Managing Crop Margins in 2009 Craig A. Chase Farm Management Field Specialist

Presentation Objectives Cost of Production Sizing up the Market Strategies/Tools for Managing Margins

Costs for 2009 Extremely hard to predict this year –Pre-paid vs. spot –Changes in world and domestic demand –Changes due to financial crisis –New varieties and traits –Energy markets

Baseline assumptions Diesel$2.50 N$.68, P $.90K $.72 LP $1.90 Corn seed; $250 Soybeans $45/50 lb Land; $178 $205 $232 Yields; continuous corn –Rotated corn –Soybeans

Source: Schnitkey, U of IL Ext. Economics, Oct Direct Cost of Crop Production ($/A) Historical vs Forecast 36% 19%

Non-Land Costs vs. Gross Revenue ($/A) Historical vs Forecast Source: Schnitkey, U of IL Ext. Economics, Oct $177/A $200/A

Sizing Up the Market

Reluctance Toward Pre-Harvest Marketing Failure to Understand and Track Your Local Basis Lack of an Exit Strategy Holding Grain in Storage Too Long Misunderstanding Carrying Charges Develop a Marketing Plan Avoid the Five Common Mistakes in Grain Marketing?!?!

Sep $4.38 July $4.28 May $4.18 Mar $4.07 Corn Futures Carry Dec $4.52 Source: December Dec. 31, 2008 Good carry through July: rewards on-farm storage

Corn Storage Costs Assumption: Corn is Valued at $4/bu - 7% APR Source: Johnson, ISU Ext. Economics, December

Corn Basis

Jul $10.03 May $9.92 Mar $9.80 Jan. $9.72 Dec. 11 th, 2008 Soybean Futures Carry Nov $10.07 Source: December Lack of carry, difficult to justify storage long-term

Soybean Storage Costs Source: Johnson, ISU Ext. Economics, December Assumption: Soybeans are Valued at $9/bu - 7% APR

Soybean Basis

New Crop Corn Seasonal Trend Source: CBOT data compiled by the U of MN, CFFM, % Odds: Spring Price Exceeds Harvest Price

$3.65/bu 17% $3.80/bu 65% $4.65/bu 18% Corn Cash Price & Probability Forecast ’09-’10 Marketing Year Source: Wisner, ISU Biofuels Economist, December 2008.

December 2009 Corn Futures

New Crop Soybeans Seasonal Trend Source: CBOT data compiled by the U of MN, CFFM, % Odds: Spring Price Exceeds Harvest Price

$7.45/bu 17% $7.75/bu 65% $8.45/bu 18% Soybean Cash Price & Probability Forecast ’09-’10 Marketing Year Source: Wisner, ISU Biofuels Economist, December 2008.

November 2009 Soybean Futures

Tools for Evaluation Machinery Economics Crop Rotation Calculator flexiblerentanalysis.xls Crop Rotation Calculator Crop Rotation N Calculator Flexible Rent Calculator

Crop Rotation Calculator

Crop Rotation Calculator

Decision #1 What should the crop rotation be? What are the choices? Are there alternative or specialty crops that are more profitable and that would fit into a rotation?

Corn after SB $4.00 price $.75 N 104 pounds

Corn on Corn $4.50 price $.75 N 157 pounds

Decision #2 What should the fertility program look like? Can fertility costs be lowered without affecting yields? (over 1/3 of non-land production cost is from fertility).

Machinery costs Fixed costsVariable costs Depreciation Interest Storage Insurance Repairs Labor Fuel

asp?section=FAST Machinery Economics Field Operations

Managing Machinery Costs Combine Operations

Decision #3 Does the machinery “fit” the operation ? (not too big or too little) Do the custom rate charges reflect the costs of the machinery? Are there some machinery costs that can be re-evaluated (field operations)?

Tenants’ Residual Computing a Cropland Cash Rental Rate

Flexible Cash Rent Leases

Decision #4 Does the lease terms provide for some profitability? Can I re-negotiate the lease or move it toward a flexible terms lease?

Crop Insurance du/cropins/index.asp

Decision #5 Determine the right insurance product to meet your risk management needs. Make sure you have enough insurance, but are not “over-insured”. –Look at what the insurance product does compared to the farm marketing plan. –Evaluate the new farm bill and how ACRE may affect crop insurance needs.

Conclusions Input prices have risen dramatically and will show increased volatility. Some signs world prices have softened but not likely to be seen until current high priced stocks are used. Take soil tests and only use what is necessary. Evaluate seed and seeding rates carefully.

Conclusions Try for flexible lease arrangements. Consider all the pest management options available. Don’t simply cut back without carefully evaluating the consequences; you have to spend money to make money. Consider all the risk management options available.

Conclusions Know your costs of production. Make cuts and changes where they will do you the most good. Follow a good marketing plan.

Risk Management Web Sites Ag Decision Maker – ISU Extension Economics Farm Doc – U of IL Extension Economics Center for Farm Financial Management – U of MN Corn Nitrogen Rate Calculator Calculator

ISU Crop Marketing Web Sites Grain and Oilseed Market Analysis o/ Corn and Soybean Basis (State and County) Ag Econ Periodicals, Publications and Programs Ag Decision Maker (Crop Updates/ Publications Decision Tools)

Questions….. Any questions or comments? Thank You for This Opportunity! NOTE: This presentation can be found at cchase.html Craig A. Chase Farm Management Field Specialist th Avenue SW Tripoli, IA (319)