Thursday, July 21, 2011
2012 Crop Costs and Prices: Will You Farm For A Profit Next Year?
You probably are aware that fertilizer prices will be considerably higher for this fall. Based on prices and profits, the cash rent you pay for next year will probably have to be more. However, if those two items rise too rapidly, 2012 could shift from being a profitable year to one of tight margins, or potential losses. That warning comes along with a 25% chance that commodity prices will be under $4.40 for corn and $10.25 for beans. Can you make a profit with those prices?
Good yields (if the heat doesn’t cook the corn) and good prices await many Cornbelt farmers who have the luxury of farming good soils. However, good farms could face financial challenges with the 2012 crop due to the trends being seen for input costs and commodity prices. That is the contention of University of Illinois ag economist Gary Schnitkey who has assembled crop budgets for the coming year. His estimates of production costs, yields cash rents, and net returns will give pause to a farmer whose operation could be on the financial edge if everything doesn’t go “just right.”
Schnitkey’s budgets are based on revenue of $5.50 for corn and $13.00 for beans, which are lower than today’s prices, but are based on futures prices and expected basis for 2012. He used trend yields for good farmland which estimated corn yields in the 195 range for next year, and 56 bushel beans. Adjust your situation if need be, but do that will all other costs and revenue.
Your non-land costs rise to $513 per acre for corn and $301 for beans. That includes a price increase up to $165 for corn and $56 for fertilize for beans. Along with seed and crop protection chemicals calculate your break-even price On Schnitkey’s work sheet he uses a $230 per acre cash rent charge along with the 2012 input costs, resulting in a break-even price of $3.81 for corn and $9.48 for soybeans. While those may seem high he says ag economists also are expecting some years when the corn price is in the low $3 range and beans are in the low $8 range.
So far, cash rents have been kept low, but that will have to be the case is there is to be profitability beyond the current year. Schnitkey says if 2011 cash rents were at the proper level, then there should not have to be any upward adjustment for 2012. He says at some point commodity prices will have to decline and so will cash rents, if farmers are going to continue farming. Those that don’t decline with commodity prices will reflect a farm undergoing a hard financial transition.
2012 is a profitable year on good farmland, if commodity prices, input costs, and profit margins are close to what Schnitkey calculates. He says for 2012 net returns are $269 for corn and $136 for beans, both of which are dependent on commodity prices. He says if prices get as low as what the options market says they could be, then margins will be erased and financial losses will be recorded. He says, “At this point, CME options prices suggest that there is a 25 percent chance of cash prices in the fall of 2012 being below $4.40. CME options prices suggest a 25 percent chance of cash soybean prices in the fall of 2012 being below $10.25. These prices would result in much lower returns and likely cause financial stress on some farms, particularly those that have high cash rent levels.”
Summary:
For 2012, farming good productive land will be profitable, if costs are controlled and commodity prices remain near current trends. However, if cash rents rise much higher than 2011 and commodity prices fall to lower levels of potential range, profitability could be erased and losses would be accrued.
Posted by Stu Ellis on 07/21 at 12:00 AM | Permalink