Panelists probe crop economic outlook for 2017

Ray Mueller

FOND DU LAC - As farmers prepare for their 2017 cropping season and marketing of their commodities, many of them face questions how to cope with what is likely to be a tough economic climate.

As farmers prepare for their 2017 cropping season and marketing of their commodities, many of them face questions how to cope with what is likely to be a tough economic climate.

Suggestions on things to consider and hints on how to proceed were shared at the panel program sponsored by Badgerland Financial at an information meeting for client members. The panelists were Badgerland dairy sector specialist Steve Schwoerer, Green Lake area grain farmer Jim Hebbe, Stewart-Peterson Group principal and market analyst Brad Peterson, and Badgerland's assistant director for insurance services Ann Marie Lau.

Dropping crop acres

One recent development that was discussed is the decision or pending decision by some operators of rented land to drop some of those acres in 2017 because they don't expect to earn a profit on them. The panelists urged caution on such a decision because of the possible long-term effects.

If the rental rates are too high, Lau urged communication with and education of the landowners about the current economics. She suggested considering the value of the rental history and warned about possible problems arising from practices by an interval renter if the current renter would want the land back after a few years.

Hebbe agreed, noting that long-term tenants have advantages such as making use of their previous inputs, knowing the yield potential, and having other relevant information about the land. He advised sharing information with the landlord with the hope of gaining an understanding if a reduction of the rental rate is appropriate.

In addition to lower rental rates, Peterson mentioned dropping one's most distant land and buying shelled corn from another grower, perhaps at a cost that would be less than the cost of production. Owners, particularly dairy farmers who need sufficient land on which to apply manure, need to evaluate their own situation before dropping rented land, he added.

Land purchases

On the topic of land purchases, Schwoerer observed that “the crazy prices” of a few years ago are no longer in play. He cited a combination of record high corn prices, very low interest rates, and manure application needs by dairy farms for the high land selling prices of a few years ago.

Land values today are greatly affected by location – a change from the earlier values based on soil type, Schwoerer continued. He noted that not much land is being sold at the moment and pointed out that livestock owners who need shelled corn can buy it in the $3s per bushel rather than growing it on owned or rented land.

Hebbe, who farms 1,300 acres, views land as a long-term investment. He suggested discarding short-term emotions in favor of thinking of the long-term value.

Economic considerations

As a cash grain operator, Hebbe listed knowing costs, recognizing the true variables in a budget, basing projections on actual production history, and accounting for a return on land ownership and to management as essentials. Use all the available tools to accomplish that, he stated.

While good yields are crucial during times of low prices, it's also important to be aware of the possibilities such as forward contract pricing and of storing grains as prices rise, Hebbe indicated. Peterson expanded on that point by citing the pricing tools (futures contracts, puts, and calls) to mitigate the pricing risks, thereby avoiding the price valleys while sacrificing the peaks at times.

At the moment, farmers who are holding old crop corn should consider selling it if they can obtain a price above $4 per bushel, Peterson advised. For new crop corn, he would lock in a price on a portion of the yield at between $4.20 and $4.40 a bushel.

Pricing strategies

Peterson reminded grain growers that “the first bushel is as important and valuable as the last bushel.” For that reason, he prescribes having a marketing plan that's void of emotion and that focuses on how the bottom line numbers can be improved with the use of puts and calls compared to straight reliance on the cash market.

Hebbe told grain producers not to be misled by prices quoted for other areas. Be aware of the local market conditions and how the applicable basis, usually negative, affects the net price, he said.

Agriculture is the only industry in the producers have no control over the price of their inputs along with great risks on their selling prices unless they obtain some protection on the latter, Lau noted. In such a scenario, be sure to know production costs, focus on what makes money, pre-pay expenses if appropriate, shop for better prices, and be sure have the safety net that's provided by crop insurance, she remarked.

Role of crop insurance

Emphasizing that it is not a self-serving comment, Lau stated that dropping crop insurance is not a way to cut costs because it could well be at the risk of losing protection on revenue or yields that is provided in the policies. With lower crop prices, the insurance rates are also a bit lower, Schwoerer pointed out.

Having the peace of mind that comes with bushel or revenue guarantee that comes with crop insurance should translate into confidence with selling a portion of one's projected production if attractive prices crop up, Hebbe advised. He said it comes down to “how you are wired” to handle the situation.

On the possibility that the Trump administration and Republican Congress would lower the federal subsidies on crop insurance, Lau advised growers to contact their representatives on that topic. Hebbe observed that a few operators might not need a subsidy, that older ones might drop crop insurance in the face of much higher rates, and that younger growers could be forced by their lenders to have a policy.

Crop insurance is appropriate for growers who are easing toward retirement to protect their assets, for new growers who face barriers to entry, and for those who need to preserve what they have, Lau remarked. “Crop insurance is a solid risk management tool.”

Lau stated that crop insurance should not be viewed as “an investment.” She described whole life insurance as an investment.

Costs of production

There are up to 15 different ways to calculate one's cost of production, Lau pointed out. While the income tax Schedule F serves as a common base for the costs, the expenses that cannot be overlooked are principal and interest payments, depreciation, fixed costs, capital replacement, real estate ownership costs, and family living allowance, she emphasized.

The cost of money itself has already risen by .25 to .75 percentage points from very low rates on 15, 20, and 30 year mortgages but is not likely to go to very high numbers, Schwoerer predicted. He anticipates interest rates of about 5 percent on land and 4 percent on housing mortgages.

Dairy finances

As he works with about 65 dairy farmers in eight counties, Schwoerer subscribes to a general rule of subtracting one's percentage level of equity in the operation from 100 to suggest the percentage of milk production on which to lock in a protected price. What tends to happen, he observed, is that the clients choose all kinds of levels of protection, depending on their particular situation and how much risk they're willing to take.

Both crop and dairy farmers tend to be good at production but weak on marketing, Schwoerer indicated. He finds that only about 10 percent of dairy farmers undertake a sustained approach to price protection, 15 to 20 percent dabble in the practice, and the majority ride with the cash market.

Schwoerer acknowledged, however, that over a period such as 15 years, dairy farmers who rode solely with the cash market had virtually the same total income as those who obtained price protection. The difference, he explained, is that those without price protection have endured several periods of one year or more of very low prices which proved to the a major challenge for cash flow in many cases.

At least in the short term, Peterson is somewhat encouraged by the milk price outlook. He pointed out that about 52,000 dairy farms were bought out in order to reduce production in the European Union, that New Zealand is experiencing a production downturn, and that dairy product demand continues strong in the United States.

Corn versus soybeans

As the acreage allocations for corn and soybeans play out for 2017, the interest and pricing outlook seems to be swinging toward soybeans, the panelists observed. Hebbe had learned from a major grain elevator that more pricing contracts for 2017 have been completed for soybeans than for corn at that facility.

“There's a plentiful supply of good soybean seed,” Hebbe reported. “Soybeans are faring pretty well on price.” To those who are concerned about a drop in soybean prices, he noted that $8 per bushel puts are available for only 4 cents a bushel.

The current soybean futures at close to $10.50 per bushel present a good selling price, Peterson indicated. He cautioned that a large crop from South America is about to enter the market, suggested put options at a level that covers one's production costs, and mentioned call options as a way to participate in a price rise.

To a question about wheat, Peterson's quick response was “don't grow it.” He referred to the world-wide production of excess volumes of wheat and reminded growers of all crops in the United States that “the world is a big place.”