February 19, 2018
Iowa farmers can expect to face another challenging year of managing tight profit margins for both corn and soybeans. Managing costs needs to start with good farm financial records and focus on the big three fixed costs: land, family living as well as machinery and equipment. On average, most Iowa farms have seen a reasonable decline in total crop production costs in all of these categories. This is especially true with the reduction in average land costs; primarily from re-amortizing existing loans and renegotiating cash rental rates.
Iowa State University Extension released in late January their “Estimated Costs of Crop Production in Iowa for 2018.” This publication is available in both PDF and related.
Comparing these latest cost estimates for the major crop rotations — corn following corn, corn following soybeans, and soybeans following corn — over the past five years provides some interesting facts. Overall average costs have declined by 18% for corn, but only about 15% for soybeans since the 2014 highs. During this five-year period, estimated machinery costs declined by 16% for corn and 19% for soybeans. Crop inputs such as seed, fertilizer and crop protection declined by 18% for corn, but less than 1% for soybeans. This small decline for soybean crop inputs was due primarily to the need for increased weed resistance management.
Finding savings on crop inputs
For 2018, most farmers are simply fine-tuning their cost management strategies that have been in place for several years. Farmers should be cautious when reducing crop inputs, however, which can lead to yield reductions. Fertilizer is likely the one variable cost that has declined by almost 20% over the past five years thus having a greater impact on corn cost estimates as compared to soybeans. This is the result of lower retail costs of fertilizer in addition to soil testing, variable rate application as well as volume and early pay discounts.
Livestock operations are using animal manure to supplement fertility needs and reduce much of these costs.
Farmers have improved their recordkeeping and often track enterprise costs by farm fields. They then benchmark costs annually and calculate breakeven estimates and actual breakevens to improve margin and price risk management skills.
Importance of a crop marketing plan
Over the past five years, each year farmers were able to preharvest market corn and soybeans at prices much higher than those received at harvest. Thus, they could have avoided additional storage and interest costs on many of these unpriced bushels. The use of crop marketing plans and the discipline to implement them includes selling the spring futures price rallies that occur almost every year due to production uncertainty caused mostly by weather.
New crop marketing plans include the use of revenue protection crop insurance that guarantees a farm’s revenue by multiplying the farm’s actual production history (APH) times the level of coverage times the spring projected price determined in the month of February. The 2018 prices were $3.94 per bushel for corn and $10.06 per bushel for soybeans, respectively, as of mid-February. Analysts expect the 2018 spring projected prices to be large enough to encourage the preharvest marketing of bushels in the late winter and spring months when futures prices rally above these levels. It is estimated that about half of Iowa’s farmers use this strategy, mostly with hedge-to-arrive contracts to processors and regional co-ops with delivery in the fall and winter months.
Watch for seasonal moves in the market
A rally in new crop December corn futures price occurs nearly every year by mid-March. This is because nearly 85% of the global feed grains are grown in the northern hemisphere when the greatest uncertainty regarding weather and potential crop size occurs. Futures prices for corn usually peak by mid-June.
New crop November soybeans also tend to rally during the spring months, with price rallies that sometimes last into the early summer. However, the majority of the world’s soybeans are now produced in the southern hemisphere. Thus, the ability to capture higher new crop futures prices often occurs in late November through February when uncertainty of southern hemisphere production is greatest.
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