Risk Environment for Agriculture Ag. Credit School Ames, Iowa June 13, 2017 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911 1 1

Iowa Corn Prices vs. Costs

Iowa Soybean Prices vs. Costs

Iowa Corn Costs Overall 13% increase 21% 16% 8% 8% Source: AgDM A1-21

Iowa Soybean Costs Overall 24% increase 21% 6% 27% 39% Source: AgDM A1-21

Crop Prices for the Next Decade Source: USDA-OCE

GDP Growth Source: USDA-OCE

U.S. Crude Oil Prices Source: USDA-ERS

World Corn Markets Source: USDA 9 9

Crop Insurance One of many risk management strategies Traditionally set up to protect farmers in times of low crop yields Now offers coverage for low prices Available on over 100 commodities

Causes of Loss for Iowa Corn, 1948-2010

Causes of Loss for Iowa Soy, 1955-2010

Federal Crop Insurance

Federal Crop Insurance: Total Acres Insured

Corn Acres Insured in 2016 87% of all corn acres are insured

Soy Acres Insured in 2016 87% of all soybean acres are insured

2016 Corn and Soy Coverage Levels

PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not The choice depends on where you expect prices and yields to be over the next 5 years. There are price/yield combinations where PLC pays and ARC does not. There are also price/yield combinations where ARC pays and PLC does not.

President’s Budget Request Source: OMB, 2018 Budget

Value of Ag Trade Source: USDA-FAS

U.S. Ag Exports Source: USDA-FAS

Margin Maneuvers Negotiate lower land rental rates Explore variety choice (seed cost vs. seed benefits) Soil test and apply required fertilizer Examine and control other input costs (pesticides, herbicides, etc.) Be more aggressive marketing on rallies May look to limit losses, as opposed to capture profits Singles & doubles vs. Home run strategy

Margin Maneuvers Fully utilize government programs ARC-CO, PLC, crop insurance Break price into futures and basis components to capture improvements in either Put the pencil to paper and calculate storage benefits/costs Will a traditional seasonal price swing cover storage costs? What are futures prices telling you about storage opportunities now? Remember, Rome wasn’t built in a day It took us awhile to get into this situation and it will take awhile to get out.

Revenue Mix Source: USDA-ERS

Revenues vs. Costs Source: USDA-OCE

Farm Incomes Source: USDA-ERS

A Multi-dimensional Issue Source: Takle et. al., 2013

Communication is Key With your clients and your supervisors No one wants an unwelcome financial surprise Fewer surprises mean fewer conversations with regulators But it does require a few more conversations with clients

Understanding Clients What’s a “typical” year for them look like? Production Cash flow Marketing How far are they along their career path? Beginning Mid-career Transitioning out Do you see changes in the farm or in the client? Is the client willing to discuss the changes?

Source: Federal Reserve of Chicago Summary Ag Stats Source: Federal Reserve of Chicago

Summary Ag Lending Stats Source: Federal Reserve of Chicago

Iowa Loans Source: Hanson, 2017, IDoB

Examiner Experience Source: Hanson, 2017, IDoB

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/~chart/ Iowa Farm Outlook: http://www.econ.iastate.edu/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/