of his real per-acre profits; when prices and yields were good, that translated into $400/acre or better rents some years.

"I warned them not to get used to the big money in years like 2010 and 2011, because farming is usually a low-margin business, " he says. Because he spent so much time preparing owners for rainy day scenarios, he only received one complaint when he alerted owners that 2015 rents were likely to retreat. One 90-year-old widow said it was the first time in her life that her cash rent check would not cover the property taxes on her land and home, as well as her Medicare coverage and supplement.

(He knew it would be an unpleasant message since property taxes in his part of Ohio are slated to double in 2015).

But Mark's flex lease formula rewards landowners if he produces bumper yields, shops right on inputs or receives government payments, so his partners will fare better if he does. He's 20% sold on corn and one-third sold on 2015 soybeans, expecting to dodge uglier prices should Brazilians produce a decent harvest.

"I'm being very picky on inputs. It's the least amount of prepurchases I've made in my career by early January," Mark says. "I don't think seed dealers will blink, since we've got to commit in the next few days, but I'm holding out for fertilizer."

Follow me on Twitter@MarciaZTaylor

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