What is in this article?:
• Too many growers remember their yields from two, even three years ago, but they don’t remember their debt-to-asset ratio.
• Ultimately, if you want to reach your goals, you need to know your financial progress as well.
• Goals for farm plans must be measurable.
THE INTERACTION OF farm planning and financing too often is overlooked by growers, says Marshall Lamb, research director of the National Peanut Research Laboratory in Dawson, Ga.
Yields trending upwards
Yields for all U.S. commodities have been trending upwards, a great testament to what the research community has done, says Lamb.
“But when you’re doing your farm planning, be very conservative with yields. The biggest mistake I’ve seen is farmers coming in who have never made 3,500-pound peanuts, but they want to put 3,700-pound peanuts into their farm plan. It is nothing but a first step toward failure.
“When you use your average yields and then use a plus or minus 15 percent variation, I don’t care about the plus. If you yield 15 percent over your average yield, chances are your farm plan is going to have a positive projection. I’m concerned more about your negative side. I always like to see farmers go 15 percent below. I don’t think 10 percent is enough.”
We do have better genetics today, says Lamb, but as former University of Georgia Extension peanut specialist John Baldwin always said, “If it don’t rain, it don’t matter.”
Price volatility, he says, is at an all-time high, according to the Chicago Board of Trade Volatility Index, showing the percent volatility in commodities on an annual basis.
Wheat, historically, has a 20-percent volatility. In 2008-2010, it had a 73-percent volatility. Corn has a historic volatility rate of 22 percent, but in 2008-2010, it was 49 percent. Soybeans have a 23 percent volatility on a historical basis, but 54 percent in 2008-2010. Cotton was 17 percent historically, but 42 percent during that same two-year period, says Lamb. This represents a minimum of a doubling of volatility over the last two years for all of these major commodities.
“With peanuts, when we went into the 2010 crop, contracts were about $500 per ton. For people with un-contracted loan peanuts, they were bailing out at $800 per ton.”
Factors behind the high commodity prices include widespread shortfalls; economic growth in developing countries, especially India and China; U.S. biofuels policy; a weak U.S. dollar that makes exports more competitive; and declining investments in agricultural productivity and research, he says.
Years of under-investment in agriculture in developing countries caused stagnant growth in yields while populations continued to grow, says Lamb.
“It was because their governments stopped putting money into ag research and ag development. If cuts in ag research continue to occur in the U.S., is our country going to go from a developed country to a developing one?”
Production costs have increased in 2011, he says, with fuel being projected to be up 16 percent, and fertilizer up 14 percent. For the first time in the history of the United States, farm expenses are forecast to exceed $300 million.
Based on University of Georgia budgets, farmers saw a 7 percent increase in the cost of producing peanuts, says Lamb.
“What is interesting is how the cost of farming corresponds to the recent price spikes in commodities. Inflationary factors affect production costs, and those production costs will continue to increase.”