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Normal weather, lower grain incomes

The corn is tasseling, and August -- the most critical month for soybean development -- isn't far off. Certainly the weather's been a lot more friendly, in general, than it was a year ago in much of corn and soybean country. That's the main driver behind expectations for a dip in grain farm incomes once it's all said and done for 2013, one economist says.

If the weather that's been much closer to "normal" thus far this summer indeed holds up until harvest, corn and soybean futures contracts for delivery this fall could dip to $5 and $12 per bushel respectively, says University of Illinois Extension ag economist Gary Schnitkey.

"Near-average yields and commodity prices at current harvest bid levels will result in lower net incomes compared to average incomes in recent years," he says. "Income projections will be more certain once more is known about 2013 yields. Hence, actual incomes could vary substantially from those projected here."

Schnitkey recently simulated net farm incomes for a representative Illinois grain farm comprising 1,200 acres (2/3 corn and 1/3 soybeans), 720 of which are cash rented with the rest share-rented or owned, the "typical tenure/rental situation for farms in northern and central Illinois," he says. It takes into account a $300-per-acre cash rental rate and just shy of $500,000 in total farm debt.

"Net farm incomes are projected for different yield-price scenarios. The first has yields slightly above average: 195 bushels per acre for corn and 58 bushels for soybeans," Schnitkey explains. "These yields are used under the presumption that weather conditions will be normal during the upcoming critical yield-determination periods. Prices are near current cash bids for fall delivery: $4.80 for corn and $12.00 for soybeans. This will result in $146,000 of net farm income."

That total income declines to just short of $117,000 when the corn price slips to $4.60 per bushel and soybeans slip to $11.35. An $87,600 net farm income results from a dip in the corn price to $4.30 per bushel and slide in soybeans to $10.50. Those totals come despite yields increasing as prices decline, the typical inverse relationship between the two variables.


Chart courtesy University of Illinois Extension ag economist Gary Schnitkey.

"Between 2007 and 2011, average net incomes on grain farms in Illinois have exceeded $200,000 in all years but 2009. Even though 2012 was a drought year with low yields, net incomes in 2012 were in the high $200,000s because of high commodity prices and because crop insurance covered yields shortfall," Schnitkey says. "Projected 2013 incomes are below recent incomes. A couple of reasons exist for lower 2013 net incomes. First, commodity prices are projected at lower levels than in recent years. For example, the $4.90 corn price used to simulate 2013 incomes compares to average farmer received prices of $5.34 in 2010, $6.24 in 2011, and $6.80 in 2012. Second, costs have increased dramatically in recent years. The combination of lower commodity prices and higher costs leads to lower projected incomes."

Though the trimmed income outlook isn't particularly good news, it's not the start of a longer, lower trend. Instead, it's more of a normalization of price and income levels expected largely because of more typical seasonal weather and other factors after years of volatility.

"Lower net incomes are not necessarily suggestive of financial pressures. More likely, incomes in recent years were high because a variety of factors led to relatively high corn and soybean prices," Schnitkey says. "Projection contained herein may represent more usual income levels than incomes in recent years."

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