SALEM, Ohio — Grain farmers have been talking about tight margins since at least the beginning of 2014. All indications were that profit margins would be low, and the same looks true well into 2015.
So, what’s a grain farmer to do?
That all depends on your situation — and in many cases — how long you’ve been farming and how much equity you’ve hopefully built.
Farm and Dairy staff have attended multiple grain market outlook conferences in the past month and the one thing for certain is uncertainty. Market predictions are holding true until they don’t and, in the past few days alone, many predictions have been revised to reflect current world events and new trends.
However, here are a few principles that should outlast the daily fluctuations, and maybe, just maybe, hold true most of the year.
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1. Buy fuel now
As early as September, crude oil was trading for more than $90 a barrel, and by year’s end, prices were well below $60 a barrel, putting strong downward pressures on gasoline and diesel fuel. If these prices stick around, they could lead to significant cost savings by planting and harvest time.
But even now, farmers can benefit by purchasing their fuel in advance. Most studies show that diesel fuel retains its value for at least six months in storage (at temperatures below 70 degrees), which means fuel bought today should be good through planting, possibly longer.
If prices stay low, they could also bring down some of the production costs related to fertilizer, which is derived in part from petroleum-based products. This could make early purchases of fertilizer an attractive option.
A downside to low fuel costs, however, is the pressure on the ethanol industry, which must compete with cheap fossil fuels, including Marcellus and Utica shale. Less demand for ethanol will eventually mean less demand for corn, which could bring the corn price down in regions where the price is influenced by ethanol plants.
2. Manage inputs
While farm profits may be down, it’s unlikely that inputs like rent, seed corn and fertilizer prices will adjust — at least not right away.
Farmers could try to negotiate a lower rent, but if someone else is willing to pay the higher amount, it will be hard to keep the contract. Instead, farmers trying to rent ground should consider negotiating over non-monetary incentives, such as conservation practices, crop rotation, or other benefits that go beyond the dollar paid per acre.
You can show landowners how grain prices have come down and how inputs have gone up, but it may not make a difference. Keep in mind, property taxes have also risen.
Purchasing farmland may be even riskier. Values for farmland have been predicted to flatten or decline for the past couple years, but results show a steady increase. However, if land prices do finally drop, you won’t want to be locked in at the higher values.
3. Market smart
Thanks to the new farm bill, grain farmers have a host of new insurance options to protect their investment — but they need to spend some time with their Farm Service Agency and their crop adviser, to decide which program best suits their farm.
Farmers have until March 31 to decide which program to select, and they may be wise to wait as long as possible, so they can gather additional information about the new crop year.
Corn prices are expected to increase slightly over the next few weeks, by as much as 20-30 cents a bushel, but be prepared for a lower yield than seen in 2014, which saw 175 bushels per acre.
World events, including Russia’s ban on exports, could send wheat prices higher, but if you see July futures above $6.80 — start selling. If they top $7 per bushel, sell aggressively.
4. Use your equity, if you must
It’s no secret that grain farmers have experienced some very profitable years early in this decade. Now, they may need to turn to some of that savings — or what they hopefully saved — to balance out the next few years of tight margins.
The markets have regained some ground at the close of the year, but the increases are nothing compared to previous years’ prices, and there is nothing in the near future to suggest prices will greatly improve.
Many farmers were relieved at the end of 2014, by the President’s signing of the “tax extender’s bill,” which allowed them additional tax savings on equipment purchases. But as one OSU ag economist put it, farmers should think long and hard about buying something just for the tax incentive, especially if it means taking on new debt.
They might save some money on their taxes, but the bigger question is, do the savings outweigh the cost that the farm must endure for the next several years, especially when tight times are expected.
5. Consider some livestock
Have a barn? This may be the year to fill it with animals. Lower grain prices will be attractive for end users of grain — especially the livestock sector.
Swine and poultry, dairy and beef all stand to gain from cheaper feed costs, but it will take time for most herds to expand.
The U.S. cattle population is at its lowest in decades (95 million head in 2014), and swine numbers (65.4 million head) are at a recent low.
Finished livestock are selling at near records, but if you want to get into the livestock industry or expand your current operation, plan to pay high prices for feeders and replacements.
You also need to consider the cost of any facility upgrades and maintenance, and the cost of insuring the livestock.
One of the top reasons the cattle numbers are down is because of drought, which forced producers to send more cattle to slaughter, to stay in business. Likewise, the swine market is still recovering from the Porcine Epidemic Diarrhea virus (PEDv).
Be prepared, and make sure your investment is backed up. The new farm bill offers a bevy of programs for livestock producers to help reduce risk and keep you in the black. They include the Dairy Margin Protection Program for dairy farmers, and the Livestock Indemnity Program, which covers all livestock.
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