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Managing in Turbulent Times

Presented and written by Dr. Brent Gloy for the 2017 FCS Financial Commercial Farmer Symposium.

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Managing in Turbulent Times

  1. 1. Managing in Turbulent Times FCS Financial Columbia, MO January 25, 2017 Brent Gloy Agricultural Economic Insights, LLC www.ageconomists.com bgloy@ageconomists.com Twitter: @BrentGloy
  2. 2. Agricultural Economic Insights, LLC • www.ageconomists.com
  3. 3. Where are we at in the Cycle?
  4. 4. What Has Been Going on With World Acreage? • Up 236 million since 2000 • South Am 86 • Sub S Africa 57 • FSU 42 • E Asia 16 • Largest ever decline was in 87/88 13 Primary Crops: Barley, Corn, Cotton, Millet, Oats, Peanuts, Rapeseed, Soybeans, Sunflowers, Milled Rice, Rye, Sorghum, and Wheat
  5. 5. The Big Questions 1) Will farm profitability return? 2) Will farm finances hold? 3) Commodity stocks and plantings – still building or not? 4) How will broader economy gyrations impact ag? 5) Trump takes the helm. What now?
  6. 6. Some Perspective on the 2017 Situation “As we know, there are known knowns; these are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns- the ones we don’t know we don’t know.” - Donald Rumsfeld
  7. 7. Farm Profitability
  8. 8. There Were Some Positives in the US During 2016 1. Fertilizer prices are down 20%+ 2. Fuel prices are down 30%+ 3. Fixed costs are down a little 4. Interest rates are really low 5. Inflation is really low 6. Farm income may be stabilizing 7. Farm financial conditions have held so far 8. Some will get a large government program payment….. $50-$60 per acre cost reduction for corn
  9. 9. Will Farm Profitability Return?
  10. 10. What Costs Will Adjust to Alleviate Margin Pressure?
  11. 11. Farm Finances
  12. 12. Farm Financial Conditions. Which World is it?
  13. 13. More Work Required on Machinery Costs and Investment
  14. 14. Income Cannot Support Rents at these Levels,
  15. 15. Farmland Values Likely to Follow
  16. 16. Commodity Stocks and Plantings
  17. 17. The World Has Plenty of Grains
  18. 18. China is Holding Substantial Grain Stocks
  19. 19. Price Ratios are Currently Suggesting that Beans will Gain Acres
  20. 20. Many Budgets Favor Beans but Keep Relative Production and Alternatives in Mind
  21. 21. Wheat’s Woes
  22. 22. Broader Economy Impacts
  23. 23. Rates Still Low in Historical Context
  24. 24. Exports are Critical to Agriculture
  25. 25. Where do US Exports Go? These were the three largest export markets in 2015. These three countries account for 44% of ag exports up from 19% 25 years ago.
  26. 26. The Dollar Soars
  27. 27. Trump Takes the Helm
  28. 28. A New Administration Comes to Town Key Issues •Trade •Biofuels •Immigration •Regulation •Taxes Take the 3 Question Test
  29. 29. Situation Recap • Cost structure still too high, $50 down $50 to go • Think 3 to 5 not 1 to 2 • Will likely see more financial stress this year than past two • Working capital drawdowns continue and some get critical • 2017 will be a tough environment, lots of difficult discussions
  30. 30. Which Conditions Describe Ag Markets?** **The Poor Man’s Guide to Market Assessment – Adapted from The Most Important Thing: Uncommon Sense for Thoughtful Investors, by Howard Marks
  31. 31. Building Your Strategy for the Shifting Environment
  32. 32. Strategies for Success in Today’s Environment 1. Establish clear profit and cash flow targets 2. Determine what has to go well 3. Seize marketing opportunities 4. Revisit time management 5. Free up capital 6. Beware and navigate ARC-CO payment cliff 7. Evaluate opportunities carefully 8. Consider upside and downside 9. Focus on cash flow generation
  33. 33. 1. Establish Clear Profit and Cash Flow Targets • Realistic planning needed • Profit – per acre, per bushel, per… • Cash flow – what’s included? • Set 2-3 financial goals for 2017 • Discuss with your partners
  34. 34. 2. Determine What Has to Go Well • What are the key drivers in the business? • Price/Yield – how variable have they been in the past? • What drives yield on your operation? • What cost categories got away in the past? Why? • What other budget categories deserve the most attention?
  35. 35. 3. Seize Marketing Opportunities that Meet your Profit and Cash Flow Goals • Don’t be lulled to sleep by low prices • Lessons of 2015/16 • Use price range to advantage • Understand comfort level with different outcomes • Afford versus not afford • Discuss your plan
  36. 36. 4. Revisit Your Time Management • What are the best uses of your time? • Allocate your management where it has the largest impact • Create a stop doing list
  37. 37. 5. Free Up Capital • How much cash do you need to run your business? • Where are you going to get it? • What are the costly and less costly ways to get it? • Underutilized assets • Beware tax implications
  38. 38. 6. Beware the Looming ARC-CO Payment Cliff • ARC-CO payments will begin to decline rapidly for crops planted in 2017 • Keep this in mind when renting farmland • Payments DO NOT depend on what you have planted • Are their other government programs you can benefit from (CSP)? Table 2. Calculation of Olympic Average Prices for Corn, Soybeans, and Wheat. Year Corn Soybeans Wheat Prices used in 2014 (from 2009 to 2013) ($5.18+$6.22+$4.46)/3 = $5.29 ($11.30+$12.50+$13.00)/3 =$12.27 ($5.70+$7.24+$6.87)/3 = $6.60 Prices used in 2015 (from 2010 to 2014) ($5.18+$6.22+$4.46)/3 = $5.29 ($11.30+$12.50+$13.00)/3 =$12.27 ($7.24+$6.87+$5.99)/3 = $6.70 Prices used in 2016 (from 2011 to 2015) $6.22, $4.46, $3.70 = $4.79 $12.50, $13.00, $10.10 =$11.87 $7.24, $6.87, $5.99 =$6.70 Prices used in 2017 (from 2012-2016) $4.46, $3.70, ? $13.00, $10.10, ? $6.87, $5.99, ? Minimum Price in 2015 so that Average Doesn’t Fall in 2016 $6.22 $12.50 $7.24 Average if 2016 Price <= Reference Price $3.95 $10.68 $6.12
  39. 39. 7. Evaluate Opportunities Carefully • What is your strategic plan? • How does opportunity fit with your goals? • What are your top 3 investment priorities?
  40. 40. 8. Consider the Upside and Downside • Beware of your biases • Understand decisions – both good and bad • Don’t be paralyzed • Use analytical approach to think decisions through • Play devils advocate both ways • Talk through ideas with people who give honest feedback
  41. 41. 9. Focus on Generating Cash Flow • Evaluate alternative plans/enterprises • Cash rental agreements • Share rental agreements • Refinance/restructure • Equipment sharing, etc.
  42. 42. Agricultural Economic Insights, LLC • www.ageconomists.com

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