Crop Budgets and Marketing Plans in Low-margin Years
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Crop Budgets and Marketing Plans in Low-margin Years

Welcome! My name is Paul Mitchell. I’m an associate professor in the Department of Agriculture and Applied Economics here at the University of Wisconsin. I’m also an Extension state specialist in UW Extension, and cropping systems management. I’m also director of the Renk Agribusiness institute, and co-director of Nutrient and Pest Management Program. I’m here today to talk about crop budgets and marketing plans, an overall program we’re putting out here in UW Extension for grain management considerations in low-margin years. What I’m going to do in this set of slides go through four big issues. I’m going to present a bunch of evidence to discuss and demonstrate how the farm economy is under stress. The second one will be some simple examples of marketing plans that a farmer can do. The third part will be the importance of knowing your cost of production, and then the last part will be on talking about partial budget as a tool for low-margin years. It’s actually very good tool for many years, and we’ll talk about it. This slide shows on USDA data on the net farm income over the last several years. Here shows the US, this is for all agriculture all the crops, all the farming, livestock, dairy, ecetera. This is also national level and it shows a projection of the 67 billion dollars here for the 2016 marketing year, and it’s still a forecast at this time. You can see it’s a third year in a row it’s been declining. It’s very low, where its been several years ago back in 2009. These are cash receipts for selected crops. So this would be the revenue coming into farms. We see corn has been decreasing four years in a row, soybeans has been down for several years with an uptick last year, fruit & nuts have been dropping last couple years, vegetables and melons flat, wheat down – three or four years of decline, cotton flat. So focusing on Wisconsin here, this is cash receipts from corn. What you see here is how it’s been dropping, but last year it’s relatively flat or roughly the same as it was in 2015. And what really drove this is our state record yield. We have 270 bushels per acre which is 14 bushels more than it was in 2015. And even at $3.50/bushel, that’s about almost fifty dollars an acre. I’ve talked a lot of county Extension agents and some of the bankers in the state and that extra $ from the massive yields have really helped a lot of farmers cash flow this year. You see the same thing here in soybeans. We had another state record yield, 55 bushels per acre, which is five bushels more than 2015. So five and a half bushels at nine dollars per bushel is again almost fifty dollars an acre. So that cash receipts from soybeans in the state were actually up over 2015 but the that night extra cash that extra fifty bucks maker compared to last year as the average for the state really helps a lot of farmers and the way i have personally is you can’t expect to record years in a row i’m looking at margins here on these are data from northern illinois on witches of getting very similar to southern Wisconsin these are projected full cost of production as a arm as a converted to dollars per bushel top is corn the bottom soybeans over the last several years on since 2008 university of illinois has a very consistent program had been doing this for over a decade so what I like about this is it’s the same method you that year after year what you see in red is the cost per bushel and in green is the expected farm price both of these are expected costs in the fall so like the one there for 2017 crop here is actually the fall of 2016 october november when these projections are made what you see is the read about the greening negative margins are expected for corn every sense 2013 soybeans margins are negative again and i’m still on much smaller i’m almost positive I mean that you can see the UM estimates there i’m almost ninety percent of gaps for corn and I’m thirty-three cents per bushel gap for soybeans these are projected prices back in the following see the soybean prices are better that right now if you looked at those projections I yeah did you see a positive margin on again the other thing to notice these are the full cost production paying 250 eight dollars naked for land rent paying the farmer fair wage is the idea on for management of the land and so my guess for Wisconsin is that the range for 22 460 is a good game sure captures a large chunk of our farmers for corn or soybean some of that range 9960 captures at full cost of production for a lot of Wisconsin farmers um this is data from the arm shows the from the federal reserve banks that shows on real estate loans on demand I’m sorry non-real estate loan demand it the operating was really well for machinery and building expansion and such you can see over the last several years 2013 2 2016 in the fourth quarter so think of it as farmers going in and getting operating loans to help by the inputs for the the oncoming year 2017 in this case what you really see is the farm loan demand is dropped off dramatically on overall for non real estate loans you can see broken into the various categories there but I talked to some of the bankers around the state I’ve been meeting with the last few weeks and in general it’s pretty obvious its a mix of lower input prices fertilizer prices have really come down fuel prices are low cattle prices are down on there’s a lot of this operating loans and nationally is it is up for buying feeder cattle but also a farmer cutting back on input purchases buying less fertilizer buying less fuel buying less seed or lower cost seed and the other ones lenders are giving out as much money as they used to I my understanding is our bankers that have been dealing with farmers are just not giving them as large operating wellness they’re used to wear would like to have and you can see that these data this one now is our Federal Reserve data on and what this is as well as delinquency in bankruptcy in the state of Wisconsin since 2001 and the the highlighting those last few years here since I’m 2012-2013 what you see is a big spike up right after the Great Recession on in some of that stuff when a lot of these farms would have been somebody had another full-time job or part-time job and we’re subsidizing the farming operations and then when unemployment spiked a lot of these farms had trouble on maintain cash flow on their operating and or mortgages for their operating loans and mortgages and so what you see if there’s a big uptick in on loan delinquencies on the real estate or on the operating loans and but what happened since they fall back to historical levels and you really look at the delinquencies on the non real estate AG loans the operating loans if you will it’s essentially zero been that way since 2012 another contributing factor to this is that the fact that banks under a lot more rules of as a result of the Great Recession on the lending rules that were put into place they’re really not allowed to lend money under the disease to be able to if they don’t see a way for farmers to cash flow and able to repay that loan that they’re not really allowed to loan it blend it and so you really see that these data and what that means is I think what i think it means there are farmers out you are not getting operating loans like to expect and the banks are putting farmers in a lot of pressure to only get the loan that they think they can repay so what I really put this down in summary there’s lots of indicators that farmers are financially stressed by name is negative margins that have been existing for a while but so far most farmers are managing it in the sense that we’re not seeing a big run-up in debt to asset ratios where there’s a crisis happening it our loan delinquency rates are low the the banks are not giving loans unless amanecio viable plan to repay it and so farmers season record to repay these loans but that can’t continue there’s a lot of operating capital liquidity is gone and some of the decorations are rising and it’s ok it’s manageable right now for most farmers but there’s definitely a lot of stress out there and longer-term this can’t go on I personally see two or three more years of this and we can have a serious I crisis starting in some areas particularly I think of the Great Plain what I wanted to switch to next is our marketing plans arm and it’s a key part of being the profitability can be profitable in these low-margin years and what I really like to emphasize is there is no such thing as a writer correct plan you just have to put your style of management your personality and you can be as simple as that second bullet there by crop insurance for at least part of my operating loans by july first i’m going to forward price at least my insured production and then market everything else aggressively that can be your marketing plan there’s a lot of stuff out there and I’m there’s a couple links here you can see arm the uw-madison our answer uw-extension team grains but again there are a program there it’s the link is there and it’s a very broad in full-on program it goes much more educational allows it to try to explain why you do certain things then they adopted a community’s at the University of Minnesota Center for Financial Management he’s got a couple things there is only stuff on it on the Center for Financial Management webpage but there’s also the article there recently appeared in corn soybean digest and to be frank is probably the best in the midwest emphasis on how to do marketing he’s very much he doesn’t do outlooks and such but he likes to do what he does teach farmers how to do marketing and so I think you’ve got some very good materials what I’m going to do is kind of go through the USB extension one give you a good good idea what’s there and we’ll talk about it assets arm so the team grains put this stuff together it’s a longer and more in-depth that covers the philosophy and the strategy the multiple options are out there and stuff and so I’m kind of going to summarize what they are and like i said its goal is not just to give you the marketing plan but that give you the education the story behind it so step one is sort of inventory what’s out there what can I do from potential marketing strategies in my situation at the farm in you know this forecast contracts basis contracts i can store it leave it on price edge sure I contracts etc and it’s not necessarily just making a list of what these are but how can I do them in my community where I live who would i go see the new forecast contract where the options are whatever whatever i need for cash flow to make it happen i’m going to storage one of my storage options specifically how much does it cost to buy started at the coop etc it’s not just knowing the list but but specifically for your operation in your community on the also like to break up in these marketing horizons usually it’s pretty harvest harvest and post-harvest given that were in the area where now i like to call it on pre planned to release that we are until I think that’s the time to think about it as a marketing arising as well the next step is to arm think about you want to separate your expected production into marketable units on and then set pricing objectives for each unit you have the extension one likes to use the fifth twenty percent chunks so you kind of take maybe a crop insurance and you kind of know what your historical productions band and now you know your crop insurance guaranty armor your crop insurance on production history and then you choose your guarantee from that breakdown in twenty percent chunks and then start taking me to the twenty percent and a lot of times you start out with a less aggressive options at the first twenty percent then get more and more aggressive trying to get higher prices for your layer options now the last thing is setting people is is that implementing your plan which I think the key with its setting dates and following them a lot of these marketing plans it’s really it’s all about formalizing decision dates and trying to structure yourself so you make decisions on those dates or before those states a big problem farmers have to keep waiting come and here it comes it’s november december and you’ve got no you’re great priced because you’re waiting for something to happen what’s nice about marketing plans they’re trying to force you to make decisions by certain dates so here’s an example from the the first twenty percent the the pre-planned time period which is what we’re now this is an example with that marketing plan in DW extensions on Team grains on materials so please print I’m sorry pre-plant price the first twenty percent of expected production in the market prices twenty cents above a bushel above your variable cost of production regardless of the market outlook you get that done in march first if the elevator has a normal the strong basis of this forward contract with them but it may be elevated elevator has a week basis of the heads to arise contract and a lock in my basis later expected the basis to strengthen where it’ll be it’ll be better for me Saul wait arm the other one if the market is well above their price target this purchase a put option with the basis adjusted on strike price equal to your target price what that’s doing is nearly on that twenty percent you’re locking in the arm with the put option that price but you’re leaving the upside potential there because you do you think the prices are going to be higher on that can be that that simple we can see it’s a little more sophisticated maybe what I’m gonna do now is talk about medicine program here and he’s got this nice little five-step marketing program for on pre-harvest time period i’m here and it just recently appeared the corn-soybean digest so the first one is have a clear objective this by crop insurance to protect my production risk and price 75-percent of my anticipated soybean production by mid-june arm that’s what that’s that’sthat’s the marketing plan right there so that a minimum price into the maximum price minimum is 950 is when he’s setting AI minus 10c farms as well and so this is our marketing plan on the maximum price is 1250 on the other thing that is to set some established decision dates and it really key about it is to force your hand right there above your minimum maximum on those dates you people to trigger you don’t keep leading the last things expect your I’m sorry to select your pricing tool arm early in the season you like to stay with the simple ones like a forward or futures contract and then as the season goes on on to get more aggressive and get more creative and starts going into puts and calls and stuff and so I said if you want something simple i really recommend looking at EDD stuff if you’re a little more sophisticated or you want to understand what you’re doing i recommend uw-extension stuff so here’s more details on here for what Ed’s got laid out objective by crop insurance pick my production risk arm to calculate your your production based on your aph yield on traditional farmers a little more optimistic than their aph yield so this is a way to be structured and conservative about it he doesn’t then just bushel level so price 5,000 bushels a 954 him he’s assuming a sony type sent basis so he’s 110 25-member futures using the forward contract or futures edged contract or you can see the list there then he’s got another 5,000 bushels at 1025 or $11 future he doing that right here 11 he’s not saying the pricing tool yet is that April’s long ways away i will pick the tool closer to that time the key is he’s got an April Evan trigger date he’s got to make that decision by April of it watches those off futures prices are the global cash prices and you pick his pricing tool on abc’s that 1025 local cash price will jump on it with that or he can choose a tool to be determined later and you can see the other ones are there as well make chances another decision date for another 5,000 times bushel contract 29 arm and what what’s the other thing there is our notice how the plan starts again the first is when you wrote this up but the key is ignore these decision day to make no fail to prices are lower than that 950 local cash price or the 1025 November futures price so he’s willing to wait on but then got that unites all right if nothing’s happening the prices are not working according to my plan by june nine and their price stuff even below my cost so he’s got there twenty to forty percent of production is going to be Christ my june nine arm and i think the real key about a marketing plan is to be structured the formalized is to have those decision dates and force yourself to sell some of your crop even even the prices on what you want don’t keep waiting the next section here is about estimating the cost of production or knowing your cost of production and it in some sense it’s very simple that it’s also very difficult on whiskey and puts the variable inputs are very straightforward brand fertilizer seed chemicals insurance etc they’re all easy to figure out what your records and your everyone’s doing taxes you got your schedule left you got your numbers are you got invoices for all this stuff you can look at you did you can project ahead call the local suppliers up and find out the local current prices and so you got records from your taxes arm and that’s pretty straightforward arm and then you put it into a tool you can do in the spreadsheet if you want i think and in in Wisconsin here Ken Williams is the unit extension agent Michelle County online has got a good budget system there it’s pretty it’s pretty user-friendly me just put your numbers in the spreadsheet or you can make your own spreadsheet or you can just sit down pencil and paper and it’s not that hard on it conceptually get some more details and seasoning mix up the math that’s nice about a spreadsheet he does all the math for you and you make a little change it recalculates everything what’s harder the non-cash cost things like overhead and appreciation think where you don’t leave you don’t have receipt for him I can you pay for the pickup truck you you spend ten thousand dollars and pickup truck where the alcaide at that’s overhead on depreciation you know you got tax depreciation but it’s not always very realistic armin machinery cost probably the hardest part and so I when I really say and I emphasize this my own classroom i teach the students is you can only estimate machinery cars cheap you can’t really build them until you sell equipment and then you can calculate what you actually did spend a little over the course of the life of the equipment then customize your good start though to get started what I’d like to show you here is a slide that older from 2006 but i want to know it’sit’s to demonstrate why estimated cost efficient production is important and the key is your cost of production this is from Gary Snicket in illinois on these are from Illinois cost of production and this is on a per acre basis four corners of the corn horizontal axis is percent of the land and corn so fifty percent would be a corn subject rotation and that’s where most of the plants are clumped in that area and these don’t have rentals to get take a rent out so arm you know whatever you rent wasn’t 22 2006 but what I really want you to see is how in 2006 some farmers are making four dollars an acre to pay for the rent and pay for their own time and management effort some people were losing the hundred dollars making you can see that here how four dollars maker was a few up there there’s a few losing money vast majority of people around two hundred dollars per acre and that’s what i really want to see is how variable that cost of production isn’t it what you don’t need to know is the average cost of production for a corn farmer and Wisconsin is you know like an example to dollars an acre what you need to know is which of those dots are you and only you can do that I can estimate your cost of production for you you need to do it yourself now this is on back to 2017 projected shares and what I want to focus in on Thailand machinery dominate the cost of production the left hand pie charges forearm corn the right-hand one is for soybean the land rent is the same and 258 dollars for cook for corn that’s that’s twenty-seven percent of the of the total cost of production the second one is machinery hissing at sixteen percent you go to the other one soybeans on the right there land the same rental rates for forty percent machine is twenty percent of the cost you can see the total costs are on 575 destroyed beam and i’m a 39 to corn and these are for Northern Illinois the same budget that we use all those margins and then you can see the other categories their CPAP control nutrients and such and again those are the easy ones estimate want to talk about machine ring but before we do that I want to talk about rent and what I’ve done here is showed you the nass rents for 2016 backwards 2008 you can see there by different crop your party districts are and so these are the southern three-self central southeast southwest and then we’ll do the mid on central ones in the northern ones in the south of the lands are good for crop production really hasn’t dropped rental rates it’s still keeping up to in 2014 and 2016 they’ve been creeping up this is a central district to see the east-central there’s a lot of that Dairyland up their home in central Wisconsin that’s still going up but we’ve seen some downward pressure in the west central and the central part of the state that’s the that’s the average little profit party district I’m northern areas here in the Northeast still creeping up but the other two very flat now these are again averages and I’m sure there’s a lot of farmers that would love you paying only on your $55 maker for those areas but you remember that goes all the way up to Lake Michigan and I’m sorry Lake Superior so it’s the whole district average and this is for all cropland this isn’t the best land but what I really the lesson I would like to really take from these 13 and the next one here is on irrigated land there’s a little downward pressure on rent but in general rents of becoming up and i expect those negative margins we don’t see them going up as fast as I expected this often even some downward in most regions arm back to mark farm machinery cost now this is the hard one estimate we see here is on there’s a couple different ways approaches I’m the first one is estimating pharmaceutical aust from Iowa State University Extension this is a detailed process we sit down with the age of the machinery what you paid for it how long you expect to use it what size the tractor you’re using a bullet with you work through these sheets and we kind of go through the tables and get your number on the other way to do it is I don’t quite do that much work is just use the custom rates there’s a Kansas State University arm there’s people to study back it’s been over over 10 years ago now but the use is there’s something called the Illinois I’m sorry that with Kansas farm business for management association and they take the data and a graduate student first piece essentially analyzed the estimated cost of production and then regret them or related them to arm something we can observe custom rates when he basically found is that the actual cost production for most farmers are using that machinery is a little higher than the customer and they go to various reasons why but I made a little spreadsheet that simple method for machinery Costas constant it’s a very same very simple idea here will lay it on the next slide here essentially what it says is as you get larger your cost reductions close to the customer eight-armed but for most farmers and you can see the size there it’s probably twenty-five to thirty percent higher thirty-five percent higher than the customer eight so if you don’t want to spend a lot of time after eating farm machinery cost take the customer a tad twenty-five to thirty thirty-five percent on and with a larger percent added if you’re smaller operation and if you’re a bigger operation you can get smaller but if you want to really know your cost of production i really recommend going to the Iowa State tool on it’s got a lot of useful stuff there and it’s once you’ve done it once to surgical a lot faster on Ted bay is an extension agent over the southwestern part of the state and he’s done it he says the first time it’s hard then you start going the other equipment goes much faster I’m customer it guides the other thing is you need custom rates Wisconsin have done it for a while 2013 was last one and literally like awful this morning with on the USDA mass here in the states they have a little bit of state presents left arm and they would like to do another one probably not till this fall arm but I looked at I was customary guide from 2013-2014 all the 2016 there’s been very little change most of the machinery cost ever remain relatively stable little up little down depends on each one with specifics but it’s a start i think the 2013 isn’t too bad the last thing i want to talk about special budgeting and really what this is a tool that economist have developed or really for managers and develop they’re just small changes of refinements in the farm operation the key is a partial budget you don’t need the full budget you only fuck from the part that change you don’t budget on the full operation you just need armed you don’t need the full budget the key and it’s for fine-tuning the operation it’s holding everything else fix it doesn’t change and just focus on a small change so here’s some examples you know do I on plant root 1 BT corn or conventional cornerstone insecticide i’m currently doing the room BTW let’s switch to conventional of the soil insecticide what about maybe just taking on extra 80 acres they read that extra 80 / combine our continued custom hiring always found my current tractor and buy a new one to a paper soil test for nitrogen or just use credits that’s the kind of dumb process that uses so it’s got a basic idea and what it does is it asked you in a formal structure way to answer four questions we have income gains and then you have income losses for the gains first question there what will be your new or added revenues as a result of this change looking at the other one will be what cost of what we reduced or eliminated then on the loss of side you’re going to pick up the new cost what are the new and added cons arm and then what revenues you’re going to lose or what are going to be reduced so then what’s in that benefit take the game subtract the cost and that’s your net gain there’s some tools here I’ve got out the university has a link their arm North Dakota State has a nice on there have a class actually got some really good description if you want a real full explore explanation of partial budgeting i’ll give you the gist of it here it’s often structured in this format like this and a little table and it’s the same for questions what will be the new ad revenues would cost that will be reduced or eliminated will be the new or added cost what will be the revenues that we lost and just put them on the table film in calculate total gain until the losses take the difference so we’ll do an example here on this is hypothetical so by a planner or may continue cutting hiring for planning so it’s 7,000 acres 500 corn fiber soybeans so what am I new revenue is going to be I’m thinking higher yield two more time and planning i’m getting my crock and when I wanted not what the custom planner can get their arm what’s my cost can be reduced and no longer be paying for custom higher so that cost is gone i’m going to pick up for new cost I’m gonna be paying the fixed variable costs that point myself and in revenues I got a reduced I couldn’t think of anything and so will call to a hypothetical example here so arm I’m thinking just as make nice round numbers for to illustrate the case here three bushes next record i’m gonna get the corn in a couple three days earlier maybe a week earlier than waiting for the custom plants that have come in three bushels of corn at three dollars a bushel and 500 acres 45 hundred dollars i expect to get an extra bushels of soybeans at nine of the bushel at 500 acres also 4500 dollars one of my costs are being eliminated you can see the custom planning their and paying twenty dollars maker attempted 500 acres and $10,000 soybean planting a little cheaper end up being a thousand dollars then on the other column there on the right arm we get the additional costs are we got corn arm cost to run that planners about 15 bucks an acre and five Undertaker seventy dollars you can see the soybeans there 12 bucks naked around the planet myself at 500 acres six thousand dollars see Adam all you get 27,000 on the left here are as that as the bomb new the benefits really the gains and then the loss of 13,500 while 27,000 minus 13,500 is 13,500 so that would be the net benefit you can / thousand get $13 fifty cents an acre is your game if you want it on a per acre basis of course everything is all depends on the assumption so a lot of times these are put into a spreadsheet so what I really get three bushels made the loan only get to what does i do everything or maybe it’s not three-dollar core maybe 350 corn etc so it’s really important to do sensitivity analysis and the spreadsheet makes it very useful and it really also helps you figure out which assumptions are very critical you can start playing at the price or you can start playing the field impact or whatever and start to see which of these variables is the most important that really drives my benefits and those that seem most important you spend a lot more time holding in figure out with a very good estimate that i change there’s no example here to isolate from custom hiring my herbicides re control or our do I just do more tillage on my own and then do mcquillen mechanically control you know cultivation like we used to do back in the day I’m additional revenues I couldn’t think of any our what costs reduced custom hiring my herbicides I’m assuming this case here is true innovators so i’m spending forty dollars negative for the application and the active ingredients the herbicides that’s twelve thousand dollars and notify Swick this make this switch i’m no longer pain that so that 12,000 is gone but I’m gonna pick up these additional costs and elusive revenues here i’m going to extra tillage and cultivation for mechanical weed control and swimming ten dollars plus five dollars an acre for the everything for the arm cultivation to innovators that’s $41 most expecting more you lost that on the the cultivation is effective I’m gonna expect four percent and 250 bushel per acre corn three dollars a bushel a few hundred acres at 5,400 dollars doing this these numbers and 12,000 gains avoided cost for those her life or herbicides and arm additional costs or 9900 my net gain net benefit is 2100 dollars / 300 acres about seven bucks maker now because they’re playing with this is this really making sense how crucial is a cost assumptions how crucial is my yield loss assumptions you can start playing dead thinking about it so in summary then the farm economy is under stress and went through several examples of national level data and some Wisconsin data show that anyone is in agriculture knows that but I’ve been emphasizing that with different people talk to around the state that are not in agriculture or are tied to the state are tied Agriculture I’m simple examples of a marketing plan i showed you some edits that the rights are very good farmer friendly stuff if you want to learn more be more sophisticated i strongly encourage you to do the use of extension program there you’ll learn a lot about what’s going on there in the past some of the county agents have run marketing groups to help farmers to learn these principles with each other arm then i went there knowing your cost of production and how it’s actually very important arm and it i can’t give you an average but you really want to know is your cost production arm and i think i can show you some cost you have your attention materials out there you can make your own I think machine is the hardest part it’s roughly twenty-five percent of custom rate or you can go to the detailed tools & S make your machine costs next with partial budgeting is the last thing i did answer those four questions in a formal structured way and it helped you understand whether as a tinkering with your arm operation will be a way to reduce your costs or increase your profits which i think in this little margin year would be a very good time to think about several tools thanks for attention you have any questions about this you feel free to contact me my contact information is there thank you

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