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Positioning for Success During the Downturn in the Ag Economy

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

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Positioning for Success During the Downturn in the Ag Economy

  1. 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. 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. 3. 2 The “Boom Years” are over
  4. 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. 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. 6. 5 Good production years in grain
  7. 7. 6 Cow numbers are increasing
  8. 8. 7 More protein to consume
  9. 9. U.S. Net Farm Income Trends Source: USDA Economic Research Service, August 30, 2016 *Estimate **Forecast
  10. 10. Negative Return to Management Corn Source: farmdoc daily
  11. 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. 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. 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. 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. 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. 16. Slice #3 – Fixed Asset Costs • Typically <40% of Gross Income • Land Rent • Owned Land P&I • Machinery Debt 15
  17. 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. 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. 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. 20. FCSAmerica/Frontier Farm Credit Financial Guidelines 19
  21. 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. 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. 23. Land Rent Calculators • Purdue’s discussion used here: nd/Cash-Rents/Evaluating-Farmland-Rental.aspx • Purdue’s breakeven rent calculator (Excel spreadsheet): • Univ. Minn. “FairRent” tool (share rent, cash rent, seven flex leases): • Nebraska Farm Real Estate landing page (survey, articles on leasing, and lease calculators) : 22
  24. 24. Rental Resources • Discussion by Purdue and U. Illinois economists: • North Central Extension Library (many articles and sample forms): and • Iowa State Ag Decision Maker (articles about leases, audio/visual discussion, sample leases): • Iowa State Ag Decision Maker (Farm Financial Management: 16 Ways to Stretch Cash Flow): • Kansas State agmanager (articles, links to budgets and estimates): • Nebraska Farm Real Estate landing page (survey, articles on leasing, and lease calculators) : • South Dakota (survey results): • Wyoming (Ag Lease 101):; Pasture and Cropland Leases and Rents: • University of Illinois farmdoc (survey; lease forms): 23