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4 factors that will influence fall profits

Timo-R-E/iStock/Getty Images Cows in snow. red sheds in background
What needs to go right now for a profitable harvest?

My family runs a dairy and beef herd in Northwest Illinois. Every spring, my dad claims he isn’t worried about planting and there’s some truth to it. I know he’s actually more worried about silage quality and tonnage at harvest, especially after increasing rations over the past couple weeks to maintain net energy levels for maintenance and production amid the cold snap (Good news – the girls all thrived in the polar vortex. Cows are amazing animals.).

But that doesn’t stop him from giving me local planting updates every spring like its Kardashian-level drama!

Spring is a critical time for grain farmers. But what needs to happen this spring and summer to ensure a profitable harvest this fall? Here’s a quick look.

Weather concerns

Dry conditions this winter beleaguered winter cereal crops, particularly in the Plains. As of early February, over 64% of U.S. acreage was in some form of dry or drought condition, with that measurement significantly higher west of the Mississippi River. Of course, with 75% of the U.S. covered in snow after the past week, this concern could ease slightly in the coming weeks.

While the trend is largely characteristic of a La Niña weather pattern, it likely won’t be over by the time planting is complete. As of press time, there is a 65% chance dry La Niña conditions will last through April.

But forecasts beyond that largely remain unknown. While continued dry weather would make for a logistical headache during this planting season, early drought damage could somewhat offset lower spring prices amid the anticipated 2021 acreage expansion.

If farmers are forced to delay planting due to dry soil conditions, futures prices could see a supportive boost. Weather forecasts will likely amplify price volatility this spring until crop conditions are more established.

Global supply and demand factors

In recent years, Chinese soybean demand has shifted exclusively between the U.S. and Brazil, depending on the timing of each country’s harvest. While the Brazilian crop was delayed arriving to market, farmers should expect Chinese demand for U.S. soybeans to evaporate, as Brazilian soybean futures traded about $0.50/bushel lower than U.S. soy at press time.

How long will the Brazilian crop dominate world supply channels? This answer is less certain. USDA’s current Brazilian exportable supply forecast of 3.1 billion bushels seems high amid an optimistic 4.9-billion-bushel production estimate.

But that volume is 7.7% lower than last year’s Brazilian soy exports, when local farmers over-exported soybeans to China. This suggests that exportable supplies may run dry in Brazil by late summer if Chinese buying paces mirror those of a year ago as its hog herd returns to pre-African Swine Fever volumes.

Rising production costs

Between the last week of January and first week of February, wholesale UAN prices at New Orleans rose 5.7% to $213.85 per ton. Wholesale urea at the U.S. Gulf is up by 27% since early January. And wholesale DAP prices continue to soar to 8.5-year highs amid ongoing trade disputes with Russia and Morocco.

A cold winter in Europe and Asia consumed natural gas stocks, increasing global production costs of anhydrous ammonia. The recent cold snap in the U.S. also stalled refinery production in the Gulf, sending crude prices back to pre-pandemic highs. Propane prices were already on the rise before the cold snap as the pandemic commissioned a surge of outdoor heat lamps to enable safe social contact in the winter months.

High input prices are likely to be a persistent phenomenon in 2021. USDA’s Economic Research Service forecasts an 8.6% annual increase in production costs in 2021 to $354 billion, the first increase in production expenses since 2014 when factoring in inflation.

Fuel and input prices took off with grain prices in the second half of 2020 and will inevitably spill over into 2021. Many farmers booked forward sales of inputs, while prices remained low late in 2020, which will help maintain decent profit margins in 2021.

Fuel and fertilizer expenses will see the largest cost increases in 2021, up 7% and 6%, respectively, from 2020, according to ERS’ February 2021 forecast. The Saudis announced increased yesterday increased production intentions in February and March, which could send fuel prices this spring back below pre-pandemic levels.

Other revenue sources

USDA’s Economic Research Service (ERS) forecasts an 8% annual decrease in 2021 net farm income due in large part to rising production costs and reduced government payments. It’s highly likely that any form of ad hoc government support will pale in comparison’s to last year’s record-setting $46.3 billion in total government aid, which fueled 38% of net farm incomes.

Plus, with February 2021 marketing year average (MYA) price estimates for corn and soybeans forecast at $4.30/bushel and $11.15/bushel, respectively, the attractiveness of Price Loss Coverage (PLC) revenue insurance is diminished compared to last year. PLC reference prices for corn and soybeans stand at $3.70 and $8.40.

Wheat acres could fare slightly better under the PLC program. The reference price for wheat is set at $5.55/bushel. February MYA price averages estimated a $5.00 average cash receipt for 2020/21 wheat.

The Agriculture Risk Coverage (ARC) program likely favors soybean acres this year, though a farm-level analysis of varying revenue insurance products is necessary to determine the best option for your operation. The deadline to file for 2021 ARC, PLC, and other supplemental insurance programs is March 15.

Higher commodity prices will limit the upside potential of revenue insurance programs. The sharp reduction in government support will require farmers to rely more heavily on operating revenues to cover costs and debt obligations. They will need to execute their marketing plans with more discipline and focus to maximize profit potential in 2021.

Also, no way North West painted that picture. And my dad is already chatting my ear off about planting – but really isn’t worried...

Stay healthy and safe this planting season!

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