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by Doug Tiffany, U of M Extension Educator, Agricultural Business Management

As corn farmers fine-tune their equipment and head to the fields, many have concerns about the costs of production and prospects for profitable price levels. Through the winter many have crunched the numbers to determine their corn production costs, including fuels, fertilizer, herbicides, seed, depreciation, anticipated repairs on equipment and land rent. The 2013 crop season was one fraught with production uncertainty in the form of meager soil moisture and continuation of adverse weather conditions; but in the end, a huge crop of corn with price-depressing effects was produced. Over the past long winter, there have been a series of demand-supply reports that have shown increasing levels of corn exports and greater use for ethanol production, offering some increases in prices. For tenants, corn prices still hover close to costs of production, depending on land rent.

Corn markets in the winter months are tempered by the understanding that the Upper Mississippi River is frozen, stopping the flow of corn to our most important export port, New Orleans. Rail movements of corn during the winter took the 2013 corn harvest from the Midwest to the West Coast for export to Asia and to domestic poultry and livestock feeders in SE United States and other areas. Truck traffic moves corn to ethanol plants and Midwest feeders; however, beef cattle on feed are fewer than in past years due to dry pastures and high hay prices over the last few years. With the opening of the Upper Mississippi and the price dampening effects of Southern Hemisphere corn production now understood, attention of the corn trade has shifted to the corn acreage intentions and field conditions faced by Midwest corn farmers. Those two factors will be dominant from this spring to the fall harvest.

In contrast to corn farmers, feeders of livestock, both domestic and foreign, and dairy producers are rejoicing at the cheap corn prices through the winter and going forward. Another group of corn consumers are ethanol plants, who have enjoyed excellent margins since the harvest of 2010. Many corn farmers are also stockholders in ethanol plants, so this is a great time to review the history of profits for corn farmers and corn ethanol plants.

The Agricultural Marketing Research Center (AgMRC) consisting of Don Hostrand, Robert Wisner and Ann Johanns at Iowa State University has maintained a very useful series of data on costs of production of corn in Iowa as well as modelled profits for typical ethanol plants since 2005 using farmer budgets and ethanol plant techno-economic models. Their data and analysis are regularly displayed in the Renewable Energy Newsletter.

Appearing in Figure 1 below is a graph produced by AgMRC that offers historic perspectives on profits of ethanol plants from 2005 to the present. Here one can see corn at the cost of production for the farmer, not the market price. This graph represents a period of dramatic changes in the ethanol business as that industry expanded rapidly in 2006-08 following the high profits that started at harvest time in 2005 as a consequence of Hurricane Katrina, which bottled up the Mississippi River and shut off corn exports through the Gulf of Mexico. Another effect of this natural disaster was to raise prices of ethanol and other petroleum products after damaging refineries and natural gas infrastructure on the Gulf Coast. Cheap, plentiful corn that couldn't be moved to export markets set the stage, along with for higher ethanol prices, for profits of $1.00 per gallon of ethanol produced for certain periods of time. By assuming the yield of 2.75 gallons of ethanol produced per bushel of corn, profits of $2.75 profit per bushel of corn processed resulted. However, good times rarely last for long in industries based on agricultural commodities.

Ethonol Production Tiffany article.jpg

Excellent profits between $.50 and $1.00 per gallon of ethanol remained until harvest of 2007 corn was delivered. In 2008 high ethanol prices kept ethanol plants very profitable until the financial crisis that started in the fall of 2008. Profits were zero or negative for ethanol plants from the harvest of 2008 until the harvest of 2010. Energy demand and ethanol demand were weak as the general economy staggered through this period that witnessed the bankruptcy and idling of about 10% of installed ethanol capacity in 2009. There were periods of losses in 2010 for ethanol plants before recovery to profitable levels with harvest of the 2010 crop. From the fall of 2010 until the present, margins have generally been positive for ethanol plants, with excellent returns since the harvest of the 2013 crop.

Appearing in Figure 2 is AgMRC's allocation of monthly supply chain profits for corn farmers and ethanol plants from 2005 to the present. The profits of corn farming and ethanol production run counter to each other because corn is by far the largest input in ethanol production. This modeled history shows how farmer investments in financially sound, well-managed ethanol plants can offset times of poor profits or losses in corn production, exactly as value-added enterprises are supposed to perform, overall. Profits in both corn farming and ethanol production require care at each step of each process. Corn farming requires the operator to manage weather, pest and market risks and still produce competitively priced crops. Processing of corn to ethanol requires plant management to manage substantial marketing risks in the procurement of corn and natural gas as well as the sales of ethanol and the by-product feed, distillers dried grains and solubles. Substantial efforts and vigilance are needed to monitor and coordinate performance of enzymes, yeast, centrifuges, evaporators, dryers, and distillation columns at top ethanol plants. Figure 2 confirms the historical wisdom of farmer investments in value-added enterprises that move and process their production toward the consumers.

Allocation of Ethanol Profits Tiffany article.jpg

ACRE vs. DCP in 2013

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The extension of the 2008 Farm Bill opens up the decision to participate in the Average Crop Revenue Election (ACRE) program or the Direct and Countercyclical Program (DCP). Under the earlier rules of the 2008 Farm Bill, if a farmer signed up for ACRE, they had to remain in ACRE through 2012. But the extension changes that requirement. Even if farmers signed up for ACRE before, the extension allows them to change their choice and sign up for DCP if they think that is a better choice for them in 2013. (Farmers do have the option to not sign up for either program, but this is not a sensible choice for 2013 in almost all cases.)

Farmers have until June 3, 2013, to sign up for the ACRE program and August 2, 2013, for the DCP program.

The 2013 decision to sign up for ACRE involves some uncertainty because the drought of 2012 has cast doubt on the potential yields for 2013 and thus the potential market prices. Plus, changes in the demand side for grains may have weakened the market's ability to absorb higher production at current price levels.

At this point in late April, the decision seems to tilt towards the sign up for the DCP in 2013. As we learn more about the planting season and potential production levels and price movements, this situation may change. So farmers need to pay attention to these changes and make their final choice between ACRE and DCP closer to the deadline of June 3.

Due to this uncertainty and their individual situations, every farmer needs to evaluate their own conditions and payment limits and decide whether the ACRE or DCP program is the best option for their farm in 2013. Even if they had signed up for ACRE previously, they can change their choice under the extension of the farm bill for 2013.

Farmers and their advisers can use this Excel worksheet to help them evaluate their situation for the 2013 decision.

Switch from corn to soybeans? Not so fast!

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Kent Olson, Extension Economist
Jeff Coulter, Extension Corn Agronomist

May 25, 2011

Delayed Corn Planting.jpg


With a wet spring and delayed planting, many farmers are thinking of switching from corn to soybean due to potential yield losses in corn as planting is delayed. However, if farmers consider potential net revenue, they may not make this switch as fast as if they consider just the potential yield loss.

Simple supply and demand considerations drive this analysis. Much of the U.S. Corn Belt is suffering from poor planting conditions this year, so total corn production likely will decline. Markets will react and have reacted by pushing corn prices up. And if more farmers switch to soybeans, total soybean production may increase and markets will push soybean prices down. So, since both yield and price are affected, revenue needs to be considered as well as yield.

Using last year's costs of production from the Center for Farm Financial Management's FINBIN database of Minnesota farmers' actual expenses, these farmers' three-year average yields, projected harvest prices, and estimated government payments, forecast net revenue is estimated to be $443 per acre for corn and $195 for soybean (Table 1). These estimates indicate a tremendous advantage for corn over soybean and the need for a large decrease in corn yield before soybean is more profitable than corn.

A simple sensitivity analysis shows this to be true. Suppose a farmer was able to plant corn and soybean in a timely manner and did not suffer a yield loss but many farmers across the Corn Belt switched to soybean and markets pushed the corn price up by 5% and the soybean price down by 5%. The estimates show an increase in net revenue for corn for this example farmer and a decrease for soybean (scenario 2 in Table 1).

In another situation, a farmer had corn planting delayed and suffered a 10% yield loss for corn but no yield loss for soybean. Again suppose many farmers switched to soybean so prices increased 5% for corn and decreased by 5% for soybean (scenario 3 in Table 1). In this situation, corn still has a higher net revenue than soybean for the example farmer. Switching for this farmer would lower total revenue.

Other scenarios show similar results: corn continues to have a higher net revenue. And if many farmers were to suffer a corn yield loss, the market would certainly push the corn price higher than current levels.

In one last situation, suppose the example farmer has to plant corn very late and suffers a 25% decrease in corn yield, but the soybean yield does not change and forecast prices do not change. In this situation, the estimated net revenue for corn does drop slightly below the estimated net revenue for soybean (scenario 4 in Table 1). This situation with no price changes is unlikely to happen this year since planting is being delayed across most of the Corn Belt and prices of both corn and soybean are being affected.

In a recent issue of Minnesota Crop News, Jeff Coulter and Seth Naeve report the research that show yields declining as planting date is delayed. However, in a year such as 2011 with lower growing degree days, they estimate the potential corn yield loss may be lower than in a normal year, perhaps 15% if planting is delayed to late May. Thus, potential corn yield losses may be less than the 25% loss in scenario 4.

Thus, farmers may be well served to keep their cropping plan unchanged even though yields may be lower. These estimates should hold if farmers are able to switch to shorter maturity corn hybrids.

However, if farmers stick with their full season corn hybrids, there is a good chance that these full-season hybrids will freeze early in the fall (when the grain is near 40% moisture) and that test weight will be low (as in 2009). That creates all kinds of problems with harvest, drying, marketing, and dockage. Regions in Minnesota that appear to be farthest behind in corn planting this year (parts of central and northwest Minnesota) are also those which often have below normal temperatures during the growing season. This creates a greater risk of the crop freezing before maturity if growers stick with full-season hybrids.

Farmers, lenders and others can make their own estimates of net revenue to analyze their own situations under different price and yield conditions. A management tool that may help are the enterprise budget worksheets developed by my colleague, William (Bill) Lazarus, available at http://faculty.apec.umn.edu/wlazarus/documents/Cropbud_lateplant.xls.


References

Coulter, J., and S. Naeve. 2011. Guidelines for Late-Planted Corn and Soybean in Minnesota. Minnesota Crop News. Posted on May 24, 2011, at http://blog.lib.umn.edu/efans/cropnews/2011/05/guidelines-for-late-planted-co.html


Switch from corn to soybean.jpg

Economics of Farm Management in a Global Setting

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A new book on farm management is available. I just published Economics of Farm Management in a Global Setting. As it says on the back cover of the book:

Advances in technology, communication, transportation, and policy are bringing farmers closer to the global market than they ever have been. To prepare for the future in the midst of these changes, farmers need an orderly process for developing strategic and operational plans and the ability to describe them in a structured business plan. Economics of Farm Management in a Global Setting provides the right blend of tools and knowledge for undergraduate Farm Management and Agricultural Economics students. It covers new and innovative topics needed for today's and tomorrow's farm managers while keeping the fundamental concepts at the forefront. New management tools and methods include:

• Strategic and operations management
• Quality management and control
• Production contract evaluation
• Farm Transfer and Succession Planning

Praise for Economics of Farm Management in a Global Setting

"Practical examples. Hands on. Clear text. Good breadth of material.
Michael Popp, University of Arkansas

Current, complete, concise."
Wayne A. Knoblauch, Cornell University

"Three strengths [of Economics of Farm Management are]: The strong focus on strategy (four chapters) generally lacking in most other texts. ... The integration of lessons from microeconomics and particularly macroeconomics ... [and] its practical orientation by incorporating very practical issues such as operations, quality management, land use and control, contract evaluation, etc. often forgotten by others."
Erik Mathijs, Catholic University of Leuven, Belgium

"As a teacher of Farm Management courses, I find this text very appealing... This text is well balanced and the material covered is up-to-date. It will certainly enrich the existing literature on Farm Management... It not only covers the current topics in the subject, but it also takes into consideration the global nature and competitiveness of today's farming."
Pierre Boumtje, Southern Arkansas University

The complete list of chapters is:
1 Managing the Farm in an Integrated World Economy
2 Management
3 Business Plans
4 Lessons from Microeconomics
5 Lessons from Macroeconomics
6 Government Policies Affecting Farming around the World
7 Strategic Management: Planning
8 Strategic Management: External and Internal Analysis
9 Crafting Strategy
10 Strategy Execution and Control
11 Marketing Basics
12 Financial Statements
13 Financial Analysis
14 Financial Management
15 Enterprise Budgets: Uses and Development
16 Partial Budgets
17 Whole-Farm Planning
18 Operations Management for the Farm
19 Quality Management and Control
20 Investment Analysis
21 Land Ownership and Use
22 Risk Management
23 Production Contract Evaluation
24 Human Resource Management
25 Business Organization
26 Farm Transfer and Succession Planning
27 Farming in the Future

Managing in Turbulent Times

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Given all the uncertainty of the future in the macroeconomic, politics, and the world in general, I decided to re-read "Managing in Turbulent Times," Peter Drucker's classic book from 1980. Even though Drucker was writing for a time period different in many ways from ours today, he still writes a core set of ideas that are pertinent to today's manager.

1. First task is survival. Do what needs to be done to survive today in order to be in business tomorrow.

2. Manage the fundamentals. Pay attention to the traditional measures and do what needs to be done to maintain liquidity and financial strength. Drucker adds, "Liquidity by itself is not an objective. But in turbulent times, it becomes a restraint. It becomes a survival need."

3. Manage productivity. Make the right choices to maintain and increase productivity of all resources: capital, physical assets, time, and knowledge. The productivity of each of these is managed separately with overall productivity being the ultimate goal.

4. "Tomorrow is being made today." In turbulent times, earnings made today should be used to pay the costs of staying in business tomorrow. This phrase is also the recognition that the changes that are part of today's turbulence are creating the business environment of tomorrow. So paying close attention to all the changes today will enable a manager to understand the foundations of tomorrow's market.

5. Concentrate resources on results. This means having to say, "No." Evaluate the business and the market to determine what is making money and/or establishing a base for tomorrow. If part of the business is not producing the needed results, start to let go of it. Drucker says, "Feed opportunities, starve problems."

6. Slough off yesterday. Drucker says the manager should ask, "If we weren't in this already, would we go into it knowing what we know now?" Tradition is a strong force, but if the foundations are changing, what was profitable and successful when it was started may not hold the key to success in the future. If the answer to Drucker's question is, "No," a manager should start looking at how to get out of that activity or at least asking how to stop putting additional resources into it.

7. Growth shifts to new foundations. Managers need to identify where the growth areas are that match their strengths and to start shifting resources to where the new opportunities can be found. Drucker's analogy is that business needs to distinguish between "muscle, fat, and cancer." He adds, "The rules are simple: Any growth which, within a short period of time, results in an overall increase in the total productivities of the enterprise's resources is healthy growth. It should be fed and supported. But growth that results only in volume and does not, within a fairly short period of time, produce higher overall productivities is fat. A certain amount of fat may be needed; but few businesses suffer from too little fat. Any increase in volume that does not lead to higher overall productivity should be sweated off again. Finally, any increase in volume that leads to reduced productivities, except for the shortest of start-up periods, is degenerative if not pre-cancerous. It should be eliminated by radical surgery - fast."

Even though they are 30 years old, Drucker's points are still valid today.

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