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Corn+Soybean Digest

Caution Flag for Ag Economy

For many Midwest farm operators, 2009 is turning into one of the most stressful years in farming during the past couple of decades. Obviously, crop producers in Illinois, Indiana, northern Minnesota and other areas are facing potential crop losses in 2009 due to late planting and continued heavy rainfall. Even producers who were in areas not affected by the excessive rainfall in May and early June are concerned by cooler-than-normal weather early in the growing season and very dry conditions in some areas of central Minnesota. These early season growing conditions also reduce the likelihood of reaching the corn and soybean yield levels that most producers have achieved the past several years when more favorable growing conditions have existed. However, crop conditions in many areas of the Midwest, such as southern Minnesota and Iowa, have improved significantly since June 10, which should help improve the 2009 crop prospects in those locations.

Crop input costs for 2009 were considerably higher than in 2007 and 2008, and will likely not be much lower for 2010. The cost of anhydrous ammonia and other nitrogen fertilizers, as well as dry fertilizers, had drastic cost increases for the 2009 crop year. Input costs for seed, chemicals and repairs were also marginally higher in many cases. Most land rental rates increased 5-10% in 2009, compared to a year earlier, which followed 15-25% land rental rate increases in 2008. The breakeven cost of producing corn at trend line yields will likely be near $3.50-3.75/bu., or higher for most producers in 2009, compared to $3-3.25 in 2008, and approximately $2.25/bu. as recently as 2006. The current 2009 new-crop price for corn in southern Minnesota, as of June 22, is about $3.50-3.70/bu. at most locations. The breakeven price for soybeans in the Midwest in 2009 is probably near $8.25-8.50/bu., or higher. Current 2009 new-crop soybean prices were still above $9/bu. at most locations, as of June 22.

Beyond corn and soybean production, there are other segments of the agriculture industry already facing financial challenges. The livestock industry is facing serious financial difficulties due to high cost of feed and other input costs, excess supplies, reduced export markets and low market prices. Some hog producers have been losing $25-35/head marketed in recent months, following the breakout of the H1N1 virus and all the media coverage related to the swine industry that followed. Many Midwest hog producers have had negative profits for the past 18 months or longer.

Typical cattle feedlot operators have been losing $50-100/head or more on fed cattle that have been marketed in the last two years. Profits have also been highly negative for dairy producers in recent months, with the 2009 milk prices at levels 30-50% below milk prices during the first half of 2008. Profit margins have also been negative for poultry producers. It is likely that we will see some major liquidation of hog and cattle operations, as well as dairy operations, in the coming months, which could lower the long-term demand for corn and soybean meal. In addition, many crop producers have invested in hog finishing facilities, hoping to use the swine manure as a crop fertilizer alternative, and could be affected by reductions in hog numbers.

One size does not fit all in the agriculture industry, and there are segments of the U.S. ag industry, as well as individual farm operators, that continue to be highly profitable and will likely have a very high profit year in 2009. However there is a growing list of concerns and yellow caution flags signaling that the ag industry could be headed for significant financial challenges in the years to come. Farm operators and others in the ag industry need to start preparing for some of the potential adjustments that could affect their businesses in the coming years.

Editor’s note: Kent Thiesse is a former University of Minnesota Extension educator and now is Vice President of MinnStar Bank, Lake Crystal, MN. You can contact him at 507-726-2137 or via e-mail at [email protected].

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