First, I have to give credit to farmdocDAILY for today's research. As part of the University of Illinois' Department of Ag & Consumer Econ, they've hit the nail on the head this year. And that nail is farm costs. We're talking about cost cutting on the farm so get out your budgets and let's review. If your main worry is how long prices will remain this low, we've got some information regarding that too, so join us for 2016 preparations.
Hope is not a trading strategy, which is why you must prepare the best you can for a wide range of possibilities, especially on the farm. Whether prices increase 20%, or fall another 20% like they have this year, protecting profits is priority #1. And since we can't make any guarantees about price, farmdocDaily suggests that we focus on what we CAN control. In their article Cutting $100 Per Acre In Costs For Corn and Soybeans, they present some grim facts about the impact of low prices if costs remain where they are. In the table below, they highlight cost effects on profitability at the average Central Illinois farm with an average corn price of $3.75 and 200 bpa yield.
-$72 per acre isn't helping anyone (soybean scenario isn't any better), so either revenue has to increase or costs must fall. So what costs do they suggest to cut? With the top 5 cost categories representing nearly 80% of Total Costs, they suggest to start there. Although, cutting 10% or more from farm costs in a year's time hasn't happened since 1972, a significant decrease is needed for the bulk of farmers. Farmdoc suggests to do the following:
On the upside, Professors Scott Irwin and Darrel Good believe prices do have a chance of reaching 2012 levels, but not as high of one as we'd hoped. According to How Long Will It Take Until Corn Prices Recover, they produce data that shows about a 50% chance of reaching those levels in 2016, or 2017. However, they preface their statement with the other 50% chance of not reaching them, and how that path is likely a long period (longer than five years) of below average prices, similar to those we have now. They say:
- Reduction of cash rent is most key
- Steer clear of capital purchases if possible to minimize machinery depreciation
- Review your miscellaneous expenses and whether there's any savings there
- Shop your fertilizer and seed purchases around, while possibly decreasing seeding rates
On the upside, Professors Scott Irwin and Darrel Good believe prices do have a chance of reaching 2012 levels, but not as high of one as we'd hoped. According to How Long Will It Take Until Corn Prices Recover, they produce data that shows about a 50% chance of reaching those levels in 2016, or 2017. However, they preface their statement with the other 50% chance of not reaching them, and how that path is likely a long period (longer than five years) of below average prices, similar to those we have now. They say:
"...each of these longer recoveries, to what were then new record price levels [2012 highs in the current case], required a major event - a world war, a global crop failure, or the creation of an ethanol industry, respectively - to drive prices back up to their previous levels. These game-changing events are few and far between, and their timing is completely unpredictable."
Now, this doesn't rule out the possibility of a 2012 repeat, but it does explain what has happen in the past in similar circumstances. As we said at the beginning, hope is not a trading strategy, and its best that you arm yourself with information like this so you can weather the storm. If you're curious, the exact statistical results determined from their study are found in the table below. See everyone next week!
