ldquoFarmers who were cash flowing when corn was 650 to 7 and soybeans 13 to 14 are no longer cash flowing mdash in fact theyrsquore taking significant losses in a lot of casesquot says Bryon Parman Mississippi Extension agricultural economistmdashGetty ImagesSung JungJun

“Farmers who were cash flowing when corn was $6.50 to $7 and soybeans $13 to $14 are no longer cash flowing — in fact, they’re taking significant losses in a lot of cases," says Bryon Parman, Mississippi Extension agricultural economist.—Getty Images/Sung Jung-Jun

Know cost of growing a bushel ‘to the cent’

MSU ag economist on 2017 ag sector financial picture

If you’ve still got questions about how much it costs to grow your crops, now would be a good time to find out.

“Besides producers, I work with lenders, bankers and loan officers quite a bit,” says Bryon Parman, Mississippi State University agricultural economist. “Right now, as far as we can tell, there’s no reason to believe commodity prices will be any better in the next year, or so. Miracles happen, but you can’t rely on those occurring.

“That’s why sound money management, very detailed, accurate budgeting are critical at this time. The margins – for both producers and lenders -- are very tight currently. Once you have the details needed, we can begin thinking strategically about the best way forward. To bring some of their costs down, producers need management strategies, a marketing strategy, an input procurement strategy.”

Parman, who spoke at the Jan. 6 Tri-State Soybean meeting in Dumas, Ark., says “when we’re in a tight economic period, we’re really just trying to operate in a manner that lets us get to next year. When the economics finally turn around, then we can start talking about investments, growth, expansion and the like. Right now, many operations are just trying to stay afloat for another year.”

Entwined

Parman closely tracks ag finance in production agriculture. “Within that realm it’s almost impossible to separate land values, cash rents, farm profits and agricultural lending. Those are all rather entwined. 

“Historically, we’ve had periods like 2013 when everyone in the ag sector was making money. Land values seemed to only go up and up. The same was true for cash rents along with production costs. Now, though, with commodity costs where they are, the values of farmland just don’t have the same foundational support. Higher rents, higher costs for farmland just don’t pencil out. Many farmers are often barely able to eke out a profit even putting aside cash rent. Add in rent and the ship is moving backwards.”

The biggest store of wealth for a farm is land. “That’s a producer’s main source of collateral, of borrowing power. If land values drop substantially during a lean period when farmers may need to borrow more money, their borrowing power is diminished at the time when they need it most.”

Know your numbers

In this atmosphere, “lenders are absolutely taking harder looks at clients’ financials. There may be exceptions, but I suggest you walk into your banker’s office with a solid budget, projected cash flows, projected costs. You must show them how you plan to make a profit in the coming year. Without that, you may have a hard time securing a loan.

“From what I’m hearing, this isn’t especially bad here in the Mid-South. I understand it’s happening all over.

“I know in some of the Corn Belt states like Iowa, land values have come down quite a bit. That trend hasn’t happened in the Delta states as much. But when land values were moving up the Corn Belt states saw the quickest spike. Iowa is sort of the leading indicator for land values, it seems.

In other regions, like the Delta, “land prices will follow Iowa but not at the same pace. We’ll follow the trend but not one-to-one.

“Right now, in Mississippi, there are certain classes of land – say, dryland acres in the Delta – whose value has come down. But from what I can tell, good-quality irrigated farmland hasn’t lost value. That doesn’t mean it has increased in value for several years, though.”

It’s interesting to note, says Parman “that compared to 15 years ago, commodity prices are still high. We had $2 corn in the early 2000s. High-quality farmland is still very productive and if own or rent your land it’s still profitable in the face of $4 corn and $9.50 beans.”

Farmland forces

When farmland values are going up, there are two forces acting.

“First is the land’s commercial value. Second is the speculative pressure – those looking for a rental return or looking to flip it for a profit. Well, there are only so many high-quality acres. So, when farmland prices keep going up without a lot of the high-quality land selling, it drives up the price of marginal farmland, although not in the same proportion.

“For example, suppose 10 years ago, top-quality farmland was worth twice as much as the next couple of rungs down the ladder. Well, it may turn out at the height of the boom, marginal farmland, instead of being 50 percent of the value of high-quality is 75 or 80 percent. That isn’t because it’s suddenly more productive but because speculators have bought it up.”

Then when the farm economy sours a bit, “the top-quality farmland holds its value and the marginal land price begins to crater. And it craters the most because, all of a sudden, there’s no capital gain that you can bank on in the future.

“At the winter meetings, I’ve been advising producers – and this true no matter what’s going on in the ag economy – to have accurate budgets and record-keeping. To come out of periods like this intact, you need to know, to the cent, what it takes to raise a bushel of soybeans, corn or rice in a given field. That’s a prerequisite for putting together a solid marketing plan.

“Suppose Field A takes $9.46 to grow a bushel of beans. Well, if the market price hits $9.50, we know the debts will be paid off. Don’t go backwards! Without the knowledge of how much it costs to produce a bushel of beans there, how will you know what a good versus bad price is for soybeans? I mean, $3.50 for a bushel of corn isn’t bad if you’ve only spent $2.10 producing it.

“So, step one is knowing exactly what your production costs are per bushel, per field. Step two is marketing in a manner to get back what you’ve spent per bushel.”

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