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Moneywise: Develop Your Flight Plan

February 5, 2011
 
 

Develop Your Flight Plan

Market prices and input costs are volatile, and the changes are extremely rapid. Sometimes you only have hours or even minutes to make critical decisions.

flightplanIt’s important to have a process in place to adjust to these changes in a timely manner, as well as the capacity to measure your results, says Chris Barron, director of operations and vice president of Carson and Barron Farms Inc., in Rowley, Iowa. Barron is also the author of a new blog on AgWeb.com called "Ask a Margin’s Expert."

"Just as pilots make a flight plan, agricultural producers need to do the same," Barron says.

Before a plane even leaves the ground, the pilot has a specific set of procedures and plans of action for most any situation; once in flight, pilots are constantly adjusting for changing variables.

"Think of the benefits a farming operation would have with these types of structured procedures," Barron says. He suggests four specific actions to help make a course correction in your operation.

Be Deliberate. "If you are deliberate in your decisions, you will have a predetermined plan for each specific or potential challenge you face," Barron says. Have Plan B already in your mind or in writing so when conditions change you already know what you will do.

Be Decisive. When you are decisive you are exercising discipline. For example, if you decide to sell 5,000 bu. of corn once it reaches $5.40, but change your mind when it reaches that price, be sure to ask yourself why. "It’s OK to change your mind, but it’s critical to understand why," Barron adds.

Be Accurate. There are thousands of tools to use in business management. "I’ve found that spreadsheets are an extremely powerful tool. If you have the ability to structure the numbers, you can remove much of the emotion," Barron says.

Be Immediate. Don’t wait too long to make a course correction. Don’t be afraid to make constant adjustments to your original plan and incremental improvements. Timing is critical and generally can provide the biggest payout.

For more information, visit Barron’s blog.


Follow Rules for SURE Eligibility

The farm bill provided a crop disaster payment program that is intended to supplement and enhance the Farm Service Agency’s (FSA) Noninsured Assistance Program (NAP). The only eligibility requirement is that all important crops must be insured by crop insurance or NAP, says Gene Gantz, USDA’s Risk Management Agency.

"Remember, when you insure at higher levels of coverage, the guarantees for crop insurance and SURE [Supplemental Revenue Assistance program] may be two times higher," Gantz says.

Get the details on NAP, SURE and the Average Crop Revenue Election (ACRE) programs for your farm from your FSA office, before the crop insurance enrollment/change deadline.


Prepare Now for New COMBO Crop Insurance

The new COMBO insurance policy is available for spring planted corn, grain sorghum and soybeans. It’s referred to as COMBO or combination because it includes three insurance plans: Actual Production History (APH), Crop Revenue Coverage (CRC) and Indexed Income Protection (IIP).

"You can still have most of the features of your previous plan by checking one of three boxes in the new policy," says Gene Gantz, of USDA’s Risk Management Agency.

Key advantages of the new policy are common language and prices are based on the futures market, similar to CRC.

COMBO insurance policy unit options include enterprise units for all plans, which can result in a 50% premium discount. The standardization of the basics makes it easier for producers to
do side-by-side comparisons of features, performance and premium costs among the different insurance plans and unit options.

Current policyholders will automatically receive a new 2011 replacement policy with benefits similar to the ones they chose for their 2010 policy, Gantz says. Insurance agents can help farmers fine-tune their new policies to better meet their needs for 2011.

The spring seeded crop enrollment/policy change deadline for most crops is March 15, 2011.


What Will Land Do in 2011?

Farmland prices rise for two reasons?increasing profits or rents and falling interest rates, says Gary Schnitkey, University of Illinois ag economist.

"In 2011, farmland returns are likely to increase because of above-average commodity prices, and rising interest rates do not appear likely within the next year or two as the Federal Reserve seems intent on an easy monetary policy. Both factors support land prices," he says.

Schnitkey studied farmland prices and rents from 1970 to 2010. With the exception of the farm crisis, when farmland values fell 43% from 1981 to 1987, land has trended higher. From 1987 to 2004, farmland rose an average of 4.8% per year. Between 2004 and 2008, the rate tripled to 15%, driven by nonfarm development.

The general recession has removed that pressure, and farmland has been relatively stable since 2008. Cash rents also have increased since 1987, but at a slower rate. In 1986, cash rent peaked at 8.1% of farmland price. That figure dipped to 3.4% in 2008 and increased to 3.5% in 2009 and 2010.

"This would be expected to negatively impact farmland price sometime in the future," Schnitkey says. "But falling interest rates, making borrowing cheaper, have offset the lower return to ownership."

Schnitkey divides the cash rent by the interest rate to determine "capitalized value," the estimated discounted value of all future cash flows to farmland. He then divides land price by capitalized value to derive the price-to-value ratio.

"If price-to-value ratios become high, it indicates that fundamental factors are not supporting land prices and they may come under pressure to fall," he says.

"In 2010, cash rent was $169 per acre and the 10-year Treasury note was 3.33%, giving a capitalized value of $5,075," Schnitkey explains. "Given the average farmland price of $4,820, the price-tovalue ratio is 95%. So price is about right given current cash rents and interest rates."

"At this time, there doesn’t seem to be any downward pressure on farmland prices," he concludes. "But it will not take much of an increase in interest rates to create downward pressure."

cash rents

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FEATURED IN: Top Producer - February 2011

 
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