Marketing decisions key to 'getting through 2016-17'

Knowing production costs down to each field may be key to getting through "stressful" times in current agricultural downturn.

Bryon Parman says the break-even price for Delta corn producers with an average yield of 220 bushels per acre for 2017 is about $4 per bushel. That’s with a rental rate of $175 an acre, 12-row, 38-inch equipment and furrow irrigation.

“Now there are people who are going to break even at a lot less than that, but there are also people who will break even at a lot more,” says Dr. Parman, Extension agricultural economist with Mississippi State University. “There’s still some folks in the Midwest who need $5.30 corn to break even. That (price) isn’t happening.”

For Delta soybean growers with an average yield of 60 bushels per acre the break-even is around $10.75 per bushel, he told producers attending the Delta Ag Expo in Cleveland, Miss. For Delta cotton growers with an average yield of 1,100 pounds of lint per acre the break-even is about 70 cents per pound.

“Now the reason I show that slide – as depressing as it is – is because last summer there were times when the commodity prices were actually above those break-evens that I just gave,” he said. “In June, corn was around $4.25 to $4.30; beans got almost to $12 at one point; and cotton I saw at 78 cents.

“Now I realize that with cash prices you may not get quite that high, but my break-even was well below those numbers so even with cash prices you should have been able to hit them. But the question is $11.25 per bushel a good price for an individual producer for soybeans? Is $10 a good price? Well, that really depends.”

Not a bad price

If it costs a producer $2 a bushel to raise corn, then $3.50 isn’t a bad price, he noted. The only way to know that is with an accurate partial enterprise budget, and Dr. Parman says growers should have one for each field.

“You might be surprised to find you’re subsidizing this field from this field,” he said. “You’re losing money here and making money here. It happens all the time. You have one field you’re renting for $80 an acre and one you’re renting for $175. The $175-per-acre field is more productive, but you’re losing money because you’re paying $100 more an acre.

“So you wind up subsidizing it with one you got at a lower rental or the one you’re not having to put as much into. It becomes interesting when you look at your operation and realize you’re subsidizing some fields or even some enterprises from another.

He recommends growers use accrual accounting, the practice of recognizing economic events by matching revenues to expenses at the time when the transaction occurs rather than when payment is made or received.

“If you have fertilizer contracted for delivery in March, I would include that in your budget already as you’re making decisions,” he said. “Or if you think you might be contracting for fertilizer in March and you have a good idea of what that price is going to be go ahead and throw that in your budget so you have an idea before you go talk to your banker about your operating note of what it’s going to cost.”

Better marketing plan

Having that information makes a marketing plan more workable, says Parman.

“If we know what we have in every single acre and every single bushel, then we can say that if we get to the $4 mark for corn we’ve covered all our costs and I’m going to forward contract that corn or cotton at that level,” he notes.

Prior to the discussion on break-even costs, Dr. Parman displayed a “Lender Decision Graphic” with four quadrants that describe the situations many farmers may find themselves in as they prepare for 2017.

“Any borrower or client can fall into one of these categories,” he said. “You have people in the ‘easy, I’m going to lend them money’ category – positive net worth, positive cash flow. You own more than you owe and you’re making money. That was pretty much every farm from 2005 to 2013.

“Then you have people who are mostly where we are right now – positive net worth and negative cash flow. The question if you’re in this quadrant is how long you can remain there before you fall down here to negative net worth and negative cash flow. This category right here is where no one is going to lend anyone a dime. You’re losing money and you owe more than you own.”

Workable solutions

Too many times, he said, economists deliver the bad news without giving farmers any information about how to get through the situation they find themselves in now. Parman’s comments about partial enterprise budgets, accrual accounting and marketing plans were designed to help growers meet that challenge.

“The real key to these stressed economic times is getting through them,” he said. “Agriculture is cyclical and no matter how far back you go have times like we had beginning 10 years ago and you have times like the 1980s and the 1970s.

“At the end of the day we are going to come out on the other side of this. Management becomes key when we have margins this thin. When corn is 8 bucks and input costs are $5, anybody can turn a profit, but it takes some real management and marketing to get by when margins are razor-thin like they are right now.”

For more information on this topic, visit http://extension.msstate.edu/sites/default/files/publications/publications/p2991.pdf

 

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