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Maintaining Profitability in Challenging Times

A comprehensive guide to help farmers navigate the complexities of the agricultural market and make strategic decisions to maximize profitability. Topics covered include crop prices, costs, storage issues, renewable fuels, and marketing strategies.

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Maintaining Profitability in Challenging Times

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  1. Maintaining Profitability in Challenging Times Crop Advantage Series January 2010 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911

  2. Iowa Corn Prices vs. Costs

  3. Iowa Soybean Prices vs. Costs

  4. U.S. Corn Supply and Use Source: USDA

  5. U.S. Soybean Supply and Use Source: USDA

  6. Storage Issues Source: Hurburgh and Elmore, ICM News, 10/15/09

  7. Soybeans – Argentina & Brazil Source: USDA

  8. Smaller Livestock Numbers Source: USDA, NASS, various reports

  9. Renewable Fuels Standard (RFS)

  10. Crude Oil Prices Sources: EIA, NYMEX

  11. Corn Futures Trade Source: CFTC

  12. Corn 1990 - 2006

  13. Corn

  14. Iowa Crop Basis

  15. Projected 2009 Season-Average Corn Price

  16. Projected 2009 Season-Average Soy Price

  17. Corn Futures Source: CBOT, 1/12/10

  18. Pricing Dec. 2010 Corn Sources: CBOT, ISU Extension

  19. Soybean Futures Source: CBOT, 1/12/10

  20. Pricing Nov. 2010 Soybeans Sources: CBOT, ISU Extension

  21. Seasonal Pricing Patterns Source: USDA, NASS, Monthly Price Data 1980-2008

  22. Decision Chart Futures Increase • Basis Contract • Sell Cash and Buy Futures • Call Options • Minimum Price Contract, Fixed Basis • Store & Wait to Price • Delayed Price Contract • Minimum Price Contract, Variable Basis Basis Weakens Basis Strengthens Expected Change • Hedge • Hedge to Arrive • Put Options • Cash Sale • Forward Contract Futures Decrease

  23. Iowa Corn Prices vs. Costs

  24. Iowa Soybean Prices vs. Costs

  25. Supplemental Revenue Assistance Payments Program (SURE) • Part of the 2008 Farm Bill • Permanent disaster assistance • Provides payments to producers in disaster counties for crop losses • Run by the Farm Service Agency, USDA • Covers the 2008-2011 crops

  26. 2008 SURE Map

  27. 2009 SURE Map

  28. Average Crop Revenue Election (ACRE) • ACRE is a revenue-based counter-cyclical payment program • Based on state and farm-level yields per planted acre and national prices • Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE • Program has state and farm trigger levels, both must be met before payments are made

  29. ACRE Set-up for 2009 Iowa Corn So the expected state yield would be 171.0 bushels per acre and the ACRE price guarantee would be $4.13 per bushel.

  30. ACRE vs. CCP CCP pays No CCP payments No ACRE payments ACRE pays out

  31. Quick Comparison(Your results may vary) Source: William Edwards, ISU Extension

  32. Fear, Greed, and Ego Fear of making a bad decision -- Watching prices slip away as you wait Greed of expecting even higher prices -- Not taking advantage of good price opportunities Ego of wanting to claim you caught the market high -- “Lake Wobegon” marketing

  33. Ego Greed Fear

  34. Marketing Plan To avoid fear, greed, and ego dominating your marketing, have a plan and stick to it. A marketing plan outlines your market strategy and your marketing objectives. It should examine marketing opportunities before and after harvest.

  35. Marketing Objectives • Get the highest selling price • Pretty tough to do • More realistic objective: Obtain better than average prices • Reduce price risk • Cover cash flow needs • Minimize tax liability Look at short and long-term goals for your business

  36. Knowing Your Farm Financials …Provides you several targets for your marketings Do prices cover your cash expenses, meeting your cash flow needs? Do prices cover your total expenses, providing profit and adding to your net worth? On the production side, we often compare yields to trend; on the marketing side, we need to compare prices to per-unit costs.

  37. Building a Marketing Plan 5 basic steps: • Estimate number of bushels to sell • Calculate breakeven price • Project price and yield scenarios • Compare pricing tools and analyze market opportunities • Develop a pricing plan

  38. Bushels to Sell • What’s your expected production? • What do you have in storage? • What about on-farm use? Breakeven Costs • What are your production costs? • What are your storage costs? • On-farm vs. off-farm? • What are your cash flow needs?

  39. Scenarios • Seasonal price trends • Weather outlook • Export picture • Livestock outlook Tools and Opportunities • Market tools: Futures, options, forward contracts • Government tools: Crop insurance, marketing loans, CCP/ACRE

  40. Tentative Pricing Plan • Outline realistic pricing targets • Have periodic price targets and quantities to sell • Have patience and be willing to reevaluate price goals • Remember it’s hard to lose money when making a profit

  41. Thank you for your time!Any questions?My web site:http://www.econ.iastate.edu/faculty/hart/Iowa Farm Outlook:http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/Ag Decision Maker:http://www.extension.iastate.edu/agdm/

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