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Would your farm pass the stress test?

When you pencil out 
your farm budgets, 
calculate some “what if” 
scenarios as well

New provincial guidelines for estimating 2017 crop production costs are being released across the Prairies. These guidelines can help producers predict their operating costs, breakeven yields and profitability.

Producers should also be doing a “stress test” to see how much deviation from those predictions the farm can actually bear without losing money, is the advice of Roy Arnott, farm business specialist with Manitoba Agriculture.

In a recent presentation to producers in the Cartwright, Pilot Mound, and Crystal City area of Manitoba, Arnott presented this new concept.

“What I am trying to help producers figure out is how close to the wall are they when they look at their break-even yields as a percentage of their average or target yields to see how much breathing space they have,” said Arnott.

Arnott gave an example based on average yield figures for Manitoba’s Risk Area 5 where he was making the presentation. An average canola yield of 42 bu./ac. is 113 per cent of a breakeven yield of 34.4 bu./ac. with operating and fixed costs factored in. An average yield will give a farmer some profit above that breakeven level. However, “any decline of more than 13 per cent of yield or revenue is going to put you into a negative situation in this scenario,” said Arnott.

For wheat in Risk Area 5, breakeven yield is 50 bu./ac.; the average yield is 58 bu./ac. Producers are already looking at the wall. Soybeans, with a breakeven yield of 27 bu./ac. and an average yield of 38 bu./ac. is at 121.6 per cent — there is a lot more room for yields or prices to move downwards before there is a negative impact. (Keep in mind these numbers only apply that that specific area of Manitoba.)

What if?

Taking the stress test one stage further, producers can also run some “what if?” scenarios to see what effect changes in yields or prices can have on their own farm. “The whole point is to figure out your level of risk. What if prices are down 10 per cent and yields are down five per cent, what does that mean to my farm?” said Arnott.

As Arnott demonstrated, using the same figures in a scenario where prices were down by 10 per cent and yields down by five bu./ac., margins would remain positive over operating costs. Canola returns would be around $115 per acre, wheat around $101 and soybeans $161 per acre.

The picture is scarier when you include operating and fixed costs. Under the same scenario of a 10 per cent price drop and five per cent less yield, on canola the return per acre is negative $4, and wheat is negative $20. Only soybeans maintain a positive margin of $42 per acre under this scenario.

“There are many things that go into this kind of projection but cheaper crops to grow like oats are going to suffer less when things go badly,” says Arnott. “Canola is a more expensive crop but the average yield is over 40 bu./ac. so dropping it back 10 per cent is only a four bu./ac. yield hit. If you make your projections too rosy, you can make it look really good but if you look at it realistically and apply a bit of a stress test, it can be quite different.”

The stress test or sensitivity analysis is built into the 2017 Manitoba COP and is also a part of the MYFARM CROPPLAN Management calculator, which are available on Manitoba Agriculture’s website as a downloadable Excel spreadsheet, and which producers can customize with their own figures and production and marketing scenarios.

About the author

Contributor

Angela Lovell is a freelance writer based in Manitou, Manitoba. Visit her website at http://alovell.ca or follow her on Twitter @angelalovell10.

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