positioning for success during the downturn in the ag economy

WORKING TOGETHER THROUGH A

TOUGH AGRICULTURAL ENVIRONMENT

FEBRUARY 9, 2017

Jarod RegierVice President Farm Credit Services of

America/Frontier Farm Credit

Bob CarterVice President – Farm Credit Services of

America/Frontier Farm Credit

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• 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

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The “Boom Years” are over

The Recent Spike was an

Aberration

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$/b

ush

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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.

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.

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Good production years in grain

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Cow numbers are increasing

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More protein to consume

U.S. Net Farm Income Trends

Source: USDA Economic Research Service, August 30, 2016

*Estimate **Forecast

Negative Return to Management

Corn

Source: farmdoc daily

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.

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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

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)

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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

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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

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Cash Rent/Real

Estate Pmts28%

Family Living10%

Machinery and

Equipment Pmts8%

Fertilizer18%

Seed15%

Fuel6%

Crop Insurance5%

Insurance & Misc4%

Repairs3%

Hauling2%

Slice #3 – Fixed Asset Costs

• Typically <40% of Gross Income

• Land Rent

• Owned Land P&I

• Machinery Debt

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What can producers do?

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• 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

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

Figuring the Cash Rental

Factor

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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?

FCSAmerica/Frontier Farm

Credit Financial Guidelines

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• 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

• 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

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

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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

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