Ag Economy Alejandro Plastina, Ph.D. Assistant Professor/Extension Economist Iowa Seed Association Seed Forum Iowa State Fairgrounds, Des Moines Feb 14, 2018 Overview U.S. farm sector projections Financial situation of Iowa farms Projected profit margins for Iowa corn & soy Uncertainties in farm economy 1
U.S. Farm Sector Projections (USDA) U.S. Farm Sector Profits NCFI 5% NFI 7% 2
U.S. cash receipts: CROPS U.S. cash receipts: LIVESTOCK 3
How has the financial situation of Iowa farms changed recently? 4
Average Net Farm Income in Iowa: (accrual, nominal) $250,000 $243,072 $200,000 $150,000 $100,000 $50,000 $0 $27,927 $45,597 Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1 10. Various years. Average Farm Profitability in Iowa: ROA, ROE, Operating profit margin ratio 40% 35% 30% 25% 20% 15% 10% 5% 0% Operating profit margin ratio Rate of return on farm assets Rate of return on farm equity 1.7% 1.0% Source: Iowa Farm Costs and Returns. Ag Decision Maker File C1 10. Various years. 5
Average Farm Liquidity & Solvency Higher better Lower better Liquidity: Current Ratio = Current Assets/Current Liabilities Solvency: Debt to Asset Ratio = Total Liabilities / Total Assets Data Source: Iowa Farm Business Association Actively Managed Mid-size Commercial Farms Focus on Farm Management Decisions Machinery and Land recorded at COST value 6
Track evolution of same set of farms through time December 31, 2014 December 31, 2015 December 31, 2016 Number of farms =273 Farms grouped according to: 1) LIQUIDITY RATING: Strong: Current ratio > 2 2) SOLVENCY RATING Strong: Debt-to-Asset Ratio < 30% Under Watch: 1.3 < Current ratio < 2 Under Watch: 30% < DTA Ratio < 60% Vulnerable: Current ratio < 1.3 Vulnerable: DTA ratio > 60% Source: Farm Financial Scorecard 7
Financial Liquidity 31.5% +8.1% 40.7% +2.2% 42.8% Plastina, A.2017. "Financial Stress in Iowa Farms: 2014 2016. FM 1892 R. https://store.extension.iastate.edu/product/15261 Financial Solvency 20.5% 24.5% 25.3% +0.8% +4% Plastina, A.2017. "Financial Stress in Iowa Farms: 2014 2016. FM 1892 R. https://store.extension.iastate.edu/product/15261 8
% of Farms with Vulnerable Liquidity or Solvency Ratings Vulnerable Solvency Only Vulnerable Liquidity Only Vulnerable Solvency and Liquidity 4 All 45% 4 All 38% 6 20 21 17 All 47% 15 21 22 Dec'14 Dec'15 Dec'16 N=273 farms Changes in Working Capital per Acre 9
70% 60% 50% 40% 30% 20% 10% 0% Percent of Vulnerable Farms Dec 2016 527 FARMS Liq & Solv Vulnerable Only Liq Vulnerable Only Solvency Vulnerable 8% 3% 2% 10% 22% 23% 19% 8% 8% Top 20% Upper 20% to 40% 6% 19% 19% Middle 20% Lower 20% to 40% Cash Farm Income Quintiles 7% 22% 40% Lowest 20% 5% 19% 20% Average Source: A.Plastina s calculations based on IFBA data 10
Financial stress might affect Family living expenses / Repayment of loans Local jobs Local communities Family relations / stress Litigation If you know somebody that might be stressed, call or share: Iowa Concern Hotline: 800 447 1985 www.extension.iastate.edu/iowaconcern Projected Profit Margins for Corn and Soybeans 11
% Change in Costs per Acre 2017-2018 Cost category Corn following Corn Corn following Soybeans Soybeans following Corn Pre harvest Machinery 1.8% 1.9% 1.5% Seed, Chemical, etc. 2.6% 3.8% 1.7% Harvest Machinery 16.1% 16.6% 2.5% Labor @ $14/hr 7.7% 7.7% 7.7% Land (Cash rent) 4.8% 4.8% 4.8% Total Cost per Acre 0.4% 0.7% 2.1% Costs of Crop Production in Iowa $ per Acre 900 800 700 600 500 400 300 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f Corn following Corn (165 bu) Corn following Soybeans (180 bu) Soybeans following Corn (50 bu) $671 $627 $473 Ag Decision Maker File A1 20 12
210 180 Average Yields in Iowa (bushels per acre) Corn, 202 150 120 90 60 30 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Soybeans, 56.5 Source: USDA/NASS IA CORN: Breakeven Price* (Total Cost per Acre/Yield) $7 $ per Bushels $6 $5 $4 $3 $3.19 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 170 bu: $3.77 180 bu: $3.56 190 bu: $3.38 *Average: 1/3 corn on corn & 2/3 corn following soybeans 13
$7 IA CORN: Breakeven vs. Received Price $ per Bushels $6 $5 $4 $3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 170 bu: $3.77 180 bu: $3.56 190 bu: $3.38 Sources: AgDM File A1 10 (Breakeven) and USDA/NASS (Received in IA until 2016) U.S. Corn Supply and Use 2014 2015 2016 2017 2018 Area Planted (mil. acres) 90.6 88.0 94.0 90.2 91.0 Yield (bu./acre) 171.0 168.4 174.6 176.6 173.5 Production (mil. bu.) 14,216 13,602 15,148 14,604 14,520 Beg. Stocks (mil. bu.) 1,232 1,731 1,737 2,293 2,352 Imports (mil. bu.) 32 67 57 50 50 Total Supply (mil. bu.) 15,479 15,401 16,942 16,947 16,922 Feed & Residual (mil. bu.) 5,280 5,120 5,467 5,550 5,550 Ethanol (mil. bu.) 5,200 5,224 5,439 5,525 5,525 Food, Seed, & Other (mil. bu.) 1,401 1,422 1,450 1,470 1,475 Exports (mil. bu.) 1,867 1,898 2,293 2,050 1,900 Total Use (mil. bu.) 13,748 13,664 14,649 14,595 14,450 Ending Stocks (mil. bu.) 1,731 1,737 2,293 2,352 2,472 Season-Average Price ($/bu.) 3.70 3.61 3.36 3.30 3.30 Source: Chad Hart (ISU) based on USDA data (Feb 8) 14
$7 IA CORN: Breakeven vs. Received Price $ per Bushels $6 $5 $4 $3 If 2018 cost per acre $645, required yield to break even at $3.30/bu: 195 bushels per acre 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 170 bu: $3.77 180 bu: $3.56 190 bu: $3.38 USDA/NASS Prices: Received in IA until 2016; U.S. Forecast 2017 18 $ per Bushels $15 $14 $13 $12 $11 $10 $9 $8 $7 IA SOYBEANS: Breakeven vs. Received Price $8.55 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 45 bu: $10.51 50 bu: $9.46 55 bu: $8.60 USDA/NASS Prices: Received in IA until 2016; U.S. Forecast 2017 18 15
U.S. Soybean Supply and Use 2014 2015 2016 2017 2018 Area Planted (mil. acres) 83.3 82.7 83.4 90.1 91.0 Yield (bu./acre) 47.5 48.0 52.0 49.1 48.4 Production (mil. bu.) 3,927 3,926 4,296 4,392 4,360 Beg. Stocks (mil. bu.) 92 191 197 302 530 Imports (mil. bu.) 33 24 22 25 25 Total Supply (mil. bu.) 4,052 4,140 4,515 4,718 4,915 Crush (mil. bu.) 1,873 1,886 1,899 1,950 1,970 Seed & Residual (mil. bu.) 146 122 141 139 140 Exports (mil. bu.) 1,842 1,936 2,174 2,100 2,325 Total Use (mil. bu.) 3,862 3,944 4,213 4,188 4,435 Ending Stocks (mil. bu.) 191 197 302 530 480 Season-Average Price ($/bu.) 10.10 8.95 9.47 9.30 9.40 Source: Chad Hart (ISU) based on USDA data (Feb 8) $ per Bushels $15 $14 $13 $12 $11 $10 $9 $8 $7 IA SOYBEANS: Breakeven vs. Received Price Lower soybean margins in 2018, but more likely to break even than corn. If soy cost per acre $473, required yield to break even at $9.40/bu: 51 bushels per acre $8.55 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018f 45 bu: $10.51 50 bu: $9.46 55 bu: $8.60 Sources: AgDM File A1 10 (Breakeven) and USDA/NASS (Received in IA until 2016; U.S. Forecast 2017 18) 16
Major Uncertainties for the Farm Economy Price volatility ARC/PLC Payments USDA Budget FY2019 Tax changes Next Farm Bill Price volatility Recent short term rally: dry weather in Argentina U.S. drought monitor: Smaller crops than projected by USDA? Upside price risk? 17
USDA Budget FY2019 (President s request) $19 billion: a $3.7 billion or 16% decrease from enacted level. Crop insurance reform: reduce premium subsidy from 62% to 48%; limit commodity, conservation, and crop insurance subsidies to those producers that have an Adjusted Gross Income of $500,000+ Caps underwriting gains for insurance companies at 12% Establishes user fees for some federal agencies 18
President s Budget Request. Feb 12, 2018 PRESIDENT S BUDGET FACES OPPOSITION FROM: NATIONAL CORN GROWERS ASSOCIATION AMERICAN SOYBEAN ASSOCIATION NATIONAL FARMERS UNION President s Budget Request. Feb 12, 2018 19
Tax Changes Bipartisan Budget Act of 2018 (signed into Law on Feb 9, 2018) revives many expired tax breaks retroactively (only for 2017): Extension of excise tax credits relating to alternative fuels. Extension of biodiesel and renewable diesel incentives. Extension of second generation biofuel producer credit. Waiting on IRS guidance Tax Changes (continued) The Tax Cuts and Jobs Act of 2017 (signed into Law Dec 22, 2017): reduces tax rates for businesses and individuals increases the standard deduction and family tax credits in personal income tax calculation, but eliminates personal exemptions (less beneficial to itemize deductions) limits the mortgage interest deduction repeals the individual mandate of the Affordable Care Act (ACA) Agriculture: changes the rules to trade equipment or livestock, calculate vehicle depreciation and trades. Waiting on IRS guidance 199A Deduction (coop dividends)? 20
Next Farm Bill 2014 Farm Bill expires at the end of September 2018 Expectations for House version to receive vote before end of March (House Agriculture Committee Chairman Mike Conaway) Small tweaks or big changes? Thank you for your attention! Questions? Alejandro Plastina Assistant Professor/Extension Economist plastina@iastate.edu (515) 294-6160 21
Resources Estimated Costs of Crop Production in Iowa 2018: www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf Center for Agricultural Law and Taxation: www.calt.iastate.edu 22