As harvest gets into full swing for Midwestern corn and soybean producers, riding in the combine helps you put on your thinking cap and start mentally preparing for the year ahead.
On the top end of the financial sector are producers who invested two or more years ago in ethanol plants and/or have a farm with an oil well or two on it and their concern is limiting income taxes. On the other end of the spectrum are producers with low land bases, paying high cash rents and high input costs. They're caught in a profit margin squeeze that threatens their future.
One thing for sure, however, is that this year is going to be different than any we've faced in the past. When it comes to marketing, we'll likely be better off just forgetting what we did good or bad last year — because this year won't be the same.
Here are some issues for you to think about:
- Small or no LDP
Last year at harvesttime many producers were collecting a 55¢ LDP on corn. That helps cover a lot of cash-flow issues. It also purchased new pickups and farm equipment. This year cash flow will need to come from selling grain.
- Land prices and cash rents continue to rise
It's becoming more difficult to squeeze a profit margin in grain production if you have a small land base of ownership and/or are highly leveraged on equipment and paying high cash rents. Compared to a long-established farm with a huge land base and little debt, there will be no comparison when it comes time to bid on cash rents who can bid the highest.
This is difficult for a young farmer trying to get started or expand. It can be done, but good management skills are necessary to survive.
- Energy prices are still high
Fortunately those predicting $100/barrel oil have not been correct — yet. But I must admit, a year ago I thought oil by now would be under $50/barrel and that hasn't happened either. There's really no shortage of oil — just a concern that there will be a shortage of oil. With the conflict in the Middle East combined with production problems with the U.S. supply in Alaska, the result is a market that continues to trade between $70 and $80/barrel. Overall, the energy market is going to continue squeezing farm profits.
- Ethanol and biodiesel are changing the world of farming
This has been a big boom for many producers as well as farm communities. The enthusiasm is like winning the lottery. But as in any business, if prices are too high the market will take care of it by over building. It's widely predicted that by 2008 the U.S. will have a glut of ethanol and the profit margins will be diminished if they're there at all.
Nevertheless, it's important to ride the tide as the waves continue to come in. The industry will continue to be profitable for the next several months and is certainly changing the basis levels as well as transportation systems for the movement of grain.
- Marketing strategies will be different
Many who live close to ethanol plants may think they no longer have to worry about marketing their grain. But, marketing is important as long as you have volatility. With the changing fundamentals of the corn market, volatility will be higher than ever. The only thing that's changed and will make life easier is where you're going to deliver your crop — not how it's going to be priced.
Don't forget there are two important decisions to make in marketing:
- pricing and
- delivery (storage).
It's always easy, and in fact a function of human nature, to make this year's business decisions on what worked right or wrong last year. Yet, history is a strong indicator that the same decisions in agriculture rarely work two years in a row.
The demand and need for grain will keep the bidding war alive in rural America. Many buyers want your grain, but that doesn't mean the price will go up forever. Continue to concentrate on your bottom line profit — not whatever your neighbor is doing.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.