Take rallying grain prices with a grain of salt (Grain Marketing)
(Editor’s note: John Hall is a professional commodities analyst.)
The November USDA Supply and Demand balance sheet report was released on Nov. 8.
On Thursday, a day before, the grain trade expected a slight reduction in corn harvested acres 81.3 million acres (81.8 million last month), a slight reduction in yield — 167.2 bushels per acre (168.4 last month) giving a slight reduction in total production for corn of 13.604 billion bushels (13.779 last month).
The trade expected a similar trend in beans with a slight decline in acres 75.5 million acres (75.6 last month), a slight decline in yield 46.6 bushels per acre (46.9 last month) giving a slight decline in total production 3,513 million bushels (3,550 last month).
Even though they expected to see lower production, they were also expecting lower demands to off set any reduction in ending stocks. Poor ethanol numbers and slow exports have hampered corn while the delay in the China trade deal has held beans.
Plus, it appears Phase 1 of the U.S.-China trade deal will be pushed off until December.
On Nov. 7, December corn futures closed at $3.79 and had been trending slightly down and sideways the past month. March 2020 corn futures closed at $3.88.
November beans closed at $9.18 and have also traded sideways the past two weeks. January 2020 beans closed at $9.32. July 2020 wheat closed at $5.31.
The one current rising market is pork and beef. Have you bought meat in the grocery store recently?
The USDA Crop Progress Report released on Monday, Nov. 4 had corn harvest at 52-percent complete, up from 41 percent the previous week, but well behind the 77-percent, five-year average for this time. Soybean harvest was reported at 75-percent complete, also behind the 87-percent, five-year average.
Winter wheat planting was reported at 89-percent complete.
It appears we have been fortunate with suitable harvest weather here in the East, compared with the Midwest. Farmers there are also facing a new headache: Finding fuel to dry their grain.
With colder temperatures, propane fuel supplies have been running short. Harvest is expected to pick up over the next couple weeks, but temperatures are expected to fall.
Twenty- to 30-degree highs are expected there along with snow over the next week.
The planting pace in South America is behind previous years due to dry weather. However, they appear to be getting scattered rainfall now.
I have covered several ag finance issues the past several weeks. The last couple weeks I grouped several cash-demand items outside of the enterprise budgets and referred to them as “black hole” items.
They include family living expenses, home improvements, vacations, educational expenses, personal autos, medical and dental expenses, excess labor not used in the enterprises.
I also mentioned some capital payments into that mix and need to expand that discussion before we move forward.
To begin this discussion we must address credit options.
How many credit cards have you been offered in the past year?
In years past, the bank was the soul source of credit.
Now we have equipment dealers, seed dealers, chemical dealers, and other suppliers all offering credit.
This can be good, until you get a bill due that you forgot about.
This is where a cash flow spreadsheet is an essential and very useful management tool.
The cash flow statement is simply a time table for cash movement. For most businesses, a monthly tally of cash inflows and outflows is normally sufficient.
It sounds simple, but it can become your most important management tool.
A major challenge in businesses with seasonal income is managing cash flow.
In traditional crop farming, you borrow operating capital in the spring, and hope to pay it back in the fall after harvest.
For this example, I will assume you will start your cash flow spreadsheet in January.
You would begin by doing your enterprise budgets. Multiply the number of acres , units, etc., for each enterprise you plan to do.
Put the expected costs for each expense category in the spreadsheet in the month it will occur. Now move to harvest and add the expected volume and price received. By doing this, you can visualize the cash flow.
You will be able to estimate your operating note / credit line needs for the year in the spring and then see when you will be able to pay them back.
By placing each enterprise in the spreadsheet first, you can also see the profit potential.
The next step will be to add your “black hole” expenses to your spread sheet. I would assume your estimated family draw would be similar from month to month. You must then add expenses that may be annual or semi annual.
This would include vacations, educational expenses, medical insurance, farm and home owners insurance, taxes, monthly car and truck payments, etc.
Place these expenses in the month that they will likely occur.
You are not done yet. You now need to list and add all your additional payments to the spread sheet.
This would include mortgage payments, machinery payments, line of credit payments, and any other payments not all ready listed.
When complete, this spreadsheet serves as a road map for the coming year.
It starts out as a budget. It clearly points out if the business is viable. It also points out if there are too many black hole expense and/or capital payments that pull cash from the operation.
At the end of each month the manager should replace the budgeted items with the real costs that occurred. As the year progresses, the spreadsheet becomes the actual road map. I believe the cash flow spreadsheet is the most useful management tool a manager can have.
I would be glad to share a simple cash flow spreadsheet I have used in my ag business classes if you are interested — just send me an e-mail.
(Note: I research material from Allendale, DTN, USDA, University Land Grants and other credible sources in compiling this article. It is not merely my opinion, but rather a consensus of experts in the trade. Looking for a marketing coach or someone to discuss strategies with? Contact me at firstname.lastname@example.org, or call 410-708-8781.)
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