WEST LAFAYETTE, Ind. — In the face of an economic downturn, row crop farmers will need to strategize carefully to offset the decrease in crop prices over the next few years, said Purdue ag experts in a recent webinar.

Ag economist Chris Hurt said corn farmers are entering a “moderation period,” in which high revenues are dropping significantly. Since 2006, revenues have increased by double and triple in some years – but now supply has caught up with demand.

“We are not going into a bust. It’s a moderation period that involves adjustments. We’re very good on the farm at figuring how to hit singles instead of those homeruns that were a lot of fun for a few years. We can always adjust to an upside if it’s better than we think,” Hurt explained.

Mike Boehlje, extension economist, added farmers need to go back to their old methods for managing in tough times. “We need to pull the playbook down off the shelf. We haven’t needed it for a while ... It’s not as though we haven’t done this before,” he said.

Jim Mintert, director of Purdue’s Center for Commercial Agriculture, listed management categories to thrive in this economy: financial, input purchasing, execution, marketing, government programs and crop insurance. While other webinars will focus on each of these, financial and inputs were the focus of this panel. (The webinars can be found on YouTube.)

As a financial strategy, Boehlje emphasized the need for farmers to preserve working capital – current assets minus current liabilities – or one’s “financial cushion.”

“We like to have, historically, about 15 to 25 percent of current revenue to put into working capital. We’re talking about upping that percentage to 25 to 30 percent of revenue,” he said.

Boehlje said to look at the burn rate on the farm’s working capital. “It’s a back-of-the-envelope calculation … Two years of working capital is a short cushion.” If working capital is already low, rebuild that first, he said.

Second, reduce capital expenditures, such as buying new machinery or drain tile. “This is the time to pull back on capital expenditures,” said Boehlje, noting there is no tax write-off for them in 2015. “If your working capital is low, you ought to rebuild that before making capital expenditures.”

In addition, lenders are going to be cautious about giving loans, Boehlje said. “Lenders are saying it’s going to be tougher sledding this winter.”

Mintert cautioned that deferred taxes may come due when farmers do not have the cash to pay them. “This is not the time to focus on tax minimization. That’s gotten people into trouble in the past,” he said.

Other financial strategies are to restructure debt with longer loan terms and lock in long-term interest rates, which are currently low.

“When margins were good, we could afford the 10-year payback. We need to extend those loans and put them on 20-year basis,” Boehlje said.

Another financial strategy is to reduce family living expenses. Farm data show these have almost doubled, Hurt said. Reconsider home improvements, use student loans for college until times are better and look at other ways to reduce cash flow pressure, he added.

A final way to combat an economic downturn is to prepare for your loan review.

“If he hasn’t already, your lender will have tough questions for you this year. Go into it prepared. Calculate your break-even numbers and come in with those numbers,” Boehlje said.

Mintert added: “Those are good questions because they deserve consideration to help you manage what could be a challenging time.” 

Hurt said, “2014 incomes aren’t going to be terrible for a lot of farmers. But, boy, you start getting into $3 to $4 corn, things change real quick ... The sooner you make adjustments, the better.”

Crop production costs

Crop production costs increased rapidly from 2005 to 2015, Hurt said. Production cost jumped from less than $3 per bushel to $5 per bushel in 2013, projected to settle just under $5 in 2015.

“Overhead is half the cost of production. I don’t see much moderation in 2015,” he said.

Mintert said costs could go down in 2016-18, as input costs did in 2009-10 during the recession. Four areas make up most of the cost in Indiana corn production: machinery and family living, fertilizer, seed and cash rent.

“When revenue streams don’t recover, you start thinking about where to cut costs ... Most farmers think of capital expenditures first. Secondly, we think of fertilizer,” Boehlje said.

Hurt said fertilizer prices should come down because of lower corn prices and a weaker demand. “Nitrogen and corn prices do have some correlation. It usually takes six to nine months before it shows up in nitrogen cost. We will see some lags.”

In addition, he explained reduced acres in the Southern Hemisphere and the United States, together with lowered application rates, will create a weak demand.

He advised that farmers wait to buy fertilizer as rates come down. Seed costs have spiked in recent years as traits and chemicals have been added, Boehlje said.

“The first thing I’d look at is the tendency to market traits across the board. Farmers can look closely at local trait research at a land grant university to see what’s needed in that locale,” Mintert said. “Also, look at seeding rates. They’ve increased substantially in recent years. Some moderation may be useful and is consistent with the research.”

Boehlje cautioned against decreasing inputs to the point that the yield drops dramatically.

Cash rent is another area where farmers can save some money, the panel stated. Cash rent was 28 percent of the total cost of production in 2014. The average rate has increased from $125 per acre in 2005 to more than $225 in 2013-14, and is projected to settle just under $225 in 2015, Mintert said.

“If you’ve already had conversations with your landlord and were more willing to share profits in good years, you’re in a better position to ask for an adjustment now that margins are tighter. Communication is huge,” Mintert said.

Hurt added, “Crop-share leases are automatically going to be down, and flex share probably will. The tenant needs to be talking with the landlord now about rates coming down this year or next.”

In managing input costs, Mintert said it is time to look more closely at their contribution to yield, ask key questions and use best management practices. “Don’t buy ‘wow’ technology. We need to think about this much differently. Buy a service only if we can’t provide it ourselves more efficiently,” Hurt added.

With input prices coming down, the panel agreed farmers shouldn’t lock in prices for multiple years.