1. Extension and Outreach/Department of Economics Managing Margins in 2016 and Beyond Crop Advantage Series Mason City, Iowa Jan. 15, 2016 Alejandro Plastina Assistant Professor plastina@iastate.edu 515-294-6160 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Extension and Outreach/Department of Economics Iowa Corn Prices vs. Costs

3. Extension and Outreach/Department of Economics Profitability analysis in Iowa: Rented Corn Acres Units2012201320142015f a. State Yield Bu/Ac137164178 192 b. Iowa Farm Price $/Bu6.924.493.70 3.60 c. Crop Revenue (=axb) $/Ac948736659 691 d. Average Crop Insurance Payment $/Ac12313283 n/a e. Income from Crop (=c+d) $/Ac1071868742 691 f. Average State Cash Rent $/Ac252270260 246 g. Average Non-land Production Cost $/Ac517513495 499 h. Total Production Cost (=f+g) $/Ac769783755 745 i. Net Farm Income from Corn (=e-h) $/Ac30285-13 -54 Sources: USDA/NASS, RMA, AgDM File A1-20 Corn producers who rent need to finance these gaps with $ from other sources! j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac179-47-96-54

4. Extension and Outreach/Department of Economics Net Farm Income: Corn $/Acre

5. Extension and Outreach/Department of Economics Profitability analysis in Iowa: Rented Soybean Acres Units2012201320142015f a. State Yield Bu/Ac45.045.551.5 56.5 b. Iowa Farm Price $/Bu14.4013.109.96 8.80 c. Crop Revenue (=axb) $/Ac648596513 497 d. Average Crop Insurance Payment $/Ac272526 n/a e. Income from Crop (=c+d) $/Ac675621539 497 f. Average State Cash Rent $/Ac252270260 246 g. Average Non-land Production Cost $/Ac288272270 275 h. Total Production Cost (=f+g) $/Ac540542530 521 i. Net Farm Income from Soy (=e-h) $/Ac135799 -24 Sources: USDA/NASS, RMA, AgDM File A1-20 Soybean producers who rent need to finance these gaps with $ from other sources! j. Net Farm Income w/o Crop Ins. (=i-d) $/Ac10854-17-24

6. Extension and Outreach/Department of Economics Net Farm Income: Soybeans $/Acre

7. Extension and Outreach/Department of Economics Profitability in Perspective: Living Expenses How many acres (50% corn-50% soybeans) are needed to support $40,000 in living expenses? 2012201320142015 100% Rented Acres 183487 Not Possible! Fully Owned Acres 85114155193 Half-Owned Acres 125198371700 @ $7,600/acre (2015): 193 acres  $1.47 mil. in land value = equity 700 acres  $5.32 mil. in land value = $2.7 mil. equity Sources: USDA/NASS, RMA, AgDM File A1-20

8. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2016 Corn following corn AgDM File A1-20

9. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2016 Corn following soybeans AgDM File A1-20

10. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2016 Soybeans following corn AgDM File A1-20

11. Extension and Outreach/Department of Economics CORNSOYBEANS Units2015f2016f Change 2015f2016f Change a. State Yield Bu/Ac 192177-8%56.5 50-12% b. Iowa Farm Price $/Bu 3.603.62+1%8.80 8.44-4% e. Income from Crop (=axb) $/Ac 690641-7%497 422-15% f. Average State Cash Rent $/Ac 246239-3% 246239-3% g. Average Non-land Production Cost $/Ac 499461-8% 275267-3% h. Total Production Cost (=f+g) $/Ac 745700-6% 521506-3% j. Net Farm Income w/o Crop Ins. (=e-h) $/Ac -55-59 -24-84 Profitability analysis in Iowa: Rented Acres Sources: USDA/NASS, RMA, AgDM File A1-20

12. Extension and Outreach/Department of Economics 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

13. Extension and Outreach/Department of Economics 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

14. Extension and Outreach/Department of Economics 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 / AcreSoy 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 Source: File A1-20, Ag Decision Maker

15. Extension and Outreach/Department of Economics 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, ???

16. Extension and Outreach/Department of Economics 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 2.75 bu/acre @ $3.60/bu, GO AHEAD! Otherwise, NO GO. Switch to seeds with fewer traits (+crop management)? Net savings $25/acre. If yield  smaller than 6.95 bu/acre @ $3.60/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

17. Extension and Outreach/Department of Economics 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

18. Extension and Outreach/Department of Economics Strategies: 6. Revise family living expenses Revise family living expenditures: –Vacation plans –House remodeling plans –Truck purchase 193 fully owned acres to afford $40,000 in living expenses 340 fully owned acres to afford $70,000 in living expenses

19. Extension and Outreach/Department of Economics 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

20. Extension and Outreach/Department of Economics 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

21. Extension and Outreach/Department of Economics Strategies: 9. Know your ARC/PLC Payments Payments vary widely across counties and programs No PLC payments in 2014. Small payments likely in corn base acres in 2015. If any 2014 ARC-CO Payments, use to cash flow Corn: higher yields in 2015 (except CRDs 8 & 9), and lower 5-y OA yields (except for CRDs 5, 8, 9). Lower ARC-CO payments (except for CRDs 8 & 9) even with lower prices. Soybeans: higher yields in 2015 (except for CRDs 4 & 7), but higher 5-y OA yields (except for CRDs 1, 2, 7). Higher ARC-CO payments (except for CRDs 1-3). Source: Iowa Farm Bureau Federation

22. Extension and Outreach/Department of Economics 2015 ARC-CO Payments per Corn Base Acre (issued Oct 2016) $68 Y 185.3; OAY 170.8 $51 Y 194.1; OAY 168.6 $63 Y 186.5; OAY 167.8 $49 Y 188.4 ; OAY 164.3 $38 Y 192.8; OAY 163.8 $56 Y 187.9; OAY 167.2 $37 Y 174.2; OAY 150.6 $5 Y 162.9; OAY 117.0 $20 Y 173.2; OAY 134.5 State Average: $43 per base acre Projections based on: 1)2015/16 USDA Price Projection: Corn $3.60 2) Guaranteed Price: Corn $5.29 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield

23. Extension and Outreach/Department of Economics 2015 ARC-CO Payments per Soy Base Acre 2015 yields projected with CRD yields (issued Oct 2016) State Average: $19 per base acre $9 Y 60.4; OAY 50.5 Projections based on: 1)2015/16 USDA Price Projection: Soybeans $8.80 2) Guaranteed Price: Soybeans $ 12.27 3) Projected 2015 County Yields = 2014 County Yields × 2015 CRD Yield / 2014 CRD Yield $1 Y 58.6; OAY 47.0 $8 Y 60.1; OAY 50.9 $37 Y 52.8; OAY 48.7 $27 Y 56.1; OAY 50.0 $28 Y 58.4; OAY 52.1 $34 Y 48.9; OAY 46.4 $19 Y 47.1; OAY 41.3 $12 Y 54.5; OAY 45.8

24. Extension and Outreach/Department of Economics 2015 ARC-CO Payment Calculator http://www.extension.iastate.edu/agdm/info/farmbill.html

25. Extension and Outreach/Department of Economics 2015 PLC Payments per Corn Base Acre MYA Price $3.60 per bushel State Average: $10 per base acre Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 MYA Prices: Corn $ 3.60 / bushel $10 Yield 126.8 bu $10 Yield 129.5 bu $10 Yield 125.7 bu $9 Yield 114.7 bu $10 Yield 126.8 bu $10 Yield 126.3 bu $8 Yield 107.2 bu $8 Yield 99.5 bu $9 Yield 117.5 bu

26. Extension and Outreach/Department of Economics 2015 PLC Payments per Soy Base Acre MYA Price $8.80 per bushel State Average: $0 per base acre Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 USDA MYA Prices: Soybean $ 8.80 / bushel $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 $0 Yield 35.5 bu $0 Yield 33.3 bu $0 Yield 35.4 bu

27. Extension and Outreach/Department of Economics PLC Payment Calculator http://www.extension.iastate.edu/agdm/info/farmbill.html

28. Extension and Outreach/Department of Economics 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/

29. Extension and Outreach/Department of Economics Thank you for your time! Any questions? Ag Decision Maker: http://www.extension.iastate.edu/agdm/