AgDM Newsletter September, 2011
 





Steve Johnson2012 crop input costs increase, along with profiit margin opportunities

Steven D. Johnson, farm and ag business management specialist, Iowa State University Extension, (515) 957-5790, sdjohns@iastate.edu



While most producers are concerned with their shrinking 2011 corn crop potential, keeping your focus on profit margins for 2012 is advised. Trying to pick the highest price and sell all your crops at that price seems futile.

Figure 1Besides, 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 pre-harvest sales with the consideration of your 2012 profit margins. While input costs are expected to rise, plugging in 2012 harvest prices available today is already providing attractive margins.

2012 cost estimates and profit margins

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 Sept. 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 percent over those realized in 2011; led by higher fertilizer, fuel, seed and crop protection costs.

Iowa State cost estimates are made by crop rotation and displayed as four different categories; land, crop inputs, machinery and labor. Figure 1 is for a corn following soybean rotation and three different yield expectations: 160 bu./A, 180 bu./A and 200 bu./A. Costs are then assigned based on these expected yield levels.

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 tillable farmland. ISU Extension conducts a cash rental rate survey each spring.

Many cash rental rates for 2012 are still being established between landlords and tenants. An August report from a private 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 percent to 20 percent were thought to be common, depending on when the lease terms were established.

Many farmers own their land or have multi-year land rental agreements. Some have already “locked in” fertilizer for application this fall at prices much lower than those available today. Farmers who control the land and have fertilizer prices “locked in” have already established two of the largest and most important crop production costs for 2012. These two prices added together for land and fertilizer likely represent nearly 50 percent of the 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.

Figure 2The assumption in Figure 2 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 38 percent return above the total costs.

Those farmers who are margin managers will likely 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 usually through 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 percent or greater) should be considered.

Conclusion

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; a very real concern for 2012. While nearby 2011 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 and have a negative impact on 2012 price prospects.