As I work with grain and livestock producers this winter and review their 2009 financial progress, I notice a striking difference between corn and soybean growers and hog, cattle and dairy producers throughout the Corn Belt. It is really a dichotomy in financial progress and profitability, or lack thereof, for the two groups.
Generally, corn and soybean producers had a great 2009; a number of clients netted a $200+/acre profit. On the other hand, livestock producers have had their working capital, overall equity and financial stability severely hurt.
Grain producers need to remember the biggest corn user in America is the livestock industry. With every difficulty there is opportunity, and I see potential for corn and soybean growers who have had great income the past two years to look for opportunities to develop alliances or partnerships with livestock producers who have suffered losses.
In many cases, livestock producers still have very viable businesses, but have depleted their working capital. As a result, their lenders are requiring the lines of credit be paid down to limit exposure and bring ratios into line.
What criteria should be reviewed in developing these business arrangements and how might they look?
The first question to ask: “Can I trust this individual?” If that answer is positive, then move forward; good win-win relationships can be developed. If that answer is negative, all the legal agreements one could imagine won't make the arrangement work.
HOW MIGHT THESE arrangements look? If the hog producer has owned hogs and fed them in his own buildings, he could contract-feed for a grain farmer who would own the pigs and provide the feed. To compensate the hog owner for his facility, time and work, the grain producer would pay an agreed-upon contract fee, much like hog integrators do. A grain producer could buy the feeder pig, lock in corn and soybean meal prices and forward sell the finished hog and lock in a nice profit
I have seen examples recently where a hog producer cannot do this — even though he can lock in a profit — because his lender needs the line of credit reduced to limit exposure. This could be a short- or long-term arrangement between the two parties, and a win-win for both.
PROFIT GAP WIDENS
Another observation I've had this winter in reviewing grain producer financials is a significant increase in variability of profit per acre. One major agricultural lender in Iowa indicated it is seeing profit-per-acre ranges from $50 to $220.
Our associate Jeff Appel from Normal, IL, made me aware of a study the University of Illinois conducted from its FBFM data that analyzed income from approximately 900 farmers. It showed over $100/acre variance in income per acre from the top third of producers to the bottom third. This is proof that the profit gap is getting wider among farmers and will continue to do so.
Moe Russell is president of Russell Consulting Group, Panora, IA. Russell provides risk management advice to clients in 34 states and Canada. For more risk management tips, check his Web site (www.russellconsultinggroup.net) or call toll-free 877-333-6135.