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Ag costs could exceed revenues

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One of my favorite educational venues is the American Bankers Association National Agricultural Bankers Conference. This year marked my 36th consecutive year speaking at the conference.  The Twin Cities was the site of the conference, with bankers and lenders attending from over 30 states and seven foreign countries. What were presenters discussing in sessions? What were bankers discussing in the hallways and at exhibit booths throughout the four-day conference? Let’s take a look at a few insights I picked up at the conference.

Costs Exceed Revenues

The Center for Farm Financial Management at the University of Minnesota presented some compelling data compiled on farms over eight states that are considered above average operations. The first fast fact was that the cost of production for half of the corn producers was above $5.00 per bushel. With the majority of producers not forward contracting, and corn prices in the $4.00 range and possibly down to $2.70 per bushel, cost will exceed revenues, depleting working capital reserves and straining operating lines of credit. Given this data, producers will find that lenders will want to know their cost of production by enterprise and strategies on how you will handle these price adjustments and their impact on working capital or equity.

The ratio of net working capital to revenue is a good benchmark to monitor. The top 20% of producers in the FINBIN database were at 52%, while the low 20% were at 17% working capital into revenue. Back-to-back years of negative margins for average or below average managers could quickly diminish working capital and reduce equity.

Land Values: Talk of the Town

Land values were the talk of the town at the Twin Cities convention. Drs. Henderson and Gloy of Purdue University were of the opinion that double-digit annual increases of land values and cash rents are in the rearview mirror. A possible re-entrenchment of farmland values by 10 to 15 percent is a strong possibility in the Midwest

 

Next time I will have more topic reports from the Twin Cities conference.

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What's Road Warrior?

Dave Kohl is an ag economist specializing in business management and ag finance. He can be reached at sullylab@vt.edu.

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