8 Tips for risk management in 2015
“ In the years before 2014, the agriculture community was drawn into a mentality that corn prices of $5-6 to per bushel were the “new normal,” rather than a temporary price upswing. That type of thinking has changed quite dramatically in past year, as local cash corn prices dropped to below $3.50 per bushel during 2014, before rebounding late in the year, and then dropping again after Jan. 1, 2015. The projected cash corn price for the 2014 crop, which is now in storage, is expected to remain near $3.25-3.75 per bushel until next summer. This is similar to corn price expectations for the 2015 crop year. These price projections suggest that farm operators may need to adjust risk management strategies for 2015 and beyond. Following are some things to consider regarding risk management strategies for the 2015 crop year and beyond.
Calculate realistic crop production breakeven levels. The breakeven cost of producing corn at trend line yields will likely be $4 per bushel or higher for many producers in 2015, and above $10 per bushel for soybeans. There can be a large variation in breakeven price levels among farm operators depending on yield potential, production expenses, overhead costs and land costs. Farm operators should also include a charge for an expected return for their management and labor into the breakeven calculations.
Develop a crop marketing plan with realistic price expectations. It is important for farm operators to establish a realistic grain marketing plan for both the remaining 2014 crop that is in storage, as well as the planned 2015 corn and soybean crop. Grain price targets should be based on realistic price expectations, and the calculated crop production breakeven levels referenced earlier. It is best to have targets set to forward price a portion of the expected crop when profit margins exist; however, it is also important to have a strategy to reduce loss if grain prices stay below the breakeven levels.
Utilize a sound crop insurance strategy. A good crop insurance program using Revenue Protection (RP) crop insurance policies is a very important risk management strategy for crop production in 2015 and beyond. Many producers had RP policies in 2014 with guarantees of $650-800 per acre for corn. Comparable RP policies in 2015 will likely only have guarantees of $550-700 per acre. It may be advisable to look at the higher levels of RP coverage (80-85%) for 2015, in order to increase the guarantees, especially for producers with higher breakeven market prices, even though the insurance premiums will be somewhat higher.
Carefully analyze the choices for the new farm program. There are several different options for the new farm program, including base acre reallocation, updating FSA payment yields, and making a choice on the preferred farm program option for the 2014-2018 crop years. The farm program choices are Price Loss Coverage (PLC ), Agricultural Risk Coverage-County (ARC-CO), or Ag Risk Coverage-Individual (ARC-IC). There are potential large differences in payment likelihood with the various farm program options. Base acre and payment yield decisions must be finalized by February 27 at local Farm Service Agency (FSA) offices, and require at least one landowner signature for each FSA farm unit. Producers must finalize the farm program choices on each FSA farm unit by March 31.
Look for ways to reduce production and overhead expenses. There is a wide variation in corn and soybean production costs from farm to farm, and the higher production expenses do not always translate into higher yields or greater profits. Several small to moderate adjustments in production expenses can make a significant difference on corn and soybean breakeven levels. Overhead costs for machinery ownership and expenses can be another major variable in farm profitability.
Pay attention to cash rental rates and land costs. One of the biggest variables in farm profitability is land costs, either cash rental rates or land ownership costs. Based on farm business management records, there is a wide variation in average land rental costs from farm-to-farm. Farm operators should look at breakeven levels realistic before finalizing 2015 land rental rates, or before bidding unrealistic land rental rates on new farm land that becomes available. Similarly, farm families must closely analyze the future farm cash flow ability when making land purchases in today’s land market.
Keep the “current position” (cash available) segment of the farm business strong. It is important to pay close attention to the current ratio and the level of working capital in the farm business. If there is a big decline from year to year, it is likely a warning sign of more serious farm financial difficulties. It may be advisable to use excess cash revenues from the farm operation to pay down short-term operating debt, or for prepayment of crop expenses, rather than making extra payments on real estate and term loans. Also use caution on cash expenditures for capital improvements and non-farm assets.
Don’t forget about family-living and non-farm expenditures. Family living and non-farm expenses can be a big hidden factor in farm profitability. Many crop farms have enjoyed record profitability in recent years, which has allowed farm families to up their annual expenditures for family living and lifestyle expenses, and to make some non-farm capital purchases. As profit margins get tighter in the coming years, it is important to adjust the needed allocations for non-farm expenses accordingly. “