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Managing Agricultural Risks in Iowa: Strategies and Insights from a Crop Markets Specialist

Discover insights on managing agricultural risks in Iowa from an associate professor and crop markets specialist. Learn about risk management strategies, federal crop insurance, crop prices, revenue guarantees, margin maneuvers, government programs, and effective communication tips.

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Managing Agricultural Risks in Iowa: Strategies and Insights from a Crop Markets Specialist

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  1. Risk Environment for Agriculture Ag. Credit School Ames, Iowa June 14, 2016 Chad Hart Associate Professor/Crop Markets Specialist chart@iastate.edu 515-294-9911

  2. Iowa Corn Prices vs. Costs

  3. Iowa Soybean Prices vs. Costs

  4. Iowa Corn Costs Overall 52% increase 72% 18% 54% 27% Source: AgDM A1-21

  5. Iowa Soybean Costs Overall 59% increase 72% 9% 51% 61% Source: AgDM A1-21

  6. Crop Prices for the Next Decade Source: USDA-ERS

  7. GDP Growth Source: USDA-ERS

  8. U.S. Crude Oil Prices Source: USDA-ERS

  9. World Corn Markets Source: USDA

  10. Crop Insurance • One of many risk management strategies • Traditionally set up to protect farmers in times of low crop yields • Now offers coverage for low prices • Available on over 100 commodities

  11. Causes of Loss for Iowa Corn, 1948-2010

  12. Causes of Loss for Iowa Soy, 1955-2010

  13. Federal Crop Insurance

  14. Federal Crop Insurance:Total Acres Insured

  15. Corn Acres Insured in 2015 87% of all corn acres are insured

  16. Soy Acres Insured in 2015 89% of all soybean acres are insured

  17. 2015 Corn and Soy Coverage Levels

  18. PLC: Corn Payment Potential Reference Price = $3.70 per bushel Payment Yield = 150 bushels per acre Notes: PLC payments are made on 85% of base acres.

  19. ARC-CO: 2015 Corn Revenue Guarantee Benchmark Revenue = $851.69 per acre ARC Revenue Guarantee = $732.45 per acre Notes: Revenue Guarantee equals 86% of Benchmark.

  20. PLC pays, ARC does not Neither pay Both pay ARC pays, PLC does not

  21. Margin Maneuvers • Negotiate lower land rental rates • Explore variety choice (seed cost vs. seed benefits) • Soil test and apply required fertilizer • Examine and control other input costs (pesticides, herbicides, etc.) • Be more aggressive marketing on rallies • May look to limit losses, as opposed to capture profits • Singles & doubles vs. Home run strategy

  22. Margin Maneuvers • Fully utilize government programs • ARC-CO, PLC, crop insurance • Break price into futures and basis components to capture improvements in either • Put the pencil to paper and calculate storage benefits/costs • Will a traditional seasonal price swing cover storage costs? • What are futures prices telling you about storage opportunities now? • Remember, Rome wasn’t built in a day • It took us awhile to get into this situation and it will take awhile to get out.

  23. Revenue Mix Source: USDA-ERS

  24. Revenues vs. Costs Source: USDA-ERS

  25. Farm Incomes Source: USDA-ERS

  26. A Multi-dimensional Issue Source: Takle et. al., 2013

  27. Communication is Key • With your clients and your supervisors • No one wants an unwelcome financial surprise • Fewer surprises mean fewer conversations with regulators • But it does require a few more conversations with clients

  28. Understanding Clients • What’s a “typical” year for them look like? • Production • Cash flow • Marketing • How far are they along their career path? • Beginning • Mid-career • Transitioning out • Do you see changes in the farm or in the client? • Is the client willing to discuss the changes?

  29. Summary Ag Stats Source: Federal Reserve of Chicago

  30. Summary Ag Lending Stats Source: Federal Reserve of Chicago

  31. Iowa Loans Source: Hanson, 2016, IDoB

  32. Examiner Experience Source: Hanson, 2016, IDoB

  33. Thank you for your time!Any questions?My web site:http://www.econ.iastate.edu/~chart/Iowa Farm Outlook:http://www.econ.iastate.edu/ifo/Ag Decision Maker:http://www.extension.iastate.edu/agdm/

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