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Grain profits seen eroding

The economy's downturn is digging in its heels into the farm sector. So, what's it mean to your bottom line going into fall harvest?

The short answer is grain profitability will go down and it will make it tougher to pay cash rents, specialists say. But, the long answer shows that, despite these tightening market conditions, that's not to say the fall and winter of 2009-2010 will be a farm-breaker.

Remember when inputs like nitrogen were scraping the sky last year and earlier this year? Those costs are being amplified now that the grain markets have trended lower. Just on a cost basis alone, it's going to be tough to keep the cap on the red ink pen this fall.

"Although production cost levels vary dramatically among farmers, it appears that costs for a typical cash rent farmer increased by about 25% over last year and about 50% over 2 years ago," says Iowa State University (ISU) Extension economist and farm business specialist Don Hofstrand. "Starting with the 2006 crop, corn price began to quickly move upward to new historic highs, peaking in the summer of 2008. Corn production costs followed this rise. Since the summer of 2008, corn price has been drifting downward and appears that it will intersect with the cost per bushel for the 2009 crop, resulting in a negative profi t margin for many crop farmers."

In the last 4 years, Hofstrand says per-bushel production costs for corn have gone from just under $2.50 per bushel to just over $4.00 per bushel (that includes land rent, labor, machinery, seed, fertilizer, herbicide and insurance).

But, the sharper difference lies in corn prices: A year ago, $5.00-per-bushel corn made these expenses more bearable. Take about $2.00 off each bushel of corn you market, and Hofstrand says it could create a tight squeeze.

If you can hang on through this fall, the news isn't all doom and gloom, though. Some of those costs that have tightened profit margins for corn and soybean farmers have gone down dramatically since spring, and ISU Extension economist William Edwards says the lower input prices could go a long way to restoring profitability ahead into next year.

"Costs for the major crop inputs, at least those related to energy, will likely be lower in 2010. The big shock for 2009 was nitrogen fertilizer, especially anhydrous ammonia. Some producers paid over $1,000 per ton for it last fall, but prices varied dramatically depending on when and where the product was purchased," he says. "Since then nitrogen prices have decreased to more traditional levels, and prices for diesel fuel and LP gas for drying corn are actually lower than a year ago."

When looking at per-acre production costs for corn, Edwards says 2010 costs could be around $424 compared to this year's $481. That's mostly coming from lower fertilizer costs, though machinery and grain drying costs are also seen lower for next year. But, that puts the focus squarely on land rent costs as the deal-maker or breaker.

"Even if production costs are lower in 2010, the estimated decreases of $57 per acre for corn and $16 per acre for soybeans will not offset expected lower revenues," Edwards says. "Subtracting the estimated nonland costs from the estimated gross revenues per acre would leave only $174 per acre for corn and $164 per acre for soybeans for rent and profit."

So, with this land cost focus playing such a large role in farm profits ahead through 2010, Edwards suggests carefully taking those factors into account when writing new lease terms for the coming year, a task many farmers will be taking up soon. Depending on the farm programs for which you've signed up or plan on signing up, those shouldn't be neglected when it comes to your land deals.

"Tenants and landowners need to put together these potential prices, expected yields for their own farms, and possible costs of production to estimate how much income is available for cash rents for 2010," Edwards says. "Don't forget to add in direct payments from FSA, which will be 20% lower if the farm is enrolled in ACRE."

Are these predictions accurate? Some farmers say they're already feeling their margins tighten up, but others say it's too early to speak this soon so broadly about where profits are headed.

"No one knows what the weather is going to be in the future, along with the world economy and a host of other variables," says Farm Business Talk member fernwood.

And, with the new standard of volatility that paces the grain trade these days, higher costs don't automatically mean profits will be gutted.

"Did these guys predict the $7 corn and $16 beans we had 2 years ago?" says Farm Business Talk member Pat C. #1.


The economy's downturn is digging in its heels into the farm sector. So, what's it mean to your bottom line going into fall harvest?

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