Frank Moore dreads forecasting his 2009 farm profits. If they revert to historic returns of $40-50/acre, with the enormous risk and investment he's facing, “it's not enough,” he says. “It used to be that $100 rent went with $100/acre profits — the landlord and I each made the same,” the Cresco, IA, grower says. “Now, the landlord gets $220 rent and maybe I clear $50 — something is out of whack.”
That something is the whip-lash from the credit crunch echoing through financial and commodity markets.
As profit margins swoon, the advice from Wells Fargo Economist Michael Swanson is to, “Scrutinize returns by field as carefully as you do line items on your operations statement. If you are renting marginal ground, let it go to someone else,” he says. “Why pay $200 for the chance to lose money?
“It costs just as much to farm marginal ground as it does to farm excellent ground,” he says.
Grower Frank Moore doesn't see it that way. “No one walks away from acres. My biggest fear is losing acres from a landlord passing away or to another farmer,” says the 1,700-acre corn and soybean grower. “Besides, you can't break those marginal areas from the better ones; they come together,” he says.
Knowing his costs is Moore's hallmark. For the 2009-2010 growing season, he's budgeted a $4.45/bu. corn breakeven, based on 180-bu./acre corn yields, quality seed hybrids, $55/acre machinery expense, $270/acre fertilizer costs and $200/acre land cost (his rent offered for 2009 is currently below that level).
His bible is 10 years' profit-and-loss (P&L) data on his corn and soybeans. For many of those years, government payments pushed him from red ink to black on his overall operation. When asked why he doesn't walk away from poorer ground with today's lower breakevens, he says those acres help to lower his machinery costs. “I've added land to my operation in the past that added $20/acre more to my land cost, but it lowered my machinery cost by $25/acre.” He's controlled his machinery costs by switching to no-till/ridge-till in 1988 and is now looking at strip-till.
Plainview, IA, grower Stan Mehmen says he either walks away from poor ground or negotiates the rent accordingly. He grows corn and soybeans with son Kyle in Butler, Floyd, Chickasaw and Bremer counties in north-central Iowa. “Most of our land is pretty average 76 CSR (corn suitability rating),” he says.
IN SOME CASES he pays a base rent that is adjusted up or down according to market dynamics at the end of the season.
“You don't make money by lowering your machinery cost,” Mehmen says. “If you have to run over a farm to lower your machinery cost, maybe you have too much machinery. You have to make money.”
Risk management consultant Moe Russell, Panora, IA, thinks that today's insane risks call for higher returns. “If the landlord you lose has lower quality ground, I wouldn't be that concerned. You need profits of $100/acre to justify today's risks,” he says. “It used to be that $50/acre was enough.”
He advises his clients to examine profit per farm. “I see up to $100/acre variance in returns between fields, based on different drainage, fertility and genetics,” he says.
Given today's “dire situation,” says Purdue University Ag Economist Chris Hurt, “can you risk renting land for $200/acre that isn't profitable? Let someone else have it, we are looking at survival strategies,” Hurt says.
He feels that input costs may adjust to reflect new realities. “Otherwise, there are no positive financial returns if you pay current prices for land and earn what elevators are paying (in late October). We are estimating $5/bu. breakeven costs to raise 2009 corn bidding now at $3.75. For beans, we estimate 2009 costs at $11/bu. with a cash price bid today of $8.25.”
HURT SUGGESTS THAT growers budget by beginning with a local elevator price to calculate gross revenue, then deduct the direct costs of putting out the crop. Then, subtract $70/acre for average machinery expense and $40/acre for family living expense from projected profit margins. “After allowing for input expense, what's left is what you can afford to pay for land.” Hurt says.
“If that number is lower than what the cash rent market demands, then you have to evaluate if you are willing to forgo full machinery depreciation, and accept a reduced — or no — living expense on those acres. In tight margin years growers ‘live off the depreciation.’ In the short run, they are willing to not cover machinery depreciation and family living expense for the chance to farm a piece of land in the longer run,” Hurt says.
The recent appreciation in the dollar's value, lower energy prices and potential reduced demand for fertilizer are hopeful signs that nutrient prices will moderate, along with fuel prices, cash rental values and perhaps seed prices, he adds.
“I've learned that the most profitable farmers do everything 10% better — tillage, weed control, energy costs and yields,” Moore says. He gained perspective on farm profitability at a former job reviewing farmers' anonymous P&Ls for an Iowa water quality project.
As Moore reverts to more defensive thinking, he's making operational changes. He will rely more heavily on soil test data and reduced tillage, banding to reduce phosphorus and potassium rates and fine-tuning nitrogen applications. But he will continue with the best quality hybrids he can get. “Cutting back on genetics is false economy,” he says, adding that his family planted the first Roundup Ready soybeans in Howard County.
One of his most important goals is strong landlord relations. “I aim for more frequent contact with each landlord, since my biggest fear is losing rented acres in this highly competitive land market. Last year we circulated a brochure on our family's operation,” he explains.
“It's easy to forget that until these last two years, farm profits hinged largely on cost control, according to farm business management associations,” Moore says. “Here we go again.”