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Rebound in crop prices changes strategies

Tom J. Bechman grain bins
FILL WITH CORN: If you use grain bins, the market currently is signaling to fill them with corn rather than soybeans.
Adjustments in USDA numbers tighten ending stocks, especially for soybeans, and shift the cash rent outlook.

To say that crop prices and the economic outlook for Indiana farmers have resembled a roller-coaster ride since March might be the understatement of this topsy-turvy year. When Jim Mintert and Michael Langemeier analyzed the economic outlook following USDA’s October crop report on Oct. 9, they reached far different conclusions than when they analyzed the first crop report in August. The changes are largely positive but include caution about what might be ahead.

“We were surprised by some numbers — especially by how much soybean stocks are projected to tighten,” says Mintert, a Purdue University Extension agricultural economist and director of the Purdue Center for Commercial Agriculture. Langemeier is associate director and an ag economist.

Here are key observations, coupled with some advice and words of caution:

Market says sell soybeans now. When deferred futures prices are lower than the nearby futures contract, which was the case for beans after the October report, there is negative incentive to store and hold for later sale. Besides prices you could lock in being lower, there are also storage and opportunity costs involved if you hang on to grain, Mintert says. Unless fundamentals change, the best bet appears to be selling a large portion of your soybeans soon.

Storage incentive for corn develops. While the corn price improved from August to mid-October, the increase was smaller than for soybeans, Mintert observes. USDA’s projection of ending stocks is lower than in earlier reports, but stocks aren’t as tight as with soybeans.

“It appears there could be opportunities to store corn and sell on forward contract, or practice storage hedging for later delivery and make a profit for storing above storage and opportunity costs,” Mintert says.

Expected downward pressure on cash rent evaporates. “This is a dramatic shift,” Langemeier says. “For our case farm in west-central Indiana with a corn-soybean rotation, in midsummer we were barely showing $100 net return to land, with average cash rent around $240 to $250 per acre. Based on mid-October prices, net return to land for 2020 is now nearly $250 per acre, equaling cash rent.”

The net return to land includes government program payments and income from two rounds of Coronavirus Aid, Relief and Economic Security Act payments related to COVID-19 stimulus programs.

At the same time, Langemeier doesn’t expect rising prices will pressure cash rents to go up, either. “If you look at 2021 expected prices and returns, the picture is not so rosy,” he says. “Long-term pricing indicates the market thinks soybean prices will drop in 2021, perhaps because higher prices will fuel more planted acres. If there are payments from the farm bill programs in 2021, they will likely be much lower.

“Flexible cash rent for 2021 may still make sense if a landowner wants the opportunity to participate if prices increase.”

Options exist for using extra income from better prices. If you end up with reasonable cash flow from better crop prices, you should first evaluate your working capital situation and consider rebuilding your working capital, which means you would have more cash or liquid assets on hand, Mintert says.

“The other option, if working capital is adequate, is to consider updating equipment,” Langemeier says. “Working capital ratios are much lower than the long-term average. With the outlook for 2021 income not looking as bright, it might make sense to build back working capital now and be prepared for tough times again.”

Comments? Email tom.bechman@farmprogress.com.

 

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