Bloated Expenses Cut Profits

By Elizabeth Williams
DTN Special Correspondent

MANHATTAN, Kan. (DTN) — Some Grain Belt analysts question USDA’s latest 2016 farm income estimates as overly optimistic. They doubt growers were able to shed as much in input costs this season as USDA’s revised August estimates indicated.

Kansas State University economist Allen Featherstone made that case at a joint KSU-Washburn Law School symposium last week. He painted a scenario more dire than USDA’s aggregate farm numbers indicate, potentially setting the stage for hard choices when borrowers seek financing this winter.

Kansas farmers eked out a small profit last year: $4,500 was the average net farm income for Kansas farms, reported Featherstone, who heads the department of agricultural economics at KSU. That sounds only slightly better when you compare it to the Illinois Farm Business Farm Management Association numbers which showed the average Illinois farmer lost $2,971 last year. (For more details go to http://farmdocdaily.illinois.edu/…).

The 2015 income levels are all the more shocking, since average 2014 Kansas net farm income was $120,000.

In fact, last year was the lowest net farm income in Kansas since 1985, Featherstone said. "Besides prices going down, costs have come up. Commodity prices have fallen back to levels we saw between 2007-09. But cost of production has jumped 29% for soybeans, 17% for corn and 14% for wheat since 2009." By his count, non-irrigated Kansas corn producers spent an extra $171 per acre for corn and $162 per acre for soybeans than they did a decade earlier

Featherstone wasn’t all doom and gloom. Farmers and ranchers have built up their equity compared to the 1980s, so will possess more staying power to weather tough times. In general, debt is low and interest rates are at historic low levels. However, repayment capacity is shrinking. In 2015 in Kansas, there was $4 in debt per $1 of earnings.

Repayment capacity numbers are a little alarming, he said. One hundred percent repayment capacity means you have cash available after paying farm expenses to pay debt, family living expense and taxes. Above 100% you have more than enough, below 100% means you can’t cover family living expense, debt and taxes.

"Let’s look at the drop in repayment capacity from 1979 to 1981," Featherstone noted. In 1979, Kansas producers achieved 153% repayment capacity. By 1981, repayment capacity sunk to a meager 16%. What worries Featherstone is Kansas producers have gone from 149% repayment capacity in 2009 down to only 17% in 2015.

"That means they’ll need to make substantial adjustments by stretching out principal payments, selling assets and lowering family living expenses," explained Featherstone.

Another worry is the government safety net is not very strong. "Crop insurance’s revenue guarantee program protects prices within the season, not across seasons," explained Featherstone. In 2013, Kansas producers could lock in a revenue guarantee of $678 per acre for corn, $412/acre for soybeans, $281/acre wheat. Featherstone based those calculations on Average Production History (APH) yields of 150 bpa corn, 40 bpa soybeans and wheat, with 80% coverage.

In 2016, revenue guarantees dropped to $463/acre corn, $283/acre soybeans and $166/acre wheat. For 2017, Featherstone predicts soybeans may improve slightly but corn and wheat revenue protection is expected to continue to decline: $448/A corn (base price $3.73) and $298/A soybeans (base price $9.31) and a paltry $146/A wheat (base price $4.59), using his yield and coverage assumptions.

That’s a $230 per acre drop in government guarantee for corn and $135 per acre less revenue guarantee for wheat since 2013.

"We may be talking Loan Deficiency Payment prices in the future," Featherstone said.

Wheat farmers are already pulling an average 26 cents a bushel LDP across most of Kansas. Corn and soybean prices remain too high right now for LDPs. However, farmers may still use marketing loans on their corn or soybeans to cash-flow their operations and hope for a price rally in the marketing year.

Economists and lenders assured attendees that the farm and ranch economy is not as bad as it was in the 1980s, mainly because there is much more equity in the countryside now and interest rates are low.

Bill Davis, chief credit officer with Farm Credit Services of America and Frontier Farm Credit which covers Iowa, Nebraska, South Dakota, Wyoming and Kansas, noted, "As a lender, we’re in better shape to help our borrowers weather this storm, to stay with producers than we were in the 1980s. However, we are watching our stress customers closely. If they have an under-performing asset, we’ll recommend selling it. ‘Sell an 80-acre piece if it doesn’t fit well into your operation.’ There are still land buyers out there."

"Looking ahead, 2016 and 2017 will be pivotal years in production agriculture," concluded Featherstone. "Average net farm income in 2015 was the lowest it has been since 1985. A repeat of that in 2016 will cause some agricultural producers and lenders to make difficult decisions before entering the spring of 2017."

To see USDA’s latest Farm Income forecasts, go to http://www.ers.usda.gov/…

Elizabeth Williams can be reached at talk@dtn.com

(MZT/CC/CZ)