Iowa's 2021 farm profits to hinge on trade and gov't payments, economists say

In 2021, corn prices seen averaging $3.38 per bushel, Iowa State University economist says.

Iowa ag economists who are looking into their crystal balls are finding what could amount to a challenging year in 2021 for farmers.

While land prices are expected to slightly improve, farm concentration is expected to continue, big crops are seen pressuring prices, input costs are seen as going higher, and more problems are seen for farm loans.

During a webinar Tuesday, a panel of Iowa State University (ISU) Extension economists did share some good news: China and the U.S. cannot do without each other.

For that reason, the biggest buyer of U.S. ag products is expected to remain a large customer. In addition to China’s insatiable appetite for soybeans, U.S. corn and soybean product exports are growing into other parts of world, the economists say.

Wendong Zhang, ISU Extension economist, says there are a lot of factors that will determine the direction of farmers’ income next year.

“A lot is hinging on the amount of government payments. Also, a lower interest rate tends to push the land market higher. While the interest rates have been significantly lowered to combat the coronavirus pandemic’s (impact on the U.S. economy), it takes a full decade for the movement of the interest rate to be fully capitalized. So, its impacts won’t be felt immediately in 2020’s land market,” Zhang says. 

He added, “The trade aid or pandemic-related payments will immediately impact farm income. Farmland prices have cash rent implications as well.”

U.S., China Trade

On Tuesday, the news of the U.S. and China trade officials meeting and agreeing, in principle, that they are still committed to the Phase One trade deal created mixed signals coming from the Trump administration, Zhang says.

ISU Extension economists see China importing $18.97 billion in agricultural products from the U.S. in 2020, still far behind the Phase One target of $36.5 billion.

As of August, China’s actual purchases of U.S. agricultural products in the first half of the year total $8.6 billion, according to the U.S. Census Bureau.

The trade agreement is scheduled to end in February 2021. 

“There are signals that the Trump administration sees the U.S., China trade deal as less desirable. However, the news used to be that the trade deal between these two countries was the sticking point in their relationship, while recently it seems to be the calming point.”

A large part of the Phase One agreement pertains to China buying large amounts of U.S. soybeans. 

The record U.S. Sept-Jan soybean shipments to China in 2016/2017 totaled 1.07 billion bushels, 73% of total U.S. shipments. 

So far, in 2020, China’s purchases of new-crop U.S. Sept-Jan soybean shipments, anything delivered after September 1, totals 11.9 million metric tons (438 million bushels). 

“In general, I think both countries are interested in the trade deal,” Zhang says.

Net Farm Income

In 2019, Iowa recorded an average net farm income of $77,946.00 (accrued, not adjusted for inflation).

In Iowa, farmland financials face liquidity issues, according to Alejandro Plastina, ISU economics professor.

“Entering the 2020 crop season, one in three Iowa farms had weak liquidity. There were 50% to 55% of farms with strong liquidity positions in 2019. So, we are just saying that a growing percentage of Iowa farms are in a precarious liquidity situation,” Plastina says.

With an expected average cash rent rate of $222 per acre, a 2% increase over a year ago, ISU economists see a 3% drop in the cost of production on rented land.

For corn following soybeans, the 2020 cost of production is expected to be $645 per acre, using a 199-bushel-per-acre average yield.

For soybeans following corn, the 2020 cost of production is expected to be $491 per acre, using an average yield of 56 bu./acre.

Tenant’s Gross Revenue & Costs

Corn production on rented ground might not be profitable with partial crop damage, due to very high harvest costs this year, says Plastina.

For corn following soybeans, the following targets were used to figure the gross revenue estimate of slightly more than $600 per acre for a farmer who has 50% crop loss.

ISU used a a corn yield target of 200 bu./acre with an average price of $3.10 per bushel. Also included in the formula were revenue protection (RP) insurance at the 80% level, actual production history (APH) of 180 bu./acre, price loss coverage (PLC) $77/acre to be paid out in October 2021.

A tenant who had no crop loss and received a government payment is projected to earn gross revenue of $700 per acre, while a tenant with 100% loss, crop insurance, and a government payment is expected to gross $610 per acre, slightly above the cost of production.

Meanwhile, soybean production on rented ground is not likely to be profitable in 2020, even if target yields are realized, according to Plastina.

The targets used to figure soybean gross revenue included: 56 bu./acre average yield, average price of $8.35 bu.acre, RP 80% APH 45 bu, and ARC‐CO $8 Oct ’21.

For 2021, farmers are expected to see a 1% increase in diesel prices, 5% increase in gasoline prices, and higher crop protection costs due to fewer options and more volunteer crops.

Also, 2021 fertilizer futures prices are seen higher than in 2020, while labor costs and interest rates are seen steady to lower.

“The big question for 2021 is the amount of government payments that could be paid out,” Plastina says.

Price Outlook

The interest in demand for soybeans is raising the possibilities for higher prices in 2021, according to Chad Hart, ISU Extension economist.

“We are seeing strong production around the globe, but it’s being met with strong demand,” Hart says. “We’ve seen the U.S. dollar weaken and export sales surge. Yes, China is a big buyer, but other global buyers are being seen, too.”

Based on the current pattern of the futures market, Hart sees 2020/2021 corn prices averaging $3.38 per bushel and soybeans averaging $8.89 per bushel.
 

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