Managing Tight Crop Margins In 2014

Managing Tight Crop Margins In 2014

Profit margins for corn and soybean production in 2014 will be tight; marketing will be critical.

It's time to plan ahead for 2014 crop production, input buying decisions and estimating potential crop profit margins. For the past several years, with record grain and livestock prices and favorable crop insurance revenue protection levels, farming was profitable. When prices were high, it was easy to achieve high margins without actually knowing your breakeven costs. As a result, some farmers have gotten lax on spending habits.

CAUTION AHEAD: With relatively high corn and soybean prices the past three years, profit margins were a given. But along with those higher prices, crop input costs moved up, too. Now crop prices have dropped significantly, while cost of production remains relatively high. As you prepare 2014 crop budgets, keep in mind that knowing your costs lets you make marketing decisions with more confidence.

Farming is never easy but when you can sell corn for $6.50 and soybeans for $14, it allows people to not think about costs as much; they're willing to take the price quoted for seed or fertilizer or chemicals or machinery. Or, they may bid higher for cash rent to add extra acreage when a nearby farm becomes available.

These are things you may not be able to afford in 2014, cautions Iowa State University Extension farm management specialist Steve Johnson. "We are entering a period when we'll need to have a budget and know our breakeven cost of production," he says. "Knowing your breakeven helps you get a handle on input costs. Ask yourself, is this a necessary item we're spending money on? Is it making us money? Is it adding to our efficiency? Also, knowing your breakeven cost of production helps you make better grain marketing decisions."

Steve Johnson provides the following observations and information to help farmers estimate potential crop profit margins and plan for 2014

Cost estimates for most inputs should remain flat, with the exception of fertilizer, with a decline of 15% to 20%. That's good, because cash corn prices have dropped by 35% from the 2012 average cash price and soybeans by more than 10%. You can expect 2014 crop margins to remain tight and final yields and next year's cash price to go a long way in determining profitability.~~~PAGE_BREAK_HERE~~~

Remember, its net revenue -- yield times price minus total costs -- that will determine if you made money on your 2014 crops. Plugging in harvest prices available next fall as currently reflected in new crop futures shows the potential for some very tight profit margins. These estimates assume average yield expectations.

Making preharvest sales during the spring and summer months of 2013 proved profitable again. Use of revenue protection crop insurance provided a peace of mind in making those cash sales when futures were above the 2013 spring projected prices for crop insurance of $5.65 per bushel for corn and $12.87 per bushel for soybeans. Those early sales generated fall and winter cash flow and prevented storing a large percent of your crops unpriced. Guessing widespread weather problems and the highest corn and soybean prices proved futile once again for most farmers.

ISU has released 2014 crop cost estimates that indicate minor changes in costs, with the exception of fertilizer. Land costs are not expected to drop significantly, however flexible cash leases (adjusted for yield, price and costs) are beginning to replace some of the high fixed cash rent leases.

Comparing potential profit margins by crop rotation
ISU Extension's release of 2014 crop cost estimates for producing corn and soybeans are made according to crop rotation and displayed as three different categories:

* soybeans following corn with an average yield of 50 bushels per acre

* corn following soybeans with an average yield of 180 bushels per acre

* corn following corn with an average yield of 165 bushels per acre.

The accompanying chart "2014 Crop Cost Estimates" illustrates the current ISU cost of production estimates for the different crop rotations. Keep in mind land costs are removed to determine a return to land and management. Conventional tillage is used to make rotational comparisons. The average cash price forecast for the 2014-15 marketing year is $4.50 per bushel corn and $11 per bushel soybeans. This assumes a slight drop in U.S. planted corn acres in 2014, an increase in soybean acres, and normal production weather in both the southern and northern hemispheres.

Managing Tight Crop Margins In 2014

Next, take a look at the other three charts accompanying this article. They show the non-land costs, crop revenue and margin estimate for corn after soybeans, soybeans after corn, and corn after corn. Among these rotations, the potential profit margins expressed as a return to land and management is:

* $280 per acre for soybeans following corn

* $325 per acre for corn following soybeans

* $210 per acre for corn following corn.~~~PAGE_BREAK_HERE~~~

Managing Tight Crop Margins In 2014

Managing Tight Crop Margins In 2014

Managing Tight Crop Margins In 2014

Focus on the controllable factors when managing margins and risk

While much is still not known about the 2014 growing season, now is the time to plan ahead. Farmers can't predict with a high degree of accuracy the yields or prices for next year's crops. However, the decisions they make regarding input buying and revenue risk management such crop insurance coverage are determined long before spring planting.

When updating their financial statement, many farmers will realize that their net equity gains have slowed or are turned negative for 2014. Work with your primary lender to determine corrective actions which might include:

* Buying select crop inputs ahead and receiving cash discounts

* Partnering with others to receive bulk discounts for crop inputs

* Sharing farm machinery and/or selling underutilized equipment

* Leasing equipment vs. purchasing new

* Eliminating non-essential purchases

NOTE: Iowa State University releases its annual "Estimated Costs of Crop Production in Iowa," FM-1712 publication in early January. The online version is file A1-20 that can be found on the ISU Ag Decision Maker web site.

Both versions have spaces where farmers can insert their own cost estimates for a variety of decisions reflecting different crop rotations, tillage practices, machinery costs, and inputs planned.

For farm management information and analysis visit Ag Decision Maker; ISU farm management specialist Steve Johnson's site is available here.

TAGS: Extension
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