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Hart: Expect low margins in 2016

By Staff | Nov 26, 2015

CHAD HART, an Iowa State University Extension ag economist, addresses a room of ag lenders and farmers Nov. 19 in Fort Dodge. He told them grain and livestock markets are at the same point as they were last year, low margins, and likely to be that way through 2016.

By LARRY KERSHNER

kersh@farm-new.com

FORT DODGE – The bad news is grain and livestock markets are no better now than a year ago, and, barring a weather catastrophe, are likely remain so through 2016 and possibly 2017.

“It’s going to be another rough year,” said Chad Hart, a Iowa State University crops market specialist.

The good news? Well, actually there was none.

The season’s average prices, Hart said, are $3.65 per bushel for new crop corn and $8.21 per bushel for new crop soybeans. He said the 2015 cost to produce a bushel of corn is estimated at $4.40 and soybeans at $11 per bushel.

That information was presented Nov. 19 at the Iowa State Extension office in Fort Dodge.

Hart was one of three speakers for the evening.

Christine Tidgren, a staff attorney with the Center for Ag Law and Taxation, updated the audience about ag liens and how farmers have been getting sloppy filing their paperwork during years of prosperous margins.

Alejandro Plastina, an Extension economist, offered tips for coping with long-term, down-turned market prices, emphasizing that farmers renting acres are losing significant dollars, even when prices were not as bad in 2013.

More pain ahead

With 2015 recording the third largest harvest on record, following 2014’s record yields and 2013’s second-largest, Hart said the supply of world corn and soybean production have overwhelmed record demand levels for both grains.

“Demand is good,” he said. “It’s done everything it can.

“We just keep supplying big supplies.”

Hart said it’s not just U.S. farmers, but worldwide competition keeping both markets saturated. More corn is coming from Ukraine and Africa, while South America has world-leading soybean production.

The problem is also in products, especially ethanol, he said.

That industry is maxed out, all plants in full production and can’t grind through any more corn.

In addition, with the sorghum market bottoming out, ethanol plants in southern states are buying cheaper sorghum as their feedstock, rather than corn.

A strong dollar is also holding back exports, Hart said, as China and other U.S. corn and soybean customers are seeking cheaper feedstocks elsewhere.

Concerning 2016 planting intentions, he doesn’t see corn losing a significant number of acres.

The Great Plains states, which have switched to more corn and less wheat, and southern states, switching to corn from cotton, are not expected to back away from planting corn in 2016, Hart said, since they don’t have a better alternative at the moment.

“So we’re looking at being at the same place next year,” he said.

He actually expects an increase in corn acres planted next spring, despite low prices.

Noting there were an estimated 200 million acres in prevented plantings in 2015 due to weather disasters, the country still turned in its third-largest corn harvest.

“Weather did cut yields in some places,” Hart said. “But that was offset by good yields elsewhere.”

He said that what’s needed for a quick turn-around “is a strong La Nina. We want a weather disaster, and we hope it happens to someone else.

“But in all reality, it has to be here, since the U.S. grows one-third of the world’s corn supply.”

Hart said his concerns for corn are dwarfed by his concern for the soybean situation.

“Even if the U.S. steps back (in soybean acreage),” Hart said, “South America is expected to grow.

“This supply issue will take some time to work itself through.”

He said China’s soybean exports are huge, but still backed off 30 percent compared to this time last year.

“We’re in a negative margin now,” Hart said, “and we’ll stay there through 2017 and will be there until there is a supply change.”

Hart said profitable margins like those experienced from 2005 through 2008 occur about every 30 years.

Market corrections like the present take five years to settle out. This is year three.

“I’m a short-term bear and a long-term bull,” Hart said. “It’ll work out, but it’ll take some time.”

Tips for handling low margins

By LARRY KERSHNER

kersh@farm-news.com

FORT DODGE – Alejandro Plastina, an Extension economist, told farmers and ag lenders that farmers who own their own land are seeing diminished income flows.

Those with mortgage payments are making less and those renting acres have little hope of any profitability on those acres in 2015 and 2016.

“Even 2014’s record crop,” Plastina said, “left renters with negative income, based on state average costs, rents, yields and sales.”

He said 2015 losses on rented land is $23 per acre, based on state averages; while those with half-owned land earned $73 acre profits and fully owned land was at $223 profit per acre.

To hammer his point home even further, Plastina said to meet production costs and have enough to have just $40,000 for living expenses, in 2014 it required 155 fully owned acres and 371 half-owned acres. To do that in 2015, it required 123 and 700 acres, respectively.

Rented land? It was impossible both years.

“This is just out of whack,” Plastina said.

He offered some tips for managing through another low-margin crop year. These include:

A). Renegotiate rents or don’t renew contracts.

B). Do not buy machinery to avoid taxes.

C). Carry-back losses from the past few years and obtain tax refunds.

D). Revise operation size and fixed costs for the next two to three years.

E). Keep as much cash available as possible, keeping operating credit lines open.

G(. Try to extend repayment schedules. “You may pay more interest in the long run,” Plastina said, “but you’ll have more cash on hand.”

H). Revise living expenses – postpone vacations, home remodeling and/or capital purchases.

I). Know production costs and market accordingly with price and date targets. Stick to the plan.

J Add, or at least don’t lose, off-farm income.

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