Farm Business – Separate Emotion from Business Decisions10/17/2016
Farmers in the Plains are harvesting a corn crop that is paying roughly the same cash price as the winter wheat crop they are planting.
Neither crop is expected to generate profitability, but wheat production is busting records and sharply taxing Wheat Belt growers’ financial reserves.
The Oct. 12 World Agricultural Supply and Demand Estimates pegged global wheat ending stocks at 248.4 million metric tons. The U.S. farm-gate price for wheat was increased 10 cents a bushel to a price range from $3.50 to $3.90 a bushel.
By Ohio State University calculations, inflation-adjusted 2016 wheat prices are the worst in 50 years, currently running 9% below 1998-2005 averages. (By the same token, corn’s 2016 inflation-adjusted price is expected to be up 19% compared to that depressed 1998-2005 era).
Such price prospects don’t give farmers a lot of enthusiasm about planting wheat. A $4.59 crop insurance price equates to a $3.44 crop insurance guarantee on 75% coverage. The cash price this week has ranged from $2.58 to $2.90 for HRW wheat across Kansas. As of Wednesday, the DTN National HRW Wheat Index was $2.86. Farmers nationally have already collected $76.5 million in loan-deficiency payments on more than 406 million bushels.
But farmers have to find a way to keep cash flowing, no matter what the outlook. This DTN series addresses real strategies Plains farmers are deploying through this downturn, including managing emotional stresses as well as finances.
David Schemm, a wheat grower from Sharon Springs, Kansas, started to drill wheat in late September. As vice president of the National Association of Wheat Growers, Schemm has talked to a lot of producers about their plans for the 2016-17 marketing year.
“I know a lot of producers I’ve talked to, it’s difficult for them to get excited about putting a lot of dollars into it or planting it just because they believe it’s a high risk with the prices,” Schemm said.
“Some are taking the view of low cost and trying to minimize the expenses on the crop,” Schemm said. “I’ve also talked to some who say that is exactly the wrong way to do it. They want to maintain a higher input level to go for higher production and increase their yield potential to maintain profit margins.”
Before fall planting began, Kansas State University released an outlook that showed farmers would need winter wheat to yield 60 bushels per acre to break even. USDA estimated this year’s national average yield for winter wheat was 55.3 bpa. A lot of operations in Kansas are coming off a strong harvest year — the state average was 57.0 bpa for 2016, according to USDA’s latest estimates — so farmers are leery about the prospect of reproducing such a yield next harvest.
“My county average is only 34 bushels to the acre,” Schemm said, adding he will average 45 to 47 bpa on his farm. “If I am looking at a 60 bpa breakeven, why am I putting a crop in that I’m going to lose an average of 13 bpa?”
Marvin Anliker, market president of American State Bank & Trust Co., in Garden City, Kansas, said that being strictly a dryland wheat farmer can be tough sledding at any time. Most farmers in his area diversified enough to cope with low winter wheat prices.
“The proactive guys, they will manage right through this thing. They take it in stride. It’s another downturn and another challenge, but they always rise to the occasion and come out ahead,” said Anliker, who also serves as president of the Ag Division of the Kansas Bankers Association.
In terms of belt-tightening, Anliker said more farmers are forgoing chemicals, especially with weed management. Producers who learned to rely on chemicals to fallow ground and convert to no-till farming to conserve moisture now are breaking out the old iron to till for weed management as a cost-saving strategy.
“The word that you hear is old-school,” Anliker said. “They are going back to least-cost production and doing it the old way. There is a lot of iron getting pulling out of the weed row. Guys are looking for every way they can to cut costs. Bottom line, their greatest opportunity to improve their margins is on the expense side of the ledger. They have to figure out how to decrease expenses.”
Still, Anliker said most farmers he works with are sitting in a pretty strong equity position, even though they may have burned through their working capital and cash reserves in the past two years. For farmers who are more highly leveraged, Anliker said his bank has been able to do some restructuring, as much as can be done, and gone to Farm Service Agency loan guarantees to stretch out the payments over longer periods. That reduces the cash-flow requirements needed on the farm.
“The goal is just to get them past the downturn here in the ag industry and keep them in business until more favorable times return,” Anliker said.
SELLING FOR WORKING CAPITAL
Farm Credit Services of America also has been very active with those who are stressed customers who have depleted or wiped out their working capital, said Bill Davis, chief credit officer for FCS America. Davis spoke at a financial and ag-law conference last month in Manhattan.
Davis said farmers need to look at underperforming assets, such as marginal ground, and decide whether those assets would be better served converting to working capital. That could mean selling a tract that is a little farther away from the rest of the operation, for instance.
“In many cases, that means selling land that’s a tough decision for producers to make,” Davis said, noting there are still people out there looking for farm land. He added, “We still have a lot of interest in farm ground from outside sources.”
Davis said other producers have liquidated equipment as well. Compared to the 1980s, Davis said interest rates are lower now and crop insurance options are better.
“We have a lot of producers who are stressed, but there are a lot of options to deal with it,” he said.
Lon Frahm farms about 30,000 acres near Colby, Kansas, raising mainly wheat and corn. Frahm said he has told landlords they must come down on their rent demands. His rental agreements have gone from straight cash rents to base-flex rents as well.
Frahm said he is lucky that a lot of his non-family landlords are retired farmers who understand the dynamics of what is going on in the markets. Once such leases were established with some landlords, Frahm said he approached others with the proposition.
“They recognize all of the factors we are dealing with now.”
Flex rental agreements generally allow the price of rent to move based on the prices producers get for their crops. Frahm said his leases require an upfront cash payment that doesn’t change, but the rest of the lease arrangement relies on value of the marketed crop.
“I’m lucky I have some (landlords) who are savvy and I can go to other ones and say ‘They are respected friends of yours. How about looking at what they have done?’”
Frahm’s advice to other farmers is that when it comes to either saving money or making it, do not wait for someone else to ask. “Go out and ask or make the pitch yourself,” he said.
Farmers need to keep looking for different marketing opportunities beyond their traditional rotations as well. For instance, Frahm signed a contract to grow non-GMO corn next spring that will go to a dairy operation producing milk for the yogurt market.
Frahm added that that young and beginning farmers will find some access to land as older farmers retire or those distressed farmers sell that underperforming ground.
“This will create opportunities,” he said. “Cash rents are going to come down.”
COPING WITH STRESS
Allen Featherstone, chair of the Agriculture Economics Department at Kansas State University, projected Kansas farmers could see another income drop of 10% to 12% in 2017. If farmers can further reduce expenses, those income numbers could improve somewhat.
“There’s probably another difficult year coming up before these things begin to move up,” he said.
With that in mind, Featherstone said it is important for farmers to run the numbers and look at a variety of scenarios for their farms. It’s also important for farmers to communicate with their spouses, the family and others to help weather the storm.
Looking back on the 1980s, Featherstone said one thing that stuck out was “the human toll that went on with families and all of those issues.” He added, “It’s pretty important to have those communication skills in addition to those economic skills.”
Anliker said farmers also have to try to keep emotion out of the business decisions. They also need to find a way to de-stress, which he admitted was easier to say than do.
“In the ’80s, it was a very stressful time and I’m starting to see that again,” Anliker said. “Some guys are very stressed out. Producers need to learn how to deal with stress and de-stress, and keep family priorities in order.”
Source: Chris Clayton, DTN