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Summer Business Tune-Up

July 27, 2011
By: Ed Clark, Top Producer Business and Issues Editor
summer seminar
  

Tips, strategies and outlook from the Top Producer Summer Seminar.

After the stress of planting, a break from the farm was well-deserved for producers who attended the Top Producer Summer Seminar. More than 130 attendees gathered in Bettendorf, Iowa, to hear market outlook, policy update and land value discussions and to attend breakout sessions on business management.

Thank you to our Top Producer Summer Seminar sponsors: Agrotain, Bayer CropScience, Genuity,
John Deere, Kennedy and Coe, Michelin, SFP, Top Third Ag Marketing and Water Street Solutions.


News from Washington

Expect political skirmishes ahead because of funding issues, said Roger Bernard, policy analyst with Informa Economics. Cuts are already impacting agriculture. The National Agricultural Statistics Service has reduced the number of reports it puts out, and county offices are not doing farm visits but rather interacting more by e-mail and phone.

The next farm bill—whenever it is written—will undoubtedly contain budget cuts. The 2008 farm bill’s 37 unfunded programs are all vulnerable because no baseline was established. With current farm prices, many in Congress say that agriculture spending should be able to be trimmed.

Congress says it will direct the Environmental Protection Agency (EPA) to make sure its regulations are based on sound science and have been through a cost/benefit analysis. One way to limit EPA’s reach might be through the appropriations process. For example, the House Appropriations Committee barred funding the controversial Grain Inspection, Packers and Stockyards Administration (GIPSA) bill.


Bubble Effect Unlikely

Producers have great opportunities—and greater risks—in today’s marketplace. "It’s not a surprise anymore to see limit moves [on crop prices]," said Nick Paulson, University of Illinois ag economist. Corn production costs have surged with prices, and all inputs are increasing, he said.
Some think agriculture is in a bubble and could crash. "I lean toward the anti-bubble view," he said.

In Illinois, land rents are a concern. Yet during the past two decades, rents did not increase as rapidly as land values. With land valued at $9,000 to $10,000 per acre, rents of $350—or just 3.5% of values—don’t seem so ridiculous, he said. "Even if we see a decline in commodity prices, cash rents will increase before they level off." Land rental arrangements are shifting more of the risk to the operator, he added. "There are stories in Illinois of $500 per acre cash rents."

One need Paulson sees for producers is for more working capital and/or large operating lines of credit. Overall, he is cautiously optimistic: "We have fallen on very good times," he said.


Weather Markets Will Reign

With such a small carryover on corn, growers should expect wild weather markets in both directions this summer. Traders will be buying and selling on the 10-day-or-longer forecast, but it can’t possibly be accurate that far out, said Gregg Hunt of Archer Financial Services.

"Weather will cause huge runups or rundowns," he said in a panel discussion on the grain market. "The grain market will come up and down like never before."

One factor producers need to be aware of is that there are a lot of standing orders for corn at $7 per bushel.

For an average yield of 162 bu. per acre, the crop is going to need cool nights in the Midwest. Mark Gold, managing partner of Top Third Ag Marketing, said that "if summer is hot and dry, prices will blow the socks off people." With current prices so strong, he said, it’s important not only to look at pricing the 2011 crop, but to be looking at 2012 and even 2013 as well.

On demand, Bill Biedermann of Allendale Inc. remains bullish. One reason why is China. "They have to build stocks," he said.


Watch for Ag Law Pitfalls

 

The hot buttons for agricultural law right now involve environmental regulations. As a result, it’s important for producers to be proactive to avoid costly legal problems, said Kristina Tridico, an attorney with Ice Miller LLP, Indianapolis, Ind.

Some of those topics include runoff, discharge points, surface water contamination and toxic pollution, which includes anhydrous ammonia, she said. Producers also could become embroiled in air pollution battles. In animal agriculture, large operations should have permits and producers should make sure they follow permit requirements. In one recent case, a large animal feeding operation in Texas was assessed a $1.9 million penalty for contaminating surface and groundwater, Tridico said.

It’s important for producers to not only be aware of rules, including zoning regulations, but to proactively meet with regulators and invite them to farms to show that what they are doing is environmentally friendly. "Develop a personal relationship with regulators," Tridico advised.


Take Advantage of New Marketing

production expenseProducers have a variety of marketing options, some of them new, to protect price floors. One of these is short-term dated options, said Steve Johnson, Iowa State University farm management specialist.

Another is that many elevators and co-ops, while averse to offering forward contracts due to concern about margin calls, will offer them to producers who forward buy fertilizer.

Additional tools are minimum price contracts, put options and over-the-counter options. "I’m a proponent of selling incrementally," Johnson said. "If you don’t have 2011 sales on, I’m guessing you don’t need the money."

Johnson said producers should have $300 to $400 per acre in cash to pay for increasing expenses, adding that now is not the time to be paying with lines of credit, even though interest rates are low. He advised producers to look at tax planning early and that this might be the year to make necessary purchases.


 

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