Look Ahead: Manage 2012 Crop Margins

Look Ahead: Manage 2012 Crop Margins

Many farms are now making 2012 crop input decisions, and you can expect more crop price volatility ahead. The need to focus on margin risk management is greater than ever.

Crop prices have increased over 40% for soybeans and 75% for corn since their 2010 lows. Uncertain 2011 production prospects for U.S. crops have added to price volatility, but 2011 should be a profitable year for most farms.

Looking ahead to the coming year many farmers are now making 2012 crop input buying decisions, and farmers can expect to see continued crop price volatility in the year ahead. "The need to focus on crop margin risk management is greater than ever," says Steve Johnson, Iowa State University Extension farm management specialist in central Iowa. He provides the following observations and suggestions for managing crop margins. 

Higher average corn, soybean prices forecast for 2012

In its August 11, 2011 WASDE (World Ag Supply and Demand Estimate) report USDA increased its national average cash corn and soybean price forecasts for the marketing year beginning Sept. 1, 2011. USDA economists expect corn to average in the $6.20 to $7.20 per bushel range, or around $6.70 as an average for the 2011 crop. However, these higher prices resulted in a lowering of expected demand in order to ration the limited supply of the U.S. corn crop both domestically and for export. 

The soybean cash price range increased slightly as beans are expected to average $12.50 to $14.50 per bushel or around $13.50 as a midpoint for the 2011 crop. South America is expected to increase planted soybean acres as a result of these high soybean prices.

Despite the price uncertainty ahead, 2012 crop cost estimates released by ISU Extension economists this summer are expected to increase. Early estimates indicate that non-land costs could increase approximately 15% over those realized in 2011.

Fertilizer is expected to make the largest jump, followed by fuel, seed and crop protection costs. Cash rental rates in Iowa increased 16% for 2011, and some adjustments that are higher for 2012 are underway. Adjustments are expected to continue beyond the state's September 1 farm lease termination deadline.

Increased financial and market price risk are expected

Net profit margins per acre projected for corn and soybeans in 2012 are expected to remain large. The result will likely be increased financial and market price risk for row crop farms as they handle more total dollars. With higher crop input costs, the importance of maintaining adequate working capital (current assets minus current liabilities) is critical. Financing multiple years of crops requires more capital and ag lenders recommend having $300 or more per acre of working capital available to manage uncertain financial risks.

Many farms have 2011 operating costs borrowed and are now making 2012 input decisions. Early discounts for the purchase of fuel, fertilizer and seed this summer and fall mean the need for paying cash more than a year before generating cash from the sale of that crop. This also means increasing counter-party risk as many producers are unsecured creditors to the input suppliers they pay in advance.

Solutions for managing your 2012 crop risks:

1) Know the supplier and merchandisers you're doing business with. Relationships are still key in agriculture and work with an ag lender that understands you and your farming operation. It will be increasingly important to manage cash flow with higher operating funds required that often cover multiple years of crop inputs. The use of crop marketing plans that are successfully implemented will likely become as important as cash flow projections.

2) The use of crop revenue insurance products tied to forward cash and hedge-to-arrive contracts is becoming more important as a strategy to "lock-in" attractive futures prices. Work to "prove your yield" annually on each farm to keep the Actual Production History or APH accurate for crop insurance purposes and increase the comfort level for "selling insurance bushels" ahead.

3) Focus on gross crop revenue and net profit per acre. The old focus was on bushels per acre and price per bushel. This strategy often led to the old adage of "buy low and sell high."  This idea of margin management is becoming more common as producers lock-in 2012 crop prices at the same time they make decisions on 2012 crop inputs. Having a net profit per acre goal for 2012 is the first step to tying together both potential crop production and prices being offered.

Summing up, here are several important points to remember:

* Uncertain 2011 crop production prospects have added to price volatility.

* Estimates are for non-land crop production costs to increase about 15% in 2012.

* Need for farmers to focus on margin risk management for 2012 is greater than ever.

For farm management information and analysis, go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and ISU Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farmmanagement.htm.

TAGS: USDA Extension
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