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Managing Margins in 2016 and Beyond Boone, Iowa Feb. 15, 2016 Alejandro Plastina Assistant Managing Margins in 2016 and Beyond Boone, Iowa Feb. 15, 2016 Alejandro Plastina Assistant Professor [email protected] edu 515 -294 -6160 Extension and Outreach/Department of Economics Chad Hart Associate Professor [email protected] edu 515 -294 -9911

U. S. Corn Supply and Use 2012 2013 2014 2015 Δ 97. 3 95. U. S. Corn Supply and Use 2012 2013 2014 2015 Δ 97. 3 95. 4 90. 6 88. 0 0 Area Planted (mil. acres) Yield (bu. /acre) 123. 1 158. 1 171. 0 168. 4 0 Production (mil. bu. ) 10, 755 13, 829 14, 216 13, 601 0 Beg. Stocks (mil. bu. ) 989 821 1, 232 1, 731 0 Imports (mil. bu. ) 160 36 32 50 10 Total Supply (mil. bu. ) 11, 904 14, 686 15, 479 15, 382 10 Feed & Residual (mil. bu. ) 4, 315 5, 040 5, 315 5, 300 0 Ethanol (mil. bu. ) 4, 641 5, 124 5, 209 5, 225 25 Food, Seed, & Other (mil. bu. ) 1, 397 1, 369 1, 359 1, 370 0 Exports (mil. bu. ) 730 1, 920 1, 864 1, 650 -50 Total Use (mil. bu. ) 11, 083 13, 454 13, 748 13, 545 -25 Ending Stocks (mil. bu. ) 821 1, 232 1, 731 1, 837 35 6. 89 4. 46 3. 70 3. 60 0 Season-Average Price ($/bu. ) Source: USDA-WAOB Extension and Outreach/Department of Economics

U. S. Soybean Supply and Use 2012 2013 2014 2015 Δ Area Planted (mil. U. S. Soybean Supply and Use 2012 2013 2014 2015 Δ Area Planted (mil. acres) 77. 2 76. 8 83. 3 82. 7 0 Yield (bu. /acre) 40. 0 44. 0 47. 5 48. 0 0 Production (mil. bu. ) 3, 042 3, 358 3, 927 3, 930 0 Beg. Stocks (mil. bu. ) 169 141 92 191 0 Imports (mil. bu. ) 41 72 33 30 0 Total Supply (mil. bu. ) 3, 252 3, 570 4, 052 4, 151 0 Crush (mil. bu. ) 1, 689 1, 734 1, 873 1, 880 -10 Seed & Residual (mil. bu. ) 105 107 145 131 0 Exports (mil. bu. ) 1, 317 1, 638 1, 843 1, 690 0 Total Use (mil. bu. ) 3, 111 3, 478 3, 861 3, 701 -10 Ending Stocks (mil. bu. ) 141 92 191 450 10 Season-Average Price ($/bu. ) 14. 40 13. 00 10. 10 8. 80 0 Source: USDA-WAOB Extension and Outreach/Department of Economics

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

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

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

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

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

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

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

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

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

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

Current Corn Futures 3. 72 3. 60 3. 54 Source: CME Group, 2/12/2016 Extension Current Corn Futures 3. 72 3. 60 3. 54 Source: CME Group, 2/12/2016 Extension and Outreach/Department of Economics

Current Soybean Futures 8. 66 8. 43 8. 45 Source: CME Group, 2/12/2016 Extension Current Soybean Futures 8. 66 8. 43 8. 45 Source: CME Group, 2/12/2016 Extension and Outreach/Department of Economics

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

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

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

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

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

9 Strategies to manage margins • Major concern: cash flow / liquidity • Solvency 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 Extension and Outreach/Department of Economics

Strategies: 1. Protect your working capital • Revise recent asset purchases • Revise share 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 – S 179 – Carry back operating losses to obtain tax refunds Extension and Outreach/Department of Economics

Strategies: 2. Avoid cash shortages • • Plan for operating losses (renters) Secure operating 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 Source: File A 1 -20, Ag Decision Maker Extension and Outreach/Department of Economics

Strategies: 3. Diversify Income • Add or don’t lose non-farm income • Consider alternative 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, ? ? ? Extension and Outreach/Department of Economics

Strategies: 4. Revise production costs • Revise production plans, especially for rented land (renegotiate 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 Extension and Outreach/Department of Economics

Strategies: 5. Actively Manage Risks • Know your break-even prices • Design a marketing 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 Extension and Outreach/Department of Economics

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

Strategies: 7. Secure repayment capacity • Short repayment schedules reduce cash flow vs. long 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 Extension and Outreach/Department of Economics

Strategies: 8. Revise Growth Strategy Depending on your growth stage: • Offload unproductive assets 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 Extension and Outreach/Department of Economics

Strategies: 9. Know your ARC/PLC Payments • Payments vary widely across counties and programs 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 Extension and Outreach/Department of Economics

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

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