Managing margins for 2012
By ROD SWOBODA
As you look ahead to managing profit margins for corn and soybean production in 2012, cost of production is increasing and grain prices are likely to decline. Iowa State University Extension farm management specialist Steve Johnson is telling farmers to “know your costs and estimate your own 2012 margins. Separate owned land from rented land when making these calculations.”
Also, “consider using revenue protection crop insurance coverage and the new trend-adjusted yield endorsement to increase your actual production history on your farms,” he advises.
Preharvest marketing strategies might include delivery of a large portion of these guaranteed crop insurance bushels.
“Another advantage of this strategy is that on March 1, the projected prices for revenue protection products are known,” he notes. “Consider selling bushels for harvest or later delivery when December corn futures and November soybean futures are at or above these projected price levels.”
• Crop production costs are up for 2012; grain prices are expected to slip.
• Managing 2012 margins will be challenge for corn and soybean producers.
• Consider using revenue protection crop insurance and preharvest marketing plan.
U.S. farmers are expected to increase planted acres for both corn and soybeans in 2012. While USDA won’t release the forecast until late February, the more than 6.5 million acres that weren’t planted or were flooded in 2011 are expected to be planted. Corn acres are likely to increase to 94 million acres with increased corn on corn. Soybeans are expected to approach 77 million acres, as farms benefit from the drier winter, and more beans are double-cropped behind winter wheat.
Depending on Southern Hemisphere production, global ending stocks in 2012 should increase with normal weather in the U.S. and other areas of the Northern Hemisphere. Together with a strengthening U.S. dollar due to continued European debt concerns, U.S. exports may not return to their 2010-11 marketing-year levels.
Corn and soybean prices for 2012 are expected to be lower than the $6.20-per-bushel national average cash corn price and $11.70 cash soybean price estimates from USDA in the January “World Agricultural Supply and Demand Estimates” report for the 2011-12 crop marketing year.
Weather for 2012 is difficult to forecast. With normal growing conditions in both the Southern and Northern hemispheres in 2012 and increased planted acres, ISU Extension economist Chad Hart is forecasting a national average cash price of $5.25 per bushel for corn and $11 for soybeans for the 2012-13 marketing year, which begins Sept. 1. Prices are weighted averages reflecting all bushels that will be sold over a 12-month period.
ISU Extension economist Mike Duffy has Iowa crop cost estimates for a variety of crop rotations assuming conventional tillage and use of commercial fertilizer. For 2012, he anticipates non-land costs for corn to increase around 5% over 2011.
Leading these cost estimates higher are fertilizer and machinery costs. Total non-land costs of $504 per acre for a corn-following-soybean rotation and a medium yield of 180 bushels per acre are expected.
Assuming a direct payment of $23 per acre, plus 180-bushel-per-acre yield times $5.25 per bushel, equals a $968-per-acre total crop revenue.
The difference provides a non-land margin estimate of $464 per acre. That’s about $120 per acre less than what was realized in 2011 using state average yields of 172 bushels per acre times the $6.20-per-bushel national average cash price.
Calculating breakeven costs
The cash rent equivalent considered for calculating breakeven costs would be $258 per acre for medium-yield situations, says Johnson. For lower yields, it would be $220 per acre, and for higher yields it would be a $296-per-acre cash rent equivalent.
ISU Extension conducts a statewide cash rental rate survey in March to determine cash rental rates for various yield expectations; it will release the results in May. Findings are reported for each county and the state’s nine crop reporting districts.
“Managing the risks associated with compressed profit margins will be a challenge for many corn and soybean producers in 2012,” says Johnson.
“Assuming normal spring planting conditions and normal summer weather may be difficult to imagine,” he adds. “It’s likely new-crop futures prices will be higher in the spring months than were reflected during winter months as they follow the typical seasonal patterns, especially corn.”
More than half of Iowa this winter is deficient in soil moisture. Northwest Iowa is listed on USDA’s Drought Monitor map as being in “severe drought.” Fall rains usually replenish Iowa’s soil moisture reserves in the top 5 feet, but last fall was the driest in 35 years. The situation causes concern for what’s in store for this spring and summer. For the first time in years, farmers may be planting crops in moisture-deficient fields.
Last summer was hot, but Iowa had good soil moisture, notes Elwynn Taylor, ISU Extension climatologist.
Iowa could get a wet spring to give crops a better chance at high yields. But 8 to 10 inches of rain in the driest areas this spring are needed to get proper soil moisture back. It could happen; in the past five years Iowa had an average of 4.3 inches of rain in April and 4.8 inches in May.
But this is a La Niña year, and if the current La Niña weather pattern stays in place through spring, the chance of getting enough rainfall in spring is no more than 1 in 20, says Taylor.
This article published in the February, 2012 edition of WALLACES FARMER.
All rights reserved. Copyright Farm Progress Cos. 2012.