The “FOCUS ON AG” column is sent out weekly via e-mail to all interested parties. The column features timely information on farm management, marketing, farm programs, crop insurance, crop and livestock production, and other timely topics. Previous “FOCUS ON AG columns are available on the MinnStar Bank website at: https://www.minnstarbank.com/category/focus-on-ag/ or the MinnStar Bank Facebook page at: https://www.facebook.com/MinnStarBankNA/ Selected copies of the “FOCUS ON AG” column are also available on “The FARMER” magazine web site at: https://www.farmprogress.com/focus-ag
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Projected crop production profit margins for many producers in 2023 are likely to be much tighter as compared to 2022 margins. Commodity prices and gross revenue per acre for corn and soybean production increased considerably during the 2022 crop year and are likely to continue at solid levels in 2023. However, expenses for crop inputs, such as fertilizer, chemicals, seed, fuel, repairs, and labor are likely to be substantially higher in 2023, as compared to 2022 expense levels. The profit margins in the livestock sector also improved in 2022 but are also likely to narrow somewhat in 2023 due to increased production costs. Credit availability for agriculture should remain good for farm businesses that are on a solid financial base. However, both short-term and long-term interest rates nearly doubled in in 2022 as compared to a year earlier and could rise even further in 2023.
Financial volatility remains quite high in farming today. Following are some financial strategies for farm businesses to consider during these highly volatile times in the farming business:
· Keep the “Current Position” (cash available) segment of the farm business strong.
• Pay attention to the level of “Working Capital” and the “Current Ratio” on your Farm Financial Statement. During these times of improved profit margins is probably a good time to re-build Working Capital in a farm business that may have been depleted in recent years.
• It is usually a better option to use excess cash revenues from the farm operation to pay down short-term farm operating debt, rather than to make significant extra payment on term loans.
• If there are any excess crop revenues from 2022 grain sales beyond repayment of the 2022 Farm Operating Loan, it may be best to prepay some 2023 or 2024 crop expenses.
• Remember to account for CCC grain loans, financing with crop input suppliers, short-term loans from family members, etc. when analyzing the Working Capital for the farm operation.
· Look at ways to manage production costs and other expenses.
• Try to be a “optimum-cost” producer …… thoroughly analyze seed, fertilizer, chemical, etc. crop expense decisions for 2023 crop production and look for ways to manage those input costs.
• Be cautious when making reductions in crop production costs, so not to significantly impact yield potential …… optimizing crop yields is still very important to the “bottom-line” for farm profits.
• Be cautious about paying excessive cash rental rates on rented land and make sure that rental rates are still profitable. Also try to negotiate reasonable rental rates with existing landlords.
• Negotiate “flexible lease” contracts with agreeable landlords that sets a manageable base rental rate, with the opportunity for a bonus rental payment if final crop prices and/or yields increase.
• Review other direct and overhead expenses in the farm operation and look for any adjustments.
· Review other ways to manage financial risk.
• “Fine-tune” the farm’s grain marketing plan, based on the “cost of production” that is updated regularly, which includes set price targets and deadline dates as part of the marketing plan.
• Don’t get caught up in the “market hype or chatter” …… pay attention to how changes in the corn and soybean market prices affect your own farm business. Don’t miss the profit opportunities.
• Look for positive profit margin opportunities in livestock production and take advantage to “lock-in” both cash expenses and market prices when those margins exist.
• Take time to analyze the best farm program options and crop insurance strategies for your farm operation …… these decisions can be a key to having a sound risk management strategy.
• Excessive spending for family living and non-farm expenditures can be a “hidden expense” in the farm business. Include the non-farm expenses and other family living expenditures that are reliant on farm income in the farm cash flow planning process.
· Pay attention to the repayment ability on Term Debt Loans.
• In addition to declining Working Capital, a low “Term Debt Coverage Ratio” is a key ratio in analyzing the financial strength of a farm business. This ratio is the cash available for debt repayment divided by the total principal and interest due on all intermediate and long-term loans.
• Make wise decisions on the use of available cash for farm machinery and capital improvement investments, and make sure that the investments are needed for the farm operation.
• Term loans that are set up to finance machinery purchases and capital improvements may require payments for several years, which need to be factored into cash flow budgets for 2023 and beyond.
Ø Look for opportunities to sell any farm assets that are no longer needed in the farm business and use funds for capital purchases, added working capital, or to repay some term debt.
· Carefully analyze decisions to purchase farmland.
• There is likely to be a lot of farm real estate for sale in the coming year and some farm operators are likely to have some extra cash available. Be cautious not to get caught up in the hype of: “Buy now, because they don’t make any more farmland”. Make sure that any land purchases are financially sound for the long-term future of the farm business.
• Shop around before settling on a high dollar purchase of farmland, as there may be opportunities to find comparable farmland, as far as land quality and production capability, for less money.
• Compare the cost of owning the farmland to the likely annual land rental rates over the next few years to secure increased crop acreage.
• Compare the cost and potential return of the cash investment to purchase additional farmland to the cash investment and return of improving existing farmland with upgraded drainage, etc.
• Be sure to include the required annual real estate loan principal and interest payments, along with real estate taxes, into future annual cash flow planning for the farm business.
• In addition, do a “stress test” on the real estate purchases to make that those real estate loan payments still have a positive cash flow with a 10 percent decline in net farm income, a 10 percent increase in farm expenses, and higher interest rates.
· Communicate with family members, farm partners, and ag lenders.
• When financial matters and farm profitability in the farm operation improve, such as in the current situation, it is easy to revert back to bad management habits. It is still very important to discuss and properly analyze farm financial strategies with family members, partners, ag lenders, and other consultants in the farm operation.
• Meet with your ag lender early to discuss your farm operating credit needs for 2023, and to consider possible capital or real estate purchases and adjustments for the coming year.
• Utilize farm business management advisors, crop insurance agents, marketing and crop consultants, and other professionals to assist with farm management decisions. View your Ag Lender and other professionals as consultants to assist with key financial and business management strategies in the farm operation.
• Discuss planned machinery and equipment purchases and potential land purchases, as well as the projected cash flow impacts on the farm business, prior to finalizing those decisions.
• Discuss grain and livestock marketing plans and analyze the impact that marketing decisions could have on cash flow projections.
• Discuss any financial concerns early, either farm-related or non-farm concerns, while there is still time to make any needed financial adjustments.
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The monthly USDA World Supply and Demand Estimates (WASDE) report released on January 12 was viewed as “bullish” by most grain marketing analysts and had an immediate positive effect on corn and soybean prices. The January WASDE Report, which is often known as a “market mover”, showed some noteworthy adjustments to final 2022 corn and soybean production and supply number; however, the report also showed a slight decrease in corn and soybean demand for the coming year. The immediate market reaction following the release of the WASDE report for corn and soybean prices on the Chicago Board of Trade (CBOT) was quite positive.
The final National Ag Statistics Service (NASS) 2022 Crop Production Report was also released on January 12. The report estimated the final 2022 U.S. average corn yield at 173.3 bu./acre, which increased by one bushel per acre from the December estimate. The 2022 corn yield estimate compares to 176.7 bushels per acre in 2021 and 171.4 bushels per acre in 2020. Minnesota is estimated to have a final 2022 statewide average corn yield of 195 bushels, while Iowa is projected to have a final corn yield of 200 bushels per acre for 2022. Other estimated average corn yields for 2022 included Illinois at the record yield of 214 bushels per acre, Indiana at 190 bushels per acre, Ohio at 187 bushels per acre, Wisconsin at 180 bushels, and North Dakota at 131 bushels per acre. The drought-stricken States of Nebraska and South Dakota are projected to have final 2022 corn yields of 165 and 132 bushels per acre respectively.
The latest WASDE report showed a slight decrease in the total 2022 U.S. corn production, which is now estimated at 13.73 billion bushels. This is decrease of 200 million bushels from the December estimate and is over 1.3 billion bushels below 2021 corn production level. The latest USDA report also put the total demand for corn usage in 2022-23 at just over 13.9 billion bushels, which is a decrease of over 1 billion bushels from 2021-22 corn usage figures. Corn export levels are projected to decrease by 546 million bushels in 2022-23, along with a decrease in corn used for feed of 443 million bushels and a decrease of 51 million bushels in corn used for ethanol production in the coming year. The January USDA listed the total available supply of corn available at 15.157 billion bushels, which compares to 16.333 billion bushels in January of 2022.
USDA is now estimating 2022-2023 U.S. corn ending stocks at 1.242 billion bushels, which is a decrease of 15 million bushels from the December WASDE report. USDA was projecting 2021-22 corn ending stocks at just over 1.5 billion bushels a year ago in the January WASDE report; however, the final 2021-22 ending stocks closed at an estimated 1.377 billion bushels on August 31, 2022. The U.S. corn stocks-to-use ratio is now estimated at 8.9 percent for 2021-22, which would just below the 9.2 percent ratio for 2021-22 and just above 8.3 percent in 2020-21. The recent ratios compare to corn stocks-to-use ratios of 13.7 percent for 2019-20, 14.6 percent for 2018-19, and 14.5 percent in 2017-18. This means there could be potential for short-term rallies in the cash corn market in the coming months, especially in areas of the U.S. with tight supplies and high local corn demand.
USDA is currently estimating the U.S average on-farm cash corn price for 2022-23 at $6.70 per bushel, which is at the same level as the December estimate. The projected 2022-23 market year average (MYA) corn price represents the highest WASDE estimated average corn price in nearly a decade. The 2022-23 USDA price estimates are the expected average farm-level prices for the 2022 crop from September 1, 2022, to August 31, 2023; however, they do not represent estimated prices for either the 2022 or 2023 calendar year. The current projected 2022-23 average price of $6.70 per bushel compares to national average corn prices of $6.00 per bushel in 2021-22, $4.53 per bushel in 2020-21, $3.57 per bushel for 2019-20, $3.61 per bushel for 2018-19, and $3.36 per bushel for both 2017-18 and 2016-17.
The latest NASS report estimates the final 2022 U.S. average soybean yield at 49.5 bushels per acre, which is down from the final U.S. average yields of 51.7 bushels per acre in 2021 and 51 bushels per acre in 2020. Total U.S. soybean production for 2022 is now estimated at 4.276 billion bushels, which is a decrease of 189 million bushels from final 2021 production levels. The recent WASDE report estimates total soybean demand at 4.355 billion bushels for the 2022-23 marketing year, which is a decline of 109 million bushels from 2021-22 soybean demand levels. Soybean crush levels are expected to increase by 41 million bushels in the current marketing year; however, soybean export levels are expected to decline by 168 million bushels during 2022-23.
The U.S. soybean ending stocks for the 2022-23 marketing year in the latest WASDE Report are estimated at 210 million bushels, which was a decrease of 10 million bushels from the December WASDE report. The projected 2022-23 soybean ending stocks are a decrease of 23 percent from the estimated 2021-22 carryout level of 274 million bushels. The projected 2022-23 soybean ending stocks compare to other recent year-end carryout levels of 257 million bushels for 2020-21, 525 million bushels for 2019-20, 913 million bushels for 2018-19, and 438 million bushels for 2017-18.
The soybean stocks-to-use ratio for 2022-23 is now estimated at 4.8 percent, which would be the lowest level since 2.6 percent in 2013. The projected 2022-23 ratio compares to tight ratios of 6.1 percent for 2021-22 and 5.7 percent in 2020-21; however, the current ratio is considerably lower than soybean stocks-to-use ratios of 23 percent for 2018-19 and 13.3 percent for 2019-20. The expected rather tight soybean supply may offer some opportunities for continued strong cash soybean prices in the coming months, especially if weather issues develop in South America or with the 2023 U.S. soybean crop.
USDA is now projecting the U.S. average farm-level soybean price for the 2022-2023 marketing year at $14.20 per bushel, which was an increase of $.20 per bushel from the December estimate. The estimated 2022-23 U.S. average soybean price would be the highest in nearly a decade. The 2022-23 soybean price estimate compares to other recent yearly average soybean prices of $13.30 per bushel for 2021-22, $10.80 per bushel for 2020-21, $8.57 per bushel for 2019-20, $8.48 per bushel for 2018-19, and $9.35 per bushel for 2017-18.
Many farm operators will tell you that grain marketing decisions are one of the hardest parts of farming, which is especially true during periods of highly volatile markets such as we have experienced the past two years. A year ago, December corn futures on the Chicago Board of Trade (CBOT) were below $5.60 per bushel for “new crop” 2022 corn, with a local 2022 Fall harvest prices in Southern Minnesota at just above $5.00 per bushel. By May, the futures price had risen to near $7.50 per bushel and the local harvest cash corn price to over $7.00 per bushel, with only a slight price decline for the balance of 2022. Similarly, CBOT November soybean futures for 2022 were just over $13.00 per bushel in January last year, with a local Southern Minnesota harvest price near $12.50 per bushel for the Fall of 2022. By June, the CBOT November futures price and some local cash soybean bids had risen above $15.00 per bushel, before declining slightly to just over $14.50 per bushel by year-end.
During 2021 and 2022 many farmers began selling their anticipated corn and soybean production quite aggressively early in the year, once the local cash price got into a profitable price range, thus missing higher potential prices that occurred later in the year. Given the scenarios that existed prior to planting in both years, these were not bad marketing decisions to sell some of the anticipated crop production at profitable levels, in order to reduce risk. Now producers are wondering what to do about protecting prices for the 2023 corn and soybean crop. Being able to “lock-in” local 2023 cash prices near $5.50 per bushel for corn and over $13.00 per bushel for soybeans offer some of the best pre-plant marketing opportunities that we have seen in many years.
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As we head into 2023, many farm operations are coming off a fairly good profit year in 2022; however, some producers had much more modest profit levels last year. In all cases, all farm operators are facing much higher crop and livestock input expenses in 2023, as compared to 2020 or 2021 expense levels. During these changing farm financial times, it is good to plan ahead before meeting with an ag lender for renewal of a farm operating line of credit or for an annual review of the farm financial portfolio.
Following are some tips for farm operators to be more proactive, as they are preparing for an annual meeting with their ag lender ……
• Prepare an up-to-date 2022 year-end farm balance sheet (as of 12-31-22 or 1-01-23) .
Preparation of an accurate and up-to-date year-end balance sheet is critical to the loan renewal process for any farm operation. Updating the previous year’s balance sheet with current year-end numbers can help expediate the process. If the farm operation is a sole proprietorship, most ag lenders will also want personal asset and liability data included. If it is a partnership or family corporation, most ag lenders will also require per-sonal balance sheets from all partners.
A good year-end balance sheet will include:
List of accounts receivable as of 12-31-22, which includes whom the money is due from, the dollar amount, and the date it will be received. This includes deferred payments for grain sold in 2022.
List of accounts payable as of 12-31-21, listing who the money is owed to, the dollar amount, and when payment will be due.
List of 2023 prepaid expenses for both crops and livestock as of 12-31-22, which details the input, amount of the input, and the amount that was prepaid. This for items where payment has occurred.
Grain and livestock inventory list as of 12-31-22. The grain inventory should include total bushels of each crop, bushels that are forward priced (date and price for each sale), and any sales plans for the remaining bushels. Livestock inventory should include the number, weight, and any sales information on market or feeder livestock. An updated list and estimated value of breeding livestock should be included as an intermediate asset rather than a current asset.
CCC loans on 2022 grain that were taken prior to 1-01-23, listing the bushel amount, CCC loan rate, CCC interest rate, CCC loan maturity date, and sales plans for the CCC grain.
Review the list of farm machinery and equipment, buildings and facilities, and other capital assets, removing any assets that have been sold or removed, and adding any assets that were purchased or acquired during 2022. Farm machinery is usually listed as an intermediate asset.
Add any land or other long-term assets that were added in 2022 and adjust asset values as necessary (may want to review this with an ag lender).
List of all other loans and creditors as of 12-31-22, listing the principal balance, interest rate, payment amount, and payment dates. Be sure to include short-term creditors for crop inputs, loans with family members, and CCC loans through FSA offices.
• Prepare a 2022 year-end income and expense statement as of 12-31-22.
The year-end income statement from the previous year should be based on actual sales of grain and livestock during 2022, which will likely include both some 2021 inventory that existed at the beginning of the year, as well as any 2022 grain or livestock that was sold during the year. The 2022 expenses would include any accounts payable from the beginning of the year balance sheet that were paid in 2022 and any 2023 prepaid expenses that were paid in 2022, in addition to the other 2022 crop and livestock expenses. A preliminary 2022 federal tax return is a good resource to prepare an income statement.
• Prepare a budget-to-actual summary for the previous year (as of 12-31-22).
Once the 2022 income and expense statement has been finalized, and accrual adjustments are made based on the year-end balance sheet, it always good to review the actual year-end financial analysis compared to the budgeted cash flow analysis that was prepared at the beginning of the year. Pay attention to the big differences that exist in crop and livestock income and the various expense items, as well as determine explanations for those differences. Analyze for any potential adjustments that are needed for 2023.
• Prepare a preliminary 2023 budget and cash flow analysis.
Preparing an accurate and complete budget and cash flow analysis for 2023 is a very important part of the loan renewal process. A high-quality cash flow analysis will likely include:
A grain and livestock marketing plan that includes a list of the amount sold, the contracted price, and the date to be delivered, as well as plans for remaining unpriced grain and livestock inventories.
Planned crop and livestock production for the year, including acres of various crops, anticipated production levels, and any current or planned sales of the 2023 production.
A list of planned crop and livestock inputs for 2023, the contracted or planned price of the inputs, and when the expense will be incurred.
A detailed list of rented farm land for 2023, which includes the name of the farm owner, acres rented, amount of rent (including flexible lease details), and dates when rent payments are due.
Include income received for accounts receivable on the year-end balance sheet and account for the expenses of any accounts payable at the beginning of the year.
Provide details of planned 2023 crop insurance coverage, such as updated APH yields, percentage coverage, enterprise versus optional units, ad the addi-tion of hail or wind insurance. (Your ag lender may be a good resource for these decisions.)
Provide a copy of FSA farm program information listing the crop base acres and FSA program yield for each farm unit. Discuss the 2023 farm program choice with your ag lender.
Include any planned changes or adjustments in the farming operation for 2023 in the cash flow analysis, including farm machinery purchases or sales, adding or selling land or other assets, and any other changes to the farm business, as well as any changes in personal assets or liabilities.
It is best to include all partners and family members that are part of the farm operation in the renewal process with an ag lender, so that all key players are “on the same page” with financial decisions affecting the farm business. It is very important to be trustworthy and honest in preparing and sharing financial information with an ag lender to help assure confidence in the accuracy of the financial data. View an ag lender as an informal partner in a farm business, as a good ag lender can be a valuable resource in making management decisions.
Farm operators should expect their ag lenders to be well prepared, trustworthy and honest in financial dealings. It is important to remember that most local ag lenders also face a lot of pressure in the process of renewing farm operating loans. They need to do their “due-diligence” to complete the necessary requirements in the loan renewal process. The loan renewal process and documentation that is prepared will likely be reviewed by senior management at a financial institution, as well as being subject to review and audits by Federal and State bank examiners. Most ag lenders are part of the local community and want to see farmers have financial success, which is in the best interest of both the farm business and the ag lending institution.