There are times when agriculture looks like a Texas Hold ’em table from a bad dream, where all the other players appear to be holding winning hands, except for your farm. Of course, savvy planning and careful wagers on key aspects of your business can turn your mediocre hand into a winner, but you’ll be working harder than ever for 2016.
Yet farmers we’ve connected with in the past few months are looking ahead with cautious optimism. In many parts of the country, bins are filling with corn and soybeans from a solid-performing crop that offers future income potential if you can capitalize when volatile markets offer pricing opportunities. However, the raw numbers are a warning that you’ll want to sharpen your pencil, or spend more time with your management spreadsheets than ever before.
USDA notes that net cash and net farm income are forecast to decline. For 2015, net cash income will dip by 21% and net farm income will fall 36%, which is the biggest decline since 1983. And it appears the slide is going to be shared across several parts of ag.
Crop receipts will decrease by more than 6% in 2015, led by a $7.1 billion dip in corn receipts, and a $3.4 billion slide for soybeans. Wheat also falls by $1.6 billion.
Livestock receipts will fall 9% in 2015, due mainly to a 29% slide in dairy and a 27% decline for hog receipts. Beef continues to remain solid.
The good news is that on the whole, production expenses are expected to fall for the first time since 2009. Energy and feed costs show the biggest declines; however, expenses that will rise include labor, interest and property taxes.
The same report shows asset values are falling with a decline in farmland values and rising debt. The agency predicts an average decline of 4.8% in equity — the first drop since 2009. This shows that farm financial risk indicators, including the debt-to-asset ratio, will rise in 2015, with more financial pressure on farm operations. But debt-to-asset and debt-to-equity ratios remain low versus historic levels.
The financial pressures on agriculture show up in a number of ways. The Federal Reserve Bank of Kansas City in a report earlier this year showed that non-real-estate farm loan volumes rose in the second quarter of 2015, with a big boost in operating loans. In fact, operating loan volumes earlier this year rose by 25% from a year ago.
The pressure comes, the bank reports, from the fact that cash receipts fell 22% since 2012, but costs for inputs, seeds and rent fell just 1% — a classic cost-price squeeze. Yet the Federal Reserve Bank reports that the credit risk associated with those farm loans hasn’t changed; farmers are still able to service debt.
During a recent webinar, Michael Swanson, chief ag economist, Wells Fargo, noted that USDA’s prediction of $58 billion in net farm income is about where it was in 2006. The key difference? “In 2006, total farm expense was $217 billion, and this year it’s $377 billion. There is $160 billion more in farm expense to generate the same amount of income,” Swanson said. “That creates a little bit of stress.”
The stress isn’t just on farmers, as some companies are vying to change their business models, too. For example, the crop protection industry appears to be looking at different ways to consolidate, which continues to unfold.
There are some bright spots for purchasing. “North American farmer margins remain under considerable pressure with limited relief likely in 2016,” says Kenneth S. Zuckerberg, senior analyst for farm inputs, Rabobank Food & Agribusiness Research and Advisory group. “Looking at the cost side of the equation, the industry has seen a major reduction in the purchases of commodity equipment by farmers over the past six months [most notably combines and tractors]. However, even with an excess of supply relative to demand, prices as reported by the major equipment OEMs have not declined meaningfully.”
This is the environment you’ll be farming in for 2016. Manufacturers of inputs you buy for the operation have tightened their costs and are also tightening inventories to maintain pricing. This puts pressure on your cost of products at a time when crop prices are soft, and forces you to consider which farming practices make the most sense.
The challenge, or opportunity, is the real-time decision-making you may be forced into making. For example, fall fertilizer applications might make sense. And as you read this, many who continue with that practice are probably fully involved, as temperatures hit key levels to preserve the investment. However, the increasing move to spring-applied fertilizer offers opportunities for cost containment, too.
Those that applied fall fertilizer in 2014 for the 2015 season, but got hit hard by rains, saw little opportunity to manage that up-front cost. While spring fertilizer programs put pressure on equipment and labor at planting time, more farmers are also looking at the practice from a nitrogen management standpoint.
Fertilizer choices become both a timing and cost management challenge. Add in some rising environmental concerns about nitrogen runoff, and the issue gets muddier. However, as a potential cost control measure, fertility timing may have value, too. Maximizing yield in a given year while managing costs will be theme of 2016.
Zuckerberg points out that there are some bright spots on the input horizon, noting that crop protection prices are sliding as farmer demand declines. The added pressure on crop protection companies is the rising use of generics, or post-patent products that can often have a lower cost per acre. And there are an increasing number of players in that field offering familiar active ingredients.
The crop protection decision is also a question of balancing yield and income with expenses. You want the yield that protecting the crop can deliver, but how many products do you need to meet key yield goals? As gray leaf spot and northern corn leaf blight, both treatable diseases in corn, hit this fall’s crop, growers got some good information about the true value of at-tassel-applied fungicides.
It’s that information you want for next season. If you didn’t apply and saw a significant yield decline, you surely have a better handle on those costs than in the past.
Benchmarking your fields and actions will be important, too. If you’ve built your own on-farm test systems using yield monitors and management software, you are gathering helpful management information. If you didn’t, but have the yield data combined with your crop protection practices, it’s time to sit down with an agronomist and determine the best approaches for 2016.
Another bright spot, Zuckerberg says, is fertilizer prices. “Fertilizer costs have fallen by 9% since August, and 20% thus far in 2015 as measured by the Green Markets Composite Index,” he notes. It’s one area that’s an obvious improvement in costs.
Yet Zuckerberg notes that the cost declines in those input prices have not been large enough to offset the revenue pressure on your operation. “This is the reason why the outlook margins [are] still negative heading into 2016. Farmers will need to be judicious with respect to their spending in order to ride this storm out,” he adds.
That judicious spending will drive all actions this fall and next spring, and it starts with how 2015 went. A review of your expenses with an eye toward what should fall, and what might have to rise, will drive decisions for 2016. And it may bring the need for a major change in how you farm. It’s also an opportunity to look at the benchmarking tools you may have available.
For example, FarmLink customers have access to True-Harvest information, which pulls together yield information from combines in the company’s MachineryLink system. That information can tell you more about how your crops did compared to others of similar size using the same hybrids. Did you match yields (taking into account weather) with others of your size raising a similar hybrid?
The Farmer Business Network also looks at these types of information, even offering variety-specific data for decision-making in 2016. That’s the kind of information that can really hone your buying in new ways. Simply eliminating an input or cutting back on something may actually hurt you financially deeper than the savings. Focusing on return-on-investment and analysis of your practices will be key to success in 2016, or at least holding a steady state until market prospects improve.
Hard choices ahead
No matter how you cut it, 2016 is the year of hard choices and tough questions. Yet there could be opportunities, too. Sterling Liddell, senior analyst for grain and oilseed, Rabobank Food & Agribusiness Research and Advisory group, notes that “the one silver lining coming from 2015 is an anticipated year-on-year 8% drop in stocks carried into 2016. This could increase prices above breakeven going into the spring, as low 2015 commodity prices are not likely strong enough to increase 2016 acres planted to a comfortable level.”
Given that scenario, combining benchmarking, judicious investment in key inputs — from fertilizer to seed to crop protection inputs — and some personal cost cutting could keep your balance sheet intact. Perhaps the hardest cut of all will be the family cost-of-living expense.
“We’ve seen inflation of this expense in the last few years,” said David Kohl, ag economist and national speaker, Virginia Tech University. During a talk earlier this year to a group of Wisconsin corn and soybean producers, he noted that family living expenses have risen into the six-figure area. “Some farmers are going to face a pay cut.”
Yes, there are hard choices ahead.