Thursday, December 01, 2011
Declining Commodity Prices And High Cash Rents Could Equal Red InkTweet
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
Posted by: Sharon Squires at December 1, 2011 10:10AM
Posted by: Jib at December 1, 2011 10:10AM