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Corn+Soybean Digest

Boom Or Bust For 2009?

It's hard to believe that in June you could sell corn on the December 2008 futures for $7.96 and it looked like the market still hadn't found a top. Higher prices for crop inputs weren't much more than a topic of conversation at the time.

When the same contract hit $5.05 the second week in August and crop inputs continued to rise, profits for the 2009 crop became less of a sure thing. All of a sudden, it was profit margins, not margin calls, that threatened marketing opportunities.

While crop prices now appear to be looking for a bottom, it's crop inputs that can't seem to find a top. Fertilizer and seed are leading the price parade.

“For corn, fertilizer costs in 2009 are projected at $215/acre, an increase of $97 over the 2008 projected level of $118/acre,” says Gary Schnitkey, University of Illinois ag economist. “For soybeans, fertilizer costs in 2009 are projected at $98/acre, a $53 increase over 2008. Those costs are based on projected prices of $1,000/ton anhydrous ammonia, $1,000/ton for diammonium phosphate (DAP) and $900/ton for potash.”

Just for comparison, Schnitkey points out, at $1,000/ton for anhydrous ammonia, its price will have increased $632/ton since 2003, a 171% increase in six years. DAP prices ($1,000/ton vs. $249/ton) will have increased 302% in that six-year span and potash will have increased 456% ($900/ton vs. $162/ton.)

ELITE HYBRIDS COSTS could tag $100/acre in 2009 and soybean seed could reach $70/acre, according to Bruce Erickson, Purdue University director of cropping systems management.

“More and more value continues to be delivered through seed in the form of increasing yields and crop protection traits. And, with higher grain prices, the value of that is naturally higher,” he says.

“List prices for some of the highest-performing, most fully equipped hybrids will be over the $300 mark for next year's planting, and some soybeans will be over $50/unit. Allowing for discounts and seeding rates, seed budgets for many for 2009 will be $80-100 for hybrid corn and $50-70 for soybeans.”

Moe Russell, Russell Consulting Group, Panora, IA, points out that a three-way stack used to be the Lexus of the industry; now the top hybrids feature eight-way stacks. “You pay a premium for those hybrids, but when I put together crop budgets for farmers using those hybrids, yield is much less of a variable than it used to be. Where I used to pencil in a projected yield of 175 bu. on high-producing corn ground, I'm comfortable now projecting 190 bu.”

While seed and fertilizer will be the biggest cost drivers in 2009, other inputs are up as well, and the result is a 25% increase in crop budgets for both corn and soybeans, according to Schnitkey. “Crop insurance is up. Power costs (machinery and fuel-related items) for corn are projected to increase $12/acre to $88/acre. For soybeans, power costs are projected at $75/acre, an increase of $9/acre,” he says. “Machinery depreciation costs have increased, too, as recent higher prices have prompted some farmers to update and expand their machinery complement.”

Purdue's Erickson says that last year's bigger increases came in the cost of nitrogen fertilizers and fuels, affecting the cost of putting in a corn crop relatively more than soybeans.

“Those inputs are not expected to repeat the same magnitude of increase, but other inputs such as phosphorus and potassium, seed and some herbicides will cost more,” he says. “So, the cost of putting in a soybean crop is projected to increase more than corn. Our preliminary budgets show variable costs for rotation corn increasing by 29% compared to 40% for soybeans.”

If you want to make yourself feel better, you can play with the numbers on different industry crop-production spreadsheets. While Schnitkey and Erickson predict soybean growers will spend close to $100/acre for fertilizer, Russell pencils in just $18 and figures a lot of his clients won't even spend that. “Most guys in rotation don't apply fertilizer for the soybean crop in the growing year,” he says.

(The university budgets take into consideration the value of the nutrients removed, regardless of whether the farmer replaces them with fertilizer, notes Erickson.)

Conversely, you might want to pencil in Schnitkey's cash rent projection of $200/acre. For ground that can produce 190-bu. corn, others figure it's going to cost you at least $50 more/acre to get that quality of ground rented.

The best option, of course, is to know your own numbers and get them nailed down and as soon as you can. “We've got growers who locked in anhydrous at $775 early in the summer,” says Russell. “We encourage growers to lock in as many input costs as they can — with one caution: You don't want to pre-pay for a lot of product if you don't have a good financial handle on the company you're buying it from. Some of these companies had to meet huge margin calls this summer and that has weakened their financial position.”

RUSSELL IS MOST concerned about the commodity price side of the equation. “We could be in trouble if corn prices continue to follow oil,” he says. “Some oil industry analysts are predicting oil will drop below $100/barrel in 2008 and below $80 in 2009. If you take 80% of today's futures price you're looking at $4.40 corn. If that's the case, guys are negative for 2009, or breakeven at best.”

Again, it depends on whose numbers you're looking at. Illinois' Schnitkey figures a $3.80 breakeven corn cost. Russell figures it's at least 50¢ higher than that and has some clients with breakevens closer to $5. Those figures include land costs.

“I'm using a $5 corn price for 2009 when we're putting together budgets for our clients,” Russell says. “I'm hoping that we do better than that. Farmers need to be ready to take advantage of price opportunities when they can, or it could be a bad year for them in 2009. If corn futures would get back to $6.50, I think growers need to be very aggressive with sales.

“The volatility in the market has caused a lot of confusion and some guys are starting to lose their focus,” he says. “But, instead of wringing your hands, you need to keep a cool head, know what your margins are and take a profit when it presents itself. More than ever, you have to know when to pull the trigger.”

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