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Corn+Soybean Digest

Higher Prices Don't Mean Higher Profits

The 2005-06 corn and soybean crops are one for the farm profit record books. Some farmers in west-central Illinois and southeast Iowa reduced yields and therefore reduced profit potential last year, but for 80% of the nation's corn and soybean farmers, these five factors combined to create record profits:

  • Yields were excellent and above many farmers' expectations.

  • Most corn farmers locked in record LDPs in the fall of 2005 when low corn futures and wide basis levels resulted in a 48-53¢ corn LDP in almost every Corn Belt county. Some farms with 200 bu./acre yields were able to harvest over $100/acre in LDPs.

  • The usual seasonal rally in the cash corn and soybean markets was even larger than usual. From the harvest lows in the fall of 2005, corn futures rallied by over 30¢/bu., and basis levels improved by 20¢/bu. creating a 50¢ rally in the cash corn market. Soybean futures rallied by over 50¢/bu. and basis levels improved by 20¢/bu. creating a 70¢ rally in the cash market. Many farmers who had locked in large LDPs were able to sell cash corn at 10-20¢ over the county loan.

  • Lower interest rates and good profits allowed farmers to minimize interest payments on farm operating loans. Usually every dollar that a farmer can save in interest expense can go right to the bottom line.

  • Lower fuel and drying costs saved farmers a lot of expense in 2005. Commodity prices have moved higher in 2006, but so have energy and other input costs.

For the 2005 corn and soybean crops, the combination of high yields + LDP + the seasonal rally + low interest costs + low input costs = record bottom line profits.

Looking ahead to 2006 and evaluating these same five factors, I can see that even with higher corn and soybean futures, it will be difficult in most of the Corn Belt to match last year's bottom-line profit:

  • Yields — the extreme mid-July heat suggests a national corn yield of 2-4 bu./acre below last year. The soybean crop is made in the month of August. However, based on the current soybean crop ratings, national yields are likely to come in 1-2 bu. below last year. With lower yields it's difficult even with higher prices to project the same dollars as last year.

  • LDPs are likely to be small or non-existent in the fall of 2006. I'd estimate the odds of getting an LDP on 2006 soybeans at less than one in three; and the odds of getting an LDP of 10¢ or more on corn at less than one in five. Higher corn and soybean prices this fall will also reduce the counter-cyclical payments you'll receive on the 2006 crop in 2007.

  • The much hoped for post-harvest rally will be more difficult to project into the spring and summer of 2007. A lot of the potential bullish news is factored in at the current price level. The wild card will be corn and soybean weather and crop prospects in South America this winter.

  • Interest rates are higher, and with higher input costs most farmers are now borrowing more money at a higher rate. Many producers' 2006 interest bill is likely to be 30-50% larger than in 2005.

  • Higher gasoline, diesel and drying costs will again increase the costs of running your tractors, combines and trucks. Fuel costs on most farms will run 30% higher than last year.

For 2006 the combination of lower yields + no LDP + higher futures prices + higher interest costs + higher energy prices = a reduction in bottom line 2006 corn and soybean profits.

What to do:

  • Use a disciplined scaled-up marketing plan for the 2006-07 crops. Higher prices will only help you make money if you sell when these higher prices are offered.

  • Talk to your suppliers on a strategy to lock in inputs.

  • Land and rent costs are much higher — be cautious.

Remember that higher prices do not guarantee higher profits and that commodity prices and farm profitability are cyclical.

Alan Kluis is the owner of Northland Commodities LLC, based in the Minneapolis Grain Exchange, Minneapolis, MN. You can contact him at [email protected] or call toll free 888-345-2855.

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