As we end 2015, many farmers are focusing on cash flow strategies for 2016, wondering what the future holds for land values, cash rental rates, and 2015 ARC-CO payment prospects, as well as being concerned how various ag policy issues may play out in a Presidential election year. Following are some items that are likely to be on the forefront in the agriculture industry for 2016 :

Land Values

Land values in most areas of the Midwest have declined by 10-20 percent from the peak land values in 2013 and early 2014; however, there were still some very strong localized land sales during 2015. A recent, highly credible, land value survey from Iowa State University, released in early December, showed that average land values in Iowa decreased by 3.9 percent during 2015, which followed a decline of 8.9 percent in 2014. This was only the second and third time since 1999 that Iowa farm land values decreased from one year to the next. The 2014 decline was the largest annual decrease since 1986.

According to the survey, the average land values dropped by about 6-8 % North Central Iowa from November, 2014 to November, 2015, which followed a decline of 10-12 percent a year earlier. Land values have remained surprisingly strong in many portions of Northwestern Iowa. Land value adjustments in Southern Minnesota have likely been similar to the Northern Iowa land value survey results, with slightly stronger land values in Southwest Minnesota, compared to other portions of the region. Continued low grain prices and reduced farm profitability in 2016, along with any increases in farm real estate interest rates, could cause land prices to decline even more by the end of 2016.

2015 Farm Program Payments

When 2015 ARC-CO payments for corn and soybeans are made in October, 2016, there will likely be a significant variation in the payment levels from county-to-county. This variation in 2015 ARC-CO payments will depend on the final 2015 county yield, expressed as a “% of the county benchmark (BM) Yield”. Counties in Minnesota and Northern Iowa are likely to have a wide-range in 2015 ARC-CO payments for both corn and soybeans, with many counties getting some 2015 ARC-CO payment, especially for corn. The estimated 2015 ARC-CO payments for corn and soybeans will be different in many areas of Illinois, Indiana, and Missouri. These States likely had much lower county yields in 2015, and a will likely have a lower “% of BM Yield”, which is likely to result in many counties receiving the maximum, or close to the maximum, 2015 ARC-CO payments for corn and soybeans.

Producers should contact their local Farm Service Agency (FSA) office for details on the farm program. Kent Thiesse has written an information sheet titled : “Estimating 2015 Corn and Soybean ARC-CO Payments”. To receive a free copy of this information sheet contact kent.thiesse@minnstarbank.com or call (507) 726-2137.

Tight Cash Flow Margins in 2016

It appears that profit margins in crop production in 2016 will be much tighter than in recent years. The combination of lower projected market prices for corn and soybeans in 2016, together with nearly steady input costs for seed, fertilizer, and chemicals, will limit estimated potential returns over direct expenses and land costs, at average crop yields. A major variable in profit margins for crop producers will be land costs, both land rental rates, as well as real estate loan payments on purchased land. Another key variable in breakeven levels in crop production are loan payments on capital investments such as farm machinery, facilities, etc. Tight profit margins for 2016 are also likely to exist in all segments of the livestock industry.

As we plan ahead for very tight margins in corn and soybean production for 2016, it is a good time for farm operators to review all aspects of a crop operation. Obviously weather conditions can account for a large portion of the crop yield variation; however, there are other more controllable crop management factors that may also contribute to yield differences. Looking for ways to reduce or control direct and overhead expenses, including land rental costs, is also a key to improving profit potential for crop producers. Decisions that are made on crop marketing and crop insurance, as well as potential payments from government farm programs, can also have a significant impact on potential profitability for 2016.

Farm Management Strategies for 2016:

• Know your “cost of production”  This is a key for making grain marketing decisions, analyzing where to lower production costs, and other management decisions.
• Optimize crop insurance and farm program options. These programs are key component of a good risk management plan for crop producers.
• Negotiate land rental contracts with Landlords. There may be opportunities to lower some very high land rental rates, or to convert to a “flexible lease” agreement.
• Sharpen your grain marketing skills. No matter what level grain prices are at, there is usually a large difference in the average price that farmers receive for their corn and soybeans.
• Use caution with capital investments. From 2010-2014, many farm operators invested extra income into farm machinery upgrades, facilities, and land purchases; however, much more caution and analysis is required during these times of tighter profit margins.
• Pay attention to family living expenses. Many farm families increased their level of family living expenditures during the higher profit years, but now may need to look for ways to scale-back their non-farm expenses.
• Communication is key during difficult times. Sharing farm-related issues and financial matters with business partners ag lenders, farm advisors, and family members is extremely important during challenging times in the farming business.

Note — For additional information contact Kent Thiesse, Farm Management Analyst and Vice President, MinnStar Bank, Lake Crystal, Minnesota. Phone: (507) 381-7960); Email: kent.thiesse@minnstarbank.com; Web Site: www.minnstarbank.com