Minding Ag's Business

Put Expenses on a Diet

Biggest 20% spenders in southern Minnesota Farm Business Association face formidable losses at current prices and nearly all reasonable yield expectations, figures economist Robert Craven, director of the University of Minnesota's Center for Farm Financial Management.

Given 2016's worsening prospects, this year's winners may ultimately feel like television's Biggest Losers: Those who've put expenses on a crash diet and built their cash muscle over the past few years stand a better chance to be around for the next episode in farming. Like real weight loss, shedding pounds can be an emotionally draining experience, however.

Actual southern Minnesota farm business records from 2014 (the most current available) showed the 20% highest cost cash renters needed $5.45/bu. to breakeven that year. The 20% low-cost producers needed only $3.84/bu. With USDA's 2016 season-average price projected at $3.45, and with modest budget cuts in fertilizer, fuel and rent, University of Minnesota economist Robert Craven expects Big Spenders to lose about $190/acre with 193 bpa corn yields (see chart). Dieters--those in the bottom 20% of expenses--would lose $86/acre with those same yields. (You don't want to consider the $300-$400/acre damage should corn yields collapse to 140 bpa.)

"Total crop revenues are still about 80% higher than a decade ago," notes Wells Fargo economist Michael Swanson. "There's plenty of revenue out there, but the cost side is totally upside down."

Until now farm borrowers were hoping to ride the wave, thinking they could outlast the cycle with little adjustments in expenses or lifestyle, says Aaron Johnson, executive vice president of Farm Credit Illinois.

Last year, Farm Credit Illinois racked up its second highest level of new mortgages ever, an indicator farmers hadn't yet lost their appetite for land purchases. That's one reason Illinois farmland values remained fairly stable through year-end 2015 despite a crash in commodity prices, he believes.

Johnson also admits he saw some $350 cash rents on the highest quality ground this winter but that price was beginning to stress margins. He was also disturbed by a $390/acre winning cash rent bid on a northern Illinois farm in the last two weeks.

The Farm Credit Illinois executive questions whether taking on more land now at premium rent makes sense, if it means you'll lose $150/acre this season.


However reality sinking in, as operators accept no quick turnaround is likely in 2016, or perhaps for the next three to five years, Johnson adds:

--While seed companies balked at slashing prices, some operators have looked for fewer traits in their seed package as a way to get a grip on inputs.

--More farmers than normal are soil testing and scrutinizing application rates.

--Some aggressive operators who loaded up on farmland since 2010 have voluntarily opted to liquidate real estate this winter. Others have walked away from over-priced rents. He expects more auctions on the horizon later this month as stressed growers try to free up cash.

Finances haven't hit alarming levels yet. "Delinquency rates are at historic lows. There's a lot of strength in the sector that will carry through," emphasizes Bill Johnson (no relation to Aaron), CEO of Farm Credit Mid-America, whose territory spans Indiana, Ohio, Kentucky and Tennessee. "We have staying power in this region."

A recent Chicago Federal Reserve study showing 2% of the region's bank borrowers unlikely to qualify for operating credit in 2016 indicates the Midwest may fare better than higher-risk areas, both lenders contend.

But with potentially large losses looming in 2016, those who can't whittle their calories face emotional choices in the future.

"It's disheartening for growers who raised exceptional yields--190 bpa corn and 70 bpa soybeans--to show negative returns," Aaron Johnson says.

It just means operators will need extra cost discipline to diet their way to profits going forward.

Follow Marcia Taylor on Twitter @MarciaZTaylor


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