Managing Margins in 2016 and Beyond Ocheyedan, Iowa Mar. 14, 2016 Alejandro Plastina Assistant Professor plastina@iastate.edu 515-294-6160 Chad Hart Associate Professor chart@iastate.edu 515-294-9911 1 1

U.S. Corn Supply and Use 2012 2013 2014 2015 2016 Area Planted (mil. acres) 97.3 95.4 90.6 88.0 90.0 Yield (bu./acre) 123.1 158.1 171.0 168.4 168.0 Production (mil. bu.) 10,755 13,829 14,216 13,601 13,825 Beg. Stocks 989 821 1,232 1,731 1,837 Imports 160 36 32 50 40 Total Supply 11,904 14,686 15,479 15,382 15,702 Feed & Residual 4,315 5,040 5,324 5,300 5,425 Ethanol 4,641 5,124 5,200 5,225 Food, Seed, & Other 1,397 1,369 1,360 1,370 1,375 Exports 730 1,920 1,864 1,650 1,700 Total Use 11,083 13,454 13,748 13,545 13,725 Ending Stocks 1,977 Season-Average Price ($/bu.) 6.89 4.46 3.70 3.60 3.45 Source: USDA-WAOB 2 2

U.S. Soybean Supply and Use 2012 2013 2014 2015 2016 Area Planted (mil. acres) 77.2 76.8 83.3 82.7 82.5 Yield (bu./acre) 40.0 44.0 47.5 48.0 46.7 Production (mil. bu.) 3,042 3,358 3,927 3,929 3,810 Beg. Stocks 169 141 92 191 460 Imports 41 72 33 30 Total Supply 3,252 3,570 4,052 4,150 4,299 Crush 1,689 1,734 1,873 1,870 1,900 Seed & Residual 105 107 145 130 125 Exports 1,317 1,638 1,843 1,690 1,825 Total Use 3,111 3,478 3,862 3,690 3,850 Ending Stocks 450 Season-Average Price ($/bu.) 14.40 13.00 10.10 8.75 8.50 Source: USDA-WAOB 3 3

Corn Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last year Units: Bushels/acre Source: USDA-NASS

Soybean Yield Estimate Top: 2015 Estimated Yields Bottom: Change from last year Units: Bushels/acre Source: USDA-NASS

World Corn Production Source: USDA-WAOB 6 6

World Soybean Production Source: USDA-WAOB 7 7

U.S. Meat Production & Prices Source: USDA-WAOB 8 8

Corn Export Sales Source: USDA-FAS

Soybean Export Sales Source: USDA-FAS

Strength of the U.S. Dollar Source: Federal Reserve

Crude Oil Prices Sources: EIA and CME

Corn Grind for Ethanol

Current Corn Futures 3.69 3.60 3.60 Source: CME Group, 3/11/2016

Current Soybean Futures 8.77 8.62 8.60 Source: CME Group, 3/11/2016

2015/16 Crop Margins

2016/17 Crop Margins

Iowa Corn Prices vs. Costs

Net Farm Income: Corn $/Acre

Net Farm Income: Soybeans $/Acre

9 Strategies to manage margins Major concern: cash flow / liquidity Solvency hit, but still strong: Declining land values in Iowa Declining machinery values Long term problem  strategy for 2-3 years

Strategies: 1. Protect your working capital Revise recent asset purchases Revise share of rented land Revise scale of operation and fixed costs over next 2-3 years Manage taxes: visit with tax advisor Deferred payment contracts S179 Carry back operating losses to obtain tax refunds First line of defense against financial stress! Burn rate in 2015, puts you on a weaker position for 2016 and 2017.

Strategies: 2. Avoid cash shortages Plan for operating losses (renters) Secure operating loan/emergency loan terms Be very careful with new capital expenditures Maintain cash reserves and operating credit lines: Cash Costs / Acre Soy after corn Corn after soy Corn after corn Non-land (excl. labor) $185-$200 $320-$385 $360-$425 Land $225-$300 All Cash Costs $410-$500 $545-$685 $585-$725 Operating losses – particularly for renters!! Decline in expensing and reduced flexibility to delay sales because of lower prices. Source: File A1-20, Ag Decision Maker

Strategies: 3. Diversify Income Add or don’t lose non-farm income Consider alternative sources of revenue with your assets: custom work, snow removal, truck driving in fall & winter, ???

Strategies: 4. Revise production costs Revise production plans, especially for rented land (renegotiate land rent?) Can you make changes that generate savings that offset reductions in revenue?  N 20 lbs per acre? Savings $10. If yield  smaller than 2.75 bu/acre @ $3.60/bu, GO AHEAD! Otherwise, NO GO. Switch to seeds with fewer traits (+crop management)? Net savings $25/acre. If yield  smaller than 6.95 bu/acre @ $3.60/bu, GO AHEAD! Otherwise, NO GO. Seek volume discounts in seeds, chemicals, etc. Visit with agronomist: update your production skills, evaluate how to control costs

Strategies: 5. Actively Manage Risks Know your break-even prices Design a marketing plan with price and date targets and stick to it Lock-in margins whenever possible Revise crop insurance (Explore ways to maintain protection while lowering costs) Revise use of forward contracts & crop insurance to finance inputs Crop insurance will not be quite as protective as in recent years, but it is useful to manage risks. Don’t expect to make money out of it, just like you don’t expect to make money out of your car insurance, your home owners insurance, etc.

Strategies: 6. Revise family living expenses 193 fully owned acres to afford $40,000 in living expenses Revise family living expenditures: Vacation plans House remodeling plans Truck purchase 340 fully owned acres to afford $70,000 in living expenses Tight repayment capacity makes lenders nervous. And there has been a trend in recent years to change loan terms to shorter schedules, from 30 year mortages to 20 or 15 year mortgages, from 10 year machinery loans to 7 or 5 year machinery loans.

Strategies: 7. Secure repayment capacity Short repayment schedules reduce cash flow vs. long repayment schedules Try to extend repayment schedules on equipment & real estate loans (low interest rates) Work a plan with your lender(s) for 2016-2017 Tight repayment capacity makes lenders nervous. And there has been a trend in recent years to change loan terms to shorter schedules, from 30 year mortages to 20 or 15 year mortgages, from 10 year machinery loans to 7 or 5 year machinery loans. Talk sooner than later.

Strategies: 8. Revise Growth Strategy Depending on your growth stage: Offload unproductive assets Downsize Slow down growth Beginning farmers: wait to buy land Align short term needs with long term growth goals For Beg.Farmers how long to wait: don’t get too eager. Make sure to have the financial strength to do it.

Strategies: 9. Know your ARC/PLC Payments Payments vary widely across counties and programs No PLC payments in 2014. Small payments likely in corn base acres in 2015. If any 2014 ARC-CO Payments, use to cash flow Corn: higher yields in 2015 (except CRDs 8 & 9), and lower 5-y OA yields (except for CRDs 5, 8, 9). Lower ARC-CO payments (except for CRDs 8 & 9) even with lower prices. Soybeans: higher yields in 2015 (except for CRDs 4 & 7), but higher 5-y OA yields (except for CRDs 1, 2 , 7). Higher ARC-CO payments (except for CRDs 1-3). Source: Iowa Farm Bureau Federation

Summary Expect low to negative margins in 2016 Visit with: Agronomist – control costs? Lender – refinance, lower payments? Tax advisor – refunds from previous years? Crop insurance agent – change coverage? Use resources @ Ag Decision Maker: http://www.extension.iastate.edu/agdm/

Thank you for your time. Any questions. Ag Decision Maker: http://www