They may not take you by your ear like your mother did, but you’ll have some “splainin’ to do for your spouse and your lender when they see your income and other financial records for 2013 and 2014.
Life was good the past several years, but it is going to be hard in the near future if the sole difference is returns to the operator and to farmland. They won’t be good. You need to say that out loud. They won’t be good. But what got you into this fix?
It is hard to believe, but lower commodity prices can have a devastating impact on farm income, even when production is increased. That is the bottom line in a financial projection by University of Illinois agricultural economist Gary Schnitkey. He says returns for this year and next will be about half of what they have been for the past three years.
2010 through 2012 saw high commodity prices well above trend levels. However, he says returns to land and operator the next two years will be more in line with long-term projected levels. And he says what level of returns is projected for 2013 and 2014 will be more like what is expected for the future.
He measured gross revenue from crop sales, plus crop insurance proceeds, minus the non-land costs. When land costs are subtracted the result is the return to the farm operator.
Returns to operator and farmland began to grow in 2006 and then sharply dropped in 2009. They grew at an even more rapid rated in 2010 and 2011 before collapsing after the peak of the drought. Based on Schnitkey’s data, the projected returns to farmland and operator for 2013 and 2014 will be approximately half of what they averaged over the past three years. Since the returns were based on commodity prices, Schnitkey used corn prices of $4.55 in 2013 and $4.60 for 2014. Soybean prices used in the calculations were $12.80 for 2013 and $11 for 2014.
Schnitkey included yield data for all types of soils and soil productivity. He worked with a range of yields from 196 bushels per acre to 150 bushels for corn and from 57 bushels per acre to 48 bushels per acre for soybeans.
Causing the lower returns to operators and land were a couple of issues:
- Non-land corn costs in Illinois are projected at an average of $583 per acre. The $583 projected average for 2013 and 2014 is $35 per acre higher than the $548 average from 2010 through 2012. Decreases in 2013 and 2014 costs are projected due to lower fertilizer costs.
- The second factor, and the one having a larger impact on returns, is lower commodity prices. Average projected prices for corn in 2013 and 2014 are $1.34 per bushel below the average for 2010 through 2012. Average projected soybean prices in 2013 and 2014 are $.86 below the average of actual prices from 2010 through 2012.
Schnitkey says the decline in prices for this year and next should be anticipated because economists thought the prices of the past several years were above what they should have been. Consequently, the $4.60 corn and $10.60 soybean prices seem reasonable for the long term trend. The bottom line is that the lower returns will require that farmers make financial adjustments in their operations. That may mean capital purchases are delayed or reduced overall and that cash rents will have to be reduced to reflect the lower commodity prices and expected returns for the next couple years.
A combination of higher input prices and other non-land costs for this year and next, compared to the past several years, along with lower average prices for commodities than the period of 2010 through 2012 will all combine to mean lower returns to operators and farmland. The result will be the need to reduce capital expenditures and negotiate lower cash rents to be able to maintain any degree of profitability.
Source: FarmGate blog