Try these strategies to manage margins
DECORAH, Iowa — Corn and soybean margins plummeted in 2014, fell more in 2015 and Iowa State University Extension farm management specialist Alejandro Plastina told farmers attending the recent Pro Ag Outlook Seminar in Decorah to expect low to...
DECORAH, Iowa — Extension farm management specialist Alejandro Plastina told farmers attending the recent Pro Ag Outlook Seminar in Decorah to expect low to negative soybean and corn margins in 2016 .
Farmers renting land lost $13 per acre for corn and made $9 per acre on soybeans in 2014. In 2015, farmers lost $55 per acre on corn and $23 on soybeans.
Farmers who own their land netted $247 per corn acre in 2014 and $191 per acre in 2015. Soybean margins were $269 per acre in 2014 and $223 per acre in 2015.
For farmers who are paying a mortgage on land and have paid about half of it, corn acres returned $97 in 2014 and just $41 per acre in 2015. For soybeans, margins were $119 in 2014 and $73 per acre in 2015.
Supporting $40,000 in living expenses on corn and soybean ground that was 100 percent rented land in 2014 and 2015 wasn't possible, Plastina said.
It took 155 acres of fully owned land to afford $40,000 in living expenses in 2014 and 193 acres in 2015.
For farmers buying land, it took 371 acres to support $40,000 in living expenses in 2014 and 700 in 2015.
"Things are tough," said Plastina. "What can we expect in 2016? We don't really know because we don't know what yields, prices or cost of production will be, but very low to negative margins are likely to continue."
The major concern is cash flow and liquidity.
"Solvency has been hit but it's still strong," he said. "Declining land and machinery values are occurring but no where near the rate of the 1980s."
Plastina offered farmers nine strategies to manage margins.
"These are by no means a recipe book," Plastina said. "They are things most of you thought about."
• Protect working capital.Consider revising recent asset purchases. Revise the share of rented land. Take advantage of low interest rates. Revise the scale of operation and fix costs over the next two to three years. Manage taxes considering deferred payment contracts to add flexibility. Don't buy machinery to avoid taxes. Carry back operating losses two to five years and obtain tax refunds.
• Avoid cash shortages.Renters need to plan for operating losses and secure operating loan/emergency loan terms. Be careful with new capital expenditures and maintain cash reserves and operating credit lines. Average cash costs are $431 to $467 per acre for soybeans after corn, $587 to $655 for corn after soybeans and $623 to $699 for corn after corn.
• Secure repayment capacity.Short repayment schedules reduce cash flow versus long repayment schedules. Try to extend repayment schedules on equipment and real estate loans. Work a plan with your lender for 2016.
• Income diversification."Now is not the time to lose non-farm income," Plastina said. "Keep what you have and add to it." Consider alternative sources of revenue with your assets such as custom work, snow removal or truck driving.
• Control costs.Revise production costs. Try renegotiating land rents. Consult with your agronomist to evaluate cutting costs without cutting yields substantially. Consider a soil test. Skip fall tillage. Seek volume discounts in seed and chemical purchases. Revise family living expenditures. Postpone vacation and house remodeling plans and vehicle purchases.
• Look at ways to enhance productivity.Improve timeliness and careful use of inputs. Revise production plans, especially on rented land. Visit with an agronomist and update production skills.
• Actively manage risk."The one message I want you take home is to know your break-even prices," Plastina said. Design a marketing plan with price and date targets and stick to it. Lock in margins whenever possible. Revise crop insurance. Revise use of forward contracts and crop insurance to finance inputs.
• Revise growth strategy. Get rid of unproductive assets. Consider downsizing or slowing growth. "For beginning farmers, this is a great time to wait," Plastina said. "Don't buy land now."
• Know your ARC/PLC payments.
For more information on these strategies, he urged farmers to use the Ag Decisionmaker website at http://www.extension.iastate.edu/agdm/.