The corn profit picture for 2012 isn’t quite as rosy as 2011, but the marketplace could still offer very lucrative returns for growing corn this season, says Chad Hart, Iowa State University agricultural economist.

“In Iowa, we’re projecting season-average prices to range between $5.30 and $5.40/bu., and we’re projecting inputs costs to be about $4.40/bu.,” says Hart. “So, if that holds true, the market in Iowa will be offering 90¢-$1/bu. in profits to grow corn for 2012. Returns from growing corn in Iowa last year have averaged about $1.60/bu., but that corn is still being sold.”

Historically, anything over zero is a good return for corn, because government subsidies have typically provided adequate profit incentive, even when the market has not, adds Hart. He notes that from 1972 to 2008, the return on a bushel of corn averaged -7¢/bu.

In comparison, soybean profit margins look “a lot tighter than corn this year, probably in the range from zero to a 25¢/bu. return,” says Hart. “However, soybeans are a much lower-input-cost crop, and there’s less risk to grow them in a hot, dry year.”

Farmers considering planting more corn after corn, rather than corn in rotation with soybeans,  should weigh the benefits the rotation provides versus the revenue each crop might deliver separately, he adds. “In Iowa, we generally see about a 15-bu./acre yield reduction by moving from a corn-soybean rotation to a corn-following-corn rotation,” says Hart. “However, some soils are better at producing continuous corn than others. If it’s worked for you in the past, it might work for you again. If you’ve had problems with it in the past, you might see problems this year, especially if weather conditions are dry, and soil conditions in the western part of Iowa are currently pretty dry.”

Nearby corn prices in the U.S. are presently being shaped by dry Argentina weather that is reducing South America’s crop production potential, says Hart. Yet, in a few months, corn prices will likely be shaped largely by how many acres analysts think U.S. farmers will put into corn.

“The big potential market mover will be the USDA’s perspective planting report that is scheduled to be released at the end of March,” he says. “So far, I haven’t heard an analyst project anything less than 94 million acres will be planted to corn in 2012. Last year, farmers planted 92 million acres of corn, and most analysts are saying there will probably be 2-3 million more corn acres being planted.”

Downside risk

The most likely downside risk to both corn and soybean profits stems from the potential for the general economy to weaken significantly in 2012 and bring commodity prices lower, similar to what occurred in 2008, when corn prices dropped from $7/bu. to $3.50/bu., cautions Hart. “With economic issues in Europe, China and the U.S. still hanging over the marketplace, the potential for corn to drop to $3/bu. is still there,” he says. “However, the upside potential for corn is also still pretty strong, with ample concerns over drought and a potentially inadequate crop in the U.S. to meet global demand. So, due to the high volatility in the market, $7 corn is also possible for 2012.”

Ethanol could also play a role in the supply and demand for 2012 corn. “Right now, the big ethanol subsidy, the volumetric ethanol excise tax credit, is gone,” says Hart. “That was a 45¢/gal. tax credit for ethanol, or a 4.5¢/gal. tax credit for E10 (10% ethanol) blends, which is the ethanol blend in almost all U.S. gas.”

Still, even without this significant tax credit, ethanol blending margins continue to be profitable, he points out. “Data over the last two to three years shows ethanol can be competitive as a fuel, either with or without tax credits,” says Hart. “Plants are still producing ethanol at a pretty good clip. It’s still the cheap product to blend with gasoline, and so things are still looking pretty good for the ethanol industry.”

The Renewable Fuel Standard (RFS) calls for 13.2 billion gallons of ethanol to be blended with gasoline in 2012, compared to 12.6 billion last year, he adds. Hart notes that the ethanol industry has always been able to meet and exceed the RFS blending level targets.