While farmers were concerned with drought in 2012, and they still worry whether they'll get enough rain between now and next spring to recharge subsoil moisture supplies, it's time to look ahead and plan for 2013 crop production and marketing.
"Keep your focus on profit margins for 2013," advises Steve Johnson, an Iowa State University Extension farm management specialist. "Trying to pick the highest price and sell all your crops at that price seems futile after this past summer's experience. Besides, it's net revenue -- yield times prices minus total costs -- that will determine if you made money from your corn and soybean crops."
Consider making consistent preharvest sales with the consideration of your 2013 profit margins, says Johnson. While input costs are expected to remain flat, plugging in 2013 harvest prices available today is already providing attractive margins.
Crop input costs projected up only slightly, profit margins expected to rise
In July, Iowa State University Extension economist Mike Duffy released early estimates for 2013 crop production costs to assist farm operators and landlords in cash rent negotiations. Duffy's expectations are that nonland costs for 2013 will increase less than 5% over those realized in 2012; led by higher land, seed and crop protection costs. Machinery and equipment costs should change very little, with steady fuel costs and less tillage likely this fall.
ISU's cost estimates for producing corn and soybeans are made according to crop rotation and displayed as four different categories: land, crop inputs, machinery and labor. The first table Duffy puts together is for a rotation of corn following soybeans, and three different yield expectations: 160 bushels per acre, 180 bushels and 200 bushels. Costs are then assigned based on these expected yield levels. The cash rent equivalent cost is estimated at $276 per acre, but keep in mind that yield expectations above 180 bushels will likely carry a higher rent.
Increase of 5% to 10% for cash rent is expected on the more productive land
"Many cash rental rates for 2013 are still being established between landlords and tenants, despite the fact that the termination deadline for existing leases has already passed," says Johnson. In Iowa the deadline is September 1 for one party to serve a termination notice to the other party on a cropland lease for the following year.
Increases of 5% to 10% in cash rent for 2013 were thought to be common on the more productive Iowa land. An upward limit on cash rents is expected depending on the impact of the drought on yields and when the lease terms are established.
Many farmers own their land or have multiyear land rental agreements. Most locked in their fertilizer for fall application. Farmers who control the land and have fertilizer prices locked in have already established two of the largest and important crop production costs for growing corn in 2013. These two prices added together for land and fertilizer likely represent nearly 50% of the total cost to produce the crop.
Keeping your focus on profit margins for 2013 is best advice
The ability to now lock in a cash sales price on a portion of the 2013 crop has the potential for a positive margin. With December 2013 corn futures trading over $6.50 per bushel, a harvest cash price of above $6 per bushel would be available at many elevators, processors and river terminals in Iowa. A comparison of crop costs, crop revenue and margin per acre can now be made and most farmers use five-year average yields as opposed to just one year.
Those farmers who are margin managers will likely tie production and pricing decisions together for 2013. Current corn futures prices and cost levels suggest it is possible to lock in profits on at least a portion of the acres to be planted to both corn and soybeans in 2013.
Additional considerations might focus on hedging new crop futures versus committing a larger number of bushels to delivery usually through the use of forward cash or hedge-to-arrive contracts, says Johnson. Buying put options now means paying more for the time value reflected in the premiums. A strategy might be using forward cash contracts for some of your early 2013 sales this fall and winter, then buying put options next spring on bushels you'd prefer not to commit to delivery.
Choose crop insurance revenue protection at higher level of coverage
Also, the use of crop insurance products for 2013 crops should be a consideration, he adds. While the projected price will not be determined until the month of February, the use of a Revenue Protection policy at higher levels of coverage (75% or greater) is a likely choice for many farmers with a depleted subsoil moisture supply in many parts of the Corn Belt heading into spring planting.
Managing margins is nothing new to row crop farmers, but the increased risk of these high crop prices and missed opportunities in 2012 are on their minds. However, those high crop prices led to a decrease in demand for grain -- a very real concern realized in 2012. As corn cash prices approached $8 per bushel in August, demand for corn fed by U.S. livestock producers declined. This demand will be slow to return in the short run and it will have a negative impact. Demand will be a key factor as to whether or not corn and soybean prices can climb to the extremely high levels in 2013 that some analysts believe is possible.
While many farmers will remember the $17 per bushel cash prices available for soybeans in 2012, very few bushels were actually sold at that price level, notes Johnson. With the expectation of larger planted soybean acres in South America, these high price levels might be a distant memory of another missed opportunity. Of course, that assumes farmers in Brazil and Argentina don't run into weather problems.
Three key questions farmers are asking regarding 2013 crop costs and margin estimates for 2013. Here's how ISU's Steve Johnson is answering them.
* What corn and soybean production inputs do you think will see a significant increase for 2013? Land, seed and crop protection costs are the three expenses most likely to rise.
* What should farmers be thinking about and taking action on in planning for the 2013 crop? The likelihood of more soybean planted acres, both in South America and the U.S. Farmers in Iowa and other Midwest states want to get back to planting more soybeans. The world could be flush with soybeans by next fall—unless there are weather problems in 2013 growing season.
* What else should farmers keep an eye on as they plan for next season? The impact of 2012 drought will linger for years. Stay focused on your costs of production and profit margin opportunities. It's still too early to forecast a widespread 2013 drought in the U.S. But some pockets of drought in the Corn Belt are likely as the subsoil moisture supply is still depleted as we move into this winter.
Also, the uncertainty of global economic growth and the large amount of debt that many countries are carrying could limit the upside of 2013 crop price potential despite the current tight ending stocks for both corn and soybeans that are forecast for the end of the current marketing year on August 31, 2013.
NOTE: ISU releases its annual "Estimated Costs of Crop Production in Iowa", FM-1712 Revised, as a printed publication each January. An online version of the publication with the 2012 crop cost estimates is now available on ISU's Ag Decision Maker site www.extension.iastate.edu/agdm as AgDM file A1-20. The version of file A1-20 that will have the 2013 crop cost estimates is usually available in December. The printed version of the publication for 2013 can be downloaded from the ISU Extension Online Store at store.extension.iastate.edu/ when it becomes available in January. Both the AgDM file A1-20 version and the printed FM-1712 publication have spaces where you can insert your own cost estimates for crop inputs and farming operations, to make your own estimate for your farm.
For farm management information and analysis go to ISU's Ag Decision Maker site www.extension.iastate.edu/agdm and Extension farm management specialist Steve Johnson's site www.extension.iastate.edu/polk/farm-management.htm.