Managing Margins in 2016 and Beyond Crop Advantage Series Burlington, Iowa Jan. 8, 2016 Alejandro Plastina Assistant Professor plastina@iastate.edu 515-294-6160 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1 1

U.S. Corn Supply and Use 2012 2013 2014 2015 2015 Δ Area Planted (mil. acres) 97.3 95.4 90.6 88.4 Yield (bu./acre) 123.1 158.1 171.0 169.3 Production (mil. bu.) 10,755 13,829 14,216 13,654 Beg. Stocks 989 821 1,232 1,731 Imports 160 36 32 30 Total Supply 11,904 14,686 15,479 15,415 Feed & Residual 4,315 5,040 5,315 5,300 Ethanol 4,641 5,124 5,209 5,200 25 Food, Seed, & Other 1,397 1,369 1,359 1,380 Exports 730 1,920 1,864 1,750 -50 Total Use 11,083 13,454 13,748 13,630 -25 Ending Stocks 1,785 Season-Average Price ($/bu.) 6.89 4.46 3.70 3.65 Source: USDA-WAOB 2 2

U.S. Soybean Supply and Use 2012 2013 2014 2015 2015 Δ Area Planted (mil. acres) 77.2 76.8 83.3 83.2 Yield (bu./acre) 40.0 44.0 47.5 48.3 Production (mil. bu.) 3,042 3,358 3,927 3,981 Beg. Stocks 169 141 92 191 Imports 41 72 33 30 Total Supply 3,252 3,570 4,052 4,203 Crush 1,689 1,734 1,873 1,890 Seed & Residual 105 107 145 133 Exports 1,317 1,638 1,843 1,715 Total Use 3,111 3,478 3,861 3,738 Ending Stocks 465 Season-Average Price ($/bu.) 14.40 13.00 10.10 8.90 Source: USDA-WAOB 3 3

Corn Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre Source: USDA-NASS

Soybean Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre Source: USDA-NASS

World Corn Production Source: USDA-WAOB 6 6

World Soybean Production Source: USDA-WAOB 7 7

U.S. Meat Production & Prices Source: USDA-WAOB 8 8

Corn Export Sales Source: USDA-FAS

Soybean Export Sales Source: USDA-FAS

Strength of the U.S. Dollar Source: Federal Reserve

Crude Oil Prices Sources: EIA and CME

Corn Grind for Ethanol

Current Corn Futures 3.76 3.58 3.48 Source: CME Group, 1/7/2016

Current Soybean Futures 8.56 8.35 8.43 Source: CME Group, 1/7/2016

2015/16 Crop Margins

2016/17 Crop Margins

Iowa Corn Prices vs. Costs

Profitability analysis in Iowa: Rented Corn Acres Units 2012 2013 2014 2015f a. State Yield Bu/Ac 137 164 178 189 b. Iowa Farm Price $/Bu 6.92 4.49 3.70 3.65 c. Crop Revenue (=axb) $/Ac 948 736 659 690 d. Average Crop Insurance Payment 123 132 83 n/a e. Income from Crop (=c+d) 1071 868 742 f. Average State Cash Rent 252 270 260 246 g. Average Non-land Production Cost 517 513 495 499 h. Total Production Cost (=f+g) 769 783 755 745 i. Net Farm Income from Corn (=e-h) 302 85 -13 -55 j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac 179 -47 -96 -55 Corn producers who rent need to finance these gaps with $ from other sources! Sources: USDA/NASS, RMA, AgDM File A1-20

Net Farm Income: Corn $/Acre

Profitability analysis in Iowa: Rented Soybean Acres Units 2012 2013 2014 2015f a. State Yield Bu/Ac 45.0 45.5 51.5 56.0 b. Iowa Farm Price $/Bu 14.40 13.10 9.96 8.90 c. Crop Revenue (=axb) $/Ac 648 596 513 498 d. Average Crop Insurance Payment 27 25 26 n/a e. Income from Crop (=c+d) 675 621 539 f. Average State Cash Rent 252 270 260 246 g. Average Non-land Production Cost 288 272 275 h. Total Production Cost (=f+g) 540 542 530 521 i. Net Farm Income from Soy (=e-h) 135 79 9 -23 j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac 108 54 -17 -23 Soybean producers who rent need to finance these gaps with $ from other sources! Sources: USDA/NASS, RMA, AgDM File A1-20

Net Farm Income: Soybeans $/Acre

Profitability in Perspective: Living Expenses How many acres (50% corn-50% soybeans) are needed to support $40,000 in living expenses? 2012 2013 2014 2015 100% Rented Acres 183 487 Not Possible! Fully Owned Acres 85 114 155 193 Half-Owned Acres 125 198 371 700 @ $7,900/acre (2015): 193 acres  $1.5 mil. in land value = equity 700 acres  $5.5 mil. in land value = $2.8 mil. equity Sources: USDA/NASS, RMA, AgDM File A1-20

Corn Profits: Dollars per Rented Acre What can happen in 2016? Corn Profits: Dollars per Rented Acre 2016 Revenue compared to 2015 -10% -5% 0% +5% +10% 2016 Cost of Production compared to 2015 -199 -164 -130 -95 -61 -161 -127 -92 -58 -23 -124 -90 -55 -21 14 -87 -52 -18 17 51 -50 -15 19 54 88

Soybean Profits: Dollars per Rented Acre What can happen in 2016? Soybean Profits: Dollars per Rented Acre 2016 Revenue compared to 2015 -10% -5% 0% +5% +10% 2016 Cost of Production compared to 2015 -125 -100 -75 -50 -25 -98 -74 -49 -24 1 -72 -48 -23 2 27 -46 -21 3 28 53 -20 5 30 54 79

Profitability analysis in Iowa: Rented Acres CORN SOYBEANS Units 2015f 2016f Change a. State Yield Bu/Ac 189 177 -6% 56 50 -11% b. Iowa Farm Price $/Bu 3.65 3.58 -2% 8.90 8.35 e. Income from Crop (=axb) $/Ac 690 634 -8% 498 418 -16% f. Average State Cash Rent 246 239 -3% g. Average Non-land Production Cost 499 461 275 267 h. Total Production Cost (=f+g) 745 700 521 506 j. Net Farm Income w/o Crop Ins. (=e-h) -55 -66 -23 -88   Sources: USDA/NASS, RMA, AgDM File A1-20

9 Strategies to manage margins Major concern: cash flow / liquidity Solvency hit, but still strong: Declining land values in Iowa Declining machinery values Long term problem  strategy for 2-3 years

Strategies: 1. Protect your working capital Revise recent asset purchases Revise share of rented land Revise scale of operation and fixed costs over next 2-3 years Manage taxes: visit with tax advisor Deferred payment contracts S179 Carry back operating losses to obtain tax refunds First line of defense against financial stress! Burn rate in 2015, puts you on a weaker position for 2016 and 2017.

Strategies: 2. Avoid cash shortages Plan for operating losses (renters) Secure operating loan/emergency loan terms Be very careful with new capital expenditures Maintain cash reserves and operating credit lines: Cash Costs / Acre Soy after corn Corn after soy Corn after corn Non-land (excl. labor) $185-$200 $320-$385 $360-$425 Land $225-$300 All Cash Costs $410-$500 $545-$685 $585-$725 Operating losses – particularly for renters!! Decline in expensing and reduced flexibility to delay sales because of lower prices. Source: File A1-20, Ag Decision Maker

Strategies: 3. Diversify Income Add or don’t lose non-farm income Consider alternative sources of revenue with your assets: custom work, snow removal, truck driving in fall & winter, ???

Strategies: 4. Revise production costs Revise production plans, especially for rented land (renegotiate land rent?) Can you make changes that generate savings that offset reductions in revenue?  N 20 lbs per acre? Savings $10. If yield  smaller than 2.7 bu/acre @ $3.65/bu, GO AHEAD! Otherwise, NO GO. Switch to seeds with fewer traits (+crop management)? Net savings $25/acre. If yield  smaller than 6.8 bu/acre @ $3.65/bu, GO AHEAD! Otherwise, NO GO. Seek volume discounts in seeds, chemicals, etc. Visit with agronomist: update your production skills, evaluate how to control costs

Strategies: 5. Actively Manage Risks Know your break-even prices Design a marketing plan with price and date targets and stick to it Lock-in margins whenever possible Revise crop insurance (Explore ways to maintain protection while lowering costs) Revise use of forward contracts & crop insurance to finance inputs Crop insurance will not be quite as protective as in recent years, but it is useful to manage risks. Don’t expect to make money out of it, just like you don’t expect to make money out of your car insurance, your home owners insurance, etc.

Strategies: 6. Revise family living expenses 193 fully owned acres to afford $40,000 in living expenses Revise family living expenditures: Vacation plans House remodeling plans Truck purchase 340 fully owned acres to afford $70,000 in living expenses Tight repayment capacity makes lenders nervous. And there has been a trend in recent years to change loan terms to shorter schedules, from 30 year mortages to 20 or 15 year mortgages, from 10 year machinery loans to 7 or 5 year machinery loans.

Strategies: 7. Secure repayment capacity Short repayment schedules reduce cash flow vs. long repayment schedules Try to extend repayment schedules on equipment & real estate loans (low interest rates) Work a plan with your lender(s) for 2016-2017 Tight repayment capacity makes lenders nervous. And there has been a trend in recent years to change loan terms to shorter schedules, from 30 year mortages to 20 or 15 year mortgages, from 10 year machinery loans to 7 or 5 year machinery loans. Talk sooner than later.

Strategies: 8. Revise Growth Strategy Depending on your growth stage: Offload unproductive assets Downsize Slow down growth Beginning farmers: wait to buy land Align short term needs with long term growth goals For Beg.Farmers how long to wait: don’t get too eager. Make sure to have the financial strength to do it.

Strategies: 9. Know your ARC/PLC Payments Payments vary widely across counties and programs If any 2014 ARC-CO Payments, use to cash flow Corn: 2015 corn yields similar to 2014 yields. ARC-CO payments similar too. Soy: 2015 corn yields different from 2014 yields. ARC-CO payments different too: Higher payments for central and southern counties and lower payments for northern counties. No PLC payments in 2014. Small payments likely in corn base acres in 2015. Source: Iowa Farm Bureau Federation

2015 ARC-CO Payments per Corn Base Acre (issued Oct 2016) State Average: $44 per base acre $69 Y 182.6; OAY 170.8 $52 Y 191.0; OAY 168.6 $64 Y 183.6; OAY 167.8 Projections based on: 2015/16 USDA Price Projection: Corn $3.65 2) Guaranteed Price: Corn $5.29 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $49 Y 185.4 ; OAY 164.3 $39 Y 189.9; OAY 163.8 $56 Y 185.1; OAY 167.2 $37 Y 171.3; OAY 150.6 $5 Y 159.9; OAY 117.0 $20 Y 170.2; OAY 134.5

2015 ARC-CO Payments per Soy Base Acre 2015 yields projected with CRD yields (issued Oct 2016) State Average: $19 per base acre $8 Y 60.0; OAY 50.5 $2 Y 57.8; OAY 47.0 $7 Y 59.7; OAY 50.9 Projections based on: 2015/16 USDA Price Projection: Soybeans $8.90 2) Guaranteed Price: Soybeans $ 12.27 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $39 Y 51.8; OAY 48.7 $25 Y 55.7; OAY 50.0 $29 Y 57.7; OAY 52.1 $36 Y 48.1; OAY 46.4 $18 Y 47.0; OAY 41.3 $11 Y 54.2; OAY 45.8

2015 ARC-CO Payment Calculator http://www. extension. iastate

2015 PLC Payments per Corn Base Acre MYA Price $3.65 per bushel State Average: $5 per base acre $5 Yield 126.8 bu $6 Yield 129.5 bu $5 Yield 125.7 bu $5 Yield 114.7 bu $5 Yield 126.8 bu $5 Yield 126.3 bu Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 MYA Prices: Corn $ 3.65 / bushel $5 Yield 107.2 bu $4 Yield 99.5 bu $5 Yield 117.5 bu

2015 PLC Payments per Soy Base Acre MYA Price $8.90 per bushel State Average: $0 per base acre $0 Yield 40.7 bu $0 Yield 38.6 bu $0 Yield 40.6 bu $0 Yield 37.0 bu $0 Yield 39.1 bu $0 Yield 40.7 bu Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 USDA MYA Prices: Soybean $ 8.90 / bushel $0 Yield 35.5 bu $0 Yield 33.3 bu $0 Yield 35.4 bu

PLC Payment Calculator http://www. extension. iastate

Summary Expect low to negative margins in 2016 Visit with: Agronomist – control costs? Lender – refinance, lower payments? Tax advisor – refunds from previous years? Crop insurance agent – change coverage? Use resources @ Ag Decision Maker: http://www.extension.iastate.edu/agdm/

Thank you for your time. Any questions. Ag Decision Maker: http://www