Big Bushel Bailout?

Big Bushel Bailout?

Farmers who priced grain early will be rewarded in 2014

Here in Illinois there's only one thing wrong with the corn crop: It's late. Even so, barring an early frost, we're headed for one of the biggest yields in history.

Every growing season is different, but this one will be defined as the one that was nearly perfect: Rain when we needed it, little if any pollination stress, and cooler temps all summer. We'll always have blips here and there but in general, there are big numbers coming in the grain wagons.

That said, we're about to see what great weather and a big crop might do to – or for - your bottom line, with grain prices near four year lows. Will big bushels bail out your bottom line this year?

Two big corn harvests in a row moves trend yield back where it belongs.

That's a question University of Illinois Ag economist Gary Schnitkey mulled over in a recent post at the University's Farmdoc website.

If you followed traditional risk management strategies and priced some corn at breakeven or better prices when the market offered them earlier this year, you're starting to look pretty smart right now.

In his exercise, Schnitkey uses two prices: $4.14 per bushel, representing sales opportunities earlier this year, and $3.70, representing more recent prices. (Clearly there's a lot of time left to market the 2014 crop at potentially higher prices, so take this exercise with a grain of salt.)

Now let's look at those big yields. Given a 220 BPA yield and $3.70 corn price, gross revenue equals $819 per acre (see Table 1).  This $819 revenue includes $814 of crop revenue and $5 of ARC payments.  For this type of farmland, non-land costs are estimated at $588 per acre. The average cash rent for this quality farmland is near $295 per acre. 

Depending on sales price, big yields will likely push profits over the top this fall.

In this scenario the farm is in the red ($883 per acre total costs compared to $819 per acre gross revenue) by $64 per acre. That does not compare favorably to an average farmer return of $220 per acre from the 2006-2013 time period, notes Schnitkey.

Suffice to say, your bottom line in this scenario looks a lot better if land costs are closer to $200 per acre.

Now, let's say you had corn sold at $4.14. The numbers look better – even with these high variable and fixed costs. That price brings your revenue up to $916 per acre, or $33 per acre in the black.

If your costs are the same but your yields are an eye-popping 250 BPA, then you're smiling all the way to the bank.

Dangerous precedent

There's a good chance big yields will in fact save most farms' bottom lines this year. But I worry that landlords will see big yields and use them as justification for high cash rents for 2015.

We're not likely to see such big yields three years in a row. If we do, corn prices will likely have a $2 in front of them by next fall. That would leave you needing yields even higher than 2014 to break even.

Not likely to happen.

At some point you need to protect future net income by taking a hard look at both fixed and variable costs – things you can control. It may mean taking a pass on some expensive cash leases, trading or sharing equipment, and taking a hard look at seed and fertilizer rates and costs.

Big yields may bail out bottom lines in 2014, but 2015 will present a different and bigger challenge to margins.

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