2021 is an economic game changer for farmers
It’s taken a while, but the economics for corn and soybean farmers have changed since late summer of 2020.
Farmers may have a new four-letter word to describe 2020: cash. It largely has to do with the market rally that started in late summer and continued into 2021.
At the time of this writing, the soybean cash market had added more than $4 per bushel since October 30. The cash corn market had added more than $2 per bushel since late August. In addition to commodity prices, ad hoc government payments, which reached historic highs in 2020, have contributed to the economic turnaround.
As farmers budget for 2021, the opportunity for profits exists for the first time in many years, says David Widmar, cofounder of Agricultural Economic Insights.
“In August, December 2020 corn got as low as $3.20 per bushel, with many producers facing sub-$3 cash prices. Since then, the outlook has changed completely. We’ve gone from producers facing significant losses to finishing 2020 with strong returns. Thinking about 2021, our crop budget projections have improved significantly with the price rally. In the Corn Belt, revenue projections have improved $73 per acre for corn and $114 per acre for soybeans over the last six months,” Widmar says.
There are a lot of reasons these farm markets have reached seven- and eight-year highs. A key factor is the uncertainty in corn and soybean production, Widmar says.
“The supply story is a major price driver. U.S. production has been limited by the large prevented-plant acreage of 2019 and 2020. We’ve also had below-trend corn yields. The combination of limited U.S. production and strong demand, which is well known, has paved the path for this rally. The supply story has been very important but largely overlooked,” Widmar says.
Higher Feed Costs Hijacking Livestock Profits in 2021
With corn prices at an eight-year high, Iowa State University ag economist Lee Schulz is dusting off his records from the 2012-13 drought years to see the impact of higher prices on livestock production. “We are already at large production levels, which are pressuring prices, and now we have the added factor, the wild card, of higher feed costs,” he says.
His model for farrow-to-finish production shows the increase in feed costs have added, compared with last year, about $12/cwt to the cost of production. That is more than $20 a head and takes projected profitability to breakeven to slightly below breakeven.
In the cattle industry, cost of production impacts placement into feedlots. “Farmer/feeders who walk corn off the farm through feeding cattle may change decisions now that corn is worth a lot more,” Schulz says.
In the long run, livestock markets will adjust, says Schulz, but in the short run there can be some harsh pinch points. “A producer may have placed feeder cattle at higher prices than the current feed cost situation dictates. In the long run, higher feed prices will increase finished animal values, because it cost more to finish those animals. It also brings down prices for feeder animals,” he says.
There is little margin for error in the cost to produce livestock this year. Delayed planting this spring could increase feed prices even more. On the bright side is the opportunity to have more acreage than expected going into production, says Schulz. An early start to the planting season would help, too. “There are several factors that could help steady or weaken feed prices. Unfortunately, only time will tell.”
It’s hard to know yet how pork production levels could be impacted by the recent run-up in grain prices, he says. Farrowing intentions are a best guess by producers, and the last guess they made was December 1. At that point, the industry hadn’t fully realized the latest hike in feed prices. “Costs have increased significantly since then,” says Schulz. “That could dictate how many sows are actually farrowed going forward.”
The beef herd was already declining in 2020 as a natural part of the current cattle cycle, says Schulz. He estimates the beef cow herd is down about 1% in early 2021 from a year ago. COVID-19 likely didn’t have a huge impact, he explains, because 75% of U.S. producers calve in the spring and market them in the fall or winter. Calf prices in fall 2020 had rebounded from the spring and were steady with fall 2019 levels. Higher feed prices didn’t fully start to hit until late November. “I don’t think we will see as large of declines in beef cow numbers as some would suggest,” he says. Schulz also thinks the 2020 calf crop will be reported as slightly lower than in 2019.
A Good Time To Pump the Brakes
The silly season of farmland auctions is already showing astounding prices in 2021:
• 76 acres in Lyon County, Iowa, sold for $14,100 per acre January 13.
• 160 acres in Stark County, Illinois, sold for $12,600 per acre January 18.
It’s little wonder that farmland is in high demand. Farmers appear to be flush with cash thanks to a rocket-like rise in commodity prices plus COVID-19 safety net programs like the Coronavirus Food Assistance Program (CFAP) 1 and 2 and the Paycheck Protection Program. David Widmar, cofounder of AEI, expects farmers to aggressively pursue farmland purchases and bid up cash rents to maximize on this window of prosperity.
“I think the cash rent and farmland market is going to be red hot. We’ll see double-digit percentage increases,” Widmar says.
Yet, he urges caution. Commodity prices can fall just as quickly as they soared, which could put farmers in a difficult position. Rental agreements should be structured so that if times get lean, cash rents are adjusted accordingly.
READ MORE: Strong land prices expected to continue
In most cases, farmers’ balance sheets in 2021 are weaker than they were during the 2013 run-up in commodity prices. There is less working capital and more debt now, but $5 corn is an alluring prize. It’s also a dangerous one, says Widmar, who urges farmers to ask themselves two questions:
• What did 2020 net farm income look like without government payments?
• What were you losing sleep about last May?
If the answers are: not positive and grain marketing, you may want to consider pumping the brakes on spending a lot of money to add more farmland.
“We need to avoid the decisions made in good years that we have to pay for in bad years,” he says. •
On-Farm Grain Storage In High Demand
With net farm income on the rise, many farmers are seizing the opportunity to improve their grain-handling capabilities while minimizing their tax load.
“Farmers have to find ways to even out the increase in income, and investing in a grain bin is one way to do it,” says Roger Price, GSI North America director of grain sales and service. “The demand is the largest we’ve seen in 10 years.”
An expense that sees a return in about five to seven years, a grain bin has always been viewed as a good investment. While the primary reason farmers began investing in grain storage was to capture higher prices, improving harvest speed and efficiency are also at the top of the list.
“When you’re paying a storage fee, and that bill comes due every month, it messes with a farmer’s mind. With your own grain storage, those mind games aren’t there,” says John Hanig, Sukup Manufacturing bin sales director. “You’re also not sitting in a line at the elevator. You can quickly turn that truck around and get it back to the field where it’s needed.”
READ MORE: Storage solutions
The Sheffield, Iowa, company is seeing an unprecedented spike in demand.
“It’s the biggest surge we’ve seen in our 58-year history. To have this much product sold this early in 2021, and to be booked out into late July, is not normal,” Hanig says, adding that a 48-foot-diameter grain bin with a 50,000- to 60,000-bushel capacity is the sweet spot for Sukup customers.
GSI is seeing similar interest in this range. “Generally speaking, farmers are looking at a cost of around $2.25 per bushel,” Price says.
Grain bins aren’t the only product currently driving sales. Both Hanig and Price say their entire grain-handling lines – fans, heaters, and conveyors, among other things – are also popular.
Because grain dryers can increase speed and efficiency, interest in those is also an offshoot of grain storage demand. Although last year may not have been a big drying season, 2019 was. Price says farmers building a grain storage system in most cases will have to use a dryer at least three out of five years to take advantage of carrying grain in the bin.
“We were sold out of grain dryers last year and had to roll a lot of them into this year’s production,” Hanig says. “We’re going to be facing that same thing again here shortly.”
While Price doesn’t want to throw cold water on a farmer’s plans, he says those trying to buy a bin this year may find it very difficult. “A farmer has to plan ahead, more so than normal.”
If you miss out this year, Hanig says, “You should still get your purchase locked in for next year, so you’re one of the first on the schedule.”