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Don’t Overestimate Yield, Keep Expenses in Check in 2017

Jim KnuthThe Iowa Soybean Association recently sat down with Jim Knuth, our senior vice president in Iowa. The resulting Q-and-A was published in the Iowa Soybean Association e-newsletter.

What can farmers take away from the 2016 crop year that will help them in 2017? Will commodity prices rebound this year? What changes should farmers consider making to their farm business plan? Where’s the best place to look to trim production expenses? These are just a few of the questions Iowa Soybean Association communications director Aaron Putze posed during a recent conversation with Jim Knuth, senior vice president at Farm Credit Services of America.

What conclusions can one draw from the 2016 crop year?

Farmers benefited from big bushels. The record crop meant a boost to revenue and helped many producers breakeven or even make some money. As farmers know all too well, it’s been a struggle to match revenue with expenses. So when we get big bushels like we did last year, gross revenue is increased, and that helps. But as we look to the future, we caution farmers not to plug exceptionally big yields into their cash flow. You just can’t plan on numbers like this every year. Be realistic in your yield forecast.

What’s the grain picture looking like for 2017?

Matching revenue with expenses will continue to be a challenge moving forward as we make adjustments on the cost side of agriculture, particularly grain. Corn and soybean stocks are up, planting intentions for soybeans are up, the stocks-to-use ratio is up. So, given these many factors, it’s just not realistic to think prices alone will save farmers this year.

Is there reason for optimism on the demand side?

Yes. Despite strong ending stocks, demand remains strong. You can make a case that grain prices should be lower due to ample supplies, yet they are holding due to robust demand. 

How would you characterize the current strength of the farm economy?

The soft landing continues, particularly for grain farmers. This soft landing is a positive because it’s as good as we could hope for when you consider the record production we’ve had and the height to which land and commodity prices had ascended just a few years ago. This is the fourth consecutive year of descending prices. This slow decline is preferable to what we experienced in the 1980s when we had a hard landing that included solvency issues, not just cash flow issues. When a person has equity, they generally have options. This is the good news in today’s environment. 

Why is farm business planning so important?

You need to know your current financial situation to make plans for the future. Always start with your fixed costs – owned and rented land, machinery and equipment and family living. Then, scrutinize how your debt is structured and consider the use of amortization to improve cash flow. Even with modestly rising interest rates, farmers shouldn’t be discouraged because rates are still low, viable and very workable.

What’s amortization?

It’s a banking and finance term that refers to the length or term of a loan. It drives loan payments and that, in turn, directly impacts cash flow. Understand and use the power of amortization to help drive down your costs per acre.

What are some strategies farmers can use to adjust expenses?

Look at their financial position holistically. The holistic picture is what matters and should drive decisions when making financial adjustments. Holistic concepts include total real estate debt versus total owned acres. Or, total machinery and equipment debt versus total acres farmed. Then, determine the existing average amortization on these two line items. If the existing repayment plan is too aggressive, restructuring the debt with longer amortizations can really help their cash flow.

How has farming changed from a business planning standpoint?

It’s not enough to be a good producer. You have to understand the big picture and know your costs of production. High-cost operations aren’t all that successful long-term in agriculture. Farming is not a highly-leveraged, high-cost business. It’s a margin business. The goal is to always be a low-cost producer.

Set the stage for this year’s grain production and marketing season – what should farmers know?

We believe there will be relatively large plantings of corn and soybeans on top of our already ample ending stocks. So it’s not likely that price will solve our cash flow challenges. We need to be opportunistic marketers when rallies happen and realize that the duration of these rallies could be shorter. You’re going to need to be an opportunistic marketer which really means knowing your cost of production and margins.

What is the one thing you recommend farmers do right now?

Put together a detailed, realistic cash flow for the coming year. Really put time and effort into your business plan and visit with your accountant, bookkeepers and financial experts. A detailed and realistic cash flow will tell you where your break-evens are and where you are at on making cost and operational adjustments. It’s no longer true that the more acres you plant the more you make. 

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