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Adjusting to lower crop prices in 2016

In the years prior to 2015, the agriculture community was drawn into a mentality that corn prices of $4-6 to per bushel were the “new normal,” rather than a temporary price upswing. That type of thinking has changed quite dramatically in the past couple years, as local cash corn prices dropped to below $3.50 per bushel during 2014 and 2015, and remain at those levels in early 2016. The projected cash corn price for the 2015 crop, which is now in storage, is expected to remain at fairly modest levels until next summer, and expected prices for the 2016 corn crop are in a similar range. These price projections suggest that farm operators may need to adjust grain marketing plans and risk management strategies for 2016 and beyond. 

The latest USDA report, released in January estimated the U.S national market year average (MYA) on-farm cash corn price for 2015-2016 in a range from $3.30-3.90 per bushel, or an average of $3.60 per bushel, which has changed very little in recent months. USDA is now projecting the U.S. average soybean price for 2015-2016 in a range of $8.05-9.55 per bushel, resulting in an average soybean price of $8.80 per bushel. The 2015-16 USDA price estimates are the expected average prices from September 1, 2015 to August 31, 2016, for the 2015 crop year, and are not estimated prices for the 2016 crop year. Most projections suggest average on-farm grain prices near $3.30-3.80 per bushel for corn and $8-9 per bushel for soybeans in the next few years.

Given the current large levels of projected grain stocks in the U.S., it is unlikely that we will see any significant increases in corn and soybean prices for the 2015 crop that is currently in storage. In the most recent USDA Supply and Demand Report, corn ending stocks were estimated at over 1.8 billion bushels, and soybean ending stocks at 440 million bushels, both of which are at the highest levels in recent years. Any “weather markets” are likely to have greater impact on 2016 new-crop prices.

Breakeven costs

The breakeven cost of producing corn at trend line yields was probably near $4 per bushel for many producers in 2015, and will likely be similar in 2016. The breakeven level for soybeans may have dropped to near $9 per bushel or lower for many producers in 2015, due to the excellent yields in many areas. However, the soybean breakeven level for 2016 is likely to be back above $9.50 per bushel, if yields return to more typical levels. There can be a large variation in breakeven price levels among farm operators depending on yield potential, production expenses, overhead costs, and land costs. Farm operators need to calculate their own costs of production and breakeven levels, in order to have a workable grain marketing plan for the 2015 grain in storage, as well as for the 2016 crop.

Producers need to be ready to sell some of their existing unpriced 2015 grain inventories, as well as to lock-in some market prices on anticipated 2016 production, if pricing opportunities exist. Grain price targets should be based on realistic price expectations, and the calculated crop production breakeven levels referenced earlier. It is best to have targets set to forward price a portion of the expected crop when profit margins exist; however, it is also important to have a strategy to “reduce loss”, if grain prices stay below the breakeven levels.

As part of a good grain marketing plan, it is also important to have target dates that are linked to grain marketing decisions and prices, especially with the unpriced corn and soybeans that are in storage. Historically, in most years with large grain supplies, cash grain prices for old-crop corn and soybeans usually drop by a fairly significant level after July 1. The price targets need to be continually reviewed and adjusted, as grain market situations change.         

TAGS: Soybeans Corn
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