Facebook has a game called Farmville that has become very popular.  When my wife first started playing the game, I almost thought I was going to have to get her some treatment for her addiction.  I would constantly get messages from Facebook asking me to do something for her Farmville game.  The first couple of times, I did what it asked and after that, I decided was too much work and stopped doing it.

I have found that this game seems to appeal to women more than men.  I am not sure why that is true since I like all things about farming, but I think the main reason for me, is that it is not real farming.  The process of planting, growing and harvesting a real crop has much more appeal to me than a game.

This post is simply a reflection of my opinion.  I am sure there are others who disagree with me, but I know that millions play the game.

To maximize your profit for your farm, it is very important to determine what your annual fixed costs are and determine if you are maximizing your amortization of these costs on your farm.  Fixed costs are those costs that do not materially change with production increases and decreases. 

Some examples of fixed costs are:

• Depreciation on your equipment
• Insurance costs on equipment
• Your annual salary cost for providing services to the farm operation
• Office related costs
• Other annuals salaries for workers who are not at full capacity

These costs are mostly fixed and if you can increase your production to full capacity, these costs per unit of production will decrease substantially.  The goal is to maximize your production to equal the full amortization of these fixed costs.

Lets say you have a farm with 1,000 acres of production and your total annual fixed costs are $100,000.  This means your average fixed cost per acre is $100.  If you have enough equipment and capacity to farm 2,000 acres and all of your variable costs will remain the same, you will reduce your fixed cost amortization from $100 to $50.  This will result in additional profits to the farm operation of $50,000.

Try calculating these costs for your farm operation and see how it would effect your bottom line.

However, you also need to be careful that as you approach full capacity, you may have to make major investments to go slightly over full capacity.  This can then put your back with higher fixed cost amortization.

Marcia Taylor with DTN/The Progressive Farmer had a great post recently on the elimination of crop insurance under the Group Risk Income Protection (GRIP) and Group Risk Program (GRP) in over 1,000 counties across the US.  The primary reason for eliminating these counties were due to not reporting at least 30 yield reports or 25% of the acres for the county.  The USDA requires at least this amount of data in order to provide the insurance coverage.

Also, of the 1,062 counties that lost these insurance programs, only 310 counties were actually buying these types of insurance policies.  It appears that most of the counties affected were located in the South, Great Plains and Eastern part of the US.  Most the Mid West corn belt was not affected.  The decision eliminates this coverage for corn, soybean, grain sorghum, cotton and peanut producers.

Farmers in Lawrence County, Alabama say their maximum insurance yield reduced from 135 bushels per acre to only 60.  This insurance can be expensive.  GRIP with a harvest-price option cost $90 per acre as mentioned in the article, however, the return has been as high as $415 in 2007 and $222 in 2008 per acre for this particular county.  Payouts were as high as $614 per acre in Baca County, Colorado in 2008 largely due to the steep decline in corn prices.

However, these farmers need to realize they need to report their yields and if they do a good job of this, then the coverage will be available again.  The trends over time have shown that this coverage returns about $1.78 for every $1.00 of premium. 

GRIP has offered some of these growers superior coverage levels.  This coverage is no longer available and it may cost the farmers substantial losses to their bottom line.

Mike Walsten from the “Your Precious Land” has posted recently that farmland sold at auctions are still enjoying high prices.

Mike also was interviewed on Ag Day last week and one of his interesting comments related to the trend of farmers in the metro Chicago area.  When pricing for development land was very high during the mid 2000’s, these farmers were able to sell their farm land for upwards of $15,000 an acre and then reinvest it tax-deferred under Section 1031 of the Internal Revenue Code.  They mostly reinvested in three or four times the land located in more rural areas.

Now, with the drying up of development potential, many of these farmers are now going back to the people they sold their land to for maybe $20,000 an acre and re-purchasing it for $5,000 to $7,500.  I think you will see this trend continue for a couple of more years.  Then, when the development trend starts again (and based upon a growing population, it will start again sometime), these same farmers might be able to sell the land for $20,000 an acre or more again.

It seems like some of the best investors over the last decade have been our farmers.  It has been a long-time since we could say that.

All in all, farm debt levels have increased, however, farmers have done a very good job of not letting these levels get out of control.

The United States Department of Agriculture has a very good print and online magazine called Amber Waves.  Each issue generally has several good articles related to farming and I would highly recommend reading it each month.

In the December issue, the an article on how farm debt has increased and shifted in the last few years was highly informative.  Here are the highlights of the article:

• Farm debt levels have risen sharply in recent years, but the growth in farm asset values has outpaced the growth in debt. 
• Fewer farms end the year with debt outstanding than in the past; debt is more concentrated in larger farms
• Debt repayment capacity is expected to decrease this year, but remains well above levels seen in the later 1970s and early 1980s

US farm sector debt was estimated at $240 billion at the end of 2008, however it is expected to decrease by about $6 billion to $234 billion at the end of 2009.  Total farm assets are estimated at about $1.8 trillion for a debt to asset ratio of only 13%.  This ratio is about 2.7 times better than the low reached in the mid-1980s farm crisis.

In 1986, nearly 60% of farms reported having outstanding debt at the end of the year; by 2007, this figure had dropped to 31%.  Larger farms are more likely to use debt than smaller farms.  The majority of small farms indicated they have sufficient liquidity to finance their operations.  Livestock operations tend to have higher levels of debt than crop operations.

At the end of 2007, 65% of farmers reported having no outstanding on their business balance sheet, however, these farms only average about 258 acres in size.  14% of farms reporting between $1 and $5 million in sales also reported having no debt outstanding at year-end.

Farms that reported having multiple loans with multiple lenders only represented 6% of farms, however, they had more than 31% of total farm debt outstanding.

Farm debt has increased more slowly than income.  As a result, the ratio of debt to income has trended down from a ratio of five times annual farm income to less than three times annual income in 2007.

Debt repayment capacity utilization (DRCU) measures debt obligations in relation to maximum debt repayment capabilities.  The lower the DRCU number the better.  This measure has decreased from 27% in 2007 to about 18% in 2008.

The Kansas State University Department of Agricultural Economics periodically produces a recap of the high 1/3, mid 1/3 and low 1/3 of various farms in their state.  They just released the latest analysis for corn, sorghum, wheat, soybeans and alfalfa for the three years 2006-2008.  The total number of crop farms reporting for all three years during this analysis was 629 farms.  There are several pages of producer returns, but I thought I would try to recap the major trends that I spotted.  These trends are based upon the differences between the top 1/3 and the bottom 1/3.

CORN

• The yield per acre difference was about 16 bushels for non-irrigated corn or about 18% while the price difference was only 13 cents or 3.6%.  The total average revenue difference was $61 per acre.
• Major costs variances were in fertilizer and machinery with these costs being about $49 lower for the top 1/3.
• The overall net return to management in the top third was $150 more than the bottom third.

SOYBEANS

• Yields for good producers was about 6 bushels higher or about 20%.  The net selling price was about 55 cents higher or about 7%.
• Total revenue was $72 higher or about 31%
• Again, machinery costs were materially lower for good producers at about $30 per acre lower.
• Good producers returned $130 more per acre than the low producers.

WHEAT

• Yield was about 6 bushels higher or about 19% better for the top 1/3.
• Prices were only about 4% higher than the bottom third or 23 cents overall.
• Again, machinery and fertilizer costs were about $46 lower for the better producers.
• Overall, the best producers gained $120 per acre over the bottom producers.

Other trends are:

• In all cases, the lower 1/3 of farms reporting had negative net income for this three year period, with wheat and corn growers being the worst off compared to the other crops.
• For non-irrigated crops, soybeans appeared to be the best return per acre compared to the other crops, however, the difference between returns for each 1/3 was only about $25 plus or minus per acre.
• As we have discussed in other posts, it appears that the best way to increase your return per acre is to minimize your equipment cost per acre.  This is by far the most consistent cost that is almost always higher for the lower third than the top third.

How does your operation stack up.

Chuck Schwartau of the University of Minnesota Extension Service has a great post of how the trend in milk prices has changed over the last several months.  It is no secret that dairy farmers having been hurting for close to a year now and a common statement was “If milk was at $15,00 per hundredweight, we’d be in good shape”.  During this past year, it seemed $10 was much closer than $15.

Well, the trend has changed.  In past few weeks, there have been several opportunities to contract for Class III milk at the $15 range for January and February delivery.  Chuck indicates that milk has only been over the $15 level about 10% of the time, so make sure to take advantage of these prices now.

One option is to use a Put as insurance.  This locks in a floor price, with the price you pay for the put being your insurance premium.  These contracts can be costly, but if you have premium milk, it may be worth locking in the floor price.

A dairy farmer can also use contracting services if they belong to a cooperative.  It appears that profitable dairy farming is here and you need to take advantage of it while you can.

The University of Illinois had a recent October article on how land prices for Illinois had held steady from January 1, 2008 to January 1, 2009.  Prices for both years were slightly more than $4,500 per acre.  This contrasts with prior year increases.

Between 2003 and 2008, the average price per acre grew by $2,120 or about an 87% increase.  According to a surver of professional farm managers and rural appraisers in the state, prices for all of 2009 are still expected to remain steady primarily due to the expectations of cash land rents not dropping this year or next year.

These stable cash rents indicate an average of about $170 per acre in cash rents.  Just in the last three years, this average has gone up by about $38 per acre or a 29% increase.  These high cash rents may be leading to a net return to a farmer of almost zero based on a fully costed operation.  These returns compare to over a $50 per acre return in 2007 and 2008, which were considerable above average.

These low returns suggest that cash rents should drop, however, there is usually a year or two delay in this drop.  If the net return remains low for 2010, then we should expect that cash rents for 2011 and resulting land prices may drop and this drop may be dramatic.

The National Agricultural Bankers Conference is meeting in San Antonio, Texas this week.  Marcia Zarley from DTN/The Progressive Farmer has a good overview of what the bankers are talking about. 

Farmers who are in the dairy and pork industry are really feeling the pinch of low milk and pork prices right now.  Many of the farmers are liquidating their assets now since filing chapter 11 or 12 bankruptcies does not make sense.   Under a chapter 11 or 12 bankruptcy, you mut be able to show income to pay off lower levels of debt.  With the current pricing of milk, they can not show any income left over for debt service.  It makes more sense to liquidate and retain what equity they do have.

Most of the dairy industry experts seem to predict that milk prices in 2010 will average closer to $15 to $16 which is up substantially from the $9-$11 range per hundredweight that they have gotten for most of 2009.

“This downturn has damaged the dairy industry so badly that there will be a certain number of dairymen who will never recover, no matter how good prices are going forward” said Curt Covington, senior vice president and agricultural division credit administrator for Bank of the West in Fresno, CA.  The average California dairy lost about $6 per hundredweight through the first half of 2009.  Contrary to past experience, it is the dairy with about 1,000 cows, older facilities and low debt that have weathered the crisis better than the mega-sized operations.

Eastern Pennsylvania with their large concentration of Amish and Mennonite dairy farmers have been extremely hard hit.  I have visited this area with my sons on East Coast trips and I can say this is some of the prettiest farm county in the whole USA.  These farmers have been under assault by the collapse in global protein demand and high feed costs for the last 24 months.  Many of the bankers are urging their farmers to liquidate the farm land while prices are still high.  They can at least net cash, a home and some savings.  However, for many of these farmers, this is their way of life and that may be extremely hard to do.

The key to survival is getting the dairy’s expenses down as low as possible.  Bankers indicate if you can get those expenses under $15-$16 per hundredweight, you may be able to make to 2010 and beyond.  However, if they can not get it under $17, it is better to liquidate now and save what they can.

There is some glimmer of hope in 2010 for the dairy industry, but the worry is can they get there from here.

I just got back from spending about three days in Kansas City.  During my time there, I was able to get in about 6 hours of driving a John Deere 9660 combine.  It took until about noon for the soybeans to dry up enough to be able to harvest them.

I know when I was growing up that I thought of Kansas being perfectly flat.  However, the area around the Missouri river in the Kansas City area has many hills and the farm that I was harvesting on Monday was one of these hilly areas.  We kept the combine in first gear most of the afternoon and there were a couple of times where we had to kick  in the rear wheel assist to get the combine up the hill.

The beans looked very good for this field.  In normal years, the yield would probably be 30 bushels or less, but this year, the yield looked closer to 40 – 45 bushels per the yield monitor.

I also spent some time at the local cafe for breakfast and most of the farmers were looking forward to good yields for corn and beans this year, however, most of them joked that they would be combining corn after Christmas.  The weather report called for sunshine on Monday and Tuesday and of course, we woke up to a thunderstorm on Tuesday and no combining.

I think the current weather rally in beans, corn and wheat is a very good time to lock in some good prices for this year and next year’s crop. 

All in all, it was great to get to drive the combine, but also nice to get home.