Most farmers doing the opposite of marketing
November 5, 2015
In recent conversations with bankers, several have expressed their concern, frustration, and uneasiness for the upcoming renewal season; and some with farmers in general. The concern and uneasiness primarily comes from the simple economics of the current times. With input costs at the levels they are compared to potential crop prices, cash flow projections do not look very good. Most projections show that producers are likely to lose money in 2016 unless we have a significant increase in commodity prices or considerably higher than average yields.
Where the frustration comes in for bankers is that very few farmers have quantified this yet. Most producers do not have 2015 records up to date, don't know their breakeven cost per bushel or per acre. Furthermore, producers are sitting on an extremely high percentage of their 2015 crop unpriced. Historically, there has been some benefit to leaving a portion of grain unpriced, but how can you justify having nearly all of it unpriced? The market is not giving any indication whatsoever that we are likely to see a significant spike in grain prices over the upcoming marketing year. So if you are sitting with a lot of unpriced grain, you are either very arrogant, very ignorant or just scared!
As the economics of farming have changed considerably the past few years, this should be an indicator for you to manage better, not worse. As harvest is wrapping up, you need to quickly quantify how much grain you have to market. The next step is putting together a simple cash flow for the remainder of 2015 as well as 2016 and figuring out when you need income to cover term loan payments and large input expenditures. The final step is to put a plan together about when, where, and how you plan to market your 2015 grain to meet these cash flow needs.
The same logic needs to be used for pricing your new crop grain as well. As your 2016 crop plans and budgets come together you can conservatively estimate how many bushels you will produce. You can then use a combination of futures, various elevator contracts, and options to begin pricing these bushels.
These concepts are not complicated, but this change in mindset will be necessary for you to be successful in an increasingly volatile and risky environment. I can guarantee you that regardless of how many acres you farm or what your balance sheet looks like, your banker is having less and less sympathy for your poor marketing and cash flow planning practices as it may create a huge challenge for them to provide you with necessary operating credit for the upcoming year.
As I say often, you need to control the controllable. One way to do this is to commit to keeping better records and then using this data to make plans and projections. The South Dakota Center for Farm/Ranch Management at Mitchell Technical Institute has instructors dedicated to work with you individually to help you with these principles. This program compliments the relationship that you already have with your banker and will likely impress your banker that you are admitting that you need to make changes and are committed to doing it. We can be contacted at 995-7196 or firstname.lastname@example.org.