Managing Crop Margins in 2009 Craig A. Chase Farm Management Field Specialist
Presentation Objectives • Cost of Production • Sizing up the Market • Strategies/Tools for Managing Margins
Costs for 2009 • Extremely hard to predict this year • Pre-paid vs. spot • Changes in world and domestic demand • Changes due to financial crisis • New varieties and traits • Energy markets
Baseline assumptions • Diesel $2.50 • N $.68, P $.90 K $.72 • LP $1.90 • Corn seed; $250 Soybeans $45/50 lb • Land; $178 $205 $232 • Yields; continuous corn 125 145 165 • Rotated corn 140 160 180 • Soybeans 45 50 55
Direct Cost of Crop Production ($/A)Historical vs. 2009 Forecast 36% 19% Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.
Non-Land Costs vs. Gross Revenue ($/A)Historical vs. 2009 Forecast $200/A $177/A Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.
Reluctance Toward Pre-Harvest Marketing Failure to Understand and Track Your Local Basis Lack of an Exit Strategy Holding Grain in Storage Too Long Misunderstanding Carrying Charges Develop a Marketing Plan Avoid the Five Common Mistakes in Grain Marketing?!?!
Corn Futures Carry Dec. 2009 $4.52 Dec. 31 , 2008 Good carry through July: rewards on-farm storage Source: www.cbot.com December 2008.
Corn Storage Costs .85 .66 .47 .54 .28 .43 .31 .20 Assumption: Corn is Valued at $4/bu - Financed @ 7% APR Source: Johnson, ISU Ext. Economics, December 2008.
Soybean Futures Carry Nov. 2009 $10.07 Dec. 11th, 2008 Lack of carry, difficult to justify storage long-term Source: www.cbot.com December 2008.
Soybean Storage Costs .93 .65 .38 .66 .47 .29 .10 Assumption: Soybeans are Valued at $9/bu - Financed @ 7% APR Source: Johnson, ISU Ext. Economics, December 2008.
New Crop Corn Seasonal Trend 79% Odds: Spring Price Exceeds Harvest Price Source: CBOT data compiled by the U of MN, CFFM, 2008.
Corn Cash Price & Probability Forecast ’09-’10 Marketing Year $3.80/bu 65% $3.65/bu 17% $4.65/bu 18% Source: Wisner, ISU Biofuels Economist, December 2008.
New Crop Soybeans Seasonal Trend 68% Odds: Spring Price Exceeds Harvest Price Source: CBOT data compiled by the U of MN, CFFM, 2008.
Soybean Cash Price & Probability Forecast ’09-’10 Marketing Year $7.75/bu 65% $7.45/bu 17% $8.45/bu 18% Source: Wisner, ISU Biofuels Economist, December 2008.
Tools for Evaluation Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-20croprotation.xls Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xls Crop Rotation N Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls Machinery Economics http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST Flexible Rent Calculator http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-21flexiblerentanalysis.xls
Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xls
Crop Rotation Calculator http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls
Decision #1 • What should the crop rotation be? • What are the choices? • Are there alternative or specialty crops that are more profitable and that would fit into a rotation?
Corn after SB $4.00 price $.75 N 104 pounds
Corn on Corn $4.50 price $.75 N 157 pounds
Decision #2 • What should the fertility program look like? • Can fertility costs be lowered without affecting yields? (over 1/3 of non-land production cost is from fertility).
Machinery costs Fixed costs Variable costs Depreciation Interest Storage Insurance Repairs Labor Fuel
Machinery Economics Field Operations http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST
Managing Machinery Costs Combine Operations
Decision #3 • Does the machinery “fit” the operation ? (not too big or too little) • Do the custom rate charges reflect the costs of the machinery? • Are there some machinery costs that can be re-evaluated (field operations)?
Tenants’ Residual Computing a Cropland Cash Rental Rate http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-20croplandcashrent.xls
Decision #4 • Does the lease terms provide for some profitability? • Can I re-negotiate the lease or move it toward a flexible terms lease?
Crop Insurance http://www.farmdoc.uiuc.edu/cropins/index.asp
Decision #5 • Determine the right insurance product to meet your risk management needs. • Make sure you have enough insurance, but are not “over-insured”. • Look at what the insurance product does compared to the farm marketing plan. • Evaluate the new farm bill and how ACRE may affect crop insurance needs.
Conclusions • Input prices have risen dramatically and will show increased volatility. • Some signs world prices have softened but not likely to be seen until current high priced stocks are used. • Take soil tests and only use what is necessary. • Evaluate seed and seeding rates carefully.
Conclusions • Try for flexible lease arrangements. • Consider all the pest management options available. • Don’t simply cut back without carefully evaluating the consequences; you have to spend money to make money. • Consider all the risk management options available.
Conclusions • Know your costs of production. • Make cuts and changes where they will do you the most good. • Follow a good marketing plan.
Risk Management Web Sites Ag Decision Maker – ISU Extension Economics www.extension.iastate.edu/agdm Farm Doc – U of IL Extension Economics www.farmdoc.uiuc.edu Center for Farm Financial Management – U of MN www.cffm.umn.edu Corn Nitrogen Rate Calculator Calculator http://extension.agron.iastate.edu/soilfertility/nrate.aspx
ISU Crop Marketing Web Sites Grain and Oilseed Market Analysis http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/ Corn and Soybean Basis (State and County) www.card.iastate.edu/ag_risk_tools Ag Econ Periodicals, Publications and Programs www.econ.iastate.edu/outreach/agriculture/ Ag Decision Maker (Crop Updates/ Publications Decision Tools) http://www.extension.iastate.edu/agdm
Questions….. Any questions or comments? Thank You for This Opportunity! NOTE: This presentation can be found at http://www.extension.iastate.edu/agdm/fieldstaff/ cchase.html Craig A. Chase Farm Management Field Specialist 720 7th Avenue SW Tripoli, IA 50676 (319) 882-4275 firstname.lastname@example.org