Costs Increasing For 2012 Crop Production

While there's a lot of concern about the shrinking 2011 corn crop, keep your focus on profit margin for 2012, not picking the highest price. Margin will deliver the greatest profitability.

Published on: Sep 2, 2011

Much concern has been made in recent weeks about the decreasing size of the 2011 corn crop and how high prices may go. Keep in mind that the amount of money you make on both the 2011 as well as the 2012 crops will be determined by your profit margin.

"Don't just focus on picking the market top. It's your yield times prices minus costs, or the profit margin, that will determine if you made money from your corn and soybean crops," says Steve Johnson, an Iowa State University Extension farm management specialist.

"Making consistent pre-harvest sales as the market moves toward high prices should work again as a strategy for the 2012 crop, along with managing the rising cost of inputs to produce the crop," says Johnson. "That's what you should focus on doing--to help ensure a good profit margin."

Figure 1.
Figure 1.

Johnson offers the following observations and explanation of how 2012 crop input costs are increasing, along with profit margin opportunities for crop producers.

Take advantage of profit margin opportunities for 2012

ISU Extension economist Mike Duffy released early estimates for 2012 crop costs in July to assist farm operators and landlords in cash rent negotiations. Iowa has a September 1 farm lease termination deadline to make changes for the following crop year, much earlier than most states.

Duffy's expectations are that non-land costs for 2012 will increase approximately 15% over those realized in 2011; led by higher fertilizer, fuel, seed and crop protection costs.

Figure 2.
Figure 2.

 

ISU cost estimates are made by crop rotation and displayed in four categories; land, crop inputs, machinery and labor. The bar chart accompanying this article indicates three different yield expectations: 160 bu./A, 180 bu./A and 200 bu./A. Costs are then assigned based on these yields. These particular cost estimates are for a corn-following-soybean rotation for conventional tillage. Note that increasing yield expectations also carry a higher cash rent equivalent – values that range from $222 to $296 per acre.

Using the middle column of this bar chart (180 bu./A corn yield) would have a total cost estimated at $796 per acre or $4.42 per bushel. Note that the cash rent equivalent used was $258 per acre and serves to help estimate the cost for producing 180 bu./A corn in 2012. The marketplace will set the Iowa cash rental rates on rented ground.

Cash rent is expected to rise for 2012 crop production

Most cash rental rates for 2012 are still being established between landlords and tenants. An August report from a survey of professional farm managers in Iowa, Minnesota and Illinois found that $400 cash rents will be commonplace in 2012 on highly productive land. Increases of 10% to 20% were thought to be common, depending on when the lease terms were established.

Many farmers own their land or have multiyear land rental agreements. Many have already "locked in" fertilizer for application this fall at prices much lower than those available today. Farmers who have the land and fertilizer "locked in" have already established two of the largest crop production costs for 2012. These two costs added together likely represent nearly 50% of their total costs.

The ability to now "lock in" a cash sales price on a portion of the 2012 crop has the potential for a positive margin. With December 2012 corn futures trading over $6.65 per bushel in late August, a harvest cash price of $6 per bushel is available at many elevators, processors and river terminals in the Corn Belt. A comparison of crop costs, crop revenue and margin per acre can now be made.

 

The assumption in this bar chart is that cash corn prices average $6 per bushel. Using the 180 bu./A yield estimate and a direct payment from the government of $23 per acre, the crop revenue totals over $1,100 per acre. The margin is calculated by subtracting the total costs of $796 per acre from this $1,100 crop revenue. The difference is over $300 per acre and more than 30% return of the total costs.

Managing margins is your key for 2012 profitability

Those farmers who are margin managers will tie production and pricing decisions together for 2012. 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 corn in 2012.

Additional considerations might focus on hedging corn futures versus committing a larger number of bushels to delivery via the use of forward cash or hedge-to-arrive contracts.

Also the use of crop insurance products to be used in 2012 should be a consideration. While the projected price will not be determined until the month of February 2012, the use of revenue protection (RP) at higher levels of coverage (75% or greater) should be considered.

Conclusion: Beware of increased risk with high prices

Managing margins is nothing new to row crop farmers, but the increased risk of these high crop prices is that they might lead to a decrease in demand, and that is a very real concern for 2012. While nearby corn futures prices approach $8 per bushel, you can expect demand to decline, especially the demand for corn fed by U.S. livestock producers. This demand could be slow to return in the short run.

The federal government's decision to possibly curtail the mandated Renewable Fuels Standard (RFS) is of concern, especially with the threat of global food inflation. What if global recession and reduced government expenditures expand in Europe and the U.S.? The commodity fund investors who are "long corn" would likely protect their profits and futures prices would fall much lower than those available today for the 2012 crop.

Farmers need only remember the summer of 2008 as record profitable grain prices for the 2009 crop were offered in June of that year. Many farmers "locked in" higher-priced fertilizer that summer, but they failed to sell a portion of their 2009 corn crop. They mistakenly thought crop prices would continue to increase. The result was a large loss in potential income. That 2009 crop then provided a record yield at harvest, and cash prices did not recover to those same price levels until 2011 with smaller 2010 and 2011 U.S. corn yields.

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