Managing a farm’s cash flow is critical. The ability to generate cash is what allows farmers to pay their bills.
Many Iowa farmers have done a good job of forward contracting 2017 new crop bushels and hedging or buying put options, putting them in a position to avoid cash flow concerns this fall and winter. There are other farms, however, holding large quantities of unpriced crops that could see cash flow challenges and may want to focus on understanding other marketing strategies and tools rather than storing bushels unpriced.
Suggestions for how to market these stored bushels is the focus of “Communication is key when cash flow is tight,” an article by Steve Johnson, farm management specialist with Iowa State University Extension and Outreach. The article can be found in the November issue of Ag Decision Maker.
Johnson has these recommendations for farmers trying to maximize their cash flow.
First, don’t wait too long to talk to your lender.
“If you know cash flow will be a problem, communicate that early to your lender,” Johnson said. “A large amount of cash debt has been recently restructured to stretch out principal payments and free up working capital. Lenders could be reluctant to restructure loans without a commitment from the borrower to improve their cash flow management to meet existing debt obligations.”
Additionally, most cash flow problems don’t appear until late December or January. Some lenders will require the use of the USDA Farm Service Agency’s guaranteed loan program before providing additional funds.
If storing grain on farm, Johnson recommends shopping around for the best cash price possible.
“Perhaps the greatest benefit of storing grain on farm, aside from harvest efficiency, is that it allows the farmer more time and improved chances to shop around for better cash prices reflected in basis,” Johnson said.
His final suggestion is to consider delivering additional bushels in December. By communicating with your grain merchandiser in advance a producer can still seek a greater future price through a basis or minimum price contract.
“With much of the actual cash price of the grain being received on delivery, needed cash flow can be generated while also eliminating storage costs, basis risk and accrued interest,” Johnson said.
Source: Steven Johnson, Iowa State University
United States soybean exports will play a significant role in determining soybean prices this marketing year. According to University of Illinois agricultural economist Todd Hubbs, the recent level of soybean exports from the United States trails last year’s pace.
“The prospect of ending stocks for soybeans, once again diminishing throughout the marketing year, hinges on increased soybean exports,” Hubbs says. “The development of a lowered ending-stock scenario during 2017-18 may require a shortfall in South American production or U.S. exports capturing a greater market share of the world soybean trade.”
The current projection for U.S. soybean exports during the 2017-18 marketing year is 2,250 million bushels. This forecast is 76 million bushels larger than last marketing year’s total exports.
“Although we’re only 12 weeks into the marketing year, exploring the current pace of exports is of value because soybean exports from the U.S. typically slow as the South American soybean crop enters the world market during spring,” Hubbs says.
Census Bureau export estimates are only available for September, coming in at 170.5 million bushels, up 32 million bushels over the previous period last marketing year. Census Bureau exports exceeded weekly export inspections by 9 million bushels over the same time.
“Soybean exports through Nov. 16 equaled 713 million bushels if the margin at the end of September stayed consistent,” Hubbs says. Soybean export inspections currently trail last year’s pace by approximately 12 percent. “At this point in the marketing year, export inspections need to average 37.7 million bushels per week to meet the USDA projection. As of Nov. 9, 573 million bushels of soybean had been sold for export but not shipped. The current unshipped export sales trail the 716 million bushels sold at the same time last year. The pace and sales of soybeans currently lag last year’s pace. A brief look at the supply and demand situation can provide clarity on the prospects of meeting or exceeding the USDA projection,” Hubbs says.
U.S. soybean production is currently projected at 4,425 million bushels for the 2017 crop. This production level is 129 million bushels larger than the 2016 crop and is set to push ending stocks for the current marketing year above 400 million bushels despite the current export projection level. South American production is forecast to be 4.8 percent lower than 2016-17 production levels. This lower projection is despite a 3 percent increase in projected harvested acres in the region, mainly driven by an increased prospective planting of soybean acreage in Brazil. The lower production levels occur due to a lower projected yield in the region. Brazil’s soybean yield in 2016-17 came in at a record 50.1 bushels per acre, up from the drought-induced 43.1 bushels per acre yield in 2015-16. Current yield projections for Brazil in the 2017 crop sit at 45.9 bushels per acre.
“Although it appears reasonable to assume Brazil will not reach its record yield level again in 2017, the increased production level in the U.S. and expanded acreage in South America provide the prospect of plentiful supplies over the next year,” Hubbs says.
According to Hubbs, export demand over the last decade has been driven by the dramatic expansion of soybean imports from China. Currently, USDA projections for Chinese soybean imports for 2017-18 are 3,564 million bushels. The current level is a 3.7 percent increase from last year’s Chinese soybean import estimate. By using data from the USDA’s Foreign Agricultural Service, the U.S. share of Chinese soybean imports since the 2010-2011 marketing year averaged approximately 38 percent of total Chinese imports.
“If we assume this market share for the 2017-18 marketing year, total U.S. exports to China would equal 1,343 million bushels, a mere 11.5 million bushels greater than the 1,331 million bushels exported to China in the 2016-17 marketing year,” Hubbs says. “If China expands imports to 3,764 million bushels as some reports have indicated, a similar calculation of U.S. share comes to 1,385 million bushels.
Current projections for other major importers (the European Union, Japan, Mexico, and Southeast Asia) are expected to increase 52 million bushels to 1,112 million bushels for the 2017-18 marketing year. “The prospect of meeting the current U.S. soybean export forecast may rely on acquiring a larger market share of the world’s soybean import expansion when considering the prospects for crops in South America,” Hubbs says.
Hubbs adds that U.S. soybean exports need to continue to build on the strength seen in the 2016-17 marketing year. “The ability to exceed the current USDA export projections in 2017-18 is a possibility, but it is heavily dependent on South American production and the continued growth in demand from importers. If major importer demand grows at the projected rate, the soybean export and ending-stock projections outlined in the November World Agricultural Supply and Demand Estimates report supply and demand figures appear to be reasonable approximations for the 2017-18 marketing year.”
Source: University of Illinois
With tightening margins and lower crop prices, producers are looking for ways to cut costs. In this article, we will look at power and equipment costs components, how they vary by farm size and the impact on profitability.
In 2004, Gary Schnitkey wrote a similar article called “Per Acre Machinery Costs and Values on Illinois Farms, 2003“. We will look at some of the same items that were in that article, but with updated trends, charts and current year data.
In 2003, FBFM changed depreciation methods. Before 2003, tax depreciation was used to determine machinery depreciation. Because tax law now allows large write-offs in the year of purchase, economic depreciation was adopted in 2003.
Depreciation of most farm machinery is determined using a ten-year 125% declining balance with a salvage value of $0. Bonus depreciation or expense elections claimed for tax purposes are not included in economic depreciation.
Summaries of Illinois Farm Business Farm Management (FBFM) records indicate that power and equipment costs on Illinois grain farms average $139.66 per tillable acre in 2016.
Power and equipment costs are composed of utilities ($6.79), machinery repairs ($28.24), machine hire and leases ($18.55), fuel and oil ($16.60), light vehicle ($2.00) and machinery economic depreciation ($67.48). This cost compares to 2007 when the total power and equipment cost per acre was $83.49.
Chart 1 shows the breakout of the parts of power and equipment costs from 2003 to 2016 per tillable acre.
In Chart 1, we see that in 2008 economic machinery depreciation began to accelerate more than the other components of power and equipment costs. The acceleration was due to increased incomes as well as increased expense election limits for tax purposes. Farmers were purchasing equipment to utilize the expense election to have current tax deductions.
Chart 2 shows average capital purchases per acre for Illinois grain farms from 2003 to 2016 compared to total economic depreciation. Capital purchases began to increase in 2006 with the run-up in grain prices.
This trend continued through 2013, and capital purchases have been decreasing since then. In 2016, capital purchases were less than the economic depreciation on a per acre basis.
Farm Size and Power Costs
Average power and equipment costs by farm size is displayed in Table 1. Power and equipment costs averaged higher for the smallest and the largest farm sizes. Average power and equipment costs do not show a trend for size categories in the middle ranges.
In 2016, the lowest average power and equipment cost was $127 per acre for farms between 2,001 and 3,000 acres. The highest cost was $160 for farms with 500 or fewer acres. The second highest was $154 for farms with more than 5,000 acres.
Table 2 shows economic machinery depreciation as a percent of total power and equipment costs by farm size. As you can see, there is not much difference in the percent of economic machinery depreciation by farm size.
However, the percent has increased on average about 10% every five years since 2007. The average economic depreciation as a percent of total power and equipment costs was 27% in 2007, 36% in 2011, and 48% in 2016.
Power Costs and Profitability
Lower power and equipment costs tend to lead to higher profitability. For this study, profitability is measured by per acre management returns. Management returns equal revenue minus economic expenses, with economic expenses including costs for unpaid labor and equity capital invested in the operation.
Table 3 shows management returns by ranges of power and equipment cost from 2007 to 2016. In all but one category in 2008, management returns increased when power and equipment costs decreased.
In 2016, farms that had power and equipment costs of $75 and less per tillable acre averaged management returns of $76 per acre. As power and equipment costs increased, average management returns decreased.
For power and equipment cost categories between $76 and $100 per acre, management returns were $46 per acre. For farms with power and equipment costs above $200 per acre, management returns averaged a negative $170 per acre.
In general, a strong link exists between power and equipment costs and management returns. Farms that have lower power and equipment costs tend to have higher profits. Controlling costs, including power and equipment costs, is a key in increasing farm profitability.
Power and equipment costs on Illinois FBFM grain farms increased quickly during the run-up in grain prices in the mid-2000’s. The main driver was economic machinery depreciation because of increased capital purchases.
Even though capital purchases have decreased since 2013, economic machinery depreciation has and will continue to increase because of prior large amounts of capital purchases. There is a strong connection between power and equipment costs and profitability because as power and equipment costs decrease, profitability tends to increase.
Therefore, power and equipment costs are worth looking into when trying to cut costs. However, in 2016, 48% of this cost was due to economic machinery depreciation, which will be slow to change thus large cuts will need to be made to the other components of power and equipment costs to make a more current impact on costs.
Source: Brandy Krapf, Dwight Raab, and Bradley Zwilling, University of Illinois
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