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Times are good, so start planning for downturn

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SAVE SOME DOUGH: This could be a profitable year for some farmers, but now is the time to prepare for the inevitable downturn. So, save up some money to be ready.
No one is complaining about high crop and dairy prices, but make sure you put away some cash.

Yes, input costs are high. Nobody wants to pay for $6-per-gallon diesel or $900-per-ton fertilizer. And Mother Nature could throw a weather curveball any time this summer.

But if things go well and commodity prices stay high, it could be a profitable year for some producers.

“Honestly, the sentiment I’m hearing out there is pretty positive right now,” says Mike Hosterman, an ag business consultant with Horizon Farm Credit, formerly AgChoice Farm Credit.

The question becomes, how should you be handling your finances for the inevitable downturn?

Hosterman has been telling producers to focus on their balance sheets, make sure lines of credit are paid down and start stashing away some money for future needs. For dairy farms, Hosterman recommends at least $1,000 of “near cash” per cow be stashed away.

“If you look at the top 15% to 20% of the industry, they are there,” he says. “The bottom 10% to 20% is rarely there. The middle is where you can work on, and they are making good money.”

With interest rates going up, Hosterman says producers should be wary of paying down low-interest loans right away and instead preserve that cash to offset having to buy something at a much higher interest rate.

“Think about the future. We got to watch that cost,” he says. “But maximize production and shoot for output; don’t just cut costs. Let’s plan for the future. Let’s do budgets. Same thing during low milk price periods. We can’t get lax when prices are high.”

Benjamin Spitzley, vice president and group manager of agribusiness lending with GreenStone Farm Credit Services of East Lansing, Mich., says producers he works with are raking in record profits this year despite the high input costs.

“And it is amazing how quickly that switched and flipped,” Spitzley says. “Last fall, there was a little uncertainty. 2021 was breakeven, marginally profitable.”

The trend upward, he says, started last November and December. In this year’s first quarter, profitability averaged about $5 per cwt with a range of between $3 per cwt and $7 per cwt, he says. Second-quarter profitability numbers, he says, could easily exceed that, but costs also are increasing.

The breakeven cost of milk hovered between $17 per cwt and $18 per cwt last year. This year, it’s over $20 per cwt, Spitzley says.

Spitzley, who oversees a $2 billion dairy portfolio, says he’s seeing a 7%-per-month paydown on operating loans.

“The key point is that guys are paying their operating loans aggressively, way faster than normal,” he says. “The bank is taking in more than they’re putting out.”

Looking ahead

The USDA’s Farm Sector Income Forecast released earlier this year predicted net farm income to drop 4.5% this year to $113.7 billion. While farm cash receipts are forecast to rise by 6.8% to $461.9 billion, input costs are expected to rise 5.1% to $411.6 billion, and government farm payments are forecast to decrease 57% to $11.7 billion.

Shelby Myers, an economist with American Farm Bureau Federation, says the drop in government payments — mostly a wind down of COVID-related direct payments and assistance — is a big factor in net farm income decreasing, but commodity prices will drive what happens the rest of the year, she says.

Since September 2020, the price of corn has increased 100%, but the price of fertilizer has gone up 247%. That’s not even mentioning the price of fuel.

Myers says growers should take advantage of forward contracting to get the best price possible for their crops and space out major expenses to not only manage risk and costs, but also to space out delivery times.

If you have room to store fertilizer, get it while prices are lower instead of when most farmers are buying it and the price goes up.

“It all has to do with risk tolerance,” Myers says. “You’re certainly taking risks there.”

Ben Buckner, chief grains and dairy analyst for AgResource Co., said in the most recent Dairy Outlook that Class III milk prices were expected to trade around $25 through the end of the year. The all-milk price is forecast between $27 per cwt and $28 per cwt.

The last time dairy reported record profits was 2014, Spitzley says, and higher production soon followed. But he says there are many more barriers to expanding right now, from low heifer inventories, trade issues in other countries and the threat of recession here, which likely will soften future demand.

What’s his advice for producers?

“Build working capital reserves. Every day, there is some sort of Earth-shattering thing going on. Volatility is going to continue; too many things are going on,” Spitzley says. “Take advantage of this opportunity to get financially stable given the outlook. It all comes down to supply and demand fundamentals.”

TAGS: Crops Dairy
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