BankNews.com

BankNews

2019 Ag Outlook

Be prepared to capitalize on optimistic macro-factors.

By Michael Langemeier

Corn and soybean farmers have experienced a rough few years, but the news is not all bad. And if they are still farming, they’ve already made some good decisions.

The replacement margin and the replacement margin coverage ratio enable borrowers and lenders to evaluate whether a farm has sufficient funds to repay term debt and replace assets. For a farm to grow, it is essential that the replacement margin be large enough to repay term debt, replace assets and purchase new assets, and that the replacement coverage ratio be greater than one. This article defines and illustrates the use of key repayment capacity measures.

To be sure, there are plenty of headlines that chip away at a family farmer’s confidence. Market prices at or below break-even are making it increasingly difficult just to find the capital to operate. But, for those farms backed by sound strategy, success in 2019 comes down to making a series of smart decisions at the right time.

Paul Mussman, president of AgWest Commodities in Holdredge, Neb., recently joined Bank Iowa leaders and a room full of farmers at the county fairgrounds in Clarinda, Iowa. Up for discussion was the current state of crop and livestock marketplaces for producers. Mussman talked through several key factors to watch in 2019 and offered advice on how to capitalize on a few bullish signals.

As he talked, Mussman pointed out that farmers who have made it through the downturn are already on a path to success.

Some good decisions were made along the way.

While the liquidity of every farm operation is impacted by local conditions — both in the marketplace and from Mother Nature — there are a few macro-level factors that make one optimistic about 2019. That said, the timing and sustainability of decisions made throughout the crop year will be critical. Whether marketing a few bushels at a specific price or purchasing crop inputs to manage costs, each decision farmers and ranchers make this year must be well-timed and feasible.

“You’ve made it through the last few years, so it’s a sign that you have made some good decisions along the way,” Mussman told attendees of the Clarinda event.

Mussman pulled the latest price data. His analysis showed that while grain and livestock markets remain at low levels, long-term trends give some hope. This is particularly true for producers who make good marketing decisions.

Corn is not trading at $6/bushel, but that doesn’t mean there aren’t revenue opportunities, Mussman said. The same is true for markets like soybeans and cattle. Despite continued price pressure, there are occasional opportunities to earn decent returns.

Avoid waiting and not selling.

In Mussman’s words, “2019 is ready for opportunity.” In order to take advantage of that opportunity, however, it’s important to be prepared. For example, if farmers trade grain on the futures market, they’ll need a dual strategy in place (for both old- and new-crop grain). More importantly, they’ll need to be committed to execute on that strategy. As Mussman said, “No one picks the top all the time. If you’re waiting on a drought, disease or trade issue, you’re just waiting and not selling.” Farmers must be ready to act when the time is right for their farms.

Of course, the “right time” is different for every farm. Producers have to consider both farm-level economics, as well as macro-level factors, like global crop weather, global trade and renewable fuels.

In 2019, Mussman said the following “market movers” are the main global factors for Iowa farmers to watch:

  • South American crop output. What began as a whale of a crop in late 2018 took a turn for the worse early this year as producers began turning their focus to the Safrinha crop. And while crop output will be the dominant factor from South America, infrastructure development (namely the BR-163 highway in Brazil on which much of the nation’s soybeans travel), could become equally as significant.
  • U.S. crop weather. In south Texas, farmers began to plant the 2019 corn crop in January. Many are watching to see if weather issues in the southern states affect early crop development.
  • Ethanol demand. Slumping crude oil has been bearish for the ethanol market, sending margins to well below profitable levels for most ethanol plants. Watch ethanol margins, advised Mussman. If they enter profitable territory, it could increase corn demand.
  • Global trade. There’s little hope a resolution to the trade dispute with China will be reached anytime soon, Mussman noted. Negotiations will continue through the year, as more data on a slowing Chinese economy trickles in. Keep an eye on the soybean market; the ongoing stalemate could be the culprit of stronger demand.

Marketing is a process, not an event.

It’s important to be attentive to both specific marketing goals and the optimal times to act. “Marketing is a process, not an event,” Mussman told the crowd of farmers.

He encouraged farmers to utilize all resources at their disposal. Whether it’s assistance to price crop inputs or leveraging tools like call options to help secure specific price points in the grain market, farmers should rely on the experts in the field to help make sound marketing decisions. But while it’s important to be attentive to macro-level factors like those listed above, it’s just as important to be attentive to a farm’s own break-even prices, balance sheet and overall revenue potential.

Overall, attendees walked away from Mussman’s presentation feeling more pride in their efforts and optimism about the future. We share in that pride and optimism at Bank Iowa. 

Jim Plagge is the CEO of West Des Moines-based Bank Iowa, one of the nation’s leading independent ag banks, with more than $1.3 billion in assets. For more information, visit bankiowa.bank.

  • Sign Up

  • Categories

  • Archive

Software: Kryptronic eCommerce, Copyright 1999-2019 Kryptronic, Inc. Exec Time: 0.06693 Seconds Memory Usage: 3.799812 Megabytes
Kryptronic