As combines try to squeeze the last kernel of corn and last soybean out of the field, those may be needed to keep profitability in farming. Last week’s forecast by USDA of a 38% decline in farm income was a rude wake up call for many farmers. In essence crop production costs will be down in 2009, but not nearly as much as income. That spells a drop in profitability.

The cost-price squeeze will create a profitability issue that Iowa State economist Don Hofstrand says farmers have not faced in recent years. His article in the September Ag Decision Maker says the situation is especially acute for corn since nitrogen prices pushed up the cost, which is up 25% over 2008 and up 50% over 2007. His calculation for cost per bushel allows a comparison to the price of corn, and while farmers owning their land or both owning and cash renting are still making a profit, Hofstrand’s computation indicates the pure cash rent farmer currently has a cost above the price of corn.

Hofstrand says profit margins were tight before and during the 2005 production season, but after that point, corn prices moved higher at a quicker pace than did production costs. For the past 12-14 months, corn prices have drifted lower and now intersect with that line on the graph that shows rising production costs. That is an indication of red ink on a per bushel budget basis. Hofstrand estimates cash rent at $1.25 per bushel, machinery and fuel at 65¢, labor at 15¢, seed at 50¢, fertilizer at $1.10, crop protection at 20¢, and interest & insurance at 30¢ per bushel, which totals slightly more than $4 per bushel for the new crop.

Soybeans are better he says, thanks to not having to apply nitrogen. He says the 2006 crop brought a quick run up in price that peaked at mid-summer of last year. And he says soybeans seem to remain at profitable levels for the new crop. His current estimates for production costs are pushing above the $10 per bushel mark for soybeans, with cash rent about $4 per bushel. Machinery cost and fuel are about $1, with labor at 25¢ and seed costs about $1. Fertilizers are about $2.75, crop protectants are 50¢, and interest and insurance are about 75¢ per bushel. Based on that cost of production, Hofstrand’s calculation show farmers owning their land or farmers owning part and renting part to still be in a profitable situation with $10 beans. However, the declining soybean price is close to intersecting with the rising production cost of cash rent farmers.

Hofstrand says changes in “cost per bushel” from year to year may not correspond to changes in cost per acre, because the cost per bushel considers yield changes from year to year. He says higher costs per acre may be offset by spreading those costs over more bushels from a higher yield, resulting in a lower cost per bushel.

Profitability will be a challenge for corn and soybean producers this year, with higher production costs and lower commodity receipts. The past three crops have provided more profitability because market prices were rising faster than production costs. While production costs are down for the 2009 crop, they are not down as much as market prices. The outcome is potential red ink for high cost operators, such as those who cash rent all of their land, but a likely year of profitability for farmers who either own their land or who own and rent land.

Source: Stu Ellis, University of Illinios