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Higher farm income, higher farm risk

Every year University of Illinois agricultural economist Gary Schnitkey projects returns per acre for corn and soybeans grown in his state, and net income for a typical 1,200-acre farm.

In spite of the drought, his income projection from a year ago turned out to be low, he revealed at the 2012 Illinois Farm Economics Summit meetings being held throughout the state this week. And with current futures prices still relatively high, Schnitkey looks for another good year of income in 2013. After that, there's potential for financial stress if prices return to a level of about $4.50 a bushel for corn and $12.50 for soybeans.

Two things worked in favor of northern Illinois farms last year, according to Schnitkey. The area escaped the worst effects of the 2012 drought. And crop insurance added to revenue. In Schnitkey's estimates of per-acre revenue, a typical northern Illinois farm's $1,145-per-acre gross revenue for corn in 2012 included $160 an acre in insurance proceeds with a corn yield of 130 bushels an acre. A southern Illinois farm with only 72-bushel corn had crop insurance proceeds of $350 an acre and gross revenue of $904 an acre.

"From my perspective, crop insurance worked like it's designed to work," Schnitkey said at a workshop in Sycamore, Illinois, on Tuesday. Schnitkey's farm income estimates also show significant losses on his example farms if they had no crop insurance.

For 2013, Schnitkey projects gross revenue per acre for corn at $1,090 an acre, just slightly less than 2012 income of $1,145. For 2013, he's using a corn cash price of $5.80 a bushel and a 188-bushel-an-acre yield, compared with the 2012 price of $7.40 and the drought-stunted 130-bushel yield.

As bad as the 2012 drought was, it could have been much worse for the nation's corn crop.

"The real epicenter of the drought was in Missouri," Schnitkey said, as he showed a slide of departures from trend yields in the Midwest. Farmers in much of that state harvested corn that yielded 50% of trendline yields or less, down to nothing. The poor harvest extended into southern Illinois and Indiana and eastern Kansas. In contrast, about two-thirds of Iowa harvested corn with yields ranging from 90% of trendline to 5% above trendline. Northern Illinois harvested 60% to 70% of trendline yields.

Although Schnitkey sees income remaining high in 2013, he expects much lower revenue and net income if prices fall back to the range many expected before the drought of 2012.

Costs have changed little from a year ago, and Schnitkey is keeping his estimate for the typical northern Illinois corn farm at $563 an acre.

Last year, for a 1,200-acre example farm raising 187-bushel corn and 54-bushel soybeans, Schnitkey had projected net income of $191,000. He assumed that 120 acres of the farm are owned, 360 are share-rented, and 720 cash-rented at $300 an acre. The farm had $480,000 in debt. A year ago, he expected a corn price of $5 a bushel and $12.50 soybeans.

As the calendar year of 2012 winds down, his estimate of actual net income is higher -- $228,000. That assumes average sales prices of $7 a bushel for corn and $15.20 for soybeans, and yields of only 100 bushels an acre for corn and 42-bushel beans. If the farm didn't have crop insurance, its net income would have been only $19,000. And if it hedged 50,000 bushels of corn at $5.20 a bushel without crop insurance, it would have incurred a $71,000 loss.

Using current futures prices minus a basis, Schnitkey projects even higher income for 2013 if we have normal yields --$298,000 for that 1,200-acre example farm. That assumes the farm sells $5.80 corn and $12.80 beans, harvesting a 187-bushel corn yield and 54-bushel soybeans.

Schnitkey agrees with other ag economists that in the long run, prices are likely to return to about $4.50 a bushel for corn and $10.50 a bushel for soybeans. At that level, his example farm brings in less than half of the 2012 income – $91,000.

Schnitkey said that, in spite of high land prices, the next financial crisis in agriculture is unlikely to be tied to land prices in the way it was in the 1980s.

Instead, it's "likely to be caused by the need to adjust rents downward," Schnitkey said.

Schnitkey sees one unfortunate side effect of the drought as continued upward pressure on cash rents in 2013. Even though the drought brought a temporary reprieve from lower prices, the longer run effect will be to put a squeeze on farms that cash rent a large portion of their acres at high prices. He expects some of them to have difficulty assuring positive levels of income in 2013, even with high levels of crop insurance.

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