Farm Management in Times of Low Margins · Strategies to manage margins ... 3/9/2019 9 Strategies:...
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3/9/2019 1 Farm Management in Times of Low Margins Dr. Alejandro Plastina Assistant Professor/Extension Economist Department of Economics National Farmers Convene’19 West Des Moines, IA March 11, 2019 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 Æ strategy for 2-3 years Slide from “Managing Tight Margins,” by Plastina & Hart December 2015January 2016 510 years!
Transcript of Farm Management in Times of Low Margins · Strategies to manage margins ... 3/9/2019 9 Strategies:...
3/9/2019
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Farm Management in Times of Low Margins
Dr. Alejandro PlastinaAssistant Professor/Extension Economist
Department of Economics
National Farmers Convene’19West Des Moines, IA
March 11, 2019
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
Slide from “Managing Tight Margins,” by Plastina & HartDecember 2015January 2016
510 years!
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Overview
• Farm Profitability• Strategies to cope with low margins• 2018 Farm Bill
US Net Farm Income (cash and accrual)
+10%
+7%
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US Cash Receipts: Livestock
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US Cash Receipts: Crops
US Farm Production Expenses
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Farm Program Payments -17%
2018/19 Crop Margins
Source: Dr. Chad Hart, ISUBased on futures prices
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2019/20 Crop Margins
Source: Dr. Chad Hart, ISUBased on futures prices
US Farm Solvency
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US Farm Liquidity
Source: USDA/ERS. Farm Sector Income & Finances. March 2019
$0
$50
$100
$150
$200
0.0
1.0
2.0
3.0
4.0
2012 2013 2014 2015 2016 2017 2018F 2019F
Current ratio Working capital ($1,000)
US Return to Farm Operators (inflation-adjusted to 2019)
$53.49
$0
$35
$70
$105
$140
Source: USDA/ERS. Farm Sector Income & Finances. March 2019
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Profitability in Perspective:$40,000 in Living Expenses
Source: A. Plastina’s calculations
Average Net Returns per Acre
Crop Acres to Support $40,000 in Living Expenses
$200 200 acres$100 400 acres$50 800 acres$30 1,334 acres$10 4,000 acres
8 Strategies to manage Margins• Major concern: cash flow / liquidity• Solvency hit, but still strong:
– Land values?– Machinery values?
• Still a long term problem need a strategy for next 3-5 years
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Strategies:1. Revise production costs• Revise production plans, especially for rented land • Can you make changes that generate savings that offset
reductions in revenue? • N 20 lbs per acre? Savings $10. If yield smaller than 2.9
bu/acre @ $3.50/bu, GO AHEAD! Otherwise, NO GO.• Switch to seeds with fewer traits (+crop management)? Net
savings $25/acre. If yield smaller than 7.2 bu/acre @ $3.50/bu, GO AHEAD! Otherwise, NO GO.
• Seek volume discounts in seeds, chemicals, etc.• Visit with Agronomist: update your production skills, evaluate
where to cut costs
Strategies:2. 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 (Is SCO right for you?)• Revise use of forward contracts & crop
insurance to finance inputs• Don’t count on ARC-CO payments in 2019 (IA)
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Strategies:3. Limit working capital needs• Re-evaluate recent/planned asset purchases • Revise:
– share of rented land – planting decisions in low yielding areas– fixed costs over next 3-5 years
• Plan on higher interest rates
Strategies:4. 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, ???
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Strategies:5. Revise family living expenses
• Can big-ticket items be avoided/postponed? – Truck purchase– House remodeling plans– Luxury vacation plans– Lake House
200 fully owned acres ($1.45 million in IA land) to afford $40,000 in living expenses
350 fully owned acres ($2.55 million in IA land) to afford $70,000 in living expenses
Strategies:6. Secure repayment capacity
• Work a plan with your lender(s) for 2019-2021• Extend repayment schedules for existing loans
to free up working capital• If needed, use land equity to inject liquidity or
repay short-term loans• Take Action! if interest rates go up, or
land/machinery values go down, less bang for the buck (of equity).
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Strategies:7. 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
Strategies:8. Develop a Plan B
• Maintain Cash Reserves• Secure Emergency Loan terms in advance
talk to your Lender(s)• List Assets that could be sold to generate
liquidity after taxes consult Tax Advisor
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2018 Farm Bill: What’s new?1. Switch between ARC & PLC, update PLC
yields (PLC allows SCO endorsement to crop insurance)
2. Higher Loan Rates for Marketing Assistance Program and Loan Deficiency Payments
3. Cover Crops in Crop Insurance4. Improved dairy assistance5. Industrial hemp 6. Cotton eligible for ARC/PLC
2018-23 Farm Safety Net
Marketing Assistance Loans and Deficiency Payments National Rates:
$5.00/bu Soybeans$1.95/bu Corn
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Summary• Expect low margins in corn & low-to-negative
margins in soybeans• Visit with:
Agronomist – where to cut costs?Family – living expenses?Lender – refinance, lower annual payments?Tax advisor – value of assets after taxes?Crop Insurance Agent – enterprise/basic units? SCO?
• Use resources in Ag Decision Maker: http://www.extension.iastate.edu/agdm/
Thank you for your attention!Questions?
Alejandro [email protected]
(515) 294-6160
This presentation is available at:https://www2.econ.iastate.edu/faculty/plastina/
