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Tuesday, February 07, 2012

What Are The Dynamics In 2012 Profitability?



 

January crop deliveries have been made, so you have some cash in the account to pay for inputs, income taxes, and a cash rent payment possibly.  But with much more grain unpriced, what are the dynamics driving price trends and when will the next opportunity be for making some grain sales?  Much of the answer to that question is keyed to your breakeven price and your investment in the crop.

The non-land costs, which are estimated by Iowa State University, are $4 for corn and $9.67 for soybeans.  But any profits need to be used for any land payments and a return to labor and management.  Iowa State marketing specialist Chad Hart says the current market would allow a $1.50 margin on both corn and soybeans.  And while he says that is good, it is also highly volatile and looking at his pricing charts for grains, it is apparent that prices are variable.  And he says the 2012 planting season will bring two major dynamics in the grain market, and neither is a domestic issue that your congressman can solve.
1) The global economy has been wrenching the markets for many months, particularly European debt issues, Chinese inflation, and slow job growth in the US.  Hart says demand has been friendly to both corn and beans, particularly with ethanol for corn and exports for soybeans, but neither has been dependable.  Additionally, he says global stocks are relative high with 30% for wheat, 24% for soybeans, and 15% for corn.
2) Global weather is creating some questions about the future supply, says Hart.  La Nina continues to be an unwelcome in-law, and has been camping in the fields of South America for it growing season.  The impact there has helped US crop prices as spring planting nears.  Domestically, soil moisture levels point to potential lower yields and increased price support.
Hart says the opposite impacts of both have whip-sawed the market and he expects that to continue along with price volatility since neither issue will soon be resolved.  Just like price patterns in 2011, Hart says price patterns in 2012 will reflect higher prices in the summer and fall However, he says commodity prices for the new crop will still allow profitability, based on production cost estimates of $4.41 for Corn and $10.96 for soybeans.  That allows about $1 per bushel for each to pay rent and feed your family.

Hart says he expects 2012 to be a profitable year, but also one with great swings in prices and potentially dramatic, which increases the necessity of risk management tools.  He says, “Crop insurance is always a good risk management tool, but given the current weather situation and outlook, it may be doubly important this year. With the chance for lower yields also comes the likelihood for higher prices, so marketing tools that leave upside price potential should be attractive for 2012 as well.”  One way to achieve that is with options, using puts to establish a price floor and capture possible higher prices.

Summary:
2012 shapes up to be a volatile market year with prices driven down by the global economy and driven up by global weather issues.  Prices remain profitable for both the old crop and new crop, but the new crop should also be accompanied by a crop insurance policy due to the chance for lower yields.
 

Posted by Stu Ellis on 02/07 at 11:37 PM | Permalink

Comments

$400.00 plus rent can not be paid with $1.00 per bushel on 200 BPA Reggie: Very true. That is why 2012 will require some sharp pencils to make budgets work with high rent costs. ~Stu

Posted by: Reggie Dowell at February 8, 2012 8:08AM

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