Crops > Cost & Return > Profitability

Profitable opportunities for 2013

AgDM Newsletter
December 2012

While farmers were concerned with drought in 2012, 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. 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 price minus total costs – that will determine if you made money from your corn and soybean crops.

Consider making consistent pre-harvest sales that align with your 2013 profit margins. While input costs are expected to remain fairly flat, plugging in 2013 harvest prices available today is already providing attractive margins.

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 non-land costs for 2013 will increase less than 5 percent 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 this fall likely.

Cash rent is up slightly

Iowa State University’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. For a rotation of corn following soybeans, there are 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.

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 passed. In Iowa, the deadline is September 1 for one party to serve a termination notice to the other party on a cropland lease.

Increases of 5 to 10 percent in cash rent for 2013 will likely be common on the more productive Iowa land. An upward limit on cash rents is expected depending on the impact of drought on yields and when the lease terms are established.

Many farmers own land and rent land with multi-year 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 crop production costs for growing corn in 2013. These two prices added together for land and fertilizer likely represent nearly 50 percent of the total cost to produce the crop.

Focus on profit margins

The ability to now lock in a cash sales price on a portion of the 2013 crop has 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 (HTA) contracts. Buying put options now means paying more for the time value reflected in the premiums. A strategy might be using forward cash contracts or HTAs 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.

Crop insurance coverage

The use of crop insurance products for 2013 crops is a consideration. 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 percent or greater) is a likely choice for many farmers along with the use of the Trend Adjusted APH Yield Option.

Managing margins is nothing new to row crop farmers, but the increased risk of the 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 will have a negative impact. Demand will be a key factor as to whether corn and soybean prices can climb to the extremely high levels in 2013 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. With expectations of larger planted soybean acres in South America for harvest in February/March of 2013, these high price levels might be a distant memory of another missed opportunity for U.S. growers. Of course, that assumes farmers in Brazil and Argentina don’t run into weather problems.

 

Steven D. Johnson, farm and ag business management specialist, 515-957-5790, sdjohns@iastate.edu