Minding Ag's Business

The recent corn-soybean price bump offered growers a welcome opportunity to price 2014 and 2015 crops, but it won't erase the string of negative returns the industry is accumulating, lenders and financial consultants tell DTN.

An online article released by University of Illinois economist Gary Schnitkey yesterday estimates that growers enrolled in the state's farm business records program will average just $15,000 in 2015 net income, down from the $200,000-per-farm average in 2010-2012. That's for an average Illinois 1,500-acre corn and soybean grower in the database, although it is representative of the 5,000 acre and up members, he added. The forecast also assumes trend line yields and 2015 market prices of $4.20 for corn and $10 for soybeans. For months, the Illinois economists have argued something will have to give if the financial trend continues into 2016.

Just last week, Purdue University Economist Mike Boehlje advised an invitation-only audience at the Kansas City Federal Reserve's Ag Symposium that many cash rent-intensive growers would not just lose money between 2014-2017, but likely begin to fail lending standards given the risk of multi-year losses (see DTN Special Correspondent Elizabeth William's report, "Batten Down the Hatches" at http://goo.gl/…).

"We're going to have some vulnerable agricultural borrowers out there," Boehlje cautioned. He also alluded to failures of farm machinery dealers, in part because they absorb more risk when primary lenders cut off operating funds and dealers opt to fill in the credit gap.

At an American Institute of CPAs agricultural conference in Indianapolis July 15, Iowa farmer and financial consultant Chris Barron reiterated that typical 2015 Midwest cash rents "were about $100/acre too high" for his clients to break even. Many operations were projecting losses of $20 to more than $100/acre earlier in the season, although he added crop insurance, government programs and the recent rally will likely mitigate some of that.

Like crop conditions and yields, 2015 profits will be all over the board, Barron added. "A lot of it depends on whether they have invested in the right things like tile in recent years, or accidentally spent their money on things like a boat," he said.

While growers in washed out states like Ohio may feel anxious about unplanted or saturated crops now, those with good insurance coverage may actually be able to keep their heads above water, Barron added. One Ohio client he analyzed recently could abandon his crop now and actually make $100/acre profit with insurance claims, in part because he wouldn't incur expenses like extra fertilizer and harvest costs.

One complication is that real cost of production for Barron's farm clients runs anywhere from $3 to $5 per bu., largely depending on yield. For example, someone with 160 bu. yield runs $5.14, but a 200-bu. yield runs $4.24. A similar spread between $8 to $14/bu. afflicts soybean cost of production. Without an accurate assessment of real costs, growers may not be making informed choices on where to market their crops, Barron and other financial experts stress.

"Overall, the majority of corn and soybean growers will still lose money this year, it's just less of a loss than what everyone expected," Curt Hudnutt, Rabobank's executive vice president for business development for northern states stretching from the Pacific Northwest to Pennsylvania told me in a phone interview this week. That red ink comes on top of industry wide losses for 2014 and the prospect of a third year of negative returns in 2016, unless something happens to adjust costs of production.

Hudnutt , a former chief risk officer for Rabobank's ag portfolio, said he's not worried about credit problems yet. While southern Illinois and northern Missouri show weather damage, parts of northern Iowa, Minnesota and the Dakotas look like garden spots for yields.

However, the current cycle is pressuring growers with the highest cost of production, he emphasized. In Iowa, that means producers must be trimming breakevens to about $3.70 to $4/bu. on corn, Hudnutt added. After multi-state on-farm visits the past few weeks, he thinks farmers have the message.

"We don't need to have a conversation with our clients about lowering breakevens, because they're already in the survival mode," he said.

Grain producers' biggest focus will be adjusting cash rents, most financial analysts believe, although that's not likely to achieve the $70 to $100/acre savings many need. "However, if you can trim 10% off a $400/acre rent, you could get halfway there," Hudnutt said.

"There could be a lot of notices served to landowners at rent renewal time," he said. If they can't come to terms on lower 2016 rents, "some producers will just have to turn over the land."

To read the University of Illinois farmdoc article, go to http://farmdocdaily.illinois.edu/…

For alerts on DTNfarm business coverage, follow me on Twitter@MarciaZTaylor

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