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Thursday, December 01, 2011

Declining Commodity Prices And High Cash Rents Could Equal Red Ink


Yes, the grain markets have collapsed and no, that does not negate the high cash rent you recently agreed to pay.  While the exuberance of $7 corn and $13 beans may have caused us to think commodity prices would not look back and continue upward, many farmers are now scrambling to revise their crop budgets and wonder how they are going to be profitable.  There are no easy answers unless high prices have already been hedged and the lease agreements are flexible cash rents.

A few months ago many Cornbelt families were planning some nice vacations for this winter, but now they are trying to figure out how to make ends meet with a substantial loss in the farming operation that lower commodity prices have created.  From the recent highs in the commodity market, crop budgets turned from black into a deep red as corn lost $2 and beans lost $3 per bushel.  When that happens profitability is severely challenged.

University of Illinois Farm Management Specialist Gary Schnitkey says 2012 harvest prices are now in the range of $5 for corn and $11 for beans, once a typical basis is subtracted from futures prices.  He says, “Prices changes impact expected return levels for crops, as well as the relative corn and soybean returns.”  Schnitkey calculated the recent price changes and how they would impact a crop budget, using a 182 bushel corn yield and a 54 bushel soybean yield.  He estimated direct payments of $24 per acre and input, or non-land, costs of $508 for corn and $287 for soybeans, but Schnitkey suggests putting in the appropriate numbers for your own operation.

With the $6 corn price and $13 soybean that may have existed when you signed a new cash rent lease in September, corn revenue was $608 and soybean revenue was $439.  Fast forward to current prices of $5 for corn and $11 for beans as projected by 2012 futures with the basis subtracted.  Corn revenue has fallen to $426 and soybean revenue has fallen to $331.  The corn returns that have fallen by $182 per acre and soybean returns that have fallen by $108 per acre have to be taken from either the returns to the operator, which is your profit and family care line item in your budget, or returns to land, which is the cash rent or mortgage payment line item in your budget.

For a farm that has a split rotation of 50% for each corn and soybeans, Schnitkey says that means a reduction of $145 per acre resulting from the declining 2012 futures price between September and November of this year.  Over the past decade, Schnitkey says such a rotation has averaged a $230 per acre return, but he adds, “Except for farms with high cash rents, November prices still suggest a profitable year.”

So, what changes can you make to soften the blow of lower revenue from the recent decline in commodity prices for the new crop?  Schnitkey says, “The difference in corn and soybean profits has narrowed.  This narrowing of returns reduces incentives to plant more corn.  If more corn acres are needed, relative prices between corn and soybeans likely will need to be adjusted (by the commodity market).”

With the volatility in the commodity market, farmers have some opportunity to capture higher prices to help offset the soft prices that the 2012 harvest futures now predict.  Schnitkey suggests one management tip is watching the performance of the market during the month of February when the closing prices are used to set the harvest price guarantees for crop insurance. “Once these crop insurance prices are known, much more will be known about the downside risk farmers face for the 2012 crop,” says Schnitkey.

Declining values for 2012 futures prices have reduced income prospects for the new crop.  With cash rents and crop budgets set for next year, the result may be substantial losses for farms with high cash rents, unless commodity markets return to levels seen earlier in the fall, or during the past summer.  To soften some of the loss, farmers may be able to adjust their crop rotation that would take advantage of the higher bean values in the corn and soybean ratio, and also prepare to take advantage of revenue guarantees for crop insurance if available.

Posted by Stu Ellis on 12/01 at 07:31 AM | Permalink


Hello Stu, Sooner or later this swing is going to have a huge impact on milk prices. Your blog is always so informative. Please include more info specific to dairy producers. I am sure you would tell it like it is.

Posted by: Sharon Squires at December 1, 2011 10:10AM

Let's Try to Put the Bear to Bed The numbers seem to be saying; “Hibernating time is near. Do not get too “beared up” on the 2012-13 corn crop.” For this guess to make it’s way to reality, two corn balance sheet items need some help: Feed and Residual and Exports. The Feed and Residual line has been hurt by what appears to us to be a large negative residual usage number. (Corn is somehow increasing available supplies from unknown activities.) This is not completely new or totally surprising for wheat has had this occurrence in the past but never at this magnitude. Our guess with a downward adjustment for lower cattle and broiler numbers and an increase in wheat and DDGS feeding would have a 5,200 million bushel use with more "normal" residual numbers but 4,200 million bushels with current negative residual. The “chatter” of world wheat production hurting US corn export seems to have merit. World wheat production is near record highs. The world generally does not experience shortages of wheat, as a whole. Wheat use appears to be rather inelastic. The feeding of wheat seems to top out at 19.2% of total wheat use and 16.7% of total feed consumed. The so called “low quality wheat” will need to push prices lower to find a home for the large production. Wheat is projected to miss most of the world’s coarse grain demand. (Corn is 66% to 69% of coarse grain use throughout the world in resent years.) Projected foreign coarse grain demand, after a record foreign coarse grain production, would need 1,500 to 2,000 million bushels of US corn. (The wide difference in the level of demand reflects different levels of worldwide economic activity. No wonder the corn market looks to outside markets, from time to time, to help find the economic direction and thus ag demand. Also note next year’s foreign coarse grain production most likely will not be a record. That lower production would increase US corn exports.) USDA’s conservative handling of this year’s corn production may have some more surprises at each stocks report. The large negative in corn’s residual use might work back into play. The Missouri river flooding does not appear to have an offset in production. The early freeze that hit parts of the Dakotas, Minnesota and Northern Iowa might result in lost production as that grain comes out of on farm storage. The lack of forage, from the drought, may result in more corn silage being made; displacing grain production on those acres. It might take till the September 2012 stocks report to find the answer to these things. (It shouldn’t take that long but resent history shows it just might. More “strange” balance sheets are expected from the “Keeper of the Record.”) The question of the 2012-13 trend line corn yield may be a positive as well. A short term trend line yield would have a mid-point in the 159.0 bushel per acre area. The long term would be around 160.7. These projections are quite a drop from the 163.5 bushels per acre used at the beginning of the 2010-11 marketing year. A total US corn use of 12,610 million bushels (using the high end of estimates discussed above) would have a 50% - 50% chance of seeing a price rationing supply (6.0% of total use as the minimum ending stocks) if 92.2 million acres of corn was planted for the 2012-13 marketing year. Zoodoo, a process that finds answers no matter how wrong, indicates in the current corn price environment there is only a 20% chance of “getting” that many acres planted to corn. A low corn use number of 12,100 has a 25% chance of a price rationing supply with 84.5 million acres planted. The current price environment should be able to find those acres. So prices should respond higher (and potentially a lot higher) if the perceived demand is turned up for the 2012-13 corn crop. The balance sheet numbers may not be that “moving” to most. They do, however, seem to provide a pretty good floor for prices. (Unless foreign wheat and coarse grain production is having a paradigm switch.) Remember the goal is to put the bear to bed. Later “things” might stir up the bull. Jib aka Gibberish PS What are we doing in the financial affairs of “Euro Land”? Can’t the European Center Bank print enough money on its own? Do they need our printing press as well? Will we be wallpapering the bathroom with dollars? This sure is the time of more questions than answers; maybe as it should be.

Posted by: Jib at December 1, 2011 10:10AM

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