Grain Markets and Production Costs for Corn and Soybeans
Explore the dynamics of grain markets and production costs for corn and soybeans, with insights from expert Paul D. Mitchell. Learn about break-even prices, long-term sustainability, and what farmers can do in the current market scenario.
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GRAIN MARKETS AND COST OF PRODUCTION Paul D. Mitchell Professor of Agricultural & Applied Economics Director of Renk Agribusiness Institute, UW-Madison pdmitchell@wisc.edu 608-265-6514 http://www.aae.wisc.edu/pdmitchell/extension.htm Follow me on Twitter: @mitchelluw
Main Points Cost of production for corn and soybeans had been fairly steady for 2012-2015 2014-2018: market prices are/were below break even prices Projected long-term market prices over the next several years are below break even prices Long-term: this is not sustainable, something has to give Short-term: thoughts on what farmers can do
Source: http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf
Break-Even Price versus Iowa Farm Price -------- Corn Price -------- Year Break Even Farm Average 2006 2.83 3.09 2007 2.96 4.44 2008 3.48 4.13 2009 4.32 3.57 2010 3.40 5.46 2011 3.87 6.35 2012 4.23 6.94 2013 4.31 4.51 2014 4.29 3.70 2015 4.23 3.52 2016 3.99 3.30 2017 3.51 3.25 2018 3.48 3.65* ------ Soybean Price ------ Break Even 7.19 6.73 7.79 9.81 8.67 9.45 10.92 10.95 11.13 10.96 10.67 9.66 9.46 Farm Average 6.58 10.50 10.20 9.52 11.20 12.60 14.40 13.10 9.96 8.91 9.34 9.25 8.62* Source: https://www.extension.iastate.edu/agdm/crops/pdf/a2-11.pdf
History of Break-Even Price versus Farm Price in Iowa Break Even prices about $4.25 for corn and $11 for soybeans for many years Due to negative margins, farmers brought break even down to about $3.50 for corn and $9.50 for soybeans Negative margins continue, so pressure remains to reduce break even prices Corn Soybeans
University of Illinois Cost and Returns Estimates Everything above rent line is what you pay yourself and the land Source: https://farmdocdaily.illinois.edu/2018/09/2019-crop-budgets-suggest-dismal-corn-and-soybean-returns.html (9/18/2018)
Why farmers need to estimate their own cost of production Cost estimates per bu or per acre are single averages Tremendous variability exists among farmers Gary Schnitkey Crop Production Cost and Rotation Decisions http://www.farmdoc.illinois.edu/presentations/2007%20items/ifes2007/Farm%20Economic%20Summit%20 %20Schnitkey.pdf
Long-Term Price Expectations CME Harvest Futures 10/09/2018 Year Corn Soybean 3.65 3.98 4.13 4.20 USDA Farm Price Projections Corn 3.30 3.35 3.35 3.40 3.40 3.45 3.50 3.50 3.55 3.60 Soybean 9.40 9.45 9.45 9.50 9.50 9.60 9.75 9.75 9.80 9.80 8.62 9.29 9.50 9.63 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 USDA Long Term Projections, Feb 2018: https://www.usda.gov/oce/commodity/projections/
Implications Long-term negative margins are not sustainable, break- even prices have been dropping Downward pressure on land rents/prices, machinery, seeds, fertilizer, chemicals, Previously farmers able to income smooth from the 3-4 good years they had, but not any more Farm debt rising as farmers eat equity Source: https://ageconomists.com/2018/09/17/us-farm-debt-continues-its-upward-march/
Farmer Tactics Accept below normal returns to survive for future profits Will the bank let you eat your equity to survive? Better marketing: 1 cent/bu x 200 bu/ac x 500 ac = $1,000 Negotiate lower land rents Reduce variable input costs: fertilizer, herbicide, seed, Sell machinery, keep older machinery, share machinery Use yield monitors to find unprofitable parts of fields and stop farming them Switch to crops with lower cost per acre to plant: soybean, wheat, forage, so smaller operating loans (lenders push?) Grain Crops Management in Low-Margin Years http://ipcm.wisc.edu/blog/2017/03/videos-grain-crops-management-in-low-margin-years/ https://fyi.uwex.edu/fieldcroppathology/files/2017/01/TeamGrainsFactSheet_FINAL_2.pdf
Agricultural Support Industry Tactics Get farmers thinking about lowering their cost of production and doing better at marketing Cost of production tools/spreadsheets to help them know their costs and figure out ways to cut costs Apps/tools we looked at Marketing clubs and advice for good marketing services Facilitate custom work or machinery sharing to spread machinery fixed costs over more acres
