1. Extension and Outreach/Department of Economics Managing Margins in 2016 and Beyond Crop Advantage Series Okoboji, Iowa Jan. 6, 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 U.S. Corn Supply and Use 20122013201420152015 Δ Area Planted(mil. acres)97.395.490.688.40 Yield(bu./acre)123.1158.1171.0169.30 Production(mil. bu.)10,75513,82914,21613,6540 Beg. Stocks(mil. bu.)9898211,2321,7310 Imports(mil. bu.)1603632300 Total Supply(mil. bu.)11,90414,68615,47915,4150 Feed & Residual(mil. bu.)4,3155,0405,3155,3000 Ethanol(mil. bu.)4,6415,1245,2095,20025 Food, Seed, & Other(mil. bu.)1,3971,3691,3591,3800 Exports(mil. bu.)7301,9201,8641,750-50 Total Use(mil. bu.)11,08313,45413,74813,630-25 Ending Stocks(mil. bu.)8211,2321,7311,78525 Season-Average Price($/bu.)6.894.463.703.650 Source: USDA-WAOB

3. Extension and Outreach/Department of Economics U.S. Soybean Supply and Use 20122013201420152015 Δ Area Planted(mil. acres)77.276.883.383.20 Yield(bu./acre)40.044.047.548.30 Production(mil. bu.)3,0423,3583,9273,9810 Beg. Stocks(mil. bu.)169141921910 Imports(mil. bu.)417233300 Total Supply(mil. bu.)3,2523,5704,0524,2030 Crush(mil. bu.)1,6891,7341,8731,8900 Seed & Residual(mil. bu.)1051071451330 Exports(mil. bu.)1,3171,6381,8431,7150 Total Use(mil. bu.)3,1113,4783,8613,7380 Ending Stocks(mil. bu.)141921914650 Season-Average Price($/bu.)14.4013.0010.108.900 Source: USDA-WAOB

4. Extension and Outreach/Department of Economics Corn Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre Source: USDA-NASS

5. Extension and Outreach/Department of Economics Soybean Yield Estimate Source: USDA-NASS Top: 2015 Estimated Yields Bottom: Change from last month Units: Bushels/acre

6. Extension and Outreach/Department of Economics World Corn Production Source: USDA-WAOB

7. Extension and Outreach/Department of Economics World Soybean Production Source: USDA-WAOB

8. Extension and Outreach/Department of Economics U.S. Meat Production & Prices Source: USDA-WAOB

9. Extension and Outreach/Department of Economics Corn Export Sales Source: USDA-FAS

10. Extension and Outreach/Department of Economics Soybean Export Sales Source: USDA-FAS

11. Extension and Outreach/Department of Economics Strength of the U.S. Dollar Source: Federal Reserve

12. Extension and Outreach/Department of Economics Crude Oil Prices Sources: EIA and CME

13. Extension and Outreach/Department of Economics Corn Grind for Ethanol

14. Extension and Outreach/Department of Economics Current Corn Futures Source: CME Group, 12/31/2015 3.51 3.63 3.79

15. Extension and Outreach/Department of Economics Current Soybean Futures Source: CME Group, 12/31/2015 8.568.40 8.47

16. Extension and Outreach/Department of Economics 2015/16 Crop Margins

17. Extension and Outreach/Department of Economics 2016/17 Crop Margins

18. Extension and Outreach/Department of Economics Profitability analysis in Iowa: Rented Corn Acres Units2012201320142015f a. State Yield Bu/Ac137164178 189 b. Iowa Farm Price $/Bu6.924.493.70 3.65 c. Crop Revenue (=axb) $/Ac948736659 690 d. Average Crop Insurance Payment $/Ac12313283 n/a e. Income from Crop (=c+d) $/Ac1071868742 690 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 -55 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) $/Ac179-47-96-55

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

20. Extension and Outreach/Department of Economics Profitability analysis in Iowa: Rented Soybean Acres Units2012201320142015f a. State Yield Bu/Ac45.045.551.5 56.0 b. Iowa Farm Price $/Bu14.4013.109.96 8.90 c. Crop Revenue (=axb) $/Ac648596513 498 d. Average Crop Insurance Payment $/Ac272526 n/a e. Income from Crop (=c+d) $/Ac675621539 498 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 -23 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) $/Ac10854-17-23

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

22. 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 @ $7,900/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

23. Extension and Outreach/Department of Economics 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 +10% -199-164-130-95-61 +5% -161-127-92-58-23 0% -124-90-55-2114 -5% -87-52-181751 -10% -50-15195488

24. Extension and Outreach/Department of Economics 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 +10% -125-100-75-50-25 +5% -98-74-49-241 0% -72-48-23227 -5% -46-2132853 -10% -205305479

25. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2015 Corn following corn AgDM File A1-20

26. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2015 Corn following soybeans AgDM File A1-20

27. Extension and Outreach/Department of Economics Cost of Corn Production in Iowa – 2015 Soybeans following corn AgDM File A1-20

28. Extension and Outreach/Department of Economics CORNSOYBEANS Units2015f2016f Change 2015f2016f Change a. State Yield Bu/Ac 189177-6%56 50-11% b. Iowa Farm Price $/Bu 3.653.79+4%8.90 8.47-5% e. Income from Crop (=axb) $/Ac 690671-3%498 424-15% 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 -55-29 -23-82 Profitability analysis in Iowa: Rented Acres Sources: USDA/NASS, RMA, AgDM File A1-20

29. 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

30. 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

31. 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

32. 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, ???

33. 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 2.7 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

34. 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

35. 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

36. 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

37. 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

38. Extension and Outreach/Department of Economics 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

39. Extension and Outreach/Department of Economics 2015 ARC-CO Payments per Corn Base Acre 2015 yields projected with CRD yields (issued Oct 2016) State Average: $49 per base acre $72$71$70 $64$53$61 $39$1 $3 Projections based on: 1)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

40. 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 $8$2$7 $39$25$29 $36$18 $11 Projections based on: 1)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

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

42. Extension and Outreach/Department of Economics 2015 PLC Payments per Corn Base Acre MYA Price $3.65 per bushel State Average: $5 per base acre Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 MYA Prices: Corn $ 3.65 / bushel $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 $5 Yield 107.2 bu $4 Yield 99.5 bu $5 Yield 117.5 bu

43. Extension and Outreach/Department of Economics 2015 PLC Payments per Soy Base Acre MYA Price $8.90 per bushel State Average: $0 per base acre Projections based on: 1) Payment Yields = CCP Yields 2) 2015/16 USDA MYA Prices: Soybean $ 8.90 / 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

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

45. 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/

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