If producers will have less income from the market as harvest time crop prices fall profit might have to come from production

If producers will have less income from the market as harvest time crop prices fall, profit might have to come from production.

As crop prices fall, can growers produce their way to profit this year?

As commodity prices continue to drop, are producers headed for tough times? What are some signs your operation is in trouble? From an economic standpoint, it is always difficult to have to rely on producing our way out of a financial jam.

My last article discussed the need for producers to perform a mid-year financial checkup on their operation. That has become even more critical after the July 11 USDA crop report and the realization that commodity prices are in a downtrend with little prospects to turn upward.

The next crop report in August will incorporate a first real look at 2014 yields as USDA will use the results of producer based surveys to estimate yields. For the most part nationwide there has been good growing conditions and many analysts are starting to project record grain and soybean yields for 2014. This will put additional pressure on prices as we move toward harvest.

In visits with cotton buyers and grain elevators, the indication is that less cotton and grains have been priced this year relative to previous years. The last few years of strong harvest prices have made it difficult for producers to want to forward price their crop and then have higher prices at harvest. Certainly, a lot can happen before harvest and that could again be the price pattern, it is unlikely to be so. Lower prices seem to be in the offering.

After the monthly USDA reports, I put together a profitability outlook update on cotton, soybeans, corn, milo and wheat-double crop soybeans. I use average yields, forward contract prices, and University of Tennessee costs from our crop budgets.

Comparing the April update to July does give some concern on the profitability prospects at the current price levels and average yields. Cash prices for harvest delivery have dropped 12 percent for soybeans, 16 percent for cotton and milo, and 26 percent for corn and wheat since the April projection. Wheat prices for producers in Tennessee will vary considerably depending on the level of discounts and dockage that producers received.

You can check current crop commodity prices now

For dry land crops, the largest per acre drop is in corn at $125 per acre followed by cotton & wheat-double crop soybeans with an $84 per acre drop in net returns. Milo has a $50 per acre drop with soybeans at $44 per acre less in net returns compared to April. Irrigated crops also have a projected drop in net returns with corn at $187 less income, cotton $107, wheat-double crop soybeans $93, milo $77 and soybeans $65. Again, this is less income projected per acre when comparing July forward pricing to April.

If producers will have less income from the market, it would have to be made up from production. With adequate moisture and good growing conditions, that could happen with grains and soybeans. It may be more difficult with cotton as with current conditions we do seem to be lacking the heat units to make an above-average crop. Also, in the grains some areas have had excessive moisture which has stunted the crop, delayed planting, or caused many replants. From an economic standpoint, it is always difficult to have to rely on producing our way out of a financial jam.

Signs business is in trouble

Are producers headed for tough times? What are some signs your operation is in trouble? In previous years as will happen this year, Dr. David Kohl, Professor Emeritus, Virginia Tech will be speaking at the Mid-South Ag Finance Conference on August 6 at University of Tennessee – Martin.  These are some signs that he uses to indicate a business is in trouble:

  • Accounts payables/supplier credits > 10 percent of revenue
  • Constant refinancing of operating loans
  • Not covering total cost of production – more than eighteen months
  • Annual loss of earned net worth more than 10 percent of total net worth
  • Operating expenses to revenue ratio (excluding interest and depreciation) over 85 percent
  • Interest paid revenue ratio over 15 percent of revenue
  • Credit scores under 650
  • Have more than five different sources of credit on balance sheet
  • Debt to asset ratio above 50 percent.
  • Working capital to revenue ratio below 20 percent.

If some of these fit your operation, then you definitely need to be proactive and do a thorough analysis of your business. If you would like to hear Dr. Kohl’s current take on economic conditions for farm operations and practical tools for monitoring risk and sustaining profits, please register for the August 6th Conference at www.utm.edu/agconference. Joining Dr. Kohl this year will be once again, Richard Brock of Brock Associates and Dr. Steve Isaacs of the University of Kentucky.

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