Higher crop prices followed closely by higher costs and risk
WILLMAR -- With local cash corn and soybean prices hovering around $4.75 and $11 per bushel, and futures contracts rising over $5 and $12, it is not hard to assume that farmers are profiting nicely from each bushel of grain they sell.
However, the costs of raising Minnesota's two biggest cash crops are rising just as fast, or perhaps even faster, than the prices offered at the local elevator or on futures contracts on the Chicago Board of Trade.
Statistics from the University of Minnesota Center for Farm Financial Management show an estimated projected cost of $488 to produce corn and $320 to produce soybeans in 2008 on an acre of rented farmland in southern Minnesota.
Even those figures, especially for fertilizer and land rent, may be low, according to Dale Nordquist, associate director of the center. The center used 2006 statistics from its FINBIN database, plus trend and current pricing to calculate the estimated cost per acre. The database includes farm management data from 3,300 producers in seven states managing 2.88 million acres of land.
"Fertilizer has continued to increase for farmers who will apply in the spring," Nordquist said.
"The wildcard is the cash rents," because the rents in the database may be lower than actual prices paid to work someone else's land.
The fastest rising costs are fertilizer, fuel and drying and seed costs, according to the FINBIN numbers. Between 2002 and 2008, the cost of raising an acre of corn or soybeans increased 47 and 38 percent, respectively. (See the accompanying chart for additional numbers.)
"There's a lot more dollars of risk out there," Nordquist says. "Crop insurance is going to be expensive, but necessary this year."
Using the $488 cost per acre to grow corn, farmers will need to get $4 per bushel on a 144-bushel yield just to pay the bills. Similarly, covering the soybean-growing costs requires $8 per bushel on 40-bushel yields.
Given current grain prices and "normal" yields, those numbers seem attainable on paper, but if grain prices back down or there's another drought or flood, farmers could be facing dramatic changes and hard choices about their futures.
Doug Albin, vice president of the Minnesota Corn Growers Association and a Clarkfield farmer, says the corn growers leadership is gathering to examine the issues facing producers and then provide guidance to producers. Topics in the discussion include the continuing debate about the new farm bill's payment levels and limits, along with production costs and risk management.
"We are encouraging producers to have a good, solid marketing plan that limits their exposure," he said, adding that the market plan needs to be reinforced with locked-in input costs, minimal tillage passes and close examination of technology that brings more efficiency.
"Our costs are rising just as fast as our income," Albin said. "It will cost more to farm this year."
The rising prices mean farmers can use the revenue to buy new and better equipment with more and better capabilities, to improve their land with tiling or to change crops. "It is a great time to be farming," he says. But that opportunity comes on shrinking margins.
Profits for farmers have increased, but the margin between cost and profit is getting slimmer, he said. The key factors are four- and five-fold increases in the costs of fuel, fertilizer and chemicals.
"Everyone thinks farmers are seeing a huge windfall," Albin said. "We are going to have a reality check on the bottom line when folks see the real costs."
Nordquist concurs, stressing that farmers need to remain cautious, because prices and costs will realign themselves in a year or two and producers will need to be in a financial position to withstand that adjustment.
"Simple economics will drive (prices and costs) back to normal," he said.
"We don't expect this profitability to last forever."
The Clarkfield farmer expects farmers to shift back to a more traditional crop rotation this year, instead of leaning toward one crop as in 2007.
Even with that balance, the producers will need even more astute management.
"We are encouraging farmers to use the optimum rates of fertilizer and the best genetics possible," he said. "We are asking them to really fine-tune their operation to the last dollar."
While a majority of farmers know what crop will be planted in the spring, about 25 percent are still undecided, according to estimations from Bruce Hamm, owner of Hamm Seed in Grove City. The dealership handles Monsanto and Syngenta brand seed.
Those producers still waiting, either for the markets or landowners to decide who will farm the ground next spring, can still switch crops, Hamm says. "A month from now, that may be different," he warned.
There are shortages of seed in certain varieties experiencing higher demand, he added. The market shift has also caught up with seed companies, who were following the "plant-more-corn" trend of growing more seed corn and less seed beans. Suddenly, farmers are following the market trend and switching back to a more balanced rotation or planting more beans.
The recent U.S. Department of Agriculture production report showed the nation's farmers produced less corn, about 13.1 billion bushels, than expected. The nation's corn yield was pegged at 151.1 bushels per acre, down 1.9 bushels from estimates. The 2007 crop was 24 percent more than 2006's crop. The soybean report showed production at 2.59 billion bushels, about 19 percent less than the record 2006 production level, evidence of farmers' shift to grow more corn for the booming ethanol industry.
Minnesota farmers followed the national trend, producing 1.14 billion bushels of corn on 7.8 million acres, about 950,000 acres more than 2006. The 2007 yield, cut by both drought and flooding in the state, was 146 bushels an acre, compared with 161 bushels in 2006.
The state's farmers harvested 1.1 million fewer acres of soybeans in 2007, growing 252 million bushels on 6.15 million acres of land. The yield, also lowered by weather conditions, was 41 bushels an acre, down from the 45-bushel record yield in 2006.