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Ag Economist Urges Farmers to Lock in Profit

Ag Economist Urges Farmers to Lock in Profit
High profit margins won't last for ever.

Mike Boehlje gets excited when he makes a point, especially if he is very passionate and confident about the point. When the Purdue University Extension ag economist addressed farmers and retail ag dealers at the Indiana Certified Crop Advisers Conference in Indianapolis last week, there was no doubt about how he felt farmers should react to today's high commodity price selling opportunities for both the 2010 and future 2011 crop.

"Sell it! Grab it! Lock it in!" he said. "Profit margin is the highest it's been in our Purdue Crop budgets for 2011 except for one other time in history. That was three years ago when the ethanol boom drove expectations.

"That means that 99% of the time, you've settled for lower margins than what you can lock in right now. I'm telling you, it makes no sense to hold out thinking you might get that other one percent. Now is the time to lock in these margins and be happy that you had the opportunity to do so."

Boehlje noted that contribution margin is around $400 per acre in the Purdue budget for average land, rotational corn. Contribution margin is defined as revenue minus variable costs. The contribution margin then must cover land costs, machinery payments, labor and family living expenses, if the farm is covering those.

For many farmers, that means what's left, around $200 per acre, in the budget is pure profit. The budget was based upon fertilizer prices which are only slightly lower than those current today, and a grain price slightly under what you could lock in today. The budget for 2011 was prepared in October 2010.

"We're talking $200 per ace pure profit, folks," he emphasized. "When you've only had one other chance in history to do that good or better, you've got to seize the moment. Lock that in while you can."

You might point out that the South American soybean crop isn't yet known, and weather may have affected it. Or you might argue that if La Nina persists into spring, as some now think it might, the risk for drought is up for next year. Sever droughts are set up in the fall, and this fall featured below normal precipitation, even after the rains of the last couple weeks of November.

Still, Boehlje notes that there are factors on the other side that could affect trade, world demand and many other things factoring into the market price. At the end of the day, his advice is the same—go for it now!

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