Bob Carter and Jarod Regier, Frontier Farm Credit and Farm Credit Services of America

1. WORKING TOGETHER THROUGH A
TOUGH AGRICULTURAL ENVIRONMENT
FEBRUARY 9, 2017
Jarod Regier
Vice President Farm Credit Services of
America/Frontier Farm Credit
Bob Carter
Vice President – Farm Credit Services of
America/Frontier Farm Credit

2. 1
• Current environment and how we got
here
• What adjustments you can make to be
successful
• Working with your lender
• Looking forward
What we will cover

3. 2
The “Boom Years” are over

4. The Recent Spike was an
Aberration
3
0
1
2
3
4
5
6
7
8
$/bushel
Corn Price Move Was Unprecedented
USDA
Private A
FAPRI
Private B
USDA's national average cash prices
Even with the recent large price moves included, since 1970,
the average year-to-year corn price move was 5.4¢/bu.

5. Multiple Causes of the Boom
Demand shocks:
Ethanol production ramped up
China’s economy and imports – shift from rural to urban population
Soaring meat exports and prices encouraged livestock production
Supply shock:
 Widespread drought in 2012 (Allowed high commodity prices to continue)
Outside Influence:
Commodity “super-cycle” attracted investors. Commodities as an asset class
competed with more traditional asset classes---they attracted investment
capital.
4

6. 5
Good production years in grain

7. 6
Cow numbers are increasing

8. 7
More protein to consume

9. U.S. Net Farm Income Trends
Source: USDA Economic Research Service, August 30, 2016
*Estimate **Forecast

10. Negative Return to
Management
Corn
Source: farmdoc daily

11. Where to From Here?
• Demand looks softer:
– The strong US Demand competitively challenges US exports
– China’s growth has moderated
– Ethanol demand growth is now flat (Has Become a Mature Market)
• Supplies of nearly all commodities are abundant.
• Investors are disenchanted (with commodities as an asset
class).
• Bottom line: Barring an unforeseen event, more moderate
prices and less volatility are in the long-term forecast.
10

12. 11
Cash rent 27%
Machinery &
family living
19%
Fertilizer 18%
Seed 15%
Fuel 6%
Crop protection 5%
Insurance & misc.
4%
Machinery repairs
3%
Hauling 2% Interest 1%
The Farm Pie
Source: Purdue University estimated 2016 corn production costs

13. Slice #1 – Variable Costs
• Typically variable costs are 45-55% of gross income
• Needs to be tracked and analyzed on a crop year basis not a
tax year basis (pre-pays and inventory carry-over)
12

14. Slice #1 – Variable Costs
• Assess the Marginal Cost of production – don’t over or under
spend on key input costs
• Maximize return on variable costs – don’t cut costs that limit
production
• Typically variable costs are 45-50% of gross income
13

15. Slice #2 – Family Living
• Family living can be 0-15% of gross income
• Non-Farm Income Impact
– Insurance/Benefits
– Partial or full offset of family living cost
• Must be tracked to be controlled
14
Cash
Rent/Real
Estate Pmts
28%
Family Living
10%
Machinery
and
Equipment
Pmts
8%
Fertilizer
18%
Seed
15%
Fuel
6%
Crop Insurance
5%
Insurance &
Misc
4%
Repairs
3%
Hauling
2%

16. Slice #3 – Fixed Asset Costs
• Typically <40% of Gross Income
• Land Rent
• Owned Land P&I
• Machinery Debt
15

17. What can producers do?
16
• Know your operation
– actual costs, breakevens, production history, variable AND fixed costs
• Be a low cost producer
– focus on big items that are in your control
• Use risk management
– crop insurance, marketing, input purchases, and interest rates
• Maintain a strong financial position with risk-bearing capacity
– strong working capital and sustainable levels of debt
• Know your strengths and weakness as a operator and manager and align
with a team of experts
– Ag lender, crop insurance, commodity broker or merchandiser, input experts

18. Answers for the Current Cycle
The low-hanging fruit has been picked and only goes so far:
 Reductions in input costs
 Curtailed/postponed/downscaled capital purchases such as vehicles
and machinery
The tough questions – and the place where bigger changes can happen –
relate to the four “Rs” of overhead/fixed costs:
Rented land – Renegotiate
Owned land – Re-amortize
Machinery/equipment – Refinance
Family living – Re-assess/Find ways to Reduce.
Where you as producers can make the most difference
Analyzing and adjusting your fixed costs could reduce the gap by $50-
$100/acre

19. Figuring the Cash Rental
Factor
18
Four steps illustrate the impact of paying premium rent:
1. Run a cash-flow to determine “breakeven rent.”
2. Calculate the difference between the market rate and the breakeven rent.
Can you afford the difference?
3. Determine the expected/potential loss per acre and the impact on working
capital if rent is not lowered.
4. Assess whether the operation can sustain losses until profits return. (What
is your overall financial depth)
5. Also consider the potential “sunk” money in the form of the inflated land
rental – it can easily add up to $300/acre in just three years. If profits
return thereafter, how many subsequent years will they have to farm just to
recoup that amount?

20. FCSAmerica/Frontier Farm
Credit Financial Guidelines
19

21. • Communicate early and often
– Make sure you lender knows your operation, plans, and goals.
– Update throughout year if things change
• Be prepared and have a plan
• Be flexible and open to ideas
• In challenging times, identify your “sacred cow”
• Remember that everyone is wanting to see success
Working with your lender

22. • Agriculture is cyclical and things will turn
around
• The “boom years” are most likely gone for
awhile, but profitability will return for many
operations
• US farmers and ranchers are resilient and the
best operators in the world.
Looking forward – Positive outlook

23. Land Rent Calculators
• Purdue’s discussion used here:
https://ag.purdue.edu/commercialag/Pages/Resources/Farmla
nd/Cash-Rents/Evaluating-Farmland-Rental.aspx
• Purdue’s breakeven rent calculator (Excel spreadsheet):
https://ag.purdue.edu/agecon_docs/longTermCashRent.xlsm
• Univ. Minn. “FairRent” tool (share rent, cash rent, seven flex
leases): https://fairrent.umn.edu
• Nebraska Farm Real Estate landing page (survey, articles on
leasing, and lease calculators) :
http://agecon.unl.edu/realestate
22

24. Rental Resources
• Discussion by Purdue and U. Illinois economists:
https://ag.purdue.edu/commercialag/Pages/Resources/Farmland/Cash-Rents.aspx
• North Central Extension Library (many articles and sample forms): http://aglease101.org/DocLib/default.aspx and
http://aglease101.org/default.aspx
• Iowa State Ag Decision Maker (articles about leases, audio/visual discussion, sample leases):
http://www.extension.iastate.edu/agdm/
• Iowa State Ag Decision Maker (Farm Financial Management: 16 Ways to Stretch Cash Flow):
http://www.extension.iastate.edu/agdm/wholefarm/html/c3-58.html
• Kansas State agmanager (articles, links to budgets and estimates):
http://www.agmanager.info/farmmgt/land/lease/default.asp
• Nebraska Farm Real Estate landing page (survey, articles on leasing, and lease calculators) :
http://agecon.unl.edu/realestate
• South Dakota (survey results): https://www.sdstate.edu/econ/extension/
• Wyoming (Ag Lease 101): http://aglease101.org/default.aspx; Pasture and Cropland Leases and Rents:
http://www.uwyoextension.org/highplainscropsite/pasture-and-cropland-leases-and-rates/
• University of Illinois farmdoc (survey; lease forms): http://www.farmdoc.illinois.edu/manage/index.asp
23