Koontz: Reviewing the budget is key to staying afloat amidst declining crop pricesWritten by Gayle Smith
Farmers enjoyed several years of high crop prices but now have to ride the down cycle, according to an agricultural economist from Colorado State University.
“I wish I could come here and say five dollar corn, eight dollar wheat and three dollar calves for the rest of our lives,” Stephen Koontz told a packed house of farmers and ranchers at a recent workshop, “but, that’s not the way it’s going to be.”
The spur in record high crop prices began in the mid-2000s, with phenomenal growth in the corn market because of ethanol, Koontz told farmers.
“It really drove the market, and then we had some dry weather right in the middle of it that drove prices even higher. During that silver-lined takeoff, we went from 1 billion bushels of corn to 5 billion,” he said. “We had to come up with 4 billion bushels more corn just for ethanol production.”
Because of the huge demand for corn and weather issues that made it harder for farmers to raise what was needed, all the other crops were also affected.
Soon hay prices skyrocketed, along with wheat and cattle. This was all caused by corn, Koontz said.
During this time, Koontz said there was also a substantial rise in the value of the dollar, which caused a rise in production costs.
Now that the price curve is coming back down, farmers are left with declining crop prices and high production costs.
“We are going to experience relatively weak prices and high margins in crop production, at least for the next three years and probably for the next five years,” he said.
“Everyone that grew a corn crop, a wheat crop or a calf crop made a lot of money the last five years,” he continued. “Hopefully, they saved some of that money and put it in the bank.”
Koontz projected corn prices to stay in the three-dollar range, possibly around $3.75 in 2016. He expects a slight price climb to around four dollars in 2017, followed by $4.12 in 2018 and $4.17 in 2019.
“I think the corn market will stay in the four-dollar range indefinitely,” Koontz stated. “It would take a major weather-related event for it to move into the five-dollar range.”
Wheat will follow corn. Currently, Koontz said there is an oversupply of wheat stocks worldwide, and with our strong dollar, it is hard to sell U.S. wheat. He projected wheat prices to hover around $5.25 to $5.50, which he calls “pretty optimistic.”
Penciling out the numbers, Koontz said producers could be looking at a shortfall of nearly $200 an acre if they plant corn in 2016. At today’s numbers, farmers may not be able to cover rent and certainly not depreciation, he said. They also may not be able to cover operating returns.
“The key is to reduce costs,” Koontz stated. “The revenue has come down, but the costs haven’t yet.”
“I would encourage farmers to plan for the future, update their budgets and talk to their landlord and banker,” he said. “They are also going to need to find ways to cut costs and become even more efficient.”
“Traditionally, we usually make the most bad decisions when we have the most money. Now is the time to make good decisions and use our marketing and negotiating skills,” he stressed.
Many farmers will need to have a conversation with their landlord, Koontz said.
“They need to negotiate or renegotiate their crop share leases,” he explained. “I would encourage farmers to put together a budget and show their landlord where they are at.”
“It is important to know our costs,” he continued. “We don’t want to be growing corn at a loss.”
Farmers should pay careful attention this summer for some price hikes when corn may reach four dollars, he said. Over the next year, Koontz said the strong dollar will have an effect on the export market, creating some price weakness that could prevent corn from even reaching four dollars.
“We have a good, solid cash demand in the corn prices we have,” he said. “It won’t go lower unless there is bad news on an export basis.”
Koontz shared with farmers some tips he recommends to move through this transition period of lower crop prices and higher production costs.
He encouraged farmers to sell during runs. He also noted that producers need to know their cost of production and try to make a return while also figuring out what may have gone wrong in last year’s crop. Also, they should take advantage of forward pricing, figure out what they want to make and follow through.
Koontz also encouraged farmers to look into whole farm revenue insurance. He said producers can insure their revenue based on the five-year average from their Schedule F. They will still need to do their homework and determine a deductible, but it can still be a very good product, Koontz explained.
He also encouraged producers to consider diversifying their operations.
“Diversification cheapens insurance premiums,” he said.