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Wednesday, January 11, 2012

To Maintain 2012 Profitability, Manage Your Margins


How will you remain profitable in 2012?  Live off 2011 revenue?  Depend on your spouse’s job in town?  Plan for an inheritance?  With lower commodity prices and higher input costs, the secret to profitability in 2012 is managing your margin.  You still have the opportunity to be in charge of that, unless your cash rent commitments are overboard.  So let’s see how margin management can be achieved.

Quite a few organizations have been picking agriculture’s collective brain to determine what will be planted this year, and indications point to more corn and bean acres.  USDA’s forecast will be March 30 with the Planting Intentions report, so the most comprehensive data is a long way off.  Iowa State University economist Steven Johnson, in his monthly newsletter says he knows of 6.5 million acres that will be added to the mix, and those were the flooded acres of 2011 which did not get harvested.  If 94 million acres of corn and 77 million acres of beans are planted, with the typical double-cropping, the additional acreage could keep prices soft.

Johnson says global ending stocks will be a key to price trends for the year, and those will include the La Nina-challenged corn and beans in South America, but with normal US weather Johnson says stocks could rebuild and with the weaker Euro exports will not be as hefty.  Compared to the current marketing year price estimates of $6.40 corn and $11.60 beans, any type of normal weather in the Northern or Southern Hemisphere, could push those prices closer to $5.25 and $11 in the 2012 marketing year.  Flag those prices.

On the topic of crop production costs, Johnson’s colleague Mike Duffy at Iowa State provides estimates non-land costs to rise about 5% for 2012 compared to 2011.  Fertilizer and machinery costs will lead the way, pushing corn production costs to $504 per acre for a corn and soybean rotation.  For soybeans, non-land costs are expected to rise 15% over last year because of fertilizer, seed, and machinery costs, with a $290 per acre investment expected.  Flag those costs.

With an optimistic yield of 180 bushels, the 2012 price average will provide $968 in revenue with direct payments, and with an optimistic 50 bushel soybean yield and direct payments, the revenue projection is $573.  When deducting costs from revenue, basic margin is $464 per acre on corn and $283 on soybeans, with land costs yet to be covered. Johnson says the medium yield estimates should be based on an average cash rent of $258 per acre.

The result is a compressed profit margin says Johnson, some $150 per acre less for corn than 2011 and $50 per acre less for soybeans.  And he says such reduced revenue will be a challenge for many producers in the coming crop year.  He says know your costs and estimate your own margins, which will be different for owned and rented land.

How can you manage the margins?  Johnson says there are several: 
1) Watch for marketing opportunities in the spring when rallies can frequently produce the highs for the marketing year. 
2) Use revenue protection crop insurance to protect your revenue and pay for inputs. 
3) Insurance options for the year include the opportunity to adjust your APH upward with the trend yield adjustment option. 
4) By March 1, the spring guarantees for revenue insurance will be known and additional costs of production can be managed.
5) Pre-harvest marketing strategies include delivery of a large portion of the covered bushels.
6) Consider selling with Dec corn or Nov beans are at or above the projected price levels for the insurance guarantees.

For the 2012 crop, market prices will be lower and production costs higher, compared to the 2011 crop.  That means margins will be thinner and will have to be managed to maintain profitability.  Tools that can be used include more strategic marketing, use of crop insurance to guarantee revenue, and sale of grain at levels that will guarantee a profit, although it may not be at highs for the marketing year.

Posted by Stu Ellis on 01/11 at 12:59 AM | Permalink

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