Farm Progress

Managing costs continues to be critical with today’s slim profit margins for corn and soybeans.

March 3, 2017

4 Min Read
DEVELOP A MARKETING PLAN: To help make a profit growing corn and soybeans in 2017, you need to know your cost of production, estimate possible profit margins and develop a crop marketing plan.

By Steve Johnson

For the past four years, farms have been reducing crop costs. The “biggest bang for their buck” was focusing on the big three fixed costs: land, machinery and equipment, and family living. On average, most Corn Belt farms have seen a decline in total costs in these three categories. One area is the reduction in land costs, primarily from re-amortizing existing loans and renegotiating cash rental rates.

However, caution should be used when reducing variable costs, or crop inputs, which can lead to a yield reduction. Fertilizer is likely the one variable cost that has declined by almost 20% over the past four years. This is the result of lower retail costs of fertilizer in addition to soil testing, variable-rate application, and volume and early-pay discounts.

Some input prices have declined
According to the report Estimated Cost of Production in Iowa, 2017 from Iowa State University, the total cost of corn and soybean production in Iowa is expected to decline this year. The report shows the cost of corn production dipping by 12% and soybean production falling by 9% in 2017.

Most of these adjustments reflect lower fertilizer and lime prices, machinery costs, and land rents. However, a portion of these costs are expected to be offset by increases in crop protection costs, especially herbicides. Despite higher projected diesel and gas prices in 2017, machinery costs are projected lower than in 2016 due to adjustments in the estimation process to reflect higher operating efficiency.

Total cost per bushel for the midrange yield category is projected at $4.08 for corn following corn and $3.51 for corn following soybeans. The total cost per bushel of soybeans is projected at $9.66 for herbicide-tolerant varieties. These cost estimates are representative of average costs for farms in Iowa. Very large or small farms may have lower or higher fixed costs per acre. These annual estimates are to be used as guidelines to help you compare and figure your own costs for your farming operation.

The accumulated declines in total costs of corn and soybean production since 2013 amount to 19% and 12%, respectively. However, these cost reductions are dwarfed by the 44% and 31% reduction in corn and soybean prices, respectively, between 2012 and 2016.

Fine-tune cost management
Most farm operations are simply fine-tuning their cost management strategies in 2017. In addition, recent harvests have resulted in much dryer corn, thus propane and drying-related costs have declined significantly.

One cost that continues to haunt many farms is related to commercial storage. An additional marketing challenge is the wider basis (cash minus futures) with record yields and large local supplies for both corn and soybeans. Soybean basis at many elevators in Iowa are at such wide levels (70 to 80 under nearby futures) that it impacts the decision when and where to sell these cash bushels. You can expect these same basis concerns this fall and winter, should good growing conditions mean large crops in 2017.

Do you have extra cash?
If farmers have extra cash in 2017, they should be slow to spend those funds. Consider these actions:

• Accumulate adequate working capital (current assets minus current liabilities). Running out of cash could prove challenging.

• Sell both old- and new-crop corn and soybeans by mid-July. It may be the litmus test of row crop farms that make money or lose money in 2017.

Breaking even in 2017
Lower costs of production along with well-prepared and implemented crop marketing plans will likely result in small but positive profit margins in 2017. National average cash prices with normal weather conditions in 2017 would likely mean corn could be $3.50 per bushel and soybeans $9 per bushel.

Corn and soybean yields and total production in Iowa made records in 2015 and then 2016. As a result, the average actual cost per bushel was much smaller than expected for both crops, while revenue from crop sales was higher than projected.

Knowing your farming operation’s cost per acre is critical. Use these costs to solidify your marketing plans and make the necessary arrangements — such as securing operating loans, restructuring machinery or real estate loans, and adding nonfarm income — to make sure the farm business will cash flow in 2017.

Johnson is an Iowa State University Extension farm management specialist. Contact him at [email protected].

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