Managing Crop Margins in 2009

Craig A. ChaseFarm Management Field Specialist

Presentation Objectives

• Cost of Production

• Sizing up the Market

• Strategies/Tools for Managing Margins

Costs for 2009

• Extremely hard to predict this year–Pre-paid vs. spot–Changes in world and domestic demand

–Changes due to financial crisis–New varieties and traits–Energy markets

Baseline assumptions

• Diesel $2.50• N $.68, P $.90 K $.72• LP $1.90• Corn seed; $250 Soybeans $45/50 lb• Land; $178 $205 $232• Yields; continuous corn 125 145 165

– Rotated corn 140 160 180

– Soybeans 45 50 55

2009 Base Estimated Costs of Production per Bushel

$5.40$5.10

$4.88$4.48 $4.32 $4.21

$10.04$9.81 $9.64

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

Low Medium High

Cont Corn Corn/Sb Soybeans

2009 Estimated Costs of Production per Acre

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Low Medium High

Cont Corn Corn/Sb Soybeans

Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.

Direct Cost of Crop Production ($/A)Historical vs. 2009 Forecast

36%

19%

Non-Land Costs vs. Gross Revenue ($/A)

Historical vs. 2009 Forecast

Source: Schnitkey, U of IL Ext. Economics, Oct. 2008.

$177/A

$200/A

Sizing Up the Market

• Reluctance Toward Pre-Harvest Marketing

• Failure to Understand and Track Your Local Basis

• Lack of an Exit Strategy

• Holding Grain in Storage Too Long

• Misunderstanding Carrying Charges

Develop a Marketing PlanAvoid the Five Common Mistakes in

Grain Marketing?!?!

Sep $4.38

July $4.28

May $4.18

Mar $4.07

Corn Futures Carry Dec. 2009$4.52

Source: www.cbot.com December 2008.

Dec. 31 , 2008

Good carry through July: rewards on-farm storage

Corn Storage Costs

Assumption: Corn is Valued at $4/bu - Financed @ 7%

APR

Source: Johnson, ISU Ext. Economics, December 2008.

.20

.28

.31

.47

.43

.66

.54

.85

Corn Basis

Jul $10.03

May $9.92

Mar $9.80

Jan. $9.72

Dec. 11th , 2008

Soybean Futures CarryNov. 2009$10.07

Source: www.cbot.com December 2008.

Lack of carry, difficult to justify storage long-term

Soybean Storage Costs

Source: Johnson, ISU Ext. Economics, December 2008.

Assumption: Soybeans are Valued

at $9/bu - Financed @ 7% APR

.10

.29

.38

.47

.65

.66

.93

Soybean Basis

New Crop Corn Seasonal Trend

Source: CBOT data compiled by the U of MN, CFFM, 2008.

Chicago December Corn Futures, 1990-2008 average1-

Jan 1-

Feb

1-M

ar

1-Ap

r

1-M

ay

1-Ju

n

1-Ju

l

1-Au

g

1-Se

p

1-O

ct

1-N

ov

1-D

ec

250

255

260

265

270

275

280

285

290

295

approximate dates

cent

s pe

r bu

shel

79% Odds: Spring Price Exceeds Harvest Price

$3.65/bu 17%

$3.80/bu 65%

$4.65/bu 18%

Corn Cash Price & Probability Forecast

’09-’10 Marketing Year

Source: Wisner, ISU Biofuels Economist, December 2008.

December 2009 Corn Futures

New Crop Soybeans Seasonal Trend

Chicago November Soybean Futures, 1990-2008 average1-

Jan 1-Fe

b

1-M

ar

1-Ap

r

1-M

ay

1-Ju

n

1-Ju

l

1-Au

g

1-Se

p

1-O

ct

1-N

ov

605

615

625

635

645

655

665

approximate dates

cent

s pe

r bu

shel

Source: CBOT data compiled by the U of MN, CFFM, 2008.

68% Odds: Spring Price Exceeds Harvest Price

$7.45/bu 17%

$7.75/bu 65%

$8.45/bu 18%

Soybean Cash Price & Probability Forecast

’09-’10 Marketing Year

Source: Wisner, ISU Biofuels Economist, December 2008.

November 2009 Soybean Futures

Tools for Evaluation

Machinery Economicshttp://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST

Crop Rotation Calculatorhttp://www.extension.iastate.edu/agdm/crops/xls/a1-20croprotation.xls

http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-21flexiblerentanalysis.xls

http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xlsCrop Rotation Calculator

http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls

Crop Rotation N Calculator

Flexible Rent Calculator

http://www.extension.iastate.edu/agdm/crops/xls/a1-80rotationprofitabilitycalculator.xls

Crop Rotation Calculator

http://www.extension.iastate.edu/agdm/crops/xls/a1-80nratecalculator.xls

Crop Rotation Calculator

Decision #1• What should the crop rotation be?• What are the choices? • Are there alternative or specialty

crops that are more profitable and that would fit into a rotation?

http://extension.agron.iastate.edu/soilfertility/nrate.aspx

Corn after SB$4.00 price$.75 N 104 pounds

Corn on Corn

$4.50 price

$.75 N

157 pounds

Decision #2

• What should the fertility program look like?

• Can fertility costs be lowered without affecting yields? (over 1/3 of non-land production cost is from fertility).

Machinery costs

Fixed costs Variable costs

Depreciation

Interest

Storage

Insurance

Repairs

Labor

Fuel

http://www.farmdoc.uiuc.edu/pubs/FASTtool.asp?section=FAST

Machinery Economics

Field Operations

Managing Machinery Costs

Combine Operations

Decision #3

• Does the machinery “fit” the operation ? (not too big or too little)

• Do the custom rate charges reflect the costs of the machinery?

• Are there some machinery costs that can be re-evaluated (field operations)?

Tenants’ Residual

http://www.extension.iastate.edu/agdm/wholefarm/xls/c2-20croplandcashrent.xls

Computing a Cropland Cash Rental Rate

Flexible Cash Rent Leases

Decision #4

• Does the lease terms provide for some profitability?

• Can I re-negotiate the lease or move it toward a flexible terms lease?

Crop Insurance

http://www.farmdoc.uiuc.edu/cropins/index.asp

Decision #5

• Determine the right insurance product to meet your risk management needs.

• Make sure you have enough insurance, but are not “over-insured”.– Look at what the insurance product does

compared to the farm marketing plan.– Evaluate the new farm bill and how ACRE

may affect crop insurance needs.

Conclusions• Input prices have risen dramatically

and will show increased volatility.• Some signs world prices have

softened but not likely to be seen until current high priced stocks are used.

• Take soil tests and only use what is necessary.

• Evaluate seed and seeding rates carefully.

Conclusions• Try for flexible lease arrangements.• Consider all the pest management

options available.• Don’t simply cut back without

carefully evaluating the consequences; you have to spend money to make money.

• Consider all the risk management options available.

Conclusions

• Know your costs of production. • Make cuts and changes where they

will do you the most good.• Follow a good marketing plan.

Risk Management Web Sites• Ag Decision Maker – ISU Extension Economics

www.extension.iastate.edu/agdm• Farm Doc – U of IL Extension Economics

www.farmdoc.uiuc.edu• Center for Farm Financial Management – U of

MNwww.cffm.umn.edu

• Corn Nitrogen Rate Calculator Calculatorhttp://extension.agron.iastate.edu/soilfertility/nrate.aspx

ISU Crop Marketing Web Sites• Grain and Oilseed Market Analysis

http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/

• Corn and Soybean Basis (State and County)www.card.iastate.edu/ag_risk_tools

• Ag Econ Periodicals, Publications and Programswww.econ.iastate.edu/outreach/agriculture/

• Ag Decision Maker (Crop Updates/ Publications Decision Tools)http://www.extension.iastate.edu/agdm

Questions…..

Any questions or comments?

Thank You for This Opportunity!

NOTE: This presentation can be found athttp://www.extension.iastate.edu/agdm/fieldstaff/

cchase.html

Craig A. ChaseFarm Management Field Specialist

720 7th Avenue SWTripoli, IA 50676(319) 882-4275

cchase@iastate.edu