By Brent Gloy and David Widmar
(Brent and David originally wrote this piece for the January 2018 issue of Successful Farming, available here.)
With budgeting and planning for 2018 underway, many producers are considering what might be in store for 2018 – and beyond. As the saying goes, the best-laid plans often go awry. In many cases, unknown factors outside of farmers’ control – such as weather or commodity prices – can significantly impact their bottom lines.
While you don’t know the future, you still must make plans and run your businesses in an uncertain world. This leaves you in a bit of a quandary about how to make decisions and estimates for the future. There are a variety of approaches you can use, but by focusing on the right questions, thinking critically about them, updating ideas as more information becomes available, and thinking about what is causing changes to the forecasts, you can make better decisions.
Following are six key questions you should consider and evaluate critically. In considering these questions, the answers should be made probabilistically. In other words, instead of answering yes or no, consider the probability of the event happening. For example, you should consider your answers to these question like rain forecasts. Then make some notes about how you arrived at these forecasts and make a point of revisiting your views frequently.
1. WHAT IS THE PROBABILITY OF A SUMMER GRAIN RALLY?
In recent years, the threats of dry weather and below-trend yields have sent commodity prices higher during the summer months. What do you think the probability is of a summer rally occurring in 2018? More specifically, what would you assign the probability of the December 2018 corn futures contract exceeding $4.25 before August 30, 2018?
How likely you believe a rally will happen this summer can impact your decisions on how to market grain currently in the bin or potential preharvest marketing plans for 2018 crops. Focusing on a specific price level can help you think about your marketing plan and price targets that you hope to achieve. In 2017, many producers found that their price targets were never achieved and, as a result, did not sell commodities at prices that were potentially profitable. As the year unfolds, keep track of your views and how confident you are about different price levels becoming a reality.
2. WHAT IS THE PROBABILITY OF ANOTHER DECLINE OF AT LEAST 1 MILLION WHEAT ACRES IN 2018?
Wheat acres have tumbled in recent years, down 16% (or nearly 9 million acres) from 2015 to 2017. Looking to the rest of 2018, the budgets and economic outlook for wheat have not improved much. At current levels, many producers, especially in the Great Plains, will likely look for alternative cropping options. Even if you do not produce wheat, this is important because these acres will likely lead to acreage and production of corn and soybeans.
Based on the USDA’s June 2018 Acreage Report, what is the probability of U.S wheat acres being fewer than
45 million acres (a 1-million-acre reduction from 2017)?
3. HOW WILL CORN AND SOYBEAN ACRES SORT OUT?
Acreage decisions are key to production. Wheat acreage will set the tempo for total acres of corn and soybeans. In 2017, combined corn and soybean acres exceeded 180 million, up significantly from the then-record 160 million combined acres reached in 2008. In November, the USDA forecast that corn and soybean acres would each land at 91 million acres.
When thinking about corn and soybean acres, three questions surface.
- -What is the probability of combined U.S. corn and soybean acres exceeding 182 million acres in 2018? (Based on the USDA’s June 2018 Acreage Report.)
- -What is the probability of corn acres increasing by more than 1 million acres in 2018? (Based on the USDA’s June 2018 Acreage Report.)
- -What is the probability of soybean acres increasing by more than 1 million in 2018 (Based on the USDA’s June 2018 Acreage Report.)
4. WILL YOUR FARM’S FERTILIZER EXPENSE BE LOWER IN 2018?
As you prepare for 2018, fertilizer prices are one of the biggest uncertainties on the cost side of the ledger. It is also possible that changes in fertilizer prices will impact the budget outlook and planting decisions for fertilizer-intensive crops such as corn or wheat.
Early data suggest fertilizer prices could be lower in 2018, especially for nitrogen. Lower fertilizer prices have been an important source of improvement for budgets. Fertilizer expense for an application of 180-70-70 peaked from 2011 to 2013 at nearly $160 per acre. Last spring, this fertilizer rate would have cost about $100 per acre; it is poised to be again lower in 2018. More recently, however, fertilizer prices have turned higher.
What’s the probability of your total fertilizer expenditures falling 10% from last year’s levels?
5. WHAT WILL FARMLAND VALUES AND RENTAL RATES BE IN 2018?
While the national average for U.S. farmland in 2017 was 1% lower than highs reached in 2015, state-level declines have been more significant. Changes in farmland values have been modest in Indiana and Illinois (nearly 5% lower than highs), but declines have been more significant in Iowa (-7%), South Dakota (-11%), Nebraska (-12%), and Kansas (-13%).
What is the probability of farmland values in your state declining 5% in 2018? What is the probability of a 5% decline from 2017 to 2019?
Beyond farmland values, cash rental rates play an important role in crop budgets and producer returns. Just as changes in farmland values have varied by geography, so have changes in crop rental rates.
What is the probability of your farm successfully negotiating lower rental rates in 2018? What about lower rates for 2019?
6. WHAT IS THE PROBABILITY OF YOUR FARM REACHING ITS FINANCIAL GOALS?
After considering costs of production and expected revenues, establish your financial goals for 2018. These goals should be realistic given the tight margins many will face in 2018, but they should serve as a guide for meeting your farm’s financial needs and opportunities. Are there things you can do to increase your chances of achieving success? What are some of the factors that might reduce your odds of success?
Once these goals are established, what is the probability of your farm reaching these goals in 2018?
Wrapping it Up
After forming expectations about these questions, write down and document your forecasts. Take time to revisit these forecasts (or expectations) as events and conditions change. Like an updated weather forecast, you should adjust your forecast, as key indicators and other factors change throughout the year. For example, news of a short crop in South America could significantly change the probabilities of some of these factors happening.
Beyond the satisfaction of looking back in early 2019 to reflect on how successful your forecasts were, the process of documenting expectations and revising these expectations as conditions change is an important step in improving the decision-making process. More specifically, being able to reflect on where shortcomings or successes existed helps improve planning and the decision process for 2019. This will help you identify things that you will want to monitor and improve in the future. Using a structured process should help you make better decisions and be more successful in the future.